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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
AVATEX CORPORATION
(Name of Issuer and Person Filing Statement)
$5 CUMULATIVE CONVERTIBLE PREFERRED STOCK
$4.20 CUMULATIVE EXCHANGEABLE SERIES A PREFERRED STOCK
(Title of Class of Securities)
$5 CUMULATIVE CONVERTIBLE PREFERRED STOCK - 05349F204
$4.20 CUMULATIVE EXCHANGEABLE SERIES A PREFERRED STOCK - 05349F303
(CUSIP Numbers of Classes of Securities)
------------------------
Robert H. Stone, Esq.
Avatex Corporation
5910 North Central Expressway, Suite 1780
Dallas, Texas 75206
Telephone Number (214) 365-7450
------------------------
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
------------------------
Copies to:
Stephen E. Jacobs, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10022
(212) 310-8000
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. /X/ The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. /X/
CALCULATION OF FILING FEE
================================================================================
Transaction Valuation* Amount of Filing Fee**
================================================================================
$27,895,411 $5,579
================================================================================
* Determined pursuant to Rule 0-11(b)(2) by adding (x) 652,273, the number of
outstanding shares of $5 cumulative convertible preferred stock of Avatex
Corporation, multiplied by $7.4375 per share, and (y) 4,312,352, the number
of outstanding shares of $4.20 cumulative exchangeable series A preferred
stock of Avatex Corporation, by $5.34375 per share. The value of each class
of preferred stock is determined pursuant to Rule 0-11(a)(4) by using
the average of the bid and asked price of each class of preferred
stock quoted on the OTC Bulletin Board System on August 4, 1999.
** Determined pursuant to Rule 0-11(b) by multiplying $27,895,411 by 1/50 of
1%.
/X/ Check Box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $9,014
Form or Registration No.: Registration on Form S-4
Filing Party: Avatex Corporation; Avatex Funding, Inc.
Date Filed: August 9, 1999
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INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (this "Schedule
13E-3") is being filed by Avatex Corporation, a Delaware corporation (the
"Company"), pursuant to Section 13(e) of the Securities Exchange Act of 1934, as
amended, and Rule 13e-3 thereunder, in connection with the proposed merger of
Xetava Corporation, a Delaware corporation and a wholly-owned subsidiary of the
Company, with and into the Company, pursuant to an Amended and Restated
Agreement and Plan of Merger, dated June 18, 1999 (the "Merger Agreement"). The
Company will be the surviving corporation in the merger. Pursuant to the terms
and conditions of the Merger Agreement, if the merger is consummated, each share
of existing common stock of the Company will be converted into one share of
class A common stock, par value $.01 per share (the "New Avatex Common Stock"),
of the Company, as the surviving corporation. Each share of existing $5
cumulative convertible preferred stock of the Company will be converted into
9.134 shares of New Avatex Common Stock or, at the election of the holder
thereof, (1) $3.7408 in cash, (2) $8.34 principal amount of 6.75% notes due 2002
to be issued by Avatex Funding, Inc., a new wholly-owned subsidiary of the
Company, (3) warrants to purchase 0.67456 shares of New Avatex Common Stock, and
(4) a deferred contingent right to receive (a) 16% of an amount equal to 20% of
any net recovery that the Company may receive in certain litigation brought by
it against McKesson HBOC, Inc. and certain major pharmaceutical manufacturers,
divided by (b) the number of outstanding shares of $5 cumulative convertible
preferred stock. Each share of existing $4.20 cumulative exchangeable series A
preferred stock of the Company will be converted into 7.253 shares of New Avatex
Common Stock or, at the election of the holder, (1) $2.9705 in cash, (2) $6.623
principal amount of the 6.75% notes to be issued by Avatex Funding, Inc., (3)
warrants to purchase 0.53567 shares of New Avatex Common Stock, and (4) a
deferred contingent right to receive (a) 84% of an amount equal to 20% of any
net recovery that the Company may receive in the McKesson litigation, divided by
(b) the number of outstanding shares of $4.20 cumulative exchangeable series A
preferred stock. The maximum amount of any payments on the deferred contingent
rights that could be made is $7.5 million.
If all of the holders of the $5 cumulative convertible preferred stock
and the $4.20 cumulative exchangeable series A preferred stock elect to receive
the common stock alternative consideration for their shares of preferred stock
in the merger, they will receive, in the aggregate, $15,250,000 in cash,
$34,000,000 principal amount of the Avatex Funding 6.75% notes, and warrants to
purchase 2,750,000 shares of New Avatex Common Stock.
The merger will effect a recapitalization of the Company's capital
stock resulting in the elimination of the Company's $5 cumulative convertible
preferred stock and $4.20 cumulative exchangeable series A preferred stock.
Concurrently with the filing of this Schedule 13E-3, the Company is
filing a Registration Statement on Form S-4 that contains a preliminary proxy
statement/prospectus (the "Proxy Statement/Prospectus"). Pursuant to the Proxy
Statement/Prospectus, among other things, the stockholders of the Company will
be given notice of the merger. The cross reference sheet below is being supplied
pursuant to Instruction F to Schedule 13E-3 and shows the location in the Proxy
Statement/Prospectus of the information required to be included in response to
the items of this Schedule 13E-3. The information in the Proxy
Statement/Prospectus is hereby expressly incorporated herein by reference, and
capitalized terms used but not defined herein shall have the meanings ascribed
thereto in the Proxy Statement/Prospectus.
2
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
Item 1. ISSUER AND CLASS OF
SECURITY SUBJECT TO THE
TRANSACTION.
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Companies
(b)....................................... Not Applicable.
(c)....................................... THE MERGER--Market Price
and Dividend Information
(d)....................................... THE MERGER--Market Price
and Dividend Information
(e)....................................... Not Applicable
(f)....................................... Not Applicable
Item 2. IDENTITY AND BACKGROUND.
(a) - (g) Statement filed by Issuer.
Item 3. PAST CONTACTS, TRANSACTIONS OR
NEGOTIATIONS.
(a)(1) and (2)............................ Not Applicable
(b)....................................... THE MERGER--QUESTIONS
AND ANSWERS ABOUT THE
MERGER, THE MERGER--THE
MERGER TRANSACTION--
Background of the Merger,
THE MERGER--AGREEMENTS
WITH CERTAIN STOCKHOLDERS
--Settlement Agreement
3
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
Item 4. TERMS OF THE TRANSACTION.
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER TRANSACTION, THE
MERGER--THE MERGER
AGREEMENT, THE
MERGER--AGREEMENTS WITH
CERTAIN STOCKHOLDERS, THE
MERGER--DESCRIPTION OF
WARRANTS, THE
MERGER--DESCRIPTION OF THE
AVATEX FUNDING 6.75%
NOTES, THE
MERGER--DESCRIPTION OF
DEFERRED CONTINGENT CASH
RIGHTS
(b)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE
MERGER--AGREEMENTS WITH
CERTAIN STOCKHOLDERS
Item 5 PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
(a)....................................... Not Applicable
(b)....................................... THE MERGER--MERGER
INFORMATION
SUMMARY--Summary of the
Terms of the 6.75% Notes,
THE MERGER--DESCRIPTION OF
THE AVATEX FUNDING 6.75%
NOTES--Collateral and
Security, THE
MERGER--DESCRIPTION OF THE
AVATEX FUNDING 6.75%
NOTES--Subrogation
Agreement
(c)....................................... Not Applicable
(d)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--
Dividends
(e)....................................... Not Applicable
4
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(f) & (g)................................. THE MERGER--STOCK EXCHANGE
LISTING; DELISTING OUR
PREFERRED STOCK
Item 6. SOURCE AND AMOUNT OF
FUNDS OR OTHER
CONSIDERATION.
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER AGREEMENT--Merger
Consideration
(b)....................................... THE MERGER--HISTORICAL
FINANCIAL AND PRO FORMA
FINANCIAL DATA--Merger
Related Expenses
(c) and (d)............................... Not Applicable
Item 7. PURPOSE(S), ALTERNATIVES,
REASONS AND EFFECTS.
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--Our
Reasons for the Merger,
THE MERGER--THE MERGER
TRANSACTION--Our Reasons
for the Merger
(b)....................................... THE MERGER--THE MERGER
TRANSACTION--Background of
the Merger, THE
MERGER--THE MERGER
TRANSACTION--Our Reasons
for the Merger
(c)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--Our
Reasons for the Merger,
THE MERGER--THE MERGER
TRANSACTION--Background of
the Merger, THE
MERGER--THE MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board
5
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(d)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--Our
Reasons for the Merger,
THE MERGER--MERGER
INFORMATION
SUMMARY--Comparative
Rights of Stockholders,
THE MERGER--RISK FACTORS,
THE MERGER--THE MERGER
TRANSACTION--Background of
the Merger, THE
MERGER--THE MERGER
TRANSACTION--Our Reasons
for the Merger, THE
MERGER--THE MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board, THE MERGER--THE
MERGER
TRANSACTION--Opinions of
Financial Advisor, THE
MERGER--DESCRIPTION OF NEW
AVATEX COMMON STOCK, THE
MERGER--MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF
THE MERGER
Item 8 FAIRNESS OF THE
TRANSACTION.
(a) ...................................... THE MERGER--MERGER
INFORMATION
SUMMARY--Recommendation of
our Board of Directors,
THE MERGER--THE MERGER
TRANSACTION--Background of
the Merger, MERGER--THE
MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board
6
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(b)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--Our
Reasons for the Merger,
THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER TRANSACTION--Our
Reasons for the Merger,
THE MERGER--THE MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board, THE MERGER--THE
MERGER
TRANSACTION--Opinions of
Financial Advisor
(c)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER
AGREEMENT--Conditions to
the Completion of the
Merger, INFORMATION ABOUT
THE MEETING AND
VOTING--THE ANNUAL
MEETING--Vote Necessary to
Approve Merger Proposal
(d)....................................... No.
(e)....................................... THE MERGER--MERGER
INFORMATION
SUMMARY--Recommendation of
our Board of Directors,
THE MERGER--THE MERGER
TRANSACTION--Background of
the Merger, THE
MERGER--THE MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board
(f)....................................... Not Applicable
7
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
Item 9. REPORTS, OPINIONS,
APPRAISALS AND CERTAIN
NEGOTIATIONS.
(a) and (b)............................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER
TRANSACTION--Background of
the Merger, THE
MERGER--THE MERGER
TRANSACTION--Opinions of
Financial Adviser
(c)....................................... Not Applicable
Item 10. INTEREST IN SECURITIES OF
THE ISSUER
(a)....................................... THE MERGER--AGREEMENTS
WITH CERTAIN STOCKHOLDERS
(b)....................................... Not Applicable
Item 11. CONTRACTS, ARRANGEMENTS
OR UNDERSTANDINGS WITH
RESPECT TO THE ISSUER'S
SECURITIES................................ THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE
MERGER--AGREEMENTS WITH
CERTAIN STOCKHOLDERS
Item 12. PRESENT INTENTION AND
RECOMMENDATION OF
CERTAIN PERSONS WITH
REGARD TO THE
TRANSACTION.
8
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--Our
Reasons for the Merger,
THE MERGER--MERGER
INFORMATION
SUMMARY--Recommendation of
our Board of Directors,
THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER TRANSACTION--Our
Reasons for the Merger,
THE MERGER--THE MERGER
TRANSACTION--Factors
Considered by, and
Recommendation of, Our
Board, THE
MERGER--INTERESTS OF
CERTAIN PERSONS IN THE
MERGER, THE
MERGER--AGREEMENTS WITH
CERTAIN STOCKHOLDERS,
INFORMATION ABOUT THE
MEETING AND VOTING--THE
ANNUAL MEETING--Shares
Beneficially Owned by
Directors, Executive
Officers and Phar-Mor
(b)....................................... No recommendation has been
made by such person.
Item 13. OTHER PROVISIONS OF THE
TRANSACTION.
(a)....................................... THE MERGER--MERGER
INFORMATION SUMMARY--The
Merger, THE MERGER--THE
MERGER
TRANSACTION--Appraisal
Rights, THE MERGER--THE
MERGER
AGREEMENT--Appraisal
Rights
(b)....................................... Not Applicable
9
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(c)....................................... THE MERGER----THE MERGER
TRANSACTION--Federal
Securities Laws
Consequences, THE
MERGER--STOCK EXCHANGE
LISTING; DELISTING OF OUR
PREFERRED STOCK
Item 14. FINANCIAL INFORMATION.
(a)....................................... THE MERGER--HISTORICAL
AND PRO FORMA FINANCIAL
DATA--Our Historical
Financial Data,
INFORMATION REGARDING
AVATEX--FINANCIAL
STATEMENTS AND
SUPPLEMENTARY DATA
(b)....................................... THE MERGER--HISTORICAL
AND PRO FORMA FINANCIAL
DATA--Pro Forma Condensed
Consolidated Financial
Information
Item 15. PERSONS AND ASSETS
EMPLOYED, RETAINED OR
UTILIZED.
(a)....................................... INFORMATION ABOUT THE
MEETING AND VOTING--THE
ANNUAL MEETING--Proxies
(b)....................................... Not Applicable
Item 16. ADDITIONAL INFORMATION.................... None
Item 17. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1).................................... Not Applicable
10
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(b)(1).................................... Opinion of Houlihan Lokey
Howard & Zukin Financial
Advisors, Inc., dated as
of May 6, 1999, as to the
reasonable range of fair
value for the
consideration to be
received by holders of the
$5 cumulative convertible
preferred stock and the
$4.20 cumulative
exchangeable series A
preferred stock, attached
as Annex C to the Proxy
Statement/Prospectus,
attached to this Schedule
13e-3 as Exhibit D.
(b)(2).................................... Materials presented to the
Board of Directors on May
6, 1999 by Houlihan Lokey
Howard & Zukin Financial
Advisors, Inc. with
respect to the fair value
opinion described above in
Exhibit (b)(1).
(b)(3) Opinion of Houlihan Lokey
Howard & Zukin Financial
Advisors, Inc., dated as
of May 6, 1999, as to
factors affecting Avatex's
solvency, attached as
Annex D to the Proxy
Statement/Prospectus,
attached to this Schedule
13e-3 as Exhibit D.
(b)(4) Materials presented to the
Board of Directors on May
6, 1999 by Houlihan Lokey
Howard & Zukin Financial
Advisors, Inc. with
respect to the solvency
opinion described above in
Exhibit (b)(3).
(c)(1).................................... Amended and Restated
Agreement and Plan of
Merger, dated as of June
18, 1999, by and between
Avatex and Xetava
Corporation. (Filed as
Exhibit 2 to Avatex's
Current Report on Form 8-K
filed June 24, 1999 and
incorporated herein by
reference).
11
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY
- ----------------------- -----------------
STATEMENT/PROSPECTUS
--------------------
(c)(2).................................... Stipulation of Settlement
of the lawsuits styled In
re Avatex Corporation
Shareholders Litigation
and Elliott Associates,
L.P. v. Avatex
Corporation, et al.
(c)(3).................................... Stockholders' Agreement
dated June 18, 1999, by
and among Avatex, Elliott
Associates, L.P., Martley
International, Inc., Moses
Marx, Momar Corporation,
and United Equities
Commodities Company.
(Filed as Exhibit 10-A to
Avatex's Current Report on
Form 8-K filed June 24,
1999 and incorporated
herein by reference.)
(c)(4).................................... Voting Agreement, dated
June 18, 1999, by and
among Avatex, Mark S.
Zucker, Anvil Investment
Partners, L.P. and Anvil
Investors, Inc. (Filed as
Exhibit 10-B to Avatex's
Current Report on Form 8-K
filed June 24, 1999 and
incorporated herein by
reference).
(d)(1).................................... Proxy Statement/Prospectus
contained in registration
statement on Form S-4,
together with the proxy
card.
(e)(1).................................... Section 262 of the
Delaware General
Corporation Law (set forth
as Annex G to the Proxy
Statement).*
(f)(1).................................... Not Applicable
- -------------------
* Incorporated by reference to the Proxy Statement.
12
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Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Companies" of the Proxy Statement is incorporated herein by
reference.
(b) The titles of the securities that are the subject of the Rule 13e-3
transaction are $5 cumulative convertible preferred stock ("$5 Preferred
Stock"), and $4.20 cumulative exchangeable series A preferred stock
("$4.20 Preferred Stock"). As of July 31, 1999, approximately 652,273
shares of $5 Preferred Stock and 4,312,352 shares of $4.20 Preferred
Stock were issued and outstanding. Avatex had approximately 75 holders of
record of $5 Preferred Stock and 815 holders of record of $4.20
Prefered Stock as of July 31, 1999.
(c) The information set forth in "THE MERGER--MARKET PRICE AND DIVIDEND
INFORMATION" of the Proxy Statement is incorporated by reference herein.
(d) The information set forth in "THE MERGER--MARKET PRICE AND DIVIDEND
INFORMATION" of the Proxy Statement is incorporated by reference herein.
(e) Not applicable.
(f) Not Applicable.
Item 2. Identity and Background.
This Statement is being filed by the Company (which is the issuer of the
class of equity securities that is the subject of the Rule 13e-3
transaction).
Item 3. Past Contacts, Transactions or Quotations.
(a) (1) and (2) Not applicable.
(b) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER TRANSACTION--Background of
the Merger" and "THE MERGER--AGREEMENTS WITH CERTAIN
STOCKHOLDERS--Settlement Agreement" of the Proxy Statement is
incorporated herein by reference.
Item 4. Terms of the Transaction.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER TRANSACTION," "THE
MERGER--THE MERGER AGREEMENT," "THE MERGER--AGREEMENTS WITH CERTAIN
STOCKHOLDERS," "THE MERGER--DESCRIPTION OF WARRANTS," "THE
MERGER--
13
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DESCRIPTION OF THE AVATEX FUNDING 6.75% NOTES" and "THE
MERGER--DESCRIPTION OF DEFERRED CONTINGENT CASH RIGHTS" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger" and "THE MERGER--AGREEMENTS WITH CERTAIN
STOCKHOLDERS" of the Proxy Statement is incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a) Not Applicable.
(b) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Summary of the Terms of the 6.75% Notes," "THE
MERGER--DESCRIPTION OF THE AVATEX FUNDING 6.75% NOTES--Collateral and
Security," "THE MERGER--DESCRIPTION OF THE AVATEX FUNDING 6.75%
NOTES--Subrogation Agreement" of the Proxy Statement is incorporated
herein by reference.
(c) Not Applicable.
(d) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Dividends" of the Proxy Statement is incorporated herein by
reference.
(e) Not Applicable.
(f) & (g) The information set forth in "THE MERGER--STOCK EXCHANGE
LISTING; DELISTING OF OUR PREFERRED STOCK" of the Proxy Statement is
incorporated herein by reference.
Item 6. Source and Amount of Funds or Other Consideration.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER AGREEMENT--Merger
Consideration" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in "THE MERGER--HISTORICAL FINANCIAL AND
PRO FORMA FINANCIAL DATA--Merger Related Expenses" of the Proxy Statement
is incorporated herein by reference.
(c) and (d) Not Applicable.
14
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Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Our Reasons for the Merger" and "THE MERGER--THE MERGER
TRANSACTION--Our Reasons for the Merger" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth in "THE MERGER--THE MERGER
TRANSACTION--Background of the Merger" and "THE MERGER--THE MERGER
TRANSACTION--Our Reasons for the Merger" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Our Reasons for the Merger," "THE MERGER--THE MERGER
TRANSACTION--Background of the Merger" and "THE MERGER--THE MERGER
TRANSACTION--Factors Considered by, and Recommendation of, Our Board" of
the Proxy Statement is incorporated herein by reference.
(d) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Our Reasons for the Merger," "THE MERGER--MERGER INFORMATION
SUMMARY--Comparative Rights of Stockholders," "THE MERGER--RISK FACTORS,"
"THE MERGER--THE MERGER TRANSACTION--Background of the Merger," "THE
MERGER--THE MERGER TRANSACTION--Our Reasons for the Merger, "THE
MERGER--THE MERGER TRANSACTION--Factors Considered by, and Recommendation
of, Our Board," "THE MERGER--THE MERGER TRANSACTION--Opinions of
Financial Advisor," "THE MERGER--DESCRIPTION OF NEW AVATEX COMMON STOCK,"
"THE MERGER--MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER," of
the Proxy Statement is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Recommendation of our Board of Directors," "THE MERGER--THE
MERGER TRANSACTION--Background of the Merger," "THE MERGER--THE MERGER
TRANSACTION--Factors Considered by, and Recommendation of, Our Board" of
the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Our Reasons for the Merger," "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER TRANSACTION--Our Reasons
for the Merger," "THE MERGER--THE MERGER TRANSACTION--Factors Considered
by, and Recommendation of, Our Board," "THE MERGER--THE MERGER
TRANSACTION--
15
<PAGE>
Opinions of Financial Advisor" of the Proxy Statement is incorporated
herein by reference.
(c) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER AGREEMENT--Conditions to
the Completion of the Merger," "INFORMATION ABOUT THE MEETING AND
VOTING--THE ANNUAL MEETING--Vote Necessary to Approve Merger Proposal,"
"THE MERGER--AGREEMENTS WITH CERTAIN STOCKHOLDERS--Elliott/Marx
Stockholders' Agreement," "THE MERGER--AGREEMENTS WITH CERTAIN
STOCKHOLDERS--Zucker Voting Agreement" of the Proxy Statement is
incorporated herein by reference.
(d) The majority of non-employee directors have not retained a
representative.
(e) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Recommendation of our Board of Directors," "THE MERGER--THE
MERGER TRANSACTION--Background of the Merger," "THE MERGER--THE MERGER
TRANSACTION--Factors Considered by, and Recommendation of, Our Board" of
the Proxy Statement is incorporated herein by reference.
(f) No such offer has been received.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a) and (b) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER TRANSACTION--Background of
the Merger," "THE MERGER--THE MERGER TRANSACTION----Opinions of Financial
Adviser" of the Proxy Statement is incorporated herein by reference.
(c) The Opinions of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc., each dated May 6, 1999, are included in the information to be
circulated to the stockholders and shall also be made available for
inspection and copying at the principal executive offices of the Company
during its regular business hours by any interested stockholder of the
Company or his or her representative who has been designated in writing.
At the written request of such stockholder, a copy of such opinion will
be sent, at the stockholder's expense, to such stockholder or his or her
representative.
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in "THE MERGER--AGREEMENTS WITH CERTAIN
STOCKHOLDERS--Elliott/Marx Stockholders' Agreement" of the Proxy
Statement is incorporated herein by reference.
16
<PAGE>
(b) Not Applicable.
Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's
Securities.
The information set forth in "THE MERGER--MERGER INFORMATION SUMMARY--The
Merger," "THE MERGER--AGREEMENTS WITH CERTAIN STOCKHOLDERS" of the Proxy
Statement is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--Our Reasons for the Merger," "THE MERGER--MERGER INFORMATION
SUMMARY--Recommendation of our Board of Directors," "THE MERGER--MERGER
INFORMATION SUMMARY--The Merger," "THE MERGER--THE MERGER
TRANSACTION--Our Reasons for the Merger," "THE MERGER--THE MERGER
TRANSACTION--Factors Considered by, and Recommendation of, Our Board,"
"THE MERGER--INTERESTS OF CERTAIN PERSONS IN THE MERGER," "THE
MERGER--AGREEMENTS WITH CERTAIN STOCKHOLDERS," "INFORMATION ABOUT THE
MEETING AND VOTING--THE ANNUAL MEETING--Shares Beneficially Owned by
Directors, Executive Officers and Phar-Mor" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
Item 13. Other Provisions of the transaction.
(a) The information set forth in "THE MERGER--MERGER INFORMATION
SUMMARY--The Merger," "THE MERGER--THE MERGER TRANSACTION--Appraisal
Rights," "THE MERGER--THE MERGER AGREEMENT--Appraisal Rights" of the
Proxy Statement is incorporated herein by reference.
(b) Not applicable.
(c) The information set forth in "THE MERGER----THE MERGER
TRANSACTION--Federal Securities Laws Consequences," "THE MERGER--STOCK
EXCHANGE LISTING; DELISTING OF OUR PREFERRED STOCK" of the Proxy
Statement is incorporated herein by reference.
Item 14. Financial Information.
(a) The information set forth in "THE MERGER--HISTORICAL AND PRO FORMA
FINANCIAL DATA--Our Historical Financial Data," "INFORMATION
17
<PAGE>
REGARDING AVATEX--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of the
Proxy Statement is incorporated herein by reference.
(b) The information set forth in "THE MERGER--HISTORICAL AND PRO FORMA
FINANCIAL DATA--Pro Forma Condensed Consolidated Financial Information"
of the Proxy Statement is incorporated herein by reference.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in "INFORMATION ABOUT THE MEETING AND
VOTING--THE ANNUAL MEETING--Proxies" of the Proxy Statement is
incorporated herein by reference.
(b) Not Applicable.
Item 16. Additional Information.
None.
Item 17. Material to be Filed as Exhibits.
(a) (1) Not Applicable.
(b)(1) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
dated as of May 6, 1999, as to the reasonable range of fair value
for the consideration to be received by holders of the $5
cumulative convertible preferred stock and the $4.20 cumulative
exchangeable series A preferred stock, attached as Annex C to the
Proxy Statement/Prospectus, attached to this Schedule 13e-3 as
Exhibit D.*
(b)(2) Materials presented to the Board of Directors on May 6, 1999 by
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. with
respect to the fair value opinion described above in Exhibit
(b)(1).**
(b)(3) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
dated as of May 6, 1999, as to factors affecting Avatex's
solvency, attached as Annex D to the Proxy Statement/Prospectus,
attached to this Schedule 13e-3 as Exhibit D.*
(b)(4) Materials presented to the Board of Directors on May 6, 1999 by
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. with
respect to the solvency opinion described above in Exhibit
(b)(3).**
(c)(1) Amended and Restated Agreement and Plan of Merger, dated as of
June 18, 1999, by and between Avatex and Xetava Corporation.
(Filed as
18
<PAGE>
Exhibit 2 to Avatex's Current Report on Form 8-K filed June 24,
1999 and incorporated herein by reference).*
(c)(2) Stipulation of Settlement of the lawsuits styled In re Avatex
Corporation Shareholders Litigation and Elliott Associates, L.P.
v. Avatex Corporation, et al. (Filed as Exhibit 10-W to Avatex's
registration statement on Form S-4 filed August 9, 1999 and
incorporated herein by reference).*
(c)(3) Stockholders' Agreement dated June 18, 1999, by and among Avatex,
Elliott Associates, L.P., Martley International, Inc., Moses Marx,
Momar Corporation, and United Equities Commodities Company. (Filed
as Exhibit 10-A to Avatex's Current Report on Form 8-K filed June
24, 1999 and incorporated herein by reference).*
(c)(4) Voting Agreement, dated June 18, 1999, by and among Avatex, Mark
S. Zucker, Anvil Investment Partners, L.P. and Anvil Investors,
Inc. (Filed as Exhibit 10-B to Avatex's Current Report on Form 8-K
filed June 24, 1999 and incorporated herein by reference).*
(d)(1) Proxy Statement/Prospectus contained in registration statement on
Form S-4.
(e)(1) Section 262 of the Delaware General Corporation Law (set forth as
Annex G to the Proxy Statement).*
(f)(1) Not Applicable.
- --------------------------
* Incorporated by reference
** To be filed by amendment
19
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, the
undersigned certify that the information set forth in this statement is true,
complete and correct.
AVATEX CORPORATION
By: /s/ Melvyn J. Estrin
-------------------------------------
Name: Melvyn J. Estrin
Title: Co-Chairman of the Board and
Co-Chief Executive Officer
Dated: August 9, 1999
20
<PAGE>
EXHIBIT INDEX
Exhibit Description
99.17(b)(1) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc., dated as of May 6, 1999, as to the reasonable range of
fair value for the consideration to be received by holders of
the $5 cumulative convertible preferred stock and the $4.20
cumulative exchangeable series A preferred stock, attached as
Annex C to the Proxy Statement/Prospectus, attached to this
Schedule 13e-3 as Exhibit D.*
99.17(b)(2) Materials presented to the Board of Directors on May 6, 1999 by
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. with
respect to the fair value opinion described above in Exhibit
(b)(1).**
99.17(b)(3) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc., dated as of May 6, 1999, as to factors affecting Avatex's
solvency, attached as Annex D to the Proxy
Statement/Prospectus, attached to this Schedule 13e-3 as
Exhibit D.*
99.17(b)(4) Materials presented to the Board of Directors on May 6, 1999 by
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. with
respect to the solvency opinion described above in Exhibit
(b)(3).**
99.17(c)(1) Amended and Restated Agreement and Plan of Merger, dated as of
June 18, 1999, by and between Avatex and Xetava Corporation.
(Filed as Exhibit 2 to Avatex's Current Report on Form 8-K
filed June 24, 1999 and incorporated herein by reference).*
99.17(c)(2) Stipulation of Settlement of the lawsuits styled In re Avatex
Corporation Shareholders Litigation and Elliott Associates,
L.P. v. Avatex Corporation, et al. (Filed as Exhibit 10-W to
Avatex's registration statement on Form S-4 filed August 9,
1999 and incorporated herein by reference).*
99.17(c)(3) Stockholders' Agreement dated June 18, 1999, by and among
Avatex, Elliott Associates, L.P., Martley International, Inc.,
Moses Marx, Momar Corporation, and United Equities Commodities
Company. (Filed as Exhibit 10-A to Avatex's Current Report on
Form 8-K filed June 24, 1999 and incorporated herein by
reference).*
99.17(c)(4) Voting Agreement, dated June 18, 1999, by and among Avatex,
Mark S. Zucker, Anvil Investment Partners, L.P. and Anvil
Investors, Inc. (Filed as Exhibit 10-B to Avatex's Current
Report on Form 8-K filed June 24, 1999 and incorporated herein
by reference).*
<PAGE>
99.17(d)(1) Proxy Statement/Prospectus contained in registration statement
on Form S-4.
99.17(e)(1) Section 262 of the Delaware General Corporation Law (set forth
as Annex G to the Proxy Statement).*
- ---------------------
* Incorporated by reference
** To be filed by amendment
22
<PAGE>
PRELIMINARY COPY, SUBJECT TO COMPLETION, DATED AUGUST 9, 1999
AVATEX CORPORATION
PROXY STATEMENT / PROSPECTUS
------------------------------
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Our board of directors has approved a merger with Xetava Corporation, a
wholly-owned subsidiary of ours. We will be the surviving corporation. As a
result of the merger:
o For each share of our common stock you own, you will receive one share of our
new common stock.
o For each share of our $5 cumulative convertible preferred stock you own, you
will receive:
o 9.134 shares of our new common stock; or
o in lieu of our new common stock, YOU MAY ELECT TO RECEIVE:
o $3.7408 in cash;
o $8.34 principal amount of 6.75% notes due 2002 to be issued by Avatex
Funding, Inc., a new wholly-owned subsidiary of ours;
o warrants to purchase 0.67456 shares of our new common stock; and
o a deferred contingent cash right equal to your pro rata share of 16% of
an amount equal to the lesser of $7.5 million or 20% of any net recovery
that we may receive in certain litigation against McKesson HBOC, Inc. and
certain major pharmaceutical manufacturers.
o For each share of $4.20 cumulative exchangeable series A preferred stock you
own, you will receive:
o 7.253 shares of our new common stock; or
o in lieu of our new common stock, YOU MAY ELECT TO RECEIVE:
o $2.9705 in cash;
o $6.623 principal amount of the 6.75% notes;
o warrants to purchase 0.53567 shares of our new common stock; and
o a deferred contingent cash right equal to your pro rata share of 84% of
an amount equal to the lesser of $7.5 million or 20% of any net recovery
that we may receive in the McKesson litigation.
If all of our preferred stockholders elect to receive the alternate
consideration described above, they will receive a total of $15,250,000 in cash,
$34,000,000 principal amount of the 6.75% notes, and warrants to purchase
2,750,000 shares of our new common stock.
Our common and preferred stockholders will be asked to vote on the merger
proposal at our annual meeting of stockholders. Only our common stockholders
will be asked to vote on the election of four directors.
You will be entitled to vote at our annual meeting on , 1999, at
10:00 a.m., local time, at .
PLEASE VOTE AS SOON AS POSSIBLE TO MAKE SURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING. TO GRANT YOUR PROXY TO VOTE YOUR SHARES, YOU MAY
COMPLETE AND RETURN THE ENCLOSED PROXY CARD. YOU MAY ALSO CAST YOUR VOTE IN
PERSON AT THE ANNUAL MEETING. IF YOU DO NOT VOTE, IT WILL HAVE THE SAME EFFECT
AS VOTING AGAINST THE MERGER PROPOSAL.
We urge you to read this proxy statement/prospectus, INCLUDING THE RISK
FACTORS THAT BEGIN ON PAGE I-14.
This proxy statement/prospectus is dated , 1999, and is first
being mailed to our stockholders on or about , 1999.
<TABLE>
<S> <C>
ABBEY J. BUTLER, MELVYN J. ESTRIN,
Co-Chairman of the Board and Co-Chief Executive Co-Chairman of the Board and Co-Chief Executive
Officer Avatex Corporation Officer Avatex Corporation
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAS APPROVED OUR NEW COMMON
STOCK, THE WARRANTS OR THE AVATEX FUNDING 6.75% NOTES TO BE ISSUED IN CONNECTION
WITH THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
AVATEX CORPORATION
5910 North Central Expressway, Suite 1780, Dallas, Texas 75206
---------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
, 1999
Our 1999 annual meeting is being held at , on , ,
1999, at 10:00 a.m., local time:
(1) to consider and vote upon a proposal to approve the adoption of the
Amended and Restated Agreement and Plan of Merger, dated as of
June 18, 1999, between Avatex and Xetava, as we describe in the
attached proxy statement/prospectus;
(2) to elect two directors to our Board of Directors to hold office until
the annual meeting of stockholders in 2001;
(3) to elect two directors to our Board of Directors to hold office until
the annual meeting of stockholders in 2002; and
(4) to act upon any other matters properly coming before the annual meeting
or any adjournment or postponement of the meeting.
Approval of the merger agreement requires the affirmative vote of the
holders of:
o a majority of the outstanding shares of our common stock;
o at least 66-2/3% of the outstanding shares of our $5 cumulative
convertible preferred stock; and
o at least 66-2/3% of the outstanding shares of our $4.20 cumulative
exchangeable series A preferred stock, each voting separately.
THEREFORE, YOUR FAILURE TO VOTE WITH REGARD TO THE MERGER WILL HAVE THE SAME
EFFECT AS A NEGATIVE VOTE.
Election of a director requires a plurality of the votes cast by our common
stockholders.
Only our stockholders of record at the close of business on ,
1999 are entitled to notice of and to vote at the meeting and any adjournment or
postponement of the meeting. To grant your proxy to vote your shares, you may
complete and return the enclosed proxy card. You may also cast your vote in
person at the annual meeting. Please vote promptly, whether or not you expect to
attend the annual meeting.
Under Delaware law, appraisal rights will be available to record holders of
our $5 preferred stock and $4.20 preferred stock in connection with the merger.
Holders of our common stock have no appraisal rights in connection with the
merger. For those preferred stockholders to exercise their appraisal rights,
they must follow the procedures prescribed by Delaware law. These procedures are
summarized under "The Merger--The Merger Transaction--Appraisal Rights"
beginning on page I-58 of this proxy statement/prospectus.
A list of our stockholders entitled to vote at the annual meeting will be
available for examination for any purpose germane to the meeting. This list will
be available during ordinary business hours at our offices at 5910 North Central
Expressway, Suite 1780 in Dallas, Texas. We will begin to make this list
available on or about , 1999, and the list will also be available at
the annual meeting.
By Order of the Board of
Directors,
ROBERT H. STONE
Secretary
Dallas, Texas
, 1999
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statement/prospectus
and other information with the SEC. Phar-Mor, Inc., our 38%-owned affiliate,
also files those same reports and other information with the SEC. You may read
and copy any reports, statements or other information both we and Phar-Mor file
at the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Both our and Phar-Mor's SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov." Our SEC file number is
1-8549. Phar-Mor's SEC file number is 0-27050.
We filed a registration statement on Form S-4 with the SEC with respect to
the shares of new common stock, the warrants (including the shares of new common
stock underlying the warrants) and the 6.75% notes to be issued in the merger.
The registration statement also relates to our guarantee of the 6.75% notes.
This proxy statement/prospectus is a part of that registration statement. In
addition to serving as a proxy statement for our annual meeting of stockholders,
this document serves as a prospectus for the shares of new common stock, the
warrants (including the shares of new common stock underlying the warrants) and
the 6.75% notes to be issued in the merger. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
In addition, each report or other document which we file pursuant to
Section 13(a), 13(c), 14 or 15(d), of the Exchange Act, between the date of this
proxy statement/prospectus and the date of the meeting, will be incorporated
into this proxy statement/prospectus and will be a part of it beginning on the
date we file it with the SEC. If anything in a subsequently filed document which
becomes a part of this proxy statement/prospectus is different from anything in
this document, this proxy statement/prospectus will be deemed modified by that
subsequently filed document.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE ADOPTION OF THE MERGER AND THE MERGER
AGREEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED [ ], 1999. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF NEW COMMON STOCK, 6.75%
NOTES OR WARRANTS IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION
CHAPTER ONE--THE MERGER................................................................................... I-1
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................................................... I-1
MERGER INFORMATION SUMMARY................................................................................ I-2
The Companies........................................................................................ I-2
Our Reasons for the Merger........................................................................... I-2
Recommendation of our Board of Directors............................................................. I-2
Stockholder Vote Required............................................................................ I-3
The Merger........................................................................................... I-3
Accounting Treatment................................................................................. I-8
Market Prices........................................................................................ I-8
Dividends............................................................................................ I-8
Comparative Rights of Stockholders................................................................... I-8
Listing of New Avatex Common Stock, 6.75% Notes and Warrants......................................... I-8
Summary of the Terms of the 6.75% Notes.............................................................. I-9
Summary of the Terms of the Warrants................................................................. I-10
Summary of the Terms of Deferred Contingent Cash Rights.............................................. I-11
Unaudited Comparative Per Share Data................................................................. I-13
RISK FACTORS.............................................................................................. I-14
Risks Relating to Phar-Mor........................................................................... I-28
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS.............................................. I-29
HISTORICAL AND PRO FORMA FINANCIAL DATA................................................................... I-30
Our Historical Financial Data........................................................................ I-31
Merger-Related Expenses.............................................................................. I-32
Pro Forma Condensed Consolidated Financial Information............................................... I-32
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS.................................... I-39
THE MERGER TRANSACTION.................................................................................... I-40
Background of the Merger............................................................................. I-40
Our Reasons for the Merger........................................................................... I-47
Factors Considered by, and Recommendation of, Our Board.............................................. I-48
Opinions of Financial Advisor........................................................................ I-50
Accounting Treatment................................................................................. I-57
Appraisal Rights..................................................................................... I-58
Federal Securities Laws Consequences................................................................. I-61
Regulatory Requirements.............................................................................. I-61
MARKET PRICE AND DIVIDEND INFORMATION..................................................................... I-62
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................................................ I-63
General.............................................................................................. I-63
Stock Option Plan.................................................................................... I-63
Performance Incentive Plan........................................................................... I-63
Maintenance of Benefits.............................................................................. I-63
Directors............................................................................................ I-63
</TABLE>
ii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Indemnification and Insurance........................................................................ I-63
THE MERGER AGREEMENT...................................................................................... I-64
Structure of the Merger.............................................................................. I-64
Effective Time and Closing........................................................................... I-64
Corporate Matters.................................................................................... I-64
Merger Consideration................................................................................. I-65
Deferred Contingent Cash Rights...................................................................... I-65
Treatment of Our Stock Options; Other Stock-Based Awards............................................. I-65
Election Procedure................................................................................... I-65
Exchange of Shares................................................................................... I-66
Appraisal Rights..................................................................................... I-67
Principal Covenants.................................................................................. I-67
Conditions to the Completion of the Merger........................................................... I-68
Termination of the Merger Agreement.................................................................. I-69
Amendments........................................................................................... I-69
Indemnification of Directors and Officers............................................................ I-69
AGREEMENTS WITH CERTAIN STOCKHOLDERS...................................................................... I-69
Settlement Agreement................................................................................. I-69
Elliott/Marx Stockholders' Agreement................................................................. I-70
Zucker Voting Agreement.............................................................................. I-73
DESCRIPTION OF WARRANTS................................................................................... I-74
Exercise Provisions.................................................................................. I-74
Special Provision Limiting Ownership Percentage...................................................... I-74
No Rights As Stockholders............................................................................ I-74
Merger, Sale of Assets, Etc.......................................................................... I-74
Adjustments.......................................................................................... I-75
Delivery of Prospectus............................................................................... I-75
Amendment............................................................................................ I-75
DESCRIPTION OF THE AVATEX FUNDING 6.75% NOTES............................................................. I-75
General.............................................................................................. I-75
Certain Definitions.................................................................................. I-76
Guarantee by Avatex.................................................................................. I-77
Transfer and Exchange................................................................................ I-78
Special Compliance Certificate....................................................................... I-79
Optional Redemption.................................................................................. I-79
Option to Purchase Upon Extraordinary Dividend....................................................... I-79
Material Operating Restrictions...................................................................... I-80
Events of Default.................................................................................... I-83
Collateral and Security.............................................................................. I-84
Procedures to Amend, Supplement or Waive the Indenture............................................... I-85
Payments for Consents................................................................................ I-86
Determining the Outstanding Notes.................................................................... I-86
</TABLE>
iii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Governing Law........................................................................................ I-87
Form of Registered Notes............................................................................. I-87
Subrogation Agreement................................................................................ I-87
CERTIFICATE OF INCORPORATION OF AVATEX FUNDING............................................................ I-89
DESCRIPTION OF DEFERRED CONTINGENT CASH RIGHTS............................................................ I-89
General.............................................................................................. I-89
Description of the McKesson Litigation............................................................... I-90
Calculation of Net Recovery and Net Recovery Participation Cap....................................... I-91
Payment on the Deferred Contingent Cash Rights....................................................... I-92
Control Over the McKesson Litigation................................................................. I-93
Relationship with Our Performance Incentive Plan..................................................... I-93
COMPARISON OF STOCKHOLDER RIGHTS.......................................................................... I-93
$4.20 Preferred Stock................................................................................ I-94
$5 Preferred Stock................................................................................... I-96
DESCRIPTION OF NEW AVATEX COMMON STOCK.................................................................... I-97
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.................................................... I-98
STOCK EXCHANGE LISTING; DELISTING OF OUR PREFERRED STOCK.................................................. I-106
LEGAL MATTERS............................................................................................. I-106
EXPERTS................................................................................................... I-106
CHAPTER TWO--INFORMATION ABOUT THE MEETING AND VOTING..................................................... II-1
THE ANNUAL MEETING........................................................................................ II-1
When and Where the Annual Meeting Will Be Held....................................................... II-1
What Will Be Voted Upon.............................................................................. II-1
Only Stockholders of Record as of [ ] Are Entitled to Vote............................. II-1
List of Stockholders................................................................................. II-1
Quorum............................................................................................... II-1
Shares Beneficially Owned by Directors, Executive Officers and Phar-Mor.............................. II-2
Vote Necessary to Approve Merger Proposal............................................................ II-2
Vote Necessary to Elect Directors.................................................................... II-2
Proxies.............................................................................................. II-2
Other Business; Adjournments......................................................................... II-3
CHAPTER THREE--OTHER ANNUAL MEETING PROPOSALS............................................................. III-1
ELECTION OF DIRECTORS..................................................................................... III-1
Board of Directors................................................................................... III-1
Committees of our Board of Directors................................................................. III-1
Compensation of Directors............................................................................ III-1
Election of Directors................................................................................ III-2
Biographical Information of Our Directors............................................................ III-3
Biographical Information of Our Executive Officers................................................... III-5
Compliance with Section 16(A) of the Securities Exchange Act of 1934................................. III-5
Executive Compensation............................................................................... III-6
Option/SAR Grants in Fiscal Year 1999 to Executive Officers.......................................... III-7
</TABLE>
iv
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Aggregate Options/SAR-Exercises in Fiscal 1999 by Executive Officers and Fiscal Year-End Option/SAR
Values.............................................................................................. III-7
Long-Term Incentive Plans--Awards in Last Fiscal Year................................................ III-8
Employment and Indemnification Agreements............................................................ III-8
Compensation Committee Interlocks and Insider Participation.......................................... III-11
Report of the Finance and Personnel Committee........................................................ III-11
Performance Graph.................................................................................... III-13
Security Ownership of Certain Beneficial Owners and Management....................................... III-13
Certain Relationships and Related Transactions....................................................... III-16
OTHER MATTERS............................................................................................. III-17
CHAPTER FOUR--INFORMATION REGARDING AVATEX................................................................ IV-1
BUSINESS.................................................................................................. IV-1
Real Estate.......................................................................................... IV-1
Equity Investment in Phar-Mor........................................................................ IV-1
Other................................................................................................ IV-2
Additional Information............................................................................... IV-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... IV-3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ IV-3
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................... IV-3
AVATEX STOCK OPTION PLAN.................................................................................. IV-4
AVATEX PERFORMANCE INCENTIVE PLAN......................................................................... IV-8
<CAPTION>
ANNEXES
<S> <C>
Annex A Amended and Restated Agreement and Plan of Merger
Annex B Fairness Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc. with respect
to Avatex common stock
Annex C Fairness Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc. with respect
to Avatex $5 cumulative convertible preferred stock and $4.20 cumulative exchangeable
series A preferred stock
Annex D Solvency Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc.
Annex E Our Annual Report on Form 10-K for our fiscal year ended March 31, 1999
Annex F Certain financial statements of Phar-Mor, Inc. excerpted from Phar-Mor's Annual Report on
Form 10-K for its fiscal year ended June 27, 1998 and from its Quarterly Report on
Form 10-Q for its quarterly period ended March 27, 1999
Annex G Section 262 of the General Corporation Law of the State of Delaware
</TABLE>
v
<PAGE>
INTRODUCTION
This proxy statement/prospectus is being mailed to stockholders of Avatex
Corporation in connection with our annual meeting of stockholders. The document
is organized into four chapters.
Chapter One--"The Merger" provides summary and detailed information about
our proposed merger with Xetava on which our stockholders will vote at the
annual meeting. This chapter also describes the election available to our
preferred stockholders in connection with the merger.
Chapter Two--"Information about the Annual Meeting and Voting" provides
information about our annual meeting, how stockholders may vote or grant a proxy
and the vote required to adopt each proposal.
Chapter Three--"Other Annual Meeting Proposals" provides information about
the other matters that our common stockholders will vote on at the annual
meeting, including election of directors. Our preferred stockholders will not
vote on these matters.
Chapter Four--"Information Regarding Avatex" provides information about us.
YOU SHOULD READ THIS PROXY STATEMENT/PROSPECTUS CAREFULLY BEFORE YOU VOTE
YOUR SHARES.
<PAGE>
CHAPTER ONE--THE MERGER
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: When and where is our annual stockholders' meeting?
A: Our annual meeting will take place at , on , 1999, at
10:00 a.m., local time.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please fill out, sign and mail your signed proxy card in the enclosed
return envelope as soon as possible, so that we may vote your shares at the
annual meeting.
To assure that we obtain your vote, please give your proxy as instructed on your
proxy card even if you currently plan to attend the meeting in person.
Q: What do I do if I want to change my vote?
A: Send in a later-dated, signed proxy card to our Secretary before the meeting.
Or, you can attend the meeting in person and vote. You may also revoke your
proxy by sending a notice of revocation to our Secretary as instructed on the
proxy card.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker cannot vote them on the merger proposal. You
should therefore be sure to provide your broker with instructions on how to vote
your shares.
If you do not give voting instructions to your broker, you will, in effect, be
voting against the merger unless you appear in person at the meeting with a
proxy from your broker authorizing you to vote your "street name" shares, and
vote in favor of the merger.
Q: Should I send in my stock certificates now?
A: It depends. Holders of our preferred stock who would like to receive the
alternate consideration (that is, the consideration other than our new class A
common stock) for their preferred stock in the merger will need to send in their
preferred stock certificates along with an election form and letter of
transmittal on or before [ ]. Holders of our common stock and
holders of our preferred stock that do not wish to receive the alternate
consideration should not send in their stock certificates now. Promptly after we
complete the merger, we will send those stockholders written instructions for
exchanging their existing stock certificates for certificates of our new common
stock.
Q: What happened to our original merger with Xetava that we announced on
April 9, 1998?
A: Under the original merger agreement, we would have merged into Xetava, with
the holders of our $5 cumulative convertible preferred stock and $4.20
cumulative exchangeable series A preferred stock receiving 73.1% of Xetava's
common stock and the holders of our common stock receiving 26.9% of Xetava's
common stock. After the original merger was announced, three lawsuits were
brought by certain of our preferred stockholders challenging the original merger
proposal. On August 28, 1998, the Delaware Supreme Court held that the original
merger could not be consummated without the consent of the holders of at least
two-thirds of the outstanding shares of our $5 cumulative convertible preferred
stock. Following this decision, we began negotiating with certain preferred
stockholders the terms of a recapitalization transaction that would be
acceptable to us and these stockholders. These negotiations continued for
several months culminating with the execution of the amended and restated merger
agreement on June 18, 1999.
Q: If I am a holder of $5 cumulative convertible preferred stock or $4.20
cumulative exchangeable series A preferred stock, how do I elect to receive the
alternate consideration available for my preferred stock?
A: You can only receive the alternate consideration if you indicate this
preference on the election form and letter of transmittal that you received
along with this proxy statement/prospectus. Your election will only be valid if
you properly complete and return the election form, letter of transmittal and
other required materials to our exchange agent prior to 5:00 p.m., New York City
time, on , 1999. If you do not validly elect to receive the
alternate consideration for your preferred stock, you will receive our new
common stock.
Q: When do you expect to complete the merger?
A: We currently expect to complete the merger promptly following the annual
meeting.
Q: Whom do I call if I have questions about the meeting or the merger?
A: Stockholders may call our Corporate Secretary, Robert H. Stone, at
(214) 365-7450.
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MERGER INFORMATION SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger and related transactions fully and
for a more complete description of the legal terms of the merger and the related
transactions, you should read this document and the documents we have referred
you to carefully. See "Where You Can Find More Information" on page i above.
THE COMPANIES
AVATEX CORPORATION
5910 North Central Expressway, Suite 1780
Dallas, Texas 75206
(214) 365-7450
We are a holding company that, along with our subsidiaries, owns interests in
other corporations and partnerships. Through Phar-Mor, Inc., our 38% owned
affiliate, we are involved in operating a chain of discount retail drugstores.
XETAVA CORPORATION
5910 North Central Expressway, Suite 1780
Dallas, Texas 75206
(214) 365-7450
We incorporated Xetava in Delaware on April 8, 1998 for the purpose of
consummating our originally proposed merger with it. Xetava conducts no business
operations and has no assets or liabilities of any significance.
AVATEX FUNDING, INC.
5910 North Central Expressway, Suite 1780
Dallas, Texas 75206
(214) 365-7450
Avatex Funding is a Delaware corporation that we wholly own. We incorporated
Avatex Funding for the specific purpose of, and its business activities will be
limited primarily to, issuing the 6.75% notes in the merger and owning shares of
Phar-Mor common stock that will be collateral for the 6.75% notes.
OUR REASONS FOR THE MERGER (PAGE I-47)
Our Board of Directors believes that the completion of the merger is the
optimal method for achieving an equity recapitalization and restoring our
viability and business prospects. Our Board believes that, among other benefits,
the merger will:
o align the interests of all of our equity owners through the creation of one
principal equity security;
o make our common stock more attractive to the financial markets and more
liquid by eliminating our preferred stock and simplifying our capital
structure;
o alleviate the uncertainty concerning our viability by eliminating the payment
obligations of our preferred stock;
o allow us to save costs and reallocate resources that we would have otherwise
incurred or allocated defending the lawsuits brought in connection with our
originally proposed merger into Xetava;
o enable us to protect, develop and realize upon our existing investments, and
afford us with the opportunity to prosecute and realize upon our pending
litigation against McKesson HBOC, Inc. and certain major pharmaceutical
manufacturers;
o improve our perception as a qualified purchaser, investor and/or business
partner, as we will no longer be burdened by our preferred stock obligations;
and
o stabilize our financial condition so that we will continue to be able to
retain highly qualified management and employees.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our Board of Directors believes that the merger is advisable, fair to you and in
your best interest, and recommends that you vote FOR approval of the adoption of
the merger agreement.
Four of our directors abstained from our Board's discussion and consideration
of, and vote on, the merger and the merger agreement. These four directors were
elected by our preferred stockholders pursuant to the terms of the Certificates
of Designation for our $5 cumulative convertible preferred stock and our $4.20
cumulative exchangeable series A preferred stock. These directors informed us
that they abstained because they may have been deemed to have a conflict of
interest due to their current or past affiliation with Elliott Associates, L.P.
Elliott Associates owns shares of our $5 cumulative convertible preferred stock
and $4.20 cumulative exchangeable series A preferred stock and certain of its
representatives participated in our negotiation of the terms of the merger. In
connection with the merger, we entered into a stockholders' agreement with
Elliott Associates. In addition, Phar-Mor has agreed to purchase all of the
833,900 shares of our common stock owned by Elliott Associates and Westgate
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International L.P. (an entity associated with Elliott Associates) at a purchase
price of $2.00 per share. Phar-Mor's purchase will occur simultaneously with the
closing of the merger.
STOCKHOLDER VOTE REQUIRED
Approval of the merger agreement requires the separate affirmative vote of the
holders of:
o a majority of the outstanding shares of our common stock;
o at least two-thirds of the outstanding shares of our $5 cumulative
convertible preferred stock; and
o at least two-thirds of the outstanding shares of our $4.20 cumulative
exchangeable Series A preferred stock.
Certain of our preferred stockholders owning approximately 57.1% and 56.8% of
our $5 cumulative convertible preferred stock and $4.20 cumulative exchangeable
Series A preferred stock, respectively, have agreed to vote in favor of the
merger proposal.
A stockholder who abstains or does not vote on the merger is effectively voting
against the merger.
THE MERGER
The merger agreement is attached as Annex A to this proxy statement/prospectus.
WE ENCOURAGE YOU TO READ THE ENTIRE MERGER AGREEMENT AS IT IS THE LEGAL DOCUMENT
THAT GOVERNS THE MERGER.
For purposes of this proxy statement/prospectus, the term "Surviving
Corporation" means Avatex following the completion of the merger. Unless the
context requires otherwise, references to Avatex in this proxy
statement/prospectus are deemed to include Avatex as the surviving corporation
in the merger.
WHAT OUR COMMON STOCKHOLDERS WILL RECEIVE (PAGE I-65)
If the merger is completed and you are a holder of our common stock, you will
receive for each of your shares of common stock one share of our new class A
common stock, which we will refer to as the "NEW AVATEX COMMON STOCK."
WHAT OUR PREFERRED STOCKHOLDERS WILL RECEIVE (PAGE I-65)
If the merger is completed and you are a holder of our $5 cumulative convertible
preferred stock ("$5 PREFERRED STOCK"), you will receive for each of your shares
of $5 Preferred Stock:
o 9.134 shares of New Avatex Common Stock; or
o in lieu of New Avatex Common Stock, YOU MAY ELECT ALTERNATIVELY TO RECEIVE:
o $3.7408 in cash;
o $8.34 principal amount of 6.75% notes due 2002 to be issued by Avatex
Funding;
o warrants to purchase 0.67456 shares of New Avatex Common Stock; and
o a deferred contingent cash right (a "$5 PREFERRED DEFERRED CONTINGENT
CASH RIGHT") equal to your pro rata share of 16% of an amount equal to
the lesser of $7.5 million or 20% of any net recovery that we may receive
in certain litigation against McKesson and a number of major
pharmaceutical manufacturers.
We refer to the latter form of consideration as the "$5 PREFERRED STOCK
ALTERNATE CONSIDERATION."
If the merger is completed and you are a holder of our $4.20 cumulative
exchangeable series A preferred stock ("$4.20 PREFERRED STOCK"), you will
receive for each of your shares of $4.20 Preferred Stock:
o 7.253 shares of New Avatex Common Stock; or
o in lieu of New Avatex Common Stock, YOU MAY ELECT ALTERNATIVELY TO RECEIVE:
o $2.9705 in cash;
o $6.623 principal amount of 6.75% notes due 2002 to be issued by Avatex
Funding;
o warrants to purchase 0.53567 shares of New Avatex Common Stock; and
o a deferred contingent cash right (a "$4.20 PREFERRED DEFERRED CONTINGENT
CASH RIGHT") equal to your pro rata share of 84% of an amount equal to
the lesser of $7.5 million or 20% of any net recovery that we may receive
in the McKesson litigation.
We refer to the latter form of consideration as the "$4.20 PREFERRED STOCK
ALTERNATE CONSIDERATION."
Elliott Associates, Westgate International and Moses Marx and certain of his
affiliates, who together beneficially own 50% and 55.3% of the $5 Preferred
Stock and the $4.20 Preferred Stock, respectively, have agreed to elect to
receive the $5 Preferred Stock Alternate Consideration and the $4.20 Preferred
Stock Alternate Consideration.
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NO FRACTIONAL SHARES
We will not issue any fractional shares of New Avatex Common Stock in the
merger. Holders of our common stock, $5 Preferred Stock and $4.20 Preferred
Stock will receive a check for any fractional shares in an amount based on the
average of the last reported sales prices (or the average of the quoted closing
bid and ask prices if there were no sales) of a share of our common stock quoted
on the OTC Bulletin Board system during the thirty (30) consecutive trading days
ending on the last full trading day prior to the merger.
EXAMPLES OF WHAT OUR PREFERRED STOCKHOLDERS CAN RECEIVE
Example #1: If you own 100 shares of $5 Preferred Stock, in the merger you will
be entitled to receive:
o 913 shares of New Avatex Common Stock and a check for the market value of
four-tenths of a share; or
o YOU CAN ELECT TO RECEIVE:
o $374.08 in cash;
o $834 principal amount of the 6.75% notes;
o warrants to purchase 67 shares of New Avatex Common Stock; and
o .0153% of 16% of any net recovery from the McKesson litigation, which
amount will in no event exceed $184.
Example #2: If you own 100 shares of $4.20 Preferred Stock, in the merger you
will be entitled to receive:
o 725 shares of New Avatex Common Stock and a check for the market value of
three-tenths of a share; or
o YOU CAN ELECT TO RECEIVE:
o $297.05 in cash;
o $662 principal amount of the 6.75% notes;
o warrants to purchase 53 shares of New Avatex Common Stock; and
o .0023% of 84% of any net recovery from the McKesson litigation, which
amount will in no event exceed $146.
EFFECTS OF THE MERGER
The merger will effect a recapitalization of our capital stock resulting in the
elimination of our $5 Preferred Stock and $4.20 Preferred Stock.
We have not declared or paid any dividends on either the $5 Preferred Stock or
the $4.20 Preferred Stock since October 15, 1996. The dividends on both series
of preferred stock are cumulative. As of March 31, 1999, the cumulative
dividends accrued and not paid were $8.2 million ($12.50 per share) and $51.0
million ($11.83 per share) on the $5 Preferred Stock and $4.20 Preferred Stock,
respectively. In addition, we have not made the sinking fund payments of
$4,400,000 with respect to 88,000 shares of the $5 Preferred Stock that were
scheduled for each of January 1998 and January 1999. These dividend and sinking
fund payment arrearages are reflected in the exchange ratios for the $5
Preferred Stock and the $4.20 Preferred Stock.
As a result of the elimination of the $5 Preferred Stock and the $4.20 Preferred
Stock in the merger, any and all rights and preferences of these stocks,
including to any accumulated dividends or sinking fund arrearage or to any
future dividends or sinking fund payments, will be extinguished automatically.
Examples:
100% Elect
If all of our preferred stockholders elect to receive the applicable alternate
consideration described above, they will receive, in the aggregate, $15,250,000
in cash, $34,000,000 principal amount of the 6.75% notes and warrants to
purchase 2,750,000 shares of New Avatex Common Stock. Our common stockholders
immediately prior to the merger would own, in the aggregate, 100% of the shares
of New Avatex Common Stock outstanding immediately after the merger.
50% Elect
If holders of 50% of each of the outstanding shares of $5 Preferred Stock and
$4.20 Preferred Stock elect to receive the $5 Preferred Stock Alternate
Consideration and the $4.20 Preferred Stock Alternate Consideration, as
applicable, the following will result:
o our common stockholders immediately prior to the merger would own, in the
aggregate, 42.6% of the shares of New Avatex Common Stock outstanding
immediately after the merger;
o our preferred stockholders immediately prior to the merger would own, in the
aggregate, 57.4% of the shares of New Avatex Common Stock outstanding
immediately after the merger;
o we would pay a total of $7,625,000 in cash to our existing preferred
stockholders;
o we would issue warrants to purchase 1,375,000 shares of New Avatex Common
Stock to our existing preferred stockholders; and
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o Avatex Funding would issue $17,000,000 principal amount of 6.75% notes to our
existing preferred stockholders.
AGREEMENTS WITH CERTAIN STOCKHOLDERS (SEE PAGE I-69)
Elliott Associates/Moses Marx
Elliott Associates, Westgate International and Moses Marx and certain of his
affiliates have agreed to, among other things:
o vote their shares of $5 Preferred Stock and $4.20 Preferred Stock in favor of
the merger agreement; and
o elect to receive the $5 Preferred Stock Alternate Consideration and/or the
$4.20 Preferred Stock Alternate Consideration with respect to their shares of
$5 Preferred Stock and $4.20 Preferred Stock.
These stockholders have informed us that, as of the date of this proxy
statement/prospectus, they beneficially own 50% and 55.3% of the outstanding
shares of $5 Preferred Stock and $4.20 Preferred Stock, respectively.
These stockholders also agreed to:
o waive certain rights they have in respect of the merger and to release claims
they may have against us;
o a ten-year standstill arrangement that, among other things, prohibits them
from acquiring additional equity securities of us or seeking to influence or
control our management or policies; and
o settle pending litigation against us relating to our originally proposed
merger into Xetava.
In consideration of the standstill arrangement, we will pay a total of $600,000
to these stockholders following the closing of the merger.
Anvil Investment Partners
We have entered into a similar agreement with Anvil Investment Partners, L.P.
However, this stockholder had not determined whether it will elect to receive
the $5 Preferred Stock Alternate Consideration or the $4.20 Preferred Stock
Alternate Consideration. In consideration of the standstill arrangement to which
this stockholder agreed, we will pay it a total of $300,000.
This stockholder has informed us that, as of the date of this proxy
statement/prospectus, it and certain of its affiliates beneficially own 7.1% and
1.5% of the outstanding shares of $5 Preferred Stock and $4.20 Preferred Stock,
respectively.
SETTLEMENT OF LITIGATION RELATING TO ORIGINAL MERGER
We have entered into an agreement to settle two class actions brought on behalf
of all holders of our preferred stock and an action brought by Elliott
Associates. All three of these actions were filed in the Delaware Court of
Chancery in April 1998 and challenged our originally proposed merger into
Xetava. Based upon the increased consideration in the merger agreement, the
parties to these actions have agreed to settle the actions. As part of the
settlement, we will pay the fees of counsel for the plaintiffs in the two class
actions up to $175,000. We will also reimburse Elliott Associates $925,000 for
attorneys' and advisory fees it incurred in connection with its action. The
settlement is subject to court approval and completion of the merger.
STOCK PURCHASE ARRANGEMENT BETWEEN CERTAIN STOCKHOLDERS AND PHAR-MOR
We have been informed that Elliott Associates, Westgate International and Moses
Marx and certain of his affiliates entered into a stock purchase agreement with
Phar-Mor. Phar-Mor has agreed to purchase a total of 2,862,400 shares of our
common stock beneficially owned by these persons for a purchase price of $2.00
per share. This purchase is supposed to occur simultaneously with the closing of
the merger. These stockholders also granted Phar-Mor a proxy to vote these
shares of our common stock. Phar-Mor agreed to vote these shares in favor of the
merger agreement.
SHARE OWNERSHIP OF CERTAIN MANAGEMENT AND PHAR-MOR
On , 1999, Melvyn J. Estrin and Abbey J. Butler, our Co-Chairmen and
Co-Chief Executive Officers, and their respective affiliates, owned and were
entitled to vote 1,507,811 shares of our common stock, or approximately 11% of
the outstanding shares of our common stock. The Master Trust for the National
Intergroup, Inc. Retirement Program and Davenport, Inc. Pension Plan, of which
we are the sponsor, currently beneficially owns approximately 10% of the
outstanding shares of our common stock. In addition, on , 1999, Phar-Mor
was entitled to vote 4,948,600 shares of our common stock (including the shares
it has agreed to purchase from Elliott Associates, Westgate International and
Moses Marx and certain of his affiliates as described above), or approximately
35.8% of the outstanding shares of our common stock. These persons and entities
have indicated that they will vote in favor of adoption of the merger agreement.
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If all of these persons and entities vote in favor of the proposed merger, we
will have obtained one of the requisite stockholder approvals of the merger
agreement, i.e., approval by the holders of a majority of the outstanding shares
of our common stock.
APPRAISAL RIGHTS (PAGE I-67)
The record holders of $5 Preferred Stock and $4.20 Preferred Stock have the
right to an appraisal with respect to their shares in connection with the
merger. The holders of our common stock do not have appraisal rights in
connection with the merger. For information about the appraisal rights available
in connection with the merger, see "The Merger--The Merger
Transaction--Appraisal Rights."
OPINIONS OF FINANCIAL ADVISOR (SEE PAGE I-50)
In deciding to approve the merger, our Board of Directors considered, among
other things, opinions of its financial advisor, Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., to the effect that:
o the consideration to be received by holders of our common stock in the merger
is fair to them from a financial point of view;
o the consideration to be received by holders of $5 Preferred Stock in the
merger is within a reasonable range of fair value of $5 Preferred Stock; and
o the consideration to be received by holders of $4.20 Preferred Stock in the
merger is within a reasonable range of fair value of $4.20 Preferred Stock.
In addition, our Board of Directors considered the opinion of Houlihan Lokey to
the effect that, immediately after and giving effect to the merger:
o on a pro forma basis, the fair value and present fair saleable value of our
assets would exceed our stated liabilities and identified contingent
liabilities;
o we should be able to pay our debts as they become absolute and mature; and
o our capital remaining after the merger would not be unreasonably small for
the business in which we are engaged (as our management has indicated it is
now conducted and is proposed to be conducted after the merger).
The merger agreement requires that these opinions be updated as of the mailing
of this proxy statement/prospectus and as of the effective time of the merger.
These opinions are attached as Annexes B, C and D to this proxy
statement/prospectus. We encourage you to read these opinions.
OUR BOARD OF DIRECTORS AND MANAGEMENT AFTER THE MERGER AND RELATED MATTERS (SEE
PAGE I-64)
Our Board of Directors at the effective time of the merger will be the initial
board of directors of the Surviving Corporation. Immediately prior to the
effective time of the merger, Messrs. Daniel Gropper, Vincent Intrieri, Ralph
DellaCamera, Jr. and Brian Miller will resign as directors. They were elected to
our Board of Directors by the preferred stockholders pursuant to certain rights
provided under the Certificates of Designation for the $5 Preferred Stock and
the $4.20 Preferred Stock.
Our officers immediately prior to the effective time of the merger will be the
initial officers of the Surviving Corporation.
Our Certificate of Incorporation will be restated as part of the merger. It will
be substantially similar to our Certificate of Incorporation in effect today,
except that the Certificates of Designation for our preferred stock will be
eliminated and the par value of our common stock will be changed from $5.00 to
$0.01 per share. A stockholder who votes in favor of the merger agreement is
also voting to approve our amended and restated Certificate of Incorporation.
Our By-laws in effect immediately prior to the effective time of the merger will
be the By-laws of the Surviving Corporation.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE I-63)
When you consider our Board of Directors' recommendation that our stockholders
vote in favor of the merger, you should be aware that a number of our officers
and directors may be viewed to have interests in the merger that may be
different from, or in addition to, yours.
Certain members of our Board and management have been issued options pursuant to
our stock option plan. If certain events occur with respect to the composition
of our Board or if a stockholder acquires a large block of our common stock, a
"change of control" under our stock option plan may be deemed to occur, in which
event the options will become immediately exercisable. The merger in and of
itself will not, however, result in a change of control under our stock option
plan.
In addition, pursuant to our performance incentive plan, we have granted our
management awards totaling 17.5% of any future income generated from our
litigation against the McKesson and certain major pharmaceutical manufacturers.
Furthermore, all of our rights and obligations under all employment agreements
and other benefit plans
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covering our employees will continue to be the rights and obligations of the
Surviving Corporation.
Elliott Associates, Westgate International and Moses Marx and certain of his
affiliates may also be deemed to have interests in the merger that may be
different from, or in addition to, yours. As we described above, following the
closing of the merger, we will pay a total of $600,000 to these persons for the
ten-year standstill arrangement to which they have agreed. In addition, as part
of the settlement of litigation brought by Elliott Associates challenging the
original merger, we will reimburse Elliott Associates $925,000 for attorneys'
and advisory fees it incurred in connection with the prosecution and settlement
of the litigation. Furthermore, Phar-Mor has agreed to purchase, simultaneously
with the closing of the merger, 2,862,400 shares of our common stock from
Elliott Associates, Westgate International and Moses Marx and certain of his
affiliates for a purchase price of $2.00 per share.
Anvil Investment Partners, L.P. may also be deemed to have interests in the
merger that may be different from, or in addition to, yours. As described above,
following the closing of the merger, we will pay $300,000 to Anvil Investment
Partners for the ten-year standstill agreement to which it and certain of its
affiliates have agreed.
CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGE I-68)
Completion of the merger requires the satisfaction of a number of conditions,
including the following:
o the approval of the merger by our common and preferred stockholders as
described above;
o the absence of any writ, order, decree or injunction prohibiting or
restricting the completion of the merger;
o the delivery of a legal opinion relating to certain federal income tax
consequences of the merger;
o the delivery of updates to the Houlihan Lokey opinions described above as of
the mailing of this proxy statement/prospectus and as of the effective time
of the merger;
o the resignation of Daniel Gropper, Vincent Intrieri, Ralph DellaCamera, Jr.
and Brian Miller as directors effective immediately prior to the effective
time of the merger;
o court approval of the settlement of the three lawsuits challenging our
originally proposed merger into Xetava;
o the continued effectiveness of the agreements with certain of our preferred
stockholders described above;
o holders of not more than 5% of the outstanding shares of $5 Preferred Stock
or $4.20 Preferred Stock request to exercise their appraisal rights; and
o each of the preferred stockholders party to the agreements with us described
above have executed a release of certain claims that they may have against us
as of the effective time of the merger.
Other than the conditions pertaining to stockholder approvals and the legality
of the transaction, we could elect to waive the satisfaction of these
conditions.
REGULATORY REQUIREMENTS
Except for (a) the effectiveness under the Securities Act of 1933 of the
registration statement containing this proxy statement/prospectus, (b) the
qualification of the issuance of the New Avatex Common Stock, the warrants and
6.75% notes in certain states where we are required to do so, and (c) the filing
of a Certificate of Merger with the Secretary of State of Delaware, we are not
required to comply with any other federal or state regulatory requirements or to
obtain any other approvals prior to completing the merger.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE I-69)
We can terminate the merger agreement if any of the following occurs:
o the holders of at least 50.1% of each of the $5 Preferred Stock and the $4.20
Preferred Stock do not timely and properly elect to receive the $5 Preferred
Stock Alternate Consideration or the $4.20 Preferred Stock Alternate
Consideration, as applicable; or
o the holders of more than 5% of the outstanding shares of $5 Preferred Stock
or $4.20 Preferred Stock request to exercise their appraisal rights.
We can also terminate the merger agreement at any time prior to the effective
time of the merger, even if it was previously approved by our stockholders,
including because of the non-fulfillment of any of the conditions to the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE I-98)
We will receive an opinion from one of our legal advisors that the exchange of
our common stock and preferred stock for shares of New Avatex Common Stock in
the merger will constitute a tax-free reorganization of us and no gain or loss
will be recognized by a holder of our common stock or
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preferred stock upon the conversion of such shares solely into shares of New
Avatex Common Stock in the merger (except with respect to any cash received in
lieu of fractional shares and any shares of New Avatex Common Stock received by
a holder of $5 Preferred Stock or $4.20 Preferred Stock on account of dividend
arrearages). In addition, no gain or loss will be recognized by us or Xetava
pursuant to the merger (other than possibly with respect to the deferred
contingent cash rights).
The receipt of $5 Preferred Stock Alternate Consideration or $4.20 Preferred
Stock Alternate Consideration will be a taxable event to holders that elect to
receive it. The federal income tax consequences of the merger to holders of $5
Preferred Stock and $4.20 Preferred Stock electing to receive the alternate
consideration in the merger are complex and, to a significant extent, subject to
legal and factual uncertainties. These federal income tax consequences
(including the timing and character of any gain or loss recognized) depend on a
number of factors, including the extent of a holder's actual or constructive
continuing stock ownership in us and the federal income tax treatment of the
deferred contingent cash rights. The tax opinion rendered to us concerning the
federal income tax consequences of the merger does not address the federal
income tax consequences of our preferred stockholders' receipt of the $5
Preferred Stock Alternate Consideration or the $4.20 Preferred Stock Alternate
Consideration. Accordingly, you are urged to consult with your own tax advisor
as to the consequences of the merger, including the application and effect of
any federal, state, local and foreign income and other tax laws.
We anticipate that, upon completion of the merger, we will undergo an ownership
change, resulting in a substantial limitation upon the utilization of our tax
loss and credit carryforwards. Accordingly, following the merger, it is possible
that our tax loss and credit carryforwards may be rendered effectively unusable
to offset our future taxable income.
ACCOUNTING TREATMENT (SEE PAGE I-57)
The merger will be accounted for as a combination of entities under common
control. Xetava has no operations and no assets or liabilities of any
significance. Information about Xetava is already included in our consolidated
financial statements and is immaterial on a stand-alone basis.
MARKET PRICES (SEE PAGE I-62)
Trading of our common stock, $5 Preferred Stock and $4.20 Preferred Stock is
quoted on the OTC Bulletin Board system under the symbols "AVAX", "AVAXP" and
"AVAXO", respectively. On June 18, 1999, the last bid prices of our common
stock, $5 Preferred Stock and $4.20 Preferred Stock quoted on the OTC Bulletin
Board system were $0.75, $3.00 and $3.00, respectively. The proposed merger was
publicly announced after the close of trading on June 18, 1999. On , 1999,
the last bid prices of our common stock, $5 Preferred Stock and $4.20 Preferred
Stock quoted on the OTC Bulletin Board system were $ , $ and $ ,
respectively.
DIVIDENDS
Following the merger, we do not intend to pay dividends on the New Avatex Common
Stock for the foreseeable future.
COMPARATIVE RIGHTS OF STOCKHOLDERS (SEE PAGE I-93)
As we discussed above, the $5 Preferred Stock and the $4.20 Preferred Stock will
be eliminated by the merger. Accordingly, all rights and preferences of the $5
Preferred Stock and the $4.20 Preferred Stock will be extinguished automatically
upon the effectiveness of the merger. The New Avatex Common Stock will be
substantially similar to our common stock today. However, the New Avatex Common
Stock's par value will be $0.01 per share and not $5.00 per share. There is a
detailed discussion of the effects of the merger upon the various classes and
series of our stock under the captions "The Merger--Comparison of Stockholders
Rights" and "The Merger--Description of New Avatex Common Stock."
LISTING OF NEW AVATEX COMMON STOCK, 6.75% NOTES AND WARRANTS
We have been informed by certain market makers that participate in the OTC
Bulletin Board system that they intend to quote and cause to be traded on the
OTC Bulletin Board system the New Avatex Common Stock, the warrants to purchase
shares of New Avatex Common Stock and the Avatex Funding 6.75% notes that will
be issued in the merger.
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<PAGE>
SUMMARY OF THE TERMS OF THE 6.75% NOTES
For a more detailed description of the 6.75% notes that will be issued by
Avatex Funding in the merger, see "--Description of the Avatex Funding 6.75%
Notes" on page I-75.
<TABLE>
<S> <C>
Issuer.................................... Avatex Funding, Inc.
Maximum Aggregate Principal
Amount.................................. $34,000,000.
Maturity.................................. Three years after the date of the closing of the merger.
Interest Rate and Payment Dates........... 6.75% per annum, payable semi-annually until maturity.
Security.................................. The 6.75% notes will be secured by a first priority lien on and
security interest in 3,571,533 shares of Phar-Mor common stock. We
will contribute these shares of Phar-Mor common stock to Avatex
Funding prior to the closing of the merger. In certain circumstances
upon the satisfaction of our obligations to the trustee of the
FoxMeyer Corporation and FoxMeyer Drug Company bankruptcy estates, we
will cause an additional 1,132,500 shares of Phar-Mor common stock to
be pledged to further secure the 6.75% notes.
Ranking................................... The 6.75% notes will be pari passu in right of payment with any
existing and future unsubordinated indebtedness of Avatex Funding.
Avatex Funding will be restricted from incurring additional
indebtedness under the indenture governing the 6.75% notes. With
respect to the collateral securing the 6.75% notes, the 6.75% notes
will be effectively senior to any other indebtedness of Avatex
Funding.
Guarantee................................. We will fully and unconditionally guarantee the 6.75% notes. Our
guarantee will be a general unsecured obligation and will rank pari
passu in right of payment with all of our existing and future
unsubordinated indebtedness. Our guarantee, however, will be
effectively subordinated to our existing and future secured
obligations, including our obligations under the $8,000,000
promissory note we issued to the trustee of the bankruptcy estates of
FoxMeyer Corporation and FoxMeyer Drug Company, to the extent of the
assets securing such obligations. As of the date of this proxy
statement/prospectus, our guarantee would have only been effectively
subordinated to that $8,000,000 promissory note plus accrued interest
on the note.
Optional Redemption....................... Avatex Funding may redeem some or all of the 6.75% notes at any time
at 100% of the principal amount plus accrued and unpaid interest to
the redemption date.
Option to Purchase........................ If Avatex Funding receives certain dividends on the shares of
Phar-Mor common stock pledged to secure the 6.75% notes, it may use
all or part of the proceeds from those dividends to make an offer to
purchase notes pursuant to the procedures outlined in "--Description
of the Avatex Funding 6.75% Notes--Option to Purchase Upon
Extraordinary Dividend."
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Certain Covenants......................... The indenture governing the 6.75% notes contains covenants that,
among other things and subject to certain exceptions, restrict Avatex
Funding's ability to:
o incur indebtedness;
o conduct certain business activities that are not related or
necessarily incidental to its issuance of the 6.75% notes;
o make certain payments and dividends;
o create liens; and
o consolidate or merge with or sell any of its assets to another
person.
The indenture also will limit our ability to consolidate, merge with
or sell all or substantially all of our assets or more than 80% of
our capital stock to another person.
Form of 6.75% Notes....................... The 6.75% notes will be represented by one or more global securities
deposited with The Depository Trust Company. You will not receive
notes in certificated form unless one of the events set forth under
the heading "--Description of the Avatex Funding 6.75% Notes--Form of
Registered Notes" occurs. Instead, beneficial interests in the 6.75%
notes to be issued in the merger will be shown on, and transfers of
these interests will be effected only through, records maintained in
book-entry form by DTC with respect to its participants.
Events of Default......................... The indenture governing the 6.75% notes describes those circumstances
which are considered events of default. See
"--Description of the Avatex Funding 6.75% Notes--Events of Default."
</TABLE>
SUMMARY OF THE TERMS OF THE WARRANTS
For a more detailed description of the warrants to purchase shares of New
Avatex Common Stock that may be issued in the merger, see "Description of
Warrants" on page I-74.
<TABLE>
<S> <C>
Issuer.................................... Avatex Corporation.
Maximum Number of Warrants that may be
Issued.................................. Warrants to purchase up to 2,750,000 shares of New Avatex Common
Stock. The warrant agreement contains certain anti-dilution
adjustment provisions.
Exercise Price............................ $2.25 per share.
Exercisable............................... At any time after three months after the closing of the merger.
Expiration................................ 5:00 p.m., New York City time, on the fifth anniversary of the date
that is three months after the closing of the merger.
</TABLE>
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<PAGE>
SUMMARY OF THE TERMS OF DEFERRED CONTINGENT CASH RIGHTS
For a more detailed description of the deferred contingent cash rights, see
"Description of Deferred Contingent Cash Rights" on page I-89. In addition, the
provisions governing the deferred contingent cash rights are contained in the
merger agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus.
A $5 Preferred Deferred Contingent Cash Right will entitle its recipient to
receive, for each of such holder's shares of $5 Preferred Stock, 16% of an
amount equal to the lesser of $7.5 million or 20% of any net recovery that we
may receive in our litigation against McKesson and certain major pharmaceutical
manufacturers divided by the total number of shares of $5 Preferred Stock
outstanding immediately prior to the effective time of the merger.
Example #1: Assuming, for purposes of this example only, that the net
recovery we receive from the McKesson litigation equals $25,000,000.
There are 652,273 shares of $5 Preferred Stock outstanding as of the date of
this proxy statement/prospectus. Each outstanding share of $5 Preferred
Stock therefore represents 0.000153% (i.e., 1/652,273) of all of the
outstanding shares of $5 Preferred Stock. Twenty percent of the net
recovery from the litigation equals $5,000,000 (i.e., 20% of
$25,000,000). The holders of all of the $5 Preferred Stock would
collectively be entitled to receive $800,000 (i.e., 16% of $5,000,000).
For each share of $5 Preferred Stock for which you elected to receive
the $5 Preferred Stock Alternate Consideration, you would be entitled
to receive $1.22 (i.e., .000153% of $800,000).
Example #2: Assuming, for purposes of this example only, that the net
recovery we receive from the McKesson litigation equals $50,000,000.
Recall that each outstanding share of $5 Preferred Stock represents
0.000153% of all of the outstanding shares of $5 Preferred Stock.
Twenty percent of the net recovery from the litigation equals
$10,000,000. However, the maximum amount of any net recovery allocable
to the deferred contingent cash rights is $7,500,000. Therefore, the
holders of all of the $5 Preferred Stock would collectively be entitled
to receive $1,200,000 (i.e., 16% of $7,500,000). For each share of $5
Preferred Stock for which you elected to receive the $5 Preferred Stock
Alternate Consideration, you would be entitled to receive $1.84 (i.e.,
.000153% of $1,200,000).
Therefore, for each share of $5 Preferred Stock for which you elect to
receive the $5 Preferred Stock Alternate Consideration, the maximum
amount you could receive from your interest in the $5 Preferred
Deferred Contingent Cash Rights is $1.84.
A $4.20 Preferred Deferred Contingent Cash Right will entitle its recipient
to receive, for each of such holder's shares of $4.20 Preferred Stock, 84% of an
amount equal to the lesser of $7.5 million or 20% of any net recovery that we
may receive in the McKesson litigation divided by the total number of shares of
$4.20 Preferred Stock outstanding immediately prior to the effective time of the
merger.
Example #1: Assuming, for purposes of this example only, that the net
recovery we receive from the McKesson litigation equals $25,000,000.
There are 4,312,352 shares of $4.20 Preferred Stock outstanding as of the
date of this proxy statement/prospectus. Each outstanding share of
$4.20 Preferred Stock therefore represents 0.0000232% (i.e.,
1/4,312,352) of all of the outstanding shares of $4.20 Preferred Stock.
Twenty percent of the net recovery from the litigation equals
$5,000,000 (i.e., 20% of $25,000,000). The holders of all of the $4.20
Preferred Stock would collectively be entitled to receive $4,200,000
(i.e., 84 % of $5,000,000). For each share of $4.20 Preferred Stock for
which you elected to receive the $4.20 Preferred Stock Alternate
Consideration, you would be entitled to receive $0.97 (i.e., .0000232%
of $4,200,000).
Example #2: Assuming, for purposes of this example only, that the net
recovery we receive from the McKesson litigation equals $50,000,000.
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<PAGE>
Recall that each outstanding share of $4.20 Preferred Stock represents
0.0000232% of all of the outstanding shares of $4.20 Preferred Stock.
Twenty percent of the net recovery from the litigation equals
$10,000,000. However, the maximum amount of any net recovery allocable
to the deferred contingent cash rights is $7,500,000. Therefore, the
holders of all of the $5 Preferred Stock would collectively be entitled
to receive $6,300,000 (i.e., 84% of $7,500,000). For each share of
$4.20 Preferred Stock for which you elected to receive the $4.20
Preferred Stock Alternate Consideration, you would be entitled to
receive $1.46 (i.e., .0000232% of $6,300,000).
Therefore, for each share of the $4.20 Preferred Stock for which you elect
to receive the $4.20 Preferred Stock Alternate Consideration, the
maximum amount you could receive from your interest in the $4.20
Preferred Deferred Contingent Cash Rights is $1.46.
Deferred contingent cash rights will NOT:
o be transferable, except by will or pursuant to the laws of descent and
distribution or by operation of law;
o be evidenced by a certificate or other instrument;
o possess any voting rights;
o receive or be entitled to receive any dividends or interest; or
o represent any equity interest in us, Xetava or the Surviving Corporation.
The value, if any, of the deferred contingent cash rights will depend upon
the outcome of the McKesson litigation. We commenced this litigation on
January 10, 1997. We are alleging, among other things, that McKesson and the
other defendants conspired to drive our former pharmaceutical distribution
subsidiary, FoxMeyer Drug Company, out of business. We are also alleging that
McKesson obtained confidential financial and competitive information about us
and FoxMeyer Drug Company and used the information to cause damage to us. We are
trying to recover in excess of $400 million in compensatory damages, plus an
unspecified amount of punitive damages. See page I-90 for a more detailed
description of the McKesson litigation.
AT THIS TIME, IT IS IMPOSSIBLE FOR US TO ESTIMATE ANY AMOUNT THAT WE MAY
RECOVER IN THE MCKESSON LITIGATION. ANY RECOVERY IS DEPENDENT ON THE FAVORABLE
RESOLUTION OF MANY COMPLEX FACTUAL AND LEGAL ISSUES. WE CANNOT ASSURE YOU THAT
THE DEFERRED CONTINGENT CASH RIGHTS WILL ULTIMATELY HAVE ANY VALUE RESULTING IN
ANY PAYMENT BEING MADE ON THEM. IN VIEW OF THE MANY UNCERTAINTIES CONCERNING THE
DEFERRED CONTINGENT CASH RIGHTS, WHEN YOU ARE DECIDING WHETHER OR NOT TO ELECT
TO RECEIVE THE ALTERNATE CONSIDERATION FOR YOUR SHARES OF PREFERRED STOCK IN THE
MERGER, YOU SHOULD NOT ASSUME THAT WE WILL OBTAIN ANY RECOVERY FROM THE MCKESSON
LITIGATION OR THAT THE DEFERRED CONTINGENT CASH RIGHTS WILL TURN OUT TO BE OF
ANY VALUE.
We will not be obligated under any circumstances to make any payment on the
deferred contingent cash rights until there has been, with respect to each and
every defendant in the McKesson litigation, a final, non-appealable judgment, a
voluntary dismissal with prejudice, or final settlement of all claims asserted
with respect to the McKesson litigation. In addition, we will be retaining sole
and exclusive control over the McKesson litigation.
I-12
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
The following table presents our historical per share data and our
unaudited per share data as if the merger had been completed on the dates set
forth in the pro forma condensed consolidated financial information we have
included in this proxy statement/prospectus. The unaudited pro forma condensed
consolidated financial information does not purport to be indicative of the
results that would actually have been attained had the merger been completed as
assumed in the pro forma data. You should read the information contained in the
table set forth below in conjunction with the pro forma condensed consolidated
financial information we have included elsewhere and with our historical
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for our fiscal year ended March 31, 1999, a copy of which we
are attaching as Annex E to this proxy statement/prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 1999
-----------------
<S> <C>
Basic and diluted income (loss) per share of our common stock:
Historical................................................................................... $ (2.65)
Pro forma assuming 100% election of alternate consideration(1)............................... $ 13.06
Pro forma assuming 50% election of alternate consideration(2)................................ $ 5.47
Book value per share of common stock outstanding:
Historical................................................................................... $(13.68)
Pro forma assuming 100% election of alternate consideration(1)............................... $ 1.45
Pro forma assuming 50% election of alternate consideration(2)................................ $ 1.29
</TABLE>
- ------------------
(1) Assumes that all of the holders of each series of preferred stock elect the
applicable alternate consideration available for their preferred stock.
(2) Assumes that the holders of 50% of each series of preferred stock elect the
applicable alternate consideration available for their preferred stock.
I-13
<PAGE>
RISK FACTORS
You should carefully consider the following important factors, in addition
to those discussed elsewhere in this document to determine whether to vote for
the merger proposal. Our preferred stockholders should also consider certain of
the following risk factors in deciding whether or not to elect to receive the
applicable alternate consideration for their preferred stock in the merger.
THERE IS A POSSIBILITY THAT THE MERGER WILL NOT TAKE PLACE.
The merger agreement must be approved by the holders of a majority of the
outstanding shares of our common stock, the holders of at least 66 2/3% of the
outstanding shares of our $5 Preferred Stock and the holders of at least 66 2/3%
of the outstanding shares of our $4.20 Preferred Stock, each voting separately
as a class. Holders of approximately 56.6%, 57.1% and 56.8% of our common stock,
$5 Preferred Stock and $4.20 Preferred Stock, respectively, have either agreed
to or indicated that they will vote their shares in favor of the merger
agreement. However, approval of the merger agreement by our stockholders is not
assured.
The merger agreement contains certain other conditions that, if not
satisfied or waived, would result in the merger not being consummated. These
include that the opinions rendered by our financial advisor to our Board of
Directors are updated and not withdrawn as of the mailing of this proxy
statement/prospectus and as of the effective time of the merger, and that only a
limited number of holders of $5 Preferred Stock and $4.20 Preferred Stock
request to exercise their appraisal rights. In addition, we can terminate the
merger agreement for any reason at any time prior to the effective time of the
merger. Therefore, there is a risk that the merger will not occur even if the
merger agreement is approved by our stockholders. See "--The Merger
Agreement--Conditions to the Completion of the Merger" and "--Termination of the
Merger Agreement."
The following would be some of the effects of our not completing the
merger:
o we would have incurred substantial financial advisory, legal, tax and
accounting expenses (approximately $ million) with no corresponding
benefit from the merger;
o our $5 Preferred Stock and $4.20 Preferred Stock would continue to remain
outstanding and it is unlikely we will have the financial resources to
make the cumulative dividend, sinking fund and mandatory redemption
payments due on these stocks; and
o we would not be able to achieve the benefits of the merger that we have
described below as part of our reasons for the merger (see "--Merger
Information Summary--Our Reasons for the Merger").
THE EXCHANGE RATIOS FOR OUR COMMON STOCK, $5 PREFERRED STOCK AND $4.20 PREFERRED
STOCK ARE FIXED DESPITE POTENTIAL CHANGES IN THEIR RESPECTIVE STOCK PRICES.
The ratios at which our common stock, $5 Preferred Stock and $4.20
Preferred Stock will be converted into shares of New Avatex Common Stock in the
merger are fixed. In addition, in the case of holders of our $5 Preferred Stock
or $4.20 Preferred Stock who elect to receive the $5 Preferred Stock Alternate
Consideration or the $4.20 Preferred Stock Alternate Consideration for their
shares in the merger, the ratios at which the $5 Preferred Stock and $4.20
Preferred Stock will be converted into the different components of the $5
Preferred Stock Alternate Consideration or the $4.20 Preferred Stock Alternate
Consideration, as applicable, are fixed. None of these exchange ratios will be
adjusted in the event of any increase or decrease in the price of our shares of
common stock, $5 Preferred Stock or $4.20 Preferred Stock. These stock prices
may vary significantly from the prices as of June 18, 1999 (i.e., the date on
which the merger agreement was executed), the date of this proxy
statement/prospectus or the date of our annual meeting of stockholders. You are
encouraged to obtain current market quotations for our common stock, $5
Preferred Stock and $4.20 Preferred Stock.
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<PAGE>
THE MERGER COULD REDUCE SUBSTANTIALLY THE PERCENTAGE OF THE COMMON EQUITY
INTEREST IN OUR COMPANY OWNED BY OUR EXISTING COMMON STOCKHOLDERS.
The percentage of the common equity interest in our company owned by our
existing holders of common stock could decrease substantially after the merger.
The degree of any reduction will depend on the number of shares of $5 Preferred
Stock and $4.20 Preferred Stock whose holders elect to receive the alternate
consideration for their preferred stock in the merger. For example, if holders
of 75% of each of the outstanding shares of $5 Preferred Stock and $4.20
Preferred Stock elect to receive the alternate consideration for their shares in
the merger, our common stockholders immediately prior to the merger would own
approximately 59.7% of the shares of New Avatex Common Stock outstanding
immediately after the merger, and our preferred stockholders immediately prior
to the merger would own, in the aggregate, 40.3% of the shares of New Avatex
Common Stock outstanding immediately after the merger. If holders of 50% of each
of the outstanding shares of $5 Preferred Stock and $4.20 Preferred Stock elect
to receive the alternate consideration, our existing common stockholders and our
preferred stockholders, in the aggregate, would own approximately 42.6% and
57.4%, respectively, of the shares of New Avatex Common Stock outstanding
immediately after the merger.
CONTROL OF OUR COMPANY BY CERTAIN OF OUR EXISTING SECURITY HOLDERS COULD ENSURE
ADOPTION OF THE MERGER AGREEMENT.
As of the date of this proxy statement/prospectus:
o Melvyn J. Estrin and Abbey J. Butler, our Co-Chairman and Co-Chief
Executive Officers, and their respective affiliates, owned and were
entitled to vote 1,507,811 shares of our common stock, or approximately
11% of the outstanding shares of our common stock;
o the Master Trust for the National Intergroup, Inc. Retirement Program and
Davenport, Inc. Pension Plan, of which we are presently the sponsor,
currently beneficially own approximately 10% of the outstanding shares of
our common stock; and
o Phar-Mor, of which Messrs. Butler and Estrin are Co-Chairmen of the Board
and Co-Chief Executive Officers, will be entitled to vote 4,948,600
shares of our common stock (including the shares it has agreed to
purchase from Elliott Associates, Westgate International and Moses Marx
and his affiliates, United Equities Commodities Company and Momar
Corporation), or approximately 35.8% of the outstanding shares of our
common stock.
These persons and entities have indicated that they will vote in favor of the
adoption of the merger agreement and election of the four directors nominated to
our Board of Directors. If all of these persons and entities vote in favor of
the merger, we will have obtained one of the requisite stockholder approvals of
the merger agreement, i.e., approval by the holders of a majority of the
outstanding shares of our common stock.
In addition, these persons and entities will cause the four director nominees to
be elected to our Board of Directors.
Elliott Associates, Westgate International, Moses Marx, United Equities
Commodities Company (an affiliate of Mr. Marx), Momar Corporation (an affiliate
of Mr. Marx), Mark S. Zucker and Anvil Investment Partners, L.P. (an affiliate
of Mr. Zucker) have agreed to vote their shares of $5 Preferred Stock and $4.20
Preferred Stock in favor of adoption of the merger agreement. These persons and
entities beneficially own approximately 57.1% and 56.8% of the outstanding
shares of our $5 Preferred Stock and $4.20 Preferred Stock, respectively. As a
result of these agreements, we will only need to obtain approval of the merger
agreement from holders of approximately 9.6% and 9.9% of the outstanding shares
of our $5 Preferred Stock and $4.20 Preferred Stock, respectively, to obtain the
stockholder approvals of the merger agreement by the holders of at least 66 2/3%
of our outstanding shares of $5 Preferred Stock and the holders of at least
66 2/3% of our outstanding shares of $4.20 Preferred Stock.
Immediately following the merger and assuming all of our preferred
stockholders elect to receive the alternate consideration for their preferred
stock in the merger, the common stockholders described above acting together
could continue to effectively control our company if they agree how to vote on a
particular matter. Even if they do not agree to vote together, each of these
stockholders, individually, could exert
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<PAGE>
substantial influence with regard to matters requiring stockholder approval. If
holders of 50% or 75% of each of the outstanding shares of our $5 Preferred
Stock and $4.20 Preferred Stock elect to receive the $5 Preferred Stock
Alternate Consideration and the $4.20 Preferred Stock Alternate Consideration
for their shares of preferred stock in the merger, the common stockholders
described above would collectively own approximately 24.1% or 33.8%
respectively, of the New Avatex Common Stock outstanding immediately following
the merger. In either case, immediately after the merger, these common
stockholders will continue to be able to exert substantial influence with
respect to matters requiring stockholder approval.
CERTAIN PERSONS HAVE INTERESTS IN THE MERGER THAT MAY BE VIEWED AS DIFFERENT
FROM, OR IN ADDITION TO, YOURS.
Certain members of our Board of Directors and management have certain
interests that may be viewed different from your interests generally.
o Certain directors and officers have been issued options under our stock
option plan.
o Certain members of our management have been granted awards under our
Performance Incentive Plan allowing them to receive, in the aggregate,
17.5% of any future net income generated from recoveries from our
litigation against McKesson and others.
o Certain members of our management have employment and indemnification
agreements with our company.
o Pursuant to the merger agreement, for a period of six years following the
merger, we will continue to indemnify and maintain directors' and
officers' liability insurance covering our present and former directors
and officers.
Elliott Associates, Westgate International, Moses Marx, United Equities
Commodities Company (an affiliate of Mr. Marx), Momar Corporation (an affiliate
of Mr. Marx), Mark S. Zucker and Anvil Investment Partners, L.P. (an affiliate
of Mr. Zucker) may also be deemed to have interests in the merger that may be
different from, or in addition to, yours.
o Following the closing of the merger, we will pay a total of $600,000 to
Elliott Associates, Westgate International and United Equities for a
ten-year standstill arrangement to which they and their affiliates have
agreed to be subject.
o As part of the settlement of litigation brought by Elliott Associates
challenging our originally proposed merger into Xetava, we will reimburse
Elliott Associates $925,000 for attorneys' and advisory fees it incurred
in prosecuting and settling the litigation.
o Simultaneously with the closing of the merger, Phar-Mor will purchase
2,862,400 shares of our common stock beneficially owned by Elliott
Associates, Westgate International, United Equities, Momar Corporation
and Moses Marx for a purchase price of $2.00 per share.
o Following the closing of the merger, we will pay $300,000 to Anvil
Investment Partners for a ten-year standstill arrangement to which it and
Mr. Zucker have agreed to be subject.
You should also review "--Interests of Certain Persons in the Merger" on
page I-63.
WE HAVE NOT BEEN PROFITABLE RECENTLY AND WE MAY CONTINUE TO INCUR LOSSES. OUR
AUDITORS HAVE QUESTIONED OUR ABILITY TO CONTINUE AS A GOING CONCERN.
For each of fiscal 1996, fiscal 1997, fiscal 1998 and fiscal 1999, we
reported a net loss of $63.7 million, $279.4 million, $77.5 million and
$6.6 million, respectively.
In addition, our independent auditors have included an explanatory
paragraph in their report on our financial statements. This note states that our
recurring losses from operations, pending litigation and stockholders'
deficiency raise substantial doubt about our ability to continue as a going
concern. Our financial statements have been prepared, and, for the foreseeable
future, are expected to continue to be prepared, on a going concern basis that
contemplates the realization of assets and the settlement of liabilities and
commitments in
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<PAGE>
the normal course of business. Our financial statements do not reflect any
adjustments that might result ultimately from the resolution of the
uncertainties related to our business.
Although we have taken steps to improve and stabilize our financial
condition since fiscal 1997, we cannot assure you that we will attain
profitability in the foreseeable future. We have no directly-owned cash
generating assets. Our ability to continue as a going concern, as well as
attaining profitability, depends on, among other things, our ability to:
o realize on certain of our investments;
o identify new or additional investment opportunities;
o acquire an operating company; and
o successfully defend litigation pending against our company.
Our investments consist of the securities of publicly-traded and
privately-held entities, including our 38% common equity interest in Phar-Mor.
We cannot predict the value of these investments because we cannot predict the
financial performance of our investees, many of whom have a limited operating
history. In addition, we cannot predict whether we will be successful in the
prosecution of the McKesson litigation or that, if we are successful, we will
receive any recovery of substance that exceeds the expenses we incur to
prosecute the litigation.
You should read Note R of the Notes to our Consolidated Financial
Statements included in our Annual Report on Form 10-K for our fiscal year ended
March 31, 1999, a copy of which is attached as Annex E to this proxy
statement/prospectus.
SINCE WE ARE A HOLDING COMPANY, OUR ABILITY TO MEET OUR OBLIGATIONS DEPENDS UPON
CASH FLOWS FROM OUR SUBSIDIARIES AND INVESTMENTS.
We are a holding company that directly or through our subsidiaries owns
interests in other corporations and partnerships, including Phar-Mor. Our
ability to meet our financial obligations, including our obligations under the
6.75% notes, depends on the amount of cash we have on hand and the flow of cash
we receive, if any, from our subsidiaries and investees. The value of our
guarantee of the 6.75% notes will depend on our ability to generate cash.
Any cash received from our investments may be in the form of dividends or
other distributions on our equity investments. The ability of our subsidiaries
or investees to pay dividends or make distributions to us may be restricted by
law or loan or other agreements to which these subsidiaries or investees are
subject.
We may be able to generate cash from the disposition of our investments.
However, we cannot assure you that any of our investments, including that in
Phar-Mor, will have any value or that there will be a suitable purchaser for, or
a liquid market in which to sell, any of our investments.
To the extent we are successful in prosecuting our litigation against
McKesson and certain major pharmaceutical manufacturers, we may generate
positive cash flow. However, we cannot assure you that there will be any
recovery of substance, if any at all, or that any recovery would exceed the
expenses we incur to prosecute the litigation.
WE CANNOT ASSURE YOU AS TO PHAR-MOR'S FUTURE VALUE. YOU SHOULD REVIEW PUBLICLY
AVAILABLE INFORMATION ABOUT PHAR-MOR.
We own a 38% equity interest in Phar-Mor, which operates a chain of
discount retail drugstores. The value of the Phar-Mor common stock that we own,
including the 3,571,533 shares that we will cause to be pledged to secure the
6.75% notes and the 1,132,500 shares that are currently pledged to secure our
promissory note due October 2000 that we issued to the trustee for the
bankruptcy estates of FoxMeyer Corporation and FoxMeyer Drug Company, equaled
20.8% of the book value of our total assets at March 31, 1999. Accordingly, the
value of our common stock and our future financial condition, including our
ability to realize upon this asset and satisfy the interest and principal
payment obligations on the 6.75% notes, depends largely upon the future value of
the shares of Phar-Mor common stock.
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The value of our investment in Phar-Mor is subject to numerous factors,
many of which may be beyond our control. These factors include the future
financial performance and condition of Phar-Mor. Phar-Mor's financial
performance is subject to the success of its business plan and operations and to
conditions inherent to the industry in which it competes. Its performance and
financial conditions are also subject to general economic and financial
conditions. We cannot assure you as to Phar-Mor's financial performance or the
future value of its common stock. Accordingly, we cannot assure the ongoing
value, if any, of our investment in Phar-Mor.
Phar-Mor is subject to the reporting requirements of the Securities
Exchange Act of 1934. Accordingly, it files annual, quarterly and special
reports, proxy statements and other information. Phar-Mor also issues, from time
to time, press releases about its business. We urge you to review publicly
available information about Phar-Mor to obtain a better understanding of
Phar-Mor's business and financial condition. See "Where You Can Find More
Information" on page i of this proxy statement/prospectus. We urge you also to
review the financial statements of Phar-Mor and the notes related thereto that
we have attached as Annex F to this proxy statement/prospectus.
AFTER THE MERGER WE WILL HAVE SUBSTANTIAL LEVERAGE THAT COULD ADVERSELY AFFECT
US. WE MIGHT BE REQUIRED TO LIQUIDATE INVESTMENTS TO SERVICE OUR INDEBTEDNESS.
THE VALUE OF THE PHAR-MOR COMMON STOCK SECURING AVATEX FUNDING'S OBLIGATIONS
UNDER THE 6.75% NOTES MAY BE INSUFFICIENT TO FULLY SATISFY ALL OF THE
OBLIGATIONS DUE TO HOLDERS OF THE 6.75% NOTES.
Although completion of the merger will eliminate our dividend, sinking-fund
and redemption payment obligations with respect to our $5 Preferred Stock and
$4.20 Preferred Stock, we will have significant financial obligations in respect
of the 6.75% notes. Assuming that all holders of our $5 Preferred Stock and
$4.20 Preferred Stock elect to receive the alternate consideration for their
preferred stock in the merger:
o $34,000,000 in principal amount of 6.75% notes will be issued in the
merger;
o the 6.75% notes would have semi-annual interest obligations of
$1,147,500; and
o the entire principal of the then outstanding 6.75% notes would be due on
, 2002.
Avatex Funding's business purpose is limited to issuing the 6.75% notes and
engaging in actions necessarily incidental to this issuance, including owning
the Phar-Mor common stock that will be pledged to secure Avatex Funding's
obligations under the 6.75% notes. Accordingly, Avatex Funding will have no
independent sources of cash other than proceeds, if any, from its ownership of
the Phar-Mor common stock. We have guaranteed Avatex Funding's obligations under
the 6.75% notes and, therefore, will be responsible for making all payments due
on the 6.75% notes.
The issuance of the 6.75% notes in the merger will make us highly leveraged
on a consolidated basis. At March 31, 1999, we had total long-term debt of
$34.3 million (including $9.0 million we owe under the promissory note due
October 2000 that we issued to the trustee for the bankruptcy estates of
FoxMeyer Corporation and FoxMeyer Drug Company) and total stockholders' deficit
of $177.9 million. Our earnings were insufficient to cover our fixed charges and
preferred stock dividend requirements by approximately $50.0 and $36.3 million
for fiscal 1998 and 1999, respectively. As of March 31, 1999, pro forma for the
merger and assuming all of our preferred stockholders elect to receive the
alternate consideration for their preferred stock in the merger, our long-term
debt and total stockholders' equity would have been $62.4 million and
$17.7 million, respectively, and our earnings would have been insufficient to
cover our fixed charges by approximately $13 million. See "Historical and Pro
Forma Financial Data" beginning on page I-30.
Our leverage could have important consequences to our future prospects and
the holders of the 6.75% notes, including the following:
(i) limiting our ability to obtain any necessary financing in the
future for working capital, debt service requirements,
acquisitions, if any, or other purposes;
(ii) limiting our flexibility in planning for, or reacting to, changes
in market conditions;
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(iii) increasing our vulnerability in the event of a downturn in our
business or the economy generally; and
(iv) requiring that a substantial portion of our cash flow, if any, be
dedicated to the payment of principal and interest on our
indebtedness, including the 6.75% notes, and not be available for
our general corporate needs and other purposes, including future
acquisitions or investments or dividends on the New Avatex Common
Stock.
Our ability to make scheduled payments of principal of or to pay interest
on our indebtedness (including the 6.75% notes) will depend on our future
capital resources, performance, including our ability to liquidate profitably
our investments or attain a recovery from our litigation against McKesson and
others, which, to a certain extent, are subject to matters beyond our control.
While we believe that we will be able to sell or otherwise realize cash from our
investments in an amount sufficient to satisfy our obligations under our
indebtedness, we cannot assure:
o that any of our investees will or will be able to make dividend payments
or cash distributions on our investments;
o the future value of our investments or that there will be a liquid market
in which to sell, or a suitable purchaser for, any of our investments; or
o that we will be able to liquidate our investments on terms sufficient to
satisfy our debt-service obligations.
In addition, we cannot assure you that we will be successful in our prosecution
of the McKesson litigation or that, if we are successful, we will receive any
recovery of substance that exceeds the expenses we incur to prosecute the
litigation.
If we are unable to generate sufficient cash flow to service our
indebtedness, including the 6.75% notes, we may be forced to refinance all or a
portion of our existing debt or obtain additional financing. If we cannot
refinance our debt or obtain sufficient additional financing, we may be forced
to default on our debt obligations which would have a material adverse effect on
us, including the possibility of requiring us and/or Avatex Funding to seek
protection under applicable bankruptcy laws.
If we default on our obligations under the 6.75% notes, the 6.75%
noteholders could elect to foreclose on the shares of Phar-Mor common stock that
will be pledged to secure our and Avatex Funding's obligations under the 6.75%
notes. In the case of a foreclosure, the 6.75% noteholders may have to rely on
the proceeds from the collateral securing the 6.75% notes to satisfy the
obligations under the 6.75% notes. There can be no assurance that the proceeds
from the sale of the shares of Phar-Mor common stock securing the 6.75% notes
would be sufficient to satisfy all the obligations due under the 6.75% notes,
because we cannot assure the market value of these shares. As of the date of
this proxy statement/prospectus, the market value of the 3,571,533 shares of
Phar-Mor common stock that will initially secure the 6.75% notes is
$ (based on the closing sale price of Phar-Mor common stock quoted on
The Nasdaq National Market at , 1999). If all of these shares could be
sold at the foregoing sales price, that market value would be insufficient to
satisfy the principal payment obligations under the 6.75% notes, assuming that
$34,000,000 principal amount of 6.75% notes are issued in the merger (i.e., all
of our preferred stockholders elect to receive the alternate consideration for
their shares of preferred stock in the merger).
In certain circumstances, upon the satisfaction of all of our obligations
under the promissory note due October 2000 that we issued to the trustee for the
bankruptcy estates of FoxMeyer Corporation and FoxMeyer Drug Company, we are
required to cause an additional 1,132,500 shares of Phar-Mor common stock, which
are currently securing that note, to be pledged to further secure the 6.75%
notes. We cannot assure you that, even with the pledge of these additional
shares, the value of the pledged shares will be adequate to satisfy all
obligations under the 6.75% notes.
The market value of the shares of the Phar-Mor common stock may be volatile
as it is subject to numerous factors, all of which are beyond our control. These
factors include the financial performance and condition of Phar-Mor and general
economic, financial and industry conditions. General price and volume
fluctuations of the stock markets and our inability to predict the perception of
Phar-Mor's common stock in
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the capital markets add to the possible volatility of the market value of the
Phar-Mor common stock. Therefore, we cannot assure you what the market value of
the shares of Phar-Mor common stock will be at the time of any foreclosure
thereon. In addition, we cannot assure you that, upon any foreclosure, a liquid
market for the shares of Phar-Mor common stock will exist or the collateral
agent will be able to effect a timely and orderly liquidation of such a large
number of shares and attain maximum value for them. The sale of a large block of
shares at one time or within a short period of time, or the market's perception
thereof, could cause the market price of Phar-Mor's common stock to decline.
Therefore, the collateral securing the 6.75% notes may not be sufficient to
satisfy all of the principal and interest payment obligations of the 6.75%
notes.
OUR GUARANTEE OF THE 6.75% NOTES IS STRUCTURALLY SUBORDINATED TO OUR OBLIGATIONS
UNDER CERTAIN OTHER INDEBTEDNESS. THEREFORE, OUR GUARANTEE MAY BE INADEQUATE.
Our guarantee of Avatex Funding's obligations under the 6.75% notes will be
a general unsecured obligation and will rank pari passu in right of payment with
all of our existing and future unsubordinated indebtedness. Our guarantee will
rank senior in right of payment to all of our existing and future subordinated
indebtedness. We are presently not restricted, and the indenture for the 6.75%
notes will not restrict us, from incurring additional indebtedness. Our
guarantee, however, will be effectively subordinated to our existing and future
secured obligations, including our obligations under the promissory note due
October 2000 in the original principal amount of $8,000,000 that we issued to
the trustee for the bankruptcy estates of FoxMeyer Corporation and FoxMeyer Drug
Company, to the extent of the assets securing these obligations. By reason of
this structural subordination of our guarantee, our secured creditors will have
claims with respect to our assets securing their debt that are prior to the
claims of the 6.75% noteholders. This may have the effect of reducing the amount
of proceeds paid to the 6.75% noteholders. As of the date of this proxy
statement/prospectus, our guarantee would only be effectively subordinated to
approximately $9,000,000 due on our promissory note to the trustee for the
FoxMeyer Corporation and FoxMeyer Drug Company bankruptcy estates.
FEDERAL AND STATE FRAUDULENT TRANSFER LAWS PERMIT A COURT, UNDER SPECIFIC
CIRCUMSTANCES, TO VOID OUR AND AVATEX FUNDING'S OBLIGATIONS UNDER THE 6.75%
NOTES AND REQUIRE THE RETURN OF PAYMENTS RECEIVED FROM US IN THE MERGER.
As a consequence of the alternate consideration into which our preferred
stockholders can elect to have their preferred stock converted in the merger,
the following will occur:
o we will pay cash as part of the merger consideration;
o we will incur long-term debt from the issuance of the 6.75% notes by
Avatex Funding and our guarantee of the obligations thereunder; and
o we will transfer 3,571,533 shares of Phar-Mor common stock that we own to
Avatex Funding to be pledged as collateral for 6.75% notes.
Each of the foregoing, as well as any cash paid in lieu of fractional
shares to our stockholders and any cash paid to our preferred stockholders
exercising appraisal rights, may be subject to review under federal or state
fraudulent transfer or fraudulent conveyance laws. Under these laws, if a court
in a lawsuit by a creditor or a representative of creditors of our company, such
as a trustee in bankruptcy, were to find that, at the time of, or after giving
effect to, the merger and the related transactions, including the issuance of
the 6.75% notes, our guarantee of the 6.75% notes, the payment of the cash
portion of the merger consideration and the transfer of our shares of Phar-Mor
common stock to secure the 6.75% notes, we:
(i) were insolvent or rendered insolvent thereby;
(ii) were engaged or about to engage in a business or transaction for which
our remaining assets constituted an unreasonably small amount of
capital;
(iii) intended to incur, or believed that we would incur, debts beyond our
ability to pay them as they matured; or
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(iv) intended to hinder, delay or defraud current or future creditors,
and, in the case of clauses (i), (ii) and (iii), that we did not receive
reasonably equivalent value or fair consideration in the merger, a court could,
among other things:
o void all or a part of the cash payment received by our preferred
stockholders in the merger and require those preferred stockholders,
including any preferred stockholders exercising appraisal rights, to
return such consideration to us or to a fund for the benefit of our
creditors;
o void all or a portion of Avatex Funding's obligations to the holders of
the 6.75% notes;
o void all or a portion of our guarantee of Avatex Funding's obligations
under the 6.75% notes and the 6.75% notes indenture;
o void any payment by us on the 6.75% notes and require the return of that
payment to us or to a fund for the benefit of our creditors;
o void the transfer of our shares of Phar-Mor common stock to Avatex
Funding that will be pledged to secure the 6.75% notes; and/or
o subordinate Avatex Funding's and/or our obligations to the holders of the
6.75% notes to our other existing and future indebtedness, which would
entitle these other creditors to be paid in full before any payment could
be made on the 6.75% notes.
If a court were to find that we came within any of clauses (i) through
(iv) above, we, or our creditors or a trustee in bankruptcy, could seek to avoid
the grant of security interests for the benefit of the 6.75% noteholders under
the indenture and the security agreement. This would result in an event of
default under the indenture for the 6.75% notes that would allow the 6.75%
noteholders to accelerate repayment of the 6.75% notes.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer or fraudulent conveyance varies depending
upon the law of the jurisdiction which is being applied. Generally, however, we
would be considered insolvent if:
(i) the sum of our debts, including contingent liabilities, is
greater than all of our property at a fair valuation;
(ii) the present fair saleable value of our assets is less than the
amount that will be required to pay our probable liabilities on
our existing debts as they become absolute and matured; or
(iii) we incurred obligations beyond our ability to pay as these
obligations become due.
There can be no assurance as to what standard a court would apply to
determine whether we were solvent at the time of, or after giving effect to, the
merger.
Our management believes that the merger and the consummation of the
transactions contemplated thereby, including the payment of the cash portion of
the merger consideration, the issuance of the 6.75% notes, our guarantee of
Avatex Funding's obligations under the 6.75% notes and the transfer of the
3,571,533 shares of Phar-Mor common stock that we own to Avatex Funding to
secure its obligations under the 6.75% notes, are being effected without the
intent to hinder, delay or defraud our creditors, for proper purposes and in
good faith. A court may find that neither we nor Avatex Funding received fair
consideration or reasonable equivalent value for the incurrence of the
indebtedness represented by the 6.75% notes and our guarantee thereof, for the
payment of the cash portion of the merger consideration and the transfer of our
3,571,533 shares of Phar-Mor common stock as collateral for the 6.75% notes in
the merger.
Our management further believes that at the time of, and after giving
effect to, the merger, we will:
(a) neither be insolvent nor rendered insolvent thereby;
(b) be in possession of sufficient capital to run our business
effectively; and
(c) be incurring debts within our ability to pay them as they mature
or become due.
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In reaching the foregoing conclusions, our management has relied upon our
operating history since fiscal 1997, and our analyses of internal cash flow
projections and estimated values of our assets and liabilities after giving
effect to the merger. Our Board of Directors also received an opinion from our
financial advisor, Houlihan, Lokey, Howard & Zukin, as to certain solvency
matters as of May 6, 1999. This opinion contained several assumptions relating
to our future operations, including with respect to our bonus compensation
decisions, potential severance payments and other benefits to our Co-Chief
Executive Officers, Melvyn J. Estrin and Abbey J. Butler, under certain
circumstances, and investment strategies and portfolio composition. As part of
their consideration of the proposed merger, our Board of Directors reviewed,
discussed and acknowledged these asumptions. For a further description of these
assumptions, see "--The Merger Transaction--Opinions of Financial Advisor" and
a copy of the solvency opinion, a copy of which is attached as Annex D to this
proxy statement/prospectus.
It is a condition to consummation of the merger that we receive updates to
the solvency opinion as of the mailing of this proxy statement/prospectus and as
of the effective time of the merger. The solvency opinion and the updates
thereto would not, however, be binding on a court.
There can be no assurance that a court would determine that we received
fair consideration or reasonably equivalent value for the merger consideration
that our preferred stockholders may receive in the merger, or that we were
solvent at the time of, or after giving effect to, the merger.
CERTAIN OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ARE UNCERTAIN.
The federal income tax consequences of receipt of the alternate
consideration by holders of our $5 Preferred Stock and $4.20 Preferred Stock
electing to receive the alternate consideration for their preferred stock in the
merger are complex and, to a significant extent, subject to legal and factual
uncertainties. In particular, uncertainty surrounds the proper treatment of a
person's entitlement to any proceeds from the deferred contingent cash rights.
In addition, the 6.75% notes may be treated as issued at a substantial
discount from their principal amount at maturity. In such event the discount
would accrue over the term of the notes and would be includible as interest
income in a holder's gross income for federal income tax purposes prior to the
receipt of cash payments attributable to such income.
The opinion of counsel we have received concerning the federal income tax
consequences of the merger does not address the federal income tax consequences
of receipt of the alternate consideration and no rulings have been requested
from the IRS with respect thereto. See "--Material Federal Income Tax
Consequences of the Merger" on page I-98.
We anticipate that, upon completion of the merger, we will undergo an
ownership change, resulting in a substantial limitation upon the utilization of
our tax loss and credit carryforwards. Accordingly, following the merger, it is
possible that our tax loss and credit carryforwards may be rendered effectively
unusable to offset any future taxable income.
WE ARE SUBJECT TO SEVERAL LAWSUITS. AN UNFAVORABLE OUTCOME IN ANY OR ALL OF
THESE LAWSUITS COULD HAVE A MATERIAL ADVERSE EFFECT ON US, THE VALUE OF THE NEW
AVATEX COMMON STOCK AND OUR ABILITY TO SATISFY OUR OBLIGATIONS UNDER THE 6.75%
NOTES.
Our company and certain of our current and former directors and executive
officers are subject to several lawsuits. We are also 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, with respect to certain of our former
operating units' prior ownership of or relationship with certain contaminated
properties. 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. We are subject to
various claims by, and have received various 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. These lawsuits and
investigations are described on pages E-8 through E-10 in our Annual
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Report on Form 10-K for our fiscal year ended March 31, 1999, a copy of which is
attached as Annex E to this proxy statement/prospectus.
At March 31, 1999, we had reserves of $1.5 million for environmental
assessments, remediation activities, penalties or fines at eight sites that may
be imposed for non-compliance with such environmental 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. Our estimates of these
costs are based upon currently available facts, existing technology, presently
enacted laws and regulations and the professional judgment of our consultants
and counsel. Where the available information is sufficient to estimate the
amount of the liability, we have used that estimate. 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, we have used the lower end of the
range. 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 us, the unknown
extent of our probable liability in proportion to the probable liability of
other parties. Moreover, we may have environmental liabilities that we cannot,
in our judgment, estimate at this time and losses attributable to remediation
costs may arise at other sites. Although we believe our reserves are adequate,
we cannot assure you that this amount will be adequate to cover such known or
unknown matters. A change in the estimated liability could have a material
impact on our financial condition and results of operations.
We are vigorously defending, and intend to continue to vigorously defend,
ourselves in each of these lawsuits and investigations. However, we can make no
assurances that we will not determine that the advantages of settling any or all
of these lawsuits or investigations outweigh the risk and expense of protracted
litigation. Nor can we assure you that ultimately we will be successful in
defending these lawsuits or investigations. An unfavorable outcome in any or all
of these lawsuits or investigations would likely have a material impact on our
financial condition, liability and results of operations and, accordingly, could
affect adversely the value of the New Avatex Common Stock and our ability to
make the principal and interest payments on the 6.75% notes. Even if all of
these lawsuits are resolved in our favor, we will have incurred considerable
costs and the efforts of our management will have been diverted significantly to
defend these lawsuits and investigations. The incurrence of these costs and
diversions of our management's efforts, in and of themselves, also would likely
have a material and adverse effect on our financial condition, liability and
results of operations.
Please read Note N of the Notes to our Consolidated Financial Statements
contained in our Annual Report on Form 10-K for our fiscal year ended March 31,
1999, a copy of which is attached as Annex E to this proxy statement/prospectus.
A SIGNIFICANT ASSET OF OURS IS BEING USED AS COLLATERAL TO SECURE AVATEX
FUNDING'S OBLIGATIONS UNDER THE 6.75% NOTES.
We have agreed to transfer 3,571,533 shares of Phar-Mor common stock that
we own to Avatex Funding. Avatex Funding will in turn pledge these shares as
collateral to secure its obligations under the 6.75% notes. As of March 31,
1999, these shares represented 15.8% of the book value of our total assets. In
addition, upon the satisfaction of all our obligations under the promissory note
that we issued to the trustee for the bankruptcy estates of FoxMeyer Corporation
and FoxMeyer Drug Company, we are required to cause an additional 1,132,500
shares of Phar-Mor common stock to be pledged to further secure the 6.75% notes.
If there is an event of default under the 6.75% notes and the 6.75% noteholders
elect to foreclose on these shares in accordance with the indenture and the
security agreement, the proceeds from a foreclosure sale of these shares would
be distributed to first satisfy our obligations under the indenture and the
6.75% notes. Accordingly, as a result of the pledge of these shares, we may lose
the benefit that we could have realized on these shares of Phar-Mor common
stock.
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THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK. THERE HAS BEEN
NO PRIOR MARKET FOR THE WARRANTS AND THE 6.75% NOTES TO BE ISSUED IN THE MERGER.
THE MARKET PRICES FOR THE NEW AVATEX COMMON STOCK, THE WARRANTS AND THE 6.75%
NOTES ARE LIKELY TO BE VOLATILE.
Prior to February 1, 1999, our common stock traded on the New York Stock
Exchange. On January 31, 1999, the New York Stock Exchange formally delisted our
common stock from trading. Our common stock is now quoted on Nasdaq's OTC
Bulletin Board system. Our common stock is thinly traded. The trading volume of
our common stock has become even more limited since the sole trading thereof
began on the OTC Bulletin Board system. It is more difficult to dispose of, or
to obtain accurate quotations as to the price of, our common stock on the OTC
Bulletin Board system. We cannot assure you that, after completion of the
merger, the New Avatex Common Stock will be traded more actively.
There has been no prior market for the warrants or the 6.75% notes to be
issued in the merger. We cannot predict the extent to which investor interest
will lead to the development of any active trading market in the warrants or the
6.75% notes or how liquid either market might become. The exercise price of the
warrants, the number of shares of New Avatex Common Stock issuable upon the
exercise of the warrants, the maximum principal amount of the 6.75% notes and
the interest rate for the 6.75% notes were each determined by negotiations
between us and certain of our preferred stockholders, primarily the preferred
stockholders who commenced lawsuits against us with respect to our originally
proposed merger into Xetava. We cannot assure you that at any time after the
merger the market price for the New Avatex Common Stock will exceed the exercise
price of the warrants or that the 6.75% notes will not trade below their face
amount.
Trading of the New Avatex Common Stock, the warrants and the 6.75% notes
will be quoted on the OTC Bulletin Board system. The OTC Bulletin Board system
is a regulated quotation medium for the trading of securities by a community of
market makers. These market makers trade securities on the OTC Bulletin Board
system by entering quotes and trade reports through a computer network. Since
the OTC Bulletin Board system operates as a dealer system, any security quoted
thereon must be sponsored by a participating market maker. We have been advised
by several market makers, including , that they currently intend to
make a market in the New Avatex Common Stock, the warrants and the 6.75% notes
following the merger. The OTC Bulletin Board system has no relationship with
issuers such as us. Only market makers can apply to quote, and cause to be
traded, on the OTC Bulletin Board system, the New Avatex Common Stock, the
warrants and the 6.75% notes. The above mentioned market makers are not
obligated to make a market in the New Avatex Common Stock, the warrants and the
6.75% notes. Any market-making activity may be discontinued at any time without
notice. If any such market making activity is discontinued, we cannot assure you
that other participating market makers will sponsor our securities for quotation
on the OTC Bulletin Board system. Accordingly, we cannot assure you that a
liquid trading market will exist for the New Avatex Common Stock, the warrants
or the 6.75% notes on the OTC Bulletin Board system or that the 6.75% notes will
not trade below their face amount.
Furthermore, we cannot assure you that we will ever be able to have the New
Avatex Common Stock, the warrants or the 6.75% notes listed for trading on a
more active trading market such as The Nasdaq SmallCap Market, The Nasdaq
National Market System or the New York Stock Exchange. As long as the only
trading market for the New Avatex Common Stock, the warrants and the 6.75% notes
is the OTC Bulletin Board system, you may find it difficult to dispose of, or
obtain accurate quotations as to the price of, these securities.
In addition, the stock markets have experienced extreme price and volume
fluctuations. These fluctuations often have had a particularly substantial
effect on the market prices for the securities of many companies. Small
companies, the securities of which trade in the over-the-counter markets and/or
are thinly traded, are often particularly subject to these fluctuations, which
may be unrelated to their specific operating performances. These market
fluctuations could adversely affect the market prices of the New Avatex Common
Stock, the warrants and the 6.75% notes. In the past, companies, including us,
that have experienced volatility in the market price of their securities have
been the object of securities class action litigation. If we were the object of
any additional securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
See a description of the securities class action lawsuits to which we are
currently subject on pages E-6 through E-8 in our Annual Report on Form 10-K for
our fiscal year ended March 31, 1999, a copy of which we have attached as Annex
E to this proxy statement/prospectus.
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THE DEFERRED CONTINGENT CASH RIGHTS MAY HAVE NO VALUE. THE DEFERRED CONTINGENT
CASH RIGHTS WILL NOT BE TRANSFERABLE. THE MAXIMUM RECOVERY YOU MAY RECEIVE FROM
PAYMENTS ON THE DEFERRED CONTINGENT CASH RIGHTS IS LIMITED. WE WILL MAINTAIN
SOLE AND EXCLUSIVE CONTROL OVER THE LITIGATION AGAINST MCKESSON AND THE OTHER
DEFENDANTS.
The value, if any, of the deferred contingent cash rights will depend upon
the outcome of our litigation against McKesson and certain major pharmaceutical
manufacturers. We commenced this litigation on January 10, 1997. We are alleging
that McKesson and the other defendants conspired to drive our former
pharmaceutical distribution subsidiary, FoxMeyer Drug Company, out of business.
We are also alleging that McKesson obtained confidential financial and
competitive information about us and FoxMeyer Drug Company and used the
information to cause damage to us. We are trying to recover in excess of
$400 million in compensatory damages, plus an unspecified amount of punitive
damages. For a more detailed description of this lawsuit, see
"Description of Deferred Contingent Cash Rights" on page I-89.
At this time, it is impossible for us to estimate any amount that we may
recover in the McKesson litigation. Any recovery depends on the favorable
resolution of many complex factual and legal issues. While we believe that there
is factual and legal support for our allegations, we cannot assure you that we
will prevail in this action. We cannot assure you that a judge or jury will
agree with our interpretation of the facts or our application of the legal
theories that we believe support our allegations. Accordingly, we cannot assure
you that the deferred contingent cash rights will ultimately have any value
resulting in any payment being made on them.
The deferred contingent cash rights will NOT:
o be transferable, except by will or pursuant to the laws of descent and
distribution or by operation of law;
o be evidenced by a certificate or other instrument;
o possess any voting rights;
o receive or be entitled to receive any dividends or interest; or
o represent any equity interest in us or Xetava.
The merger agreement provides that holders of our $5 Preferred Stock and
$4.20 Preferred Stock electing to receive the alternate consideration in the
merger for their preferred stock will have for each of their shares of preferred
stock a right to a pro rata share of 16% and 84%, respectively, of 20% of the
net recovery we actually receive in respect of all claims asserted in the
McKesson litigation. However, the 20% of any net recovery may not exceed $7.5
million. Accordingly, notwithstanding the amount of any net recovery we realize
from the McKesson litigation, our payments on the deferred contingent cash
rights is capped.
We will not be obligated under any circumstances to make any payment on the
deferred contingent cash rights until there has been, with respect to every
defendant in the McKesson litigation, a final, non-appealable judgment, a
voluntary dismissal with prejudice of, or final settlement of all claims
asserted with respect to the litigation. We cannot assure you when that will
occur. We also cannot assure that any recovery will be of any substance, or that
any recovery will exceed the expenses we incur in prosecuting this litigation so
that there is a net recovery pool from which to make payments on the deferred
contingent cash rights.
The merger agreement provides that we will retain sole and exclusive
control over the McKesson litigation. Accordingly, we may, among other things,
dismiss, settle or cease prosecuting all or any portion of the McKesson
litigation at any time, including without obtaining any recovery. Unless we
artificially arrange our affairs to avoid or minimize the payment on the
deferred contingent cash rights, recipients of the deferred contingent cash
rights will have no rights or claims against us for any decision regarding our
prosecution of the McKesson litigation, including any decision to settle with
any defendant or to cease prosecuting the litigation without any recovery.
There is also uncertainty as to the proper tax treatment of a person's
entitlement to any proceeds from the deferred contingent cash rights. See
"--Material Federal Income Tax Consequences of the Merger" on page I-98.
I-25
<PAGE>
In view of the many uncertainties concerning the deferred contingent cash
rights, when you are deciding whether or not to elect to receive the alternate
consideration for your shares of preferred stock in the merger, you should not
assume that we will obtain any recovery from the McKesson litigation or that the
deferred contingent cash rights will turn out to be of any value.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON THE NEW AVATEX COMMON STOCK FOR THE
FORESEEABLE FUTURE. YOU WILL NOT RECEIVE ANY PERIODIC INCOME FROM THE NEW AVATEX
COMMON STOCK YOU MAY RECEIVE IN THE MERGER OR FROM THE NEW AVATEX COMMON STOCK
YOU MAY RECEIVE UPON EXERCISE OF THE WARRANTS.
We have not paid any cash dividends on our common stock for the past
several years and we do not anticipate paying any dividends on the New Avatex
Common Stock in the foreseeable future. We intend to retain our earnings, if
any, for reinvestment and repayment of indebtedness, including to satisfy our
obligations under the 6.75% notes. If you receive warrants in the merger, you
will not have the right to receive any dividends until you exercise your
warrants for shares of New Avatex Common Stock. In addition, applicable
provisions of Delaware law may affect our ability to declare and pay dividends
on the New Avatex Common Stock. Accordingly, you should not expect to receive
any periodic income from owning shares of New Avatex Common Stock. Any economic
gain on the New Avatex Common Stock in the foreseeable future will be from an
appreciation, if any, in the price of the stock.
THE PROJECTIONS AND FORECASTS WE PROVIDED TO OUR FINANCIAL ADVISOR ARE SUBJECT
TO UNCERTAINTIES AND CONTINGENCIES.
The projections and forecasts that we provided to Houlihan Lokey in
connection with their rendering the opinions discussed under "--The Merger
Transaction--Opinions of Financial Advisor", while presented with numerical
specificity, were based upon a number of estimates and assumptions. These
projections and forecasts were also used by Houlihan Lokey in their financial
analysis of our company and were part of presentations they made to our Board of
Directors in connection with rendering their opinions. Certain materials that
Houlihan Lokey delivered to our Board of Directors during these presentations
are filed as an exhibit to the Transaction Statement on Schedule 13E-3 that we
filed with the SEC in connection with the merger. Though we consider these
projections and forecasts reasonable, they are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond our control, and upon assumptions with respect to future
business strategies and decisions that are subject to change. Many of these
uncertainties, contingencies and assumptions relate to the expected values of
our investments, which are inherently uncertain because they are in each case
dependent upon, among other things, the future performance of our investees. The
projections and forecasts were not prepared with a view toward compliance with
published guidelines of the SEC, the American Institute of Certified Public
Accountants, any regulatory or professional agency or body, or generally
accepted accounting principles. Moreover, our independent auditors did not
compile or examine the projections and forecasts and, accordingly, they express
no opinion or any other form of assurance with respect to, assume no
responsibility for and disclaim any association with the projections and
forecasts. While we believe the projections and forecasts are based upon
reasonable assumptions and estimates, actual results will vary and such
variation may be material. Projections and forecasts are necessarily speculative
in nature, and it is usually the case that one or more of the assumptions
underlying the projections will not materialize. Furthermore, we do not intend
to update or revise the projections and forecasts to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION COULD IMPEDE OR
DISCOURAGE A THIRD-PARTY ACQUISITION OF OUR COMPANY. THERE ARE ALSO PROVISIONS
IN THE INDENTURE GOVERNING THE 6.75% NOTES THAT RESTRICT OUR ABILITY TO EFFECT A
CHANGE-IN-CONTROL TRANSACTION. THIS COULD PREVENT OUR STOCKHOLDERS FROM
RECEIVING A PREMIUM OVER MARKET PRICE FOR THEIR NEW AVATEX COMMON STOCK.
We are incorporated under the laws of the State of Delaware. Accordingly,
we are subject to the anti-takeover provisions of Delaware law, particularly
Section 203 of the Delaware General Corporation Law. These provisions impose
various obstacles to the ability of a third party to acquire control of our
company, even if a change in control would be beneficial to its existing
stockholders.
I-26
<PAGE>
In addition, our existing certificate of incorporation, as well as the
restatement thereof to be in effect upon the completion of the merger, contains
certain provisions that may discourage other persons from attempting to acquire
control of our company. These provisions include that:
o our Board of Directors, without stockholder approval, may designate the
terms of one or more series of preferred stock and issue shares of
preferred stock;
o our Board of Directors is elected in "classes", with only one-third of
our directors coming up for election each year;
o the approval of holders of at least 80% of our outstanding common stock
is required to approve certain events relating to transactions with
interested persons of our company; and
o the approval of holders of at least 66 2/3% of our outstanding
common stock is required to amend our certificate of incorporation.
The indenture governing the 6.75% notes restricts our ability to effect
specified change-of-control transactions. These transactions include our merger
with or into another person, and the sale or disposition of all or substantially
all of our assets or more than 80% of our capital stock to another person. The
indenture will permit the occurrence of any of these change-of-control events
if:
o the person formed or surviving any merger (if other than our company), or
to which any sale or disposition of assets or capital stock is made,
assumes all of our obligations under the indenture and our guarantee of
the 6.75% notes;
o immediately after giving effect to any such change-of-control event, no
default or event of default would exist under the indenture; and
o the person formed or surviving any merger, or to which any such sale or
disposition of assets or capital stock is made, has consolidated net
worth immediately after any such change-of-control event of at least our
consolidated net worth immediately preceding the change-in-control event.
A failure to comply with these restrictions would result in an event of default
under the indenture that could permit acceleration of the 6.75% notes. If this
occurs, we may be unable to pay the accelerated principal amount of and interest
on the 6.75% notes.
The above described provisions of our certificate of incorporation and the
indenture for the 6.75% notes, as well as the Delaware law provisions, could
impede a merger, consolidation, takeover or other business combination involving
our company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company. Anything which makes an
acquisition of us more difficult could reduce the value of our common stock.
LOSS OF OUR KEY EXECUTIVES COULD HAVE A SIGNIFICANT IMPACT ON US
Our future success depends in large part upon the abilities and continued
service of our executive officers and other key employees, particularly our
Co-Chairmen of the Board and Co-Chief Executive Officers, Abbey J. Butler and
Melvyn J. Estrin. Messrs. Butler and Estrin are involved actively in monitoring
our investments and in developing liquidation and additional investment
strategies for these investments. In addition, our ability to prosecute
successfully our litigation against McKesson and others depends in large part on
the continued participation therein of Messrs. Butler and Estrin. Our future
success also depends on our ability to retain the other members of our existing
management team. Although we have entered into employment agreements with
Messrs. Butler and Estrin and certain other members of our management team,
there can be no assurance that the services of these individuals will continue
to be available to us. See "Other Annual Meeting Proposals--Election of
Directors--Employment and Indemnification Agreements."
SOME OF OUR VENDORS AND INVESTEES AND THEIR VENDORS MAY NOT BE YEAR 2000
COMPLIANT.
We are dependent on information technology and process control systems that
employ computers as well as embedded microprocessors. The entities in which we
have invested, including Phar-Mor, are also dependent on information technology
and process control systems. We, as well as our investees, also depend on the
proper functioning of the business systems of third parties. Many computer
systems and microprocessors can only process dates in which the year is
represented by two digits. As a result, some of
I-27
<PAGE>
these systems and processors may interpret "00" incorrectly as the year 1900
instead of the year 2000, in which event they could malfunction or become
inoperable after December 31, 1999. Systems and processors that can properly
recognize the year 2000 are referred to as "year 2000 compliant".
We have assessed our internal systems, both hardware and software, and they
are year 2000 compliant. We are currently trying to determine whether our
principal vendors and the entities in which we have invested are or expect to be
year 2000 compliant by the end of the year. If a critical vendor, such as a
utility company or telephone company, is not year 2000 compliant, we may suffer
potentially significant disruptions to our overall operations, depending upon
the length and severity of the problems. If any of the entities in which we have
made a significant investment, or if any critical vendor of these entities, is
not year 2000 compliant, the value of that investment may be materially and
adversely affected and, correspondingly, so will our results of operations and
financial condition. At this time, we are not certain to what extent we may be
affected by year 2000 compliance matters relating to these entities.
I-28
<PAGE>
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements, which
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, regarding our financial condition,
results of operations, cash flows, dividends, financing plans, business
strategies, budgets, capital and other expenditures, plans and objectives of our
management, markets for our stock and other matters. Statements in this document
that are not historical facts are hereby identified as "forward-looking
statements" for the purpose of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. Such forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues, working
capital, liquidity, capital needs, amounts on realization of assets, interest
costs and income, wherever they occur in this proxy statement/prospectus, are
necessarily estimates reflecting the best judgment of our senior management and
involve a number of risks and uncertainties that could cause actual results to
differ materially from those suggested by the forward-looking statements. Such
forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth in this document.
Our investments also face risks associated with currently unforeseen
competitive pressures; our ability and the ability of our investees' management
to develop, implement and market their products and services; and other such
risks. These other risks include decreased consumer spending, customer
concentration issues, millennium compliance issues and the effects of general
economic conditions.
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this document,
including, among others, our Annual Report on Form 10-K for our fiscal year
ended March 31, 1999 attached as Annex E to this proxy statement/prospectus. We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date thereof. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
I-29
<PAGE>
HISTORICAL AND PRO FORMA FINANCIAL DATA
We are providing you the following information to aid you in your analysis
of the financial aspects of the merger. We derived this information from our
audited consolidated financial statements. The information is only a summary.
You should read this information together with our historical financial
statements and related notes contained in our Annual Report on Form 10-K for our
fiscal year ended March 31, 1999. We have attached as Annex E to this proxy
statement/prospectus a copy of this Form 10-K.
Xetava did not exist prior to April 8, 1998 and was organized solely for
the purpose of completing a merger transaction with us. Xetava has no operations
and no assets or liabilities of any significance. Information about Xetava is
included in our consolidated amounts and is immaterial on a stand-alone basis.
Therefore, no historical data is presented for Xetava.
Certain rules of the SEC require us to provide you with certain financial
information about Phar-Mor. We have excerpted this information from Phar-Mor's
Annual Report on Form 10-K for its fiscal year ended June 27, 1998 and from its
Quarterly Report on Form 10-Q for its fiscal quarter ended March 27, 1999. We
have attached this information as Annex F to this proxy statement/prospectus.
I-30
<PAGE>
OUR HISTORICAL FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues...................................... $ 4,243 $ 10,439 $ 12,463 $ 12,228 $ 10,509
Operating loss................................ (10,092) (7,129) (2,391) (9,578) (5,773)
Other income (expense)........................ 47,404 21,779 19,228 (11,337) (1,475)
Financing costs, net.......................... 1,451 3,569 4,738 3,524 543
Income (loss) from continuing operations
before National Steel Corporation, equity
in income (loss) of affiliates, income tax
provision and minority interest............ 35,861 11,081 12,099 (24,439) (7,791)
Income (loss) from continuing operations...... 39,447 5,148 (12,244) (81,219) (6,587)
Discontinued operations....................... 2,167 (68,809) (267,112) 3,719 --
Net income (loss)............................. 41,614 (63,661) (279,356) (77,500) (6,587)
Preferred dividends........................... 19,096 21,108 19,081 25,604 28,178
Net income (loss) applicable to common
stockholders............................... $ 22,518 $ (84,769) $(298,437) $(103,104) $ (34,765)
COMMON SHARE DATA
Basic Earnings per share:
Continuing operations...................... $ 1.38 $ (0.97) $ (2.10) $ (7.74) $ (2.65)
Discontinued operations.................... 0.15 (4.16) (17.89) 0.27 --
Earnings (loss) per share.................. $ 1.53 $ 5.13) $ (19.99) $ (7.47) $ (2.65)
Diluted Earnings per share:
Continuing operations...................... $ 1.37 $ (0.97) $ (2.10) $ (7.74) $ (2.65)
Discontinued operations.................... 0.15 (4.16) (17.89) 0.27 --
Earnings (loss) per share.................. $ 1.52 $ (5.13) $ (19.99) $ (7.47) $ (2.65)
Cash dividends per share...................... -- -- -- -- --
Average number of shares outstanding
(in thousands)
Basic...................................... 14,711 16,521 14,931 13,806 13,102
Diluted.................................... 14,821 16,521 14,931 13,806 13,102
FINANCIAL INFORMATION
Working capital............................... $ 444,525 $ 276,401 $ 46,418 $ 40,621 $ 27,323
Total assets.................................. 1,776,996 1,577,070 167,167 119,303 117,220
Long-term debt................................ 422,751 403,831 27,482 22,923 34,268
Redeemable preferred stock.................... 175,019 187,292 189,402 214,996 243,169
Stockholders' equity (deficit)................ 304,150 202,463 (113,507) (141,902) (177,933)
Book value per share of common stock.......... $ 18.51 $ 12.15 $ (8.22) $ (10.28) $ (13.68)
Shares of common stock outstanding
(in thousands)............................. 16,432 16,667 13,806 13,806 13,005
KEY FINANCIAL RATIOS
Ratio of earnings to fixed charges and
preferred dividends (1).................... 1.68:1 -- -- -- --
Deficiency of earnings to fixed charges and
preferred dividends (1).................... -- $ (17,781) $ (7,036) $ (50,043) $ (36,294)
Redeemable preferred stock and long-term
debt as a percent of total capitalization.. 66.3% 74.5% 209.8% 247.8% 278.8%
</TABLE>
(Footnotes on next page)
I-31
<PAGE>
(Footnotes from previous page)
- ------------------
(1) For purposes of this computation, earnings are defined as income (loss) from
continuing operations before accounting for our investment in National Steel
Corporation, equity in income of affiliates, income tax provision and
minority interest plus fixed charges. Fixed charges are the sum of interest
expense and accrued dividends on our preferred stock on a pre-tax basis.
Historical ratios of earnings to fixed charges for fiscal 1996, 1997, 1998
and 1999 were less than one-to-one.
MERGER-RELATED EXPENSES
The following is an estimate of the costs and expenses incurred or expected
to be incurred in connection with the merger:
<TABLE>
<S> <C>
SEC filing fee.......................................................... $
Financial advisor fees and expenses.....................................
Legal fees and expenses.................................................
Accounting fees and expenses............................................
Printing and mailing....................................................
Litigation settlement fees and expenses.................................
Consideration for standstill arrangements............................... 900,000
Miscellaneous...........................................................
--------
Total................................................................. $
--------
--------
</TABLE>
These expenses are reflected in the pro forma financial data presented
below.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
In the table on the next page, we are providing you with our unaudited pro
forma condensed consolidated statement of operations, which is based on our
historical consolidated statements of operations for the year ended March 31,
1999, adjusted as if the merger had been completed on April 1, 1998. The pro
forma condensed balance sheet is based on our historical balance sheet at March
31, 1999, adjusted to give effect to the merger as of that date. Xetava results
and balance sheet are already included in our consolidated amounts as Xetava is
a wholly-owned subsidiary of ours. You should read this unaudited pro forma
condensed consolidated financial information in conjunction with the historical
financial statements and accompanying notes contained in our Annual Report on
Form 10-K for our fiscal year ended March 31, 1999, a copy of which we are
attaching as Annex E to this proxy statement/prospectus. You should not rely on
the unaudited pro forma financial information as an indication of our results of
operations or financial position after the completion of the merger. Each of the
statements is presented as if the holders of 50% of each series of our preferred
stock elected to receive the applicable alternate consideration available for
their preferred stock in the merger, and as if 100% of such holders elected the
alternate consideration.
I-32
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AS IF THE HOLDERS OF 50% OF EACH SERIES OF
PREFERRED STOCK ELECTED THE ALTERNATE CONSIDERATION
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1999
--------------------------------------
AVATEX PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES.................................................................... $ 10,509 $ -- $ 10,509
OPERATING COSTS
Operating costs, including general and administrative costs............... 15,051 15,051
Depreciation and amortization............................................. 1,231 1,231
-------- --------- ---------
OPERATING LOSS.............................................................. (5,773) -- (5,773)
OTHER EXPENSE............................................................... (1,475) (1,475)
FINANCING COSTS
Interest income........................................................... 1,874 (481)(e) 1,393
Interest expense.......................................................... 2,417 1,998 (d) 4,415
-------- --------- ---------
Financing costs, net...................................................... 543 2,479 3,022
-------- --------- ---------
LOSS BEFORE EQUITY IN INCOME OF AFFILIATES, INCOME TAX PROVISION AND
MINORITY INTEREST......................................................... (7,791) (2,479) (10,270)
Equity in income of affiliates.............................................. 1,263 1,263
-------- --------- ---------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST...................... (6,528) (2,479) (9,007)
Income tax provision........................................................ 8 8
-------- --------- ---------
LOSS BEFORE MINORITY INTEREST............................................... (6,536) (2,479) (9,015)
Minority interest in results of operations of consolidated subsidiaries..... 51 51
-------- --------- ---------
NET LOSS.................................................................... (6,587) (2,479) (9,066)
Effect of redemption of preferred stock..................................... -- 176,656 (d) 176,656
Preferred stock dividends................................................... (28,178) 28,178 (b) --
-------- --------- ---------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS........................... $(34,765) $ 202,355 $ 167,590
-------- --------- ---------
-------- --------- ---------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share........................................... $ (2.65) $ 5.47
Diluted earnings (loss) per share (g)..................................... $ (2.65) $ 5.47
Average number of common shares outstanding................................. 13,102 17,519 (b) 30,621
Ratio of earnings to fixed charges and preferred dividends(f)............... (f) (f)
</TABLE>
See notes to pro forma condensed consolidated financial information.
I-33
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS IF THE HOLDERS OF 50% OF EACH SERIES OF
PREFERRED STOCK ELECTED THE ALTERNATE CONSIDERATION
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT MARCH 31, 1999
----------------------------------------
AVATEX PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments...................................... $ 27,993 $ (9,625)(e) $ 18,368
Receivables--net..................................................... 2,767 2,767
Other current assets................................................. 1,823 1,823
---------- --------- ---------
TOTAL CURRENT ASSETS................................................... 32,583 (9,625) 22,958
INVESTMENTS IN AFFILIATES.............................................. 27,038 (2,198)(b) 24,840
PROPERTY AND EQUIPMENT................................................. 33,030 33,030
Less accumulated depreciation and amortization....................... 2,756 2,756
---------- --------- ---------
NET PROPERTY AND EQUIPMENT............................................. 30,274 -- 30,274
MISCELLANEOUS ASSETS................................................... 27,325 27,325
---------- --------- ---------
TOTAL ASSETS........................................................... $ 117,220 $ (11,823) $ 105,397
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable..................................................... $ 1,581 $ -- $ 1,581
Other accrued liabilities............................................ 3,270 3,270
Long-term debt due within one year................................... 409 409
---------- --------- ---------
TOTAL CURRENT LIABILITIES.............................................. 5,260 -- 5,260
LONG-TERM DEBT......................................................... 34,268 14,063 (d) 48,331
OTHER LONG-TERM LIABILITIES............................................ 12,046 12,046
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES......................... 410 410
COMMITMENTS AND CONTINGENCIES.......................................... -- --
REDEEMABLE PREFERRED STOCK............................................. 243,169 (243,169)(b) --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock......................................................... 69,032 (68,708)(c) 324
Capital in excess of par value....................................... 119,103 82,671 (c) 201,774
Warrants outstanding................................................. -- 687 (d) 687
Accumulated other comprehensive income............................... 1,820 1,820
Accumulated deficit.................................................. (365,967) 204,831 (d) (161,136)
---------- --------- ---------
(176,012) 219,481 43,469
Less: equity in cost of common stock of the Corporation held by
Phar-Mor, Inc..................................................... (1,921) (2,198)(b) (4,119)
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................... (177,933) 217,283 39,350
---------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................... $ 117,220 $ (11,823) $ 105,397
---------- --------- ---------
---------- --------- ---------
Book value per share of common stock................................... $ (13.68) $ 1.29
Shares of common stock outstanding..................................... 13,005 17,519 (b) 30,524
</TABLE>
See notes to pro forma condensed consolidated financial information.
I-34
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AS IF 100% OF PREFERRED STOCKHOLDERS ELECTED THE ALTERNATE CONSIDERATION
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1999
----------------------------------------
AVATEX PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUE.................................................................. $ 10,509 $ -- $ 10,509
OPERATING COSTS
Operating costs, including general and administrative costs............ 15,051 15,051
Depreciation and amortization.......................................... 1,231 1,231
-------- --------- ---------
OPERATING LOSS........................................................... (5,773) -- (5,773)
OTHER EXPENSE............................................................ (1,475) (1,475)
FINANCING COSTS
Interest income........................................................ 1,874 (863)(e) 1,011
Interest expense....................................................... 2,417 3,995 (d) 6,412
-------- --------- ---------
Financing costs, net................................................ 543 4,858 5,401
-------- --------- ---------
LOSS BEFORE EQUITY IN INCOME OF AFFILIATES, INCOME TAX PROVISION AND
MINORITY INTEREST...................................................... (7,791) (4,858) (12,649)
Equity in income of affiliates.................................... 1,263 1,263
-------- --------- ---------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST................... (6,528) (4,858) (11,386)
Income tax provision..................................................... 8 8
-------- --------- ---------
LOSS BEFORE MINORITY INTEREST............................................ (6,536) (4,858) (11,394)
Minority interest in results of operations of consolidated subsidiaries.. 51 51
-------- --------- ---------
NET LOSS................................................................. (6,587) (4,858) (11,445)
Effect of redemption of preferred stock.................................. -- 168,244 (d) 168,244
Preferred stock dividends................................................ (28,178) 28,178 (b) --
-------- --------- ---------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS........................ $(34,765) $ 191,564 $ 156,799
-------- --------- ---------
-------- --------- ---------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share........................................ $ (2.65) $ 13.06
Diluted earnings (loss) per share(g)................................... $ (2.65) $ 13.06
Average number of common shares outstanding.............................. 13,102 (1,099)(b) 12,003
Ratio of earnings to fixed charges and preferred dividends(f)............ (f) (f)
</TABLE>
See notes to pro forma condensed consolidated financial information.
I-35
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS IF 100% OF PREFERRED STOCKHOLDERS ELECTED THE ALTERNATE CONSIDERATION
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------------
AVATEX PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments...................................... $ 27,993 $ (17,250)(e) $ 10,743
Receivables--net..................................................... 2,767 2,767
Other current assets................................................. 1,823 1,823
---------- --------- ---------
TOTAL CURRENT ASSETS................................................... 32,583 (17,250) 15,333
INVESTMENTS IN AFFILIATES.............................................. 27,038 (2,198)(b) 24,840
PROPERTY AND EQUIPMENT................................................. 33,030 33,030
Less accumulated depreciation and amortization....................... 2,756 2,756
---------- --------- ---------
NET PROPERTY AND EQUIPMENT............................................. 30,274 -- 30,274
MISCELLANEOUS ASSETS................................................... 27,325 27,325
---------- --------- ---------
TOTAL ASSETS........................................................... $ 117,220 $ (19,448) $ 97,772
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable..................................................... $ 1,581 $ -- $ 1,581
Other accrued liabilities............................................ 3,270 3,270
Long-term debt due within one year................................... 409 409
---------- --------- ---------
TOTAL CURRENT LIABILITIES.............................................. 5,260 -- 5,260
LONG-TERM DEBT......................................................... 34,268 28,126 (d) 62,394
OTHER LONG-TERM LIABILITIES............................................ 12,046 12,046
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES......................... 410 410
COMMITMENTS AND CONTINGENCIES.......................................... -- --
REDEEMABLE PREFERRED STOCK............................................. 243,169 (243,169)(b) --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock......................................................... 69,032 (68,894)(c) 138
Capital in excess of par value....................................... 119,103 68,894 (c) 187,997
Warrants outstanding................................................. -- 1,375 (d) 1,375
Accumulated other comprehensive income............................... 1,820 1,820
Accumulated deficit.................................................. (365,967) 196,418 (d) (169,549)
---------- --------- ---------
(176,012) 197,793 21,781
Less: equity in cost of common stock of the Corporation held by
Phar-Mor, Inc..................................................... (1,921) (2,198)(b) (4,119)
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................... (177,933) 195,595 17,662
---------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................... $ 117,220 $ (19,448) $ 97,772
---------- --------- ---------
---------- --------- ---------
Book value per share of common stock................................... $ (13.68) $ 1.48
Shares of common stock outstanding..................................... 13,005 (1,099)(b) 11,906
</TABLE>
See notes to pro forma condensed consolidated financial information.
I-36
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(a) For the financial statements contained herein, Xetava is consolidated
with our results of operations and in our balance sheet for the year ended March
31, 1999. The merger will not change any historical results of operations or
balance sheet amounts. Avatex Funding is also shown consolidated in the pro
forma financial statements.
(b) As a result of the merger, our preferred stockholders can either
become common stockholders of us or elect to receive the alternate consideration
for their preferred stock in the merger. In either case, our $5 Preferred Stock
and the $4.20 Preferred Stock will be eliminated in the merger. As a result of
the elimination of these preferred stocks, any and all rights and preferences of
these stocks, including to accrued but unpaid dividends and sinking-fund payment
arrearages, will be extinguished automatically.
If the holders of 50% of each series of preferred stock elect to receive
the applicable alternate consideration for their preferred stock, approximately
18,617,670 additional shares of New Avatex Common Stock will be issued in the
merger. The total shares of common stock outstanding after the merger, including
the 13,806,487 shares of common stock to be held by our existing common
stockholders, will be approximately 32,424,157. If all of the preferred
stockholders elect to receive the applicable alternate consideration, then the
total shares will remain 13,806,487.
In addition, Phar-Mor owns 2,086,200 shares of our common stock. These
shares are treated similarly to treasury stock and are deducted from our shares
outstanding in calculating our earnings per share. Our equity in the shares of
our common stock that Phar-Mor owns is 38.4% or 801,101 shares. Simultaneously
with the completion of the merger, Phar-Mor will acquire an additional 2,862,400
shares of our common stock. As a result of this acquisition, we will reduce the
number of shares of our common stock outstanding by 38.4% of this amount, or
1,099,162 shares. We will also reduce our investment in Phar-Mor and increase
our treasury stock by 38.4% of the purchase price, or $2,198,323. Total treasury
stock will be 1,900,263 shares.
Shares of our common stock to be outstanding after the merger will be
approximately 30,523,894 if the holders of 50% of each series of preferred stock
elect to receive the applicable alternate consideration, or 11,906,224 if all of
the preferred stockholders elect to receive the applicable alternate
consideration.
(c) As a result of the merger, the par value of our common stock will
decrease from $5.00 to $.01 per share. The difference in the par value will be
transferred to "capital in excess of par value." The book value of our common
stock will not be changed as a result of the merger, except for the adjustment
of the par value. In addition, the number of shares of our common stock to be
outstanding after the merger is assumed to increase in the pro forma scenario
where holders of 50% of each series of our preferred stock elect to receive the
applicable alternate consideration. The dollar amount added to equity for New
Avatex Common Stock to be issued in the merger is based on the market value of
our existing shares of common stock on June 21, 1999, the first business day
after our announcement of the merger.
(d) The difference in the carrying value of the preferred stock, including
cumulative unpaid dividends, and the value assigned to the common stock, or the
cash, notes, warrants and other consideration that may be issued upon the
conversion of the $5 Preferred Stock and $4.20 Preferred Stock in the merger is
shown as a reduction to the net loss for computing earnings applicable to common
stockholders. The difference in the effect of the merger on the accumulated
deficit between the amount shown on the pro forma statement of operations from
the amount shown on the pro forma balance sheet is due to the difference in the
balance of preferred stock and cumulative unpaid dividends on April 1, 1998 and
March 31, 1999, the assumed dates of the merger for each statement. The pro
forma statement of operations assumes the merger occurred April 1, 1998 while
the pro forma balance sheet assumes the merger occurred on March 31, 1999.
The warrants are valued using a Black-Scholes model assuming an expected
volatility of 73.9% (based on the last five years' actual volatility), a 5.72%
risk-free interest rate, a term of 5 years and 3 months and that no dividends
are to be paid on the New Avatex Common Stock. The value based on these
assumptions is $.50 for each warrant issued. If all of the preferred
stockholders elect to receive the applicable alternate consideration, then
approximately 2,750,000 warrants would be issued. If the holders of 50% of each
series
I-37
<PAGE>
of preferred stock elect to receive the applicable alternate consideration, then
1,375,000 warrants would be issued.
The 6.75% notes have been discounted using an interest rate of 14.0% to
reflect our management's best estimate of a market rate for a similarly
collateralized, below investment grade, low interest coverage note. If all of
the preferred stockholders elect to receive the applicable alternate
consideration in the merger, then approximately $34,000,000 face amount of 6.75%
notes would be issued with a carrying value of approximately $28,125,800. The
difference in the carrying value and the face amount would be amortized on an
effective yield basis over the life of the notes. If the holders of 50% of each
series of preferred stock elect to receive the applicable alternate
consideration in the merger, then approximately $17,000,000 face amount of 6.75%
notes would be issued with a carrying value of approximately $14,062,900. The
statement of operations reflects the interest charge based on the 14.0%
effective rate.
The other component of consideration to be received is the deferred
contingent cash rights. In the pro forma statements, we assign no value to the
deferred contingent cash rights.
(e) The interest income and cash accounts were reduced for the cash
outlays related to the merger. At least $2,000,000 will be paid under any
scenario to cover merger related expenses. In addition, approximately
$15,250,000 will be paid if all of the preferred stockholders elect to receive
the applicable alternate consideration in the merger. If the holders of 50% of
each series of preferred stock elect to receive the applicable alternate
consideration in the merger, then the cash outlays will be approximately
$7,625,000 in addition to the $2,000,000.
(f) For purposes of this computation, earnings are defined as loss before
equity in income of affiliates, income tax provision and minority interest plus
fixed charges. Fixed charges are the sum of interest expense and accrued
dividends on our preferred stock on a pre-tax basis. The deficiencies of
earnings to fixed charges for pro forma calculations were $10,595,000, in the
case where 50% of the holders of each series of preferred stock elect the
applicable alternate consideration, and $12,974,000, in the case where all of
the preferred stockholders elect the applicable alternate consideration.
(g) In computing diluted earnings per share, no additional shares were
added for the 3.9 million options outstanding or for the warrants to be issued
since the exercise price for the options and warrants exceeded the market price
of our common stock on the first business day after the announcement of the
merger.
I-38
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------
YEARS ENDED MARCH 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges........................... 1.68:1 -- -- -- --
Deficiency of earnings to fixed charges...................... -- $17,781 $7,036 $50,043 $36,294
</TABLE>
For purposes of this computation, earnings are defined as income (loss)
from continuing operations before accounting for our investment in National
Steel Corporation, equity in income (loss) of affiliates, income tax provision
and minority interest plus fixed charges. Fixed charges are the sum of interest
expense and accrued dividends on our preferred stock on a pre-tax basis.
Historical ratios of earnings to fixed charges for fiscal 1997, 1998 and 1999
were less than one-to-one.
I-39
<PAGE>
THE MERGER TRANSACTION
BACKGROUND OF THE MERGER
In August 1996, our primary operating unit, FoxMeyer Corporation, was
forced to seek relief under chapter 11 of the U.S. Bankruptcy Code, thereby
dissipating a significant amount of our value. Shortly after the bankruptcy
filing, aggrieved creditors of FoxMeyer challenged our ownership of certain
former FoxMeyer assets that were unrelated to FoxMeyer's core pharmaceuticals
distribution business. Following these adverse occurrences, we moved quickly to
ensure our corporate existence by, among other things, developing and
implementing critical strategic priorities aimed at preserving and maximizing
the remaining enterprise value.
During our fiscal year ended March 31, 1998, we had significant success in
implementing the strategic priorities outlined at our 1997 annual meeting of
stockholders. These included:
1. a significant reduction in operating cash outflows;
2. the retention of key qualified personnel familiar with our
remaining assets and obligations;
3. the development and prosecution of our litigation against McKesson
and certain major pharmaceutical manufacturers;
4. the settlement with the FoxMeyer bankruptcy trustee of certain
claims made against us and the release of our assets from a temporary
restraining order;
5. the restoration of our liquidity and the elimination of substantial
healthcare, environmental and other liabilities through a negotiated
settlement of our former preferred stock holdings in National Steel
Corporation;
6. the acquisition of all shares of common stock of Phar-Mor held by
Hamilton Morgan LLC in order to thereby maximize our flexibility in
determining the management of and realization on this asset; and
7. the elimination of certain other of our or our subsidiaries'
material retiree benefit obligations.
Notwithstanding the success of these actions, however, the financial
problems brought about by the FoxMeyer bankruptcy also led us to defer dividends
on our $5 Preferred Stock, which has a face value of $50.00 per share, and our
$4.20 Preferred Stock, which has a face value of $40.00 per share. These
deferrals began with the dividends payable on January 15, 1997. As of April 15,
1998, the dividends accrued and not paid were $4.9 million ($7.50 per share) on
the $5 Preferred Stock, and $29 million (approximately $6.73 per share) on the
$4.20 Preferred Stock. In addition, as of April 15, 1998, we had not made the
sinking fund payments with respect to 88,000 shares of our $5 Preferred Stock
scheduled for January 1998. Based on the foregoing, and in determining the
appropriate approach for accomplishing our objectives, commencing in early 1998,
our Board and management began to consider numerous alternative mechanisms for
achieving an equity recapitalization including, among others, the following:
1. negotiating settlements, in whole or in part, with holders of
shares of the $5 Preferred Stock and $4.20 Preferred Stock;
2. negotiating exchanges, in whole or in part, of our common stock for
the $5 Preferred Stock and $4.20 Preferred Stock;
3. making open-market purchases of $5 Preferred Stock and $4.20
Preferred Stock;
4. paying a portion of accrued dividends in combination with a merger
and/or issuing warrants or options in combination with a merger;
5. proposing our merger into Xetava; and
6. a combination of any or all of the above.
I-40
<PAGE>
Against this background, our Board continued to consider restructuring
options that would appeal to all classes of our stockholders and engaged the
investment banking firm of Gordian Group, L.P. In February and March of 1998,
our management had several meetings with significant holders of our $5 Preferred
Stock and $4.20 Preferred Stock to discuss various alternatives to accomplish
our objectives. These holders indicated that they favored full payment of
accrued dividends. Our management believed that would severely impair our
viability. The parties were unable to agree on a mutually acceptable form of
transaction. Our management did not initiate discussions with any potential
merger partners at that time because it did not believe that any suitable
third-party candidate existed that would improve our viability.
On April 9, 1998, our Board met and formally considered the proposed merger
of us into Xetava to recapitalize our company. The original merger proposal was
embodied in a merger agreement between us and Xetava approved by our Board on
April 9, 1998. If the original merger had been consummated, the holders of our
$5 Preferred Stock and $4.20 Preferred Stock would have received, in the
aggregate, 73.1% of Xetava common stock, and the holders of our common stock
would have received 26.9% of Xetava common stock.
In response to our public announcement of the original merger proposal,
Elliott Associates, L.P. filed an individual action in the Delaware Court of
Chancery styled Elliott Associates, L.P. v. Avatex Corp. Also in response to the
public announcement of the original merger proposal, two class action lawsuits
were commenced in the Delaware Court of Chancery. These actions were styled as
Harbor Finance Partners Ltd. and Anvil Investment Partners, L.P. v. Butler, et
al. and Strougo v. Butler. We refer to these class actions as the "DELAWARE
CLASS ACTIONS". The Delaware Class Actions were brought on behalf of all holders
of $5 Preferred Stock and $4.20 Preferred Stock whose rights and interests would
have been affected by the original merger proposal. Each of these lawsuits
alleged that:
o the consideration to be paid to our preferred stockholders in the
original merger was grossly inadequate;
o the approval of the original merger agreement by our Board and the
consummation of the original merger proposal constituted breaches of our
directors' fiduciary duties;
o the approvals of the holders of at least two-thirds of the issued and
outstanding $5 Preferred Stock and $4.20 Preferred Stock, each voting
separately as a class, were required to approve the original merger
proposal; and
o our Board's failure to afford the preferred stockholders separate class
votes on the original merger proposal constituted a breach of the
certificates of designation for each class of our preferred stock, a
breach of the implied covenant of good faith and fair dealing owed by our
company to our preferred stockholders, and an anticipatory breach of the
certificates of designation for the preferred stock.
Each of the lawsuits sought, among other things, to enjoin the original merger
proposal or, in the alternative, to rescind the original merger proposal if
consummated and requested unspecified money damages. In its action, Elliott
Associates also alleged that the original merger proposal was motivated
primarily or solely for the purpose of preserving the tenure of our directors.
On April 23, 1998, a complaint was filed with the Court of Chancery of the
State of Delaware styled as Intrieri, et al. v. Avatex Corporation. The
complaint was brought by four individuals, Vincent Intrieri, Daniel Gropper,
Ralph DellaCamera, Jr. and Brian Miller, who claimed to have been elected to our
Board on April 20, 1998 by the written consent of the holders of a majority of
our preferred stock. At the time that complaint was filed, these four
individuals were affiliated with Elliott Associates. The plaintiffs contended
that the holders of our $5 Preferred Stock and $4.20 Preferred Stock had the
right to elect two directors each because of our failure to pay dividends on
each series of our preferred stock for six consecutive quarters. The plaintiffs
also contended that they were validly elected to our Board. In order to secure a
prompt hearing on the preferred stockholder's class voting claims in the
lawsuits challenging the original merger, on May 1, 1998, we consented to the
election of Vincent Intrieri and Daniel Gropper to our Board by the holders of
our $4.20 Preferred Stock. On June 8, 1998, the Delaware Court of Chancery ruled
that Ralph DellaCamera, Jr. and Brian Miller were validly elected to our Board
by the written consent of a majority of holders of our $5
I-41
<PAGE>
Preferred Stock and $4.20 Preferred Stock. The size of our Board was thereby
increased to eleven directors, four of whom have been elected by holders of our
preferred stock.
On May 22, 1998, the Delaware Class Actions were consolidated under the
caption In re Avatex Shareholders Litigation. We refer to the consolidated
Delaware Class Actions and the Elliott Associates action jointly as the
"DELAWARE ACTIONS."
On June 3, 1998, the Delaware Chancery Court held a hearing with respect to
the allegations in the Delaware Actions that the original merger proposal
required the separate approvals of the holders of two-thirds of the $5 Preferred
Stock and the $4.20 Preferred Stock and that, without these approvals, we would
breach the certificates of designation for our preferred stock by consummating
the original merger proposal. Following this hearing, the Delaware Chancery
Court ordered that the holders of our $5 Preferred Stock and $4.20 Preferred
Stock were not entitled to separate class or series votes with respect to the
original merger proposal.
On June 8, 1998, we advised the Delaware Chancery Court that our Board
would meet to determine whether it would be appropriate to reconsider and/or
modify the terms of the original proposed merger based on a number of events
that had occurred since our Board had approved the original merger proposal.
These events included the commencement of the Delaware Actions and potential
changes in the values of certain of our assets.
Elliott Associates and the class plaintiffs in the Delaware Class Actions
appealed the June 3, 1998 decision of the Delaware Chancery Court. On August,
28, 1998, the Delaware Supreme Court reversed the Chancery Court's decision and
held that consummation of the original merger required the consent of the
holders of two-thirds of our $5 Preferred Stock. The holding did not, however,
apply to our $4.20 Preferred Stock.
Following the Delaware Supreme Court's ruling, our management began to
reconsider its alternatives to the original merger proposal for achieving the
desired equity recapitalization of our company that would appeal to all classes
of our stockholders, including our common stockholders. Among the alternatives
our management considered were the following:
1. restructuring the original merger proposal in a manner that would
still not require the approval of our preferred stockholders and be within
the parameters set forth in the Delaware Supreme Court's decision;
2. making open-market purchases of $5 Preferred Stock and/or $4.20
Preferred Stock;
3. negotiating settlements, in whole or in part, with our preferred
stockholders, including Elliott Associates;
4. negotiating exchanges, in whole or in part, of our common stock for
the $5 Preferred Stock and $4.20 Preferred Stock; and
5. a combination of any or all of the above.
In mid-September 1998, certain members of our management, representatives
of Elliott Associates and Moses Marx began to discuss preliminarily alternatives
for an equity recapitalization and litigation settlement. Elliott Associates,
Moses Marx and entities affiliated or associated with them represented a
significant portion of the outstanding shares of our $5 Preferred Stock and
$4.20 Preferred Stock. Sometimes we refer to these stockholders as the
"Elliott/Marx Stockholders." Discussions with the Elliott/Marx Stockholders
continued intermittently through October and into early November 1998. These
discussions focused on consideration alternatives that could be offered to our
preferred stockholders in an equity recapitalization. These discussions were
primarily structural in nature. During this period, the parties were unable to
agree on an acceptable recapitalization framework. By early November 1998, it
appeared unlikely that the parties would be able to negotiate an acceptable
transaction framework, as the proposals made to us would, in our management's
I-42
<PAGE>
opinion, significantly impair our viability or force a liquidation of our
assets. In addition, our management believed that none of these proposals would
be supported by our common stockholders.
In an attempt to revitalize the discussions with the Elliott/Marx
Stockholders, on November 24, 1998 our Co-Chairmen of the Board and Co-Chief
Executive Officers, Abbey Butler and Melvyn Estrin, met with Daniel Gropper, a
representative of Elliott Associates, and Moses Marx. By the conclusion of the
meeting, the parties agreed conceptually to basic elements of an overall
framework for an equity recapitalization. These elements included affording our
preferred stockholders the opportunity in a recapitalization transaction to
choose between receiving our common stock or a package of alternative types of
consideration. This alternative consideration would include a four-part
combination of cash, warrants, a debt instrument or a preferred equity security
that would be convertible into debt that, in either case, would be issued by a
newly-formed, special purpose subsidiary and secured by shares of Phar-Mor
common stock, and a participation in any recovery we obtain from our McKesson
litigation. Our management indicated that any negotiated transaction would be
conditioned upon the settlement of the Delaware Actions. As part of the
settlement of their action, we agreed to reimburse Elliott Associates for the
attorneys' and advisory fees that it had incurred and will incur in connection
with the prosecution and settlement of their litigation. In addition, our
management requested that the Elliott/Marx Stockholders agree to a standstill
arrangement, which would, among other things, require these stockholders to
dispose of the shares of our common stock that they owned. The Elliott/Marx
Stockholders requested that we purchase or find another person who would be
interested in purchasing the shares of our common stock beneficially owned by
them. The meeting resulted in a potentially acceptable framework for an equity
recapitalization and potentially acceptable specific values that would be
attributed to, or amounts of the possible different components of, consideration
issuable in a transaction. The parties did not agree on exchange ratios of our
preferred stock. At the conclusion of the meeting, the parties agreed to
continue discussions to refine the structure of, and identify and resolve issues
related to, such a potential recapitalization transaction and to consult their
legal advisors.
In late November and early December 1998, Messrs. Butler and Estrin
discussed the framework emanating from the November 24 meeting with our legal
advisors and other members of our management. In addition, during the first week
of December 1998, our management contacted Gordian Group, which acted as our
financial advisor in the original merger proposal, to discuss the possible
transaction framework. Specifically, we asked Gordian to consider the structure
and potential consideration values and amounts to see if they thought they would
be able to render fairness opinions to our Board in the event we decided to
proceed with the contemplated transaction. In addition, we asked Gordian to
consider their ability to opine as to our solvency prior to and after giving
effect to the contemplated transaction. The Elliott/Marx Stockholders, as well
as our management, believed it was appropriate to request the solvency opinion
in the context of the transaction structure being considered. The parties agreed
that any transaction would be conditioned upon our Board receiving a solvency
opinion and appropriate fairness opinions.
Simultaneous with our management's continued discussions with the
Elliott/Marx Stockholders, in early December 1998, Messrs. Butler and Estrin,
who are also the Co-Chairmen of the Board and the Co-Chief Executive Officers of
Phar-Mor, informally discussed with certain of Phar-Mor's directors and
management and its general counsel and outside legal counsel the possibility of
Phar-Mor purchasing the shares of our common stock beneficially owned by the
Elliott/Marx Stockholders. On behalf of the Elliott/Marx Stockholders, Phar-Mor
was asked to consider a possible purchase price in the $2.35 per share range.
Phar-Mor's representatives indicated that they would consider the proposal in
more detail and consult with their outside legal counsel, who were not our legal
counsel.
During December 1998, our legal advisors had intermittent discussions with
the legal advisors of the Elliott/Marx Stockholders to continue to identify and
resolve open issues and to negotiate in greater detail the conceptual
transaction framework emanating from the November 24 meeting, including the
scope of a standstill arrangement from the Elliott/Marx Stockholders.
On December 22, 1998, our legal advisors and certain members of our
management participated in a telephonic conference with representatives of
Gordian and its counsel. The purpose of the conference call was to discuss
whether, based on the proposed transaction framework presented to Gordian, it
believed it would be able to render opinions as to the fairness of the proposed
transaction to our common and preferred stockholders and as to our solvency
after giving effect to the transaction. Gordian indicated that it believed
I-43
<PAGE>
that the solvency and fairness opinions were linked because of the potential
cash payments and debt incurrence contemplated by the possible transaction
structure. Gordian further indicated that it believed that the solvency analysis
and opinion were predicates to and subsets of the fairness analyses. Gordian's
representatives explained the three generic tests for solvency: (i) the ability
of a company to pay its debts as they become due; (ii) that the capital of a
company after a proposed transaction would not be unreasonably small; and (iii)
that on a pro forma basis the fair value and fair saleable value of a company's
assets would exceed its stated and identified contingent liabilities. Gordian's
representatives went on to explain that any transaction would have to satisfy
each of these generic tests to be able to render a solvency opinion. Based on
Gordian's review and analysis of the financial information and assumptions about
us that it possessed at that time, which were as of June 1998, and after
discussing the same with certain members of our management, the representatives
of Gordian indicated to us that, based on the parameters of the potential
transaction structure presented to them, Gordian probably would not be in a
position to deliver the requested opinions.
Following the December 22 conference call with Gordian, our management
decided to seek the advice of and potentially engage a different financial
advisor. After interviewing several potential financial advisors, our management
decided to engage Houlihan Lokey Howard & Zukin Financial Advisors as our
financial advisor in connection with the possible recapitalization transaction.
Houlihan Lokey was formally retained as of January 8, 1999 to render the
fairness opinions and solvency opinions described above. In the middle of
January 1999, Houlihan Lokey commenced its due diligence and financial analysis
of our company in the context of their engagement.
Throughout January and early February 1999, our legal advisors continued to
refine the terms of the transaction framework, including the terms of the
settlement of the Delaware Actions. In addition, our legal advisors continued to
address and attempt to resolve various tax, Federal securities and Delaware
corporate law issues related to the possible transaction structure. In addition,
in the interest of avoiding any potential challenge to the adequacy of the
stockholder approval of any possible recapitalization transaction, we decided
to condition the consummation of any transaction upon the separate approval
thereof by the holders of two-thirds of each of our $5 Preferred Stock and $4.20
Preferred Stock.
We were advised that, on February 10, 1999, Phar-Mor's Board of Directors
met to consider, among other things, a potential purchase of shares of our
common stock beneficially owned by the Elliott/Marx Stockholders. In addition,
the Phar-Mor Board created a special committee of its independent directors to
further consider and make a recommendation on the matter. We understand that the
special committee would not make any recommendation without obtaining the advice
of an investment banking firm with respect to the fairness of any stock
purchase. We understand that shortly after this meeting the special committee
retained CIBC Oppenheimer Corp. to evaluate the fairness of the proposed stock
purchase.
On February 12, 1999, our legal advisors circulated initial drafts of the
transaction documents for the proposed recapitalization to the Elliott/Marx
Stockholders and their legal advisors, including a draft of the merger
agreement. On March 15, 1999, our legal advisors and our general counsel met
with a representative of the Elliott/Marx Stockholders and one of their legal
advisors to further negotiate the terms of the proposed transaction and the
transaction documents. Throughout March 1999, our management and our legal
advisors had frequent discussions with the Elliott/Marx Stockholders and their
legal advisors to identify and resolve open issues. During these negotiations,
the Elliott/Marx Stockholders requested they receive a separate cash payment at
the closing of the merger in consideration of the ten-year standstill
arrangement to which they were agreeing to be subject. While our management
agreed conceptually to this, the amount of any cash consideration was not agreed
to by the parties at that time.
On April 5, 1999, our legal advisors distributed revised drafts of the
transaction documents to the Elliott/Marx Stockholders and their legal advisors.
In early April 1999, a representative of the Elliott/Marx Stockholders contacted
the class plaintiffs in the Delaware Class Actions and their counsel to discuss
the proposed framework for a recapitalization/settlement transaction. On April
14, 1999, our legal advisors
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distributed revised drafts of the transaction documents to the Elliott/Marx
Stockholders and their legal advisors and to the class plaintiffs and their
legal advisors. Throughout the remainder of April 1999, our management and legal
advisors had frequent and extensive discussions with representatives of the
Elliott/Marx Stockholders and their legal advisors and the legal advisors to the
class plaintiffs to resolve the remaining open issues and to negotiate the final
terms of the proposed transaction and the transaction documents.
Throughout February, March and April 1999, Houlihan Lokey continued to
perform its due diligence review and financial analysis of our company.
We understand that, throughout March and April 1999, CIBC Oppenheimer, on
behalf of the special committee of Phar-Mor's Board of Directors, conducted a
financial analysis of our company in the context of their evaluating the
fairness of Phar-Mor's possible purchase of our common stock from the
Elliott/Marx Stockholders.
By the end of April 1999, each of Houlihan Lokey and CIBC Oppenheimer had
concluded their financial analyses, and our legal advisors and management had
resolved the major open issues with the Elliott/Marx Stockholders and their
legal advisors. By this time, we and the Elliott/Marx Stockholders had agreed to
the specific values that would be attributed to and amounts of each of the
different components of the merger consideration, including, with respect to the
alternate consideration available to our preferred stockholders, the:
o maximum amount of cash payable;
o maximum principal amount of notes to be issued by Avatex Funding, the
interest rate for these notes and the maturity of these notes;
o maximum number of shares of New Avatex Common Stock issuable upon the
exercise of the warrants;
o exercise price for the warrants;
o percentage of any net recovery from the McKesson litigation that payments
on the deferred contingent cash rights would be made; and
o maximum amount payable on the deferred contingent cash rights.
In addition, by this time, the Elliott/Marx Stockholders and our management had
agreed to, and Houlihan Lokey confirmed, the exchange ratios of our preferred
stock. However, at that time, the class plaintiffs still had certain open issues
regarding the transaction documents. These issues included the terms of a voting
agreement with certain of the class plaintiffs, including with respect to the
terms of a proposed release and a standstill agreement to be contained in the
voting agreement.
Throughout the entire negotiation process described above, Messrs. Butler
and Estrin informally discussed the terms of the potential
recapitalization/settlement transaction with certain of our directors.
We understand that the special committee of Phar-Mor's Board met on May 6,
1999 to consider further Phar-Mor's possible purchase of the shares of our
common stock owned by the Elliott/Marx Stockholders. We have been advised that,
at this meeting, CIBC Oppenheimer made a presentation to the special committee
regarding the fairness of the possible purchase of 2,862,400 shares of our
common stock from the Elliott/Marx Stockholders at a purchase price of $2.00 per
share and rendered its opinion to that effect. We understand that the special
committee was also advised by its legal advisors regarding the possible stock
purchase.
Following this special committee meeting, we understand that the Phar-Mor
Board of Directors convened a special meeting to consider the possible stock
purchase. We have been informed that, after considering the opinion of CIBC
Oppenheimer and after consulting its legal advisors, the Phar-Mor Board of
Directors authorized and approved Phar-Mor's purchase of 2,862,400 shares of our
common stock beneficially owned
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by the Elliott/Marx Stockholders at a purchase price of $2.00. The purchase,
however, was conditioned upon the consummation of the merger.
On May 6, 1999, our Board held a special meeting to consider, among other
things, the proposed merger transaction with Xetava. Four of our directors,
Messrs. Daniel Gropper, Vincent Intrieri, Ralph Della Camera, Jr. and Brian
Miller, abstained from our Board's discussion and consideration of, and vote on,
the merger and the merger agreement. As described above, these directors were
elected by a majority of the holders of each of our $5 Preferred Stock and the
$4.20 Preferred Stock pursuant to the terms of the respective Certificates of
Designation for these stocks. These directors informed us that, after
consultation with their counsel, they were abstaining because they may be deemed
to have a conflict of interest from their current or past affiliation with
Elliott Associates. As described above, Elliott Associates, a holder of $5
Preferred Stock and $4.20 Preferred Stock, participated in the negotiation of
the terms of the merger and was to enter into a stockholders' agreement with us.
In addition, Phar-Mor was to purchase a total of 833,900 shares of our common
stock from Elliott Associates and Westgate International for a purchase price of
$2.00 per share. See "--Agreements with Certain Stockholders--Elliott/Marx
Stockholders' Agreement."
At that May 6 Board meeting our management reviewed the history of the
negotiations leading up to the Board's consideration of the proposed merger. Our
legal advisors summarized and explained the terms of the merger and reviewed and
described the terms of the merger agreement and the related transaction
agreements. Our legal advisors also reviewed with the Board the terms of the
proposed settlement of the Delaware Actions. This discussion included the scope
of the release of claims in the settlement and our obligations to pay the fees
of counsel to the class plaintiffs up to $175,000 and to reimburse Elliott
Associates $925,000 for attorneys' and advisory fees it incurred and will incur
in connection with the prosecution and settlement of its action. Our legal
counsel advised the Board that the transaction documents and the settlement
agreement were in substantially final form. Our counsel indicated, however, that
there were still some open issues with the class plaintiffs in the Delaware
Class Actions. Among the open issues were the terms of the release and the
standstill agreement to be contained in a voting agreement between our company
and certain of the class plaintiffs. In addition, our legal advisors made a
presentation to our Board on our directors' fiduciary duties with respect to the
proposed merger transaction and the related transactions.
At the May 6 Board meeting Houlihan Lokey made a presentation regarding the
financial analyses it performed in connection with its opinions. Houlihan Lokey
rendered to our Board oral opinions (which were subsequently confirmed in
writing) to the effect that, as of May 6, 1999, (a) the consideration that the
holders of our common stock would receive pursuant to the merger agreement is
fair to such holders from a financial point of view; (b) the consideration that
the holders of our $5 Preferred Stock and the $4.20 Preferred Stock would
receive pursuant to the merger agreement is within a reasonable range of fair
value of the $5 Preferred Stock and the $4.20 Preferred Stock, as applicable;
and (c) upon completion of the merger and after giving effect to the merger:
(i) on a pro forma basis, the fair value and present fair saleable value of our
assets would exceed our stated liabilities and identified contingent
liabilities; (ii) we should be able to pay our debts as they become absolute and
mature; and (iii) our capital remaining after the merger would not be
unreasonably small for the business in which we engage, as our management has
indicated it is now conducted and is proposed to be conducted following the
completion of the merger. Houlihan Lokey and our legal advisors advised the
Board that the merger agreement required Houlihan Lokey to update and confirm
their opinions as of the date of the mailing of this proxy statement/prospectus
and as of the effective time of the merger.
Our Board discussed Houlihan Lokey's presentation and reviewed the
limitations, assumptions and qualifications contained in Houlihan Lokey's
opinions, including, among others, that the solvency opinion was predicated on
our company either obtaining a $4 million line of credit or selling its real
estate investments for an amount greater than $10 million. Our Board also
reviewed and discussed certain assumptions in the solvency opinion relating to
our future operations, including with respect to our bonus compensation
decisions, potential severance payments to Messrs. Butler and Estrin under
certain circumstances and investment strategies and portfolio composition. For a
detailed description of each of the foregoing assumptions, please read Houlihan
Lokey's solvency opinion, a copy of which is attached as Annex D to this proxy
statement/prospectus.
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After discussing the terms and merits of the proposed merger and the
opinions received by Houlihan Lokey, our Board concluded at that May 6 Board
meeting that the merger and the related transactions were fair to and in the
best interests of our company and our stockholders. Our Board voted to approve
the merger, to authorize the execution of the merger agreement and the related
transaction agreements, and to recommend that our stockholders approve the
adoption of the merger agreement, subject to our management's resolving to their
satisfaction the remaining open issues with the class plaintiffs in the Delaware
Class Actions.
During the period between May 7, 1999 and June 17, 1999, our legal advisors
and management and representatives of the Elliott/Marx Stockholders had frequent
discussions with certain of the class plaintiffs and their counsel to resolve
all of the remaining open issues and to finalize all of the transaction
documents. On June 17, 1999, these negotiations were finalized and all open
issues were resolved to the satisfaction of our management.
On June 17, 1999, our counsel, counsel for Elliott Associates and
counsel for the class plaintiffs entered into a Stipulation of Settlement
relating to the settlement of the Delaware Actions.
On June 18, 1999, (i) Anvil Investment Partners and Mark S. Zucker entered
into a voting agreement with our company, (ii) the Elliott/Marx Stockholders
entered into a stockholders' agreement with our company, and (iii) the merger
agreement was executed. In addition, on June 18, 1999, the Elliott/Marx
Stockholders entered into the stock purchase agreement with Phar-Mor. For a
description of the voting agreement, the stockholders' agreement and the stock
purchase agreement, see "--Agreements with Certain Stockholders" beginning on
page I-69.
On June 18, 1999, we issued a press release announcing the merger, the
execution of the merger agreement and the proposed settlement of the Delaware
Actions. On June 18, 1999, Phar-Mor announced its agreement to purchase, upon
the consummation of the merger, 2,862,400 shares of our common stock from the
Elliott/Marx Stockholders at a purchase price of $2.00 per share.
On June 21, 1999, counsel for the class plaintiffs filed the Stipulation of
Settlement of the Delaware Actions with the Court of Chancery in the State of
Delaware.
OUR REASONS FOR THE MERGER
Our Board of Directors believes that the consummation of the merger is the
optimal method for achieving an equity recapitalization and restoring our
viability and business prospects. Our Board believes that, among other benefits,
the merger will:
o align the interests of all of our equity owners through the creation of
one principal equity security;
o make our common stock more attractive to the financial markets and more
liquid by eliminating our preferred stock and simplifying our capital
structure;
o alleviate the uncertainty concerning our viability by eliminating the
payment obligations of our preferred stock;
o allow us to save costs and reallocate resources that we would have
otherwise incurred or allocated to defending the Delaware Actions;
o enable us to protect, develop and realize upon our existing investments,
and afford us with the opportunity to prosecute and realize upon our
litigation against McKesson and certain major pharmaceutical
manufacturers;
o improve our perception as a qualified purchaser, investor and/or business
partner, as we will no longer be burdened by our preferred stock
obligations; and
o stabilize our financial condition so that we will continue to be able to
retain highly qualified management and employees.
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In addition to the foregoing, the reasons that our Board selected the
merger over the alternatives we described above include, among others, the
following:
1. our lack of sufficient liquid financial resources and our desire to
preserve a reasonable asset base with reasonable leverage from which to
operate and expand;
2. our limited amount of "surplus" under Delaware law;
3. the need for a transaction that would appeal to all classes of our
stockholders and, thus, limit our exposure to dissenting holders and to the
impairment of our asset base and liquidity; and
4. the incremental time and expense required to implement the various
alternatives, including defending the Delaware Actions or proceeding with a
transfer not supported by all classes of our stockholders, including our
common stockholders.
Finally, our Board of Directors approved the consideration to be received
by our common and preferred stockholders in the merger after evaluating our
management's discussions with Houlihan Lokey regarding factors to be considered
in estimating a reasonable range of fair value for the exchange of our common
stock and preferred stock.
FACTORS CONSIDERED BY, AND RECOMMENDATION OF, OUR BOARD
As we described above, at the special meeting of our Board of Directors
held on May 6, 1999, after due consideration, our Board:
o determined that the terms of the merger, as contemplated by the merger
agreement, are advisable and fair to and in the best interests of our
company and our stockholders;
o approved the merger, the merger agreement and the related transactions;
and
o recommended that you approve the adoption of the merger agreement.
In reaching its decision to approve the merger, the merger agreement and
the related transactions, and to recommend that you approve the adoption of the
merger agreement, our Board of Directors consulted with our management and our
financial and legal advisors and considered certain factors, including the
following:
o Our Board's knowledge of our financial condition, business and prospects,
and the assurances provided by management with respect to our assets and
liabilities.
o Our Board's recognition that, following the merger, the Surviving
Corporation would carry on our operations and business, and the assets
and liabilities of the Surviving Corporation would be substantially the
same as ours, except that the Surviving Corporation would not have
outstanding shares of $5 Preferred Stock or $4.20 Preferred Stock.
o That the merger had the support of certain of our preferred stockholders
who beneficially owned approximately 57.1% and 56.8% of our $5 Preferred
Stock and $4.20 Preferred Stock, respectively, and that, while appealing
to our preferred shareholders, our Board believed that the merger would
also be supported by our common stockholders.
o Our Board's recognition that its members and our management do not have
any interests that are materially different from the interests of you
generally. As in most transactions of this type, however, certain members
of our Board and management have certain interests that may be viewed
different from your interests generally. For example, certain members of
our Board and management have been issued options pursuant to our stock
option plan. If certain events occur with respect to the composition of
our Board of Directors or if a stockholder acquires a large block of our
common stock, a "change of control" under our stock option plan may be
deemed to occur, in which event the options issued to the members of our
Board and management will become immediately exercisable. The merger in
and of itself will not, however, result in a change in control under our
option plan. See "Information Regarding Avatex-Avatex Stock Option Plan."
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o Our Board considered the interests in the merger that certain preferred
stockholders may have that are different from yours. For example, we have
agreed to pay the Elliott/Marx Stockholders and Anvil Investment Partners
a total of $900,000 following the merger for their ten-year standstill
agreements. We have also agreed to reimburse Elliott Associates $925,000
for attorneys' and advisory fees it incurred in commencing, prosecuting
and settling litigation against us challenging our originally proposed
merger into Xetava. Furthermore, we have agreed to pay the fees of
counsel for the class plaintiffs in the Delaware Class Actions up to
$175,000 as part of the settlement of these actions. In addition, our
affiliate, Phar-Mor, has agreed to purchase, simultaneously with the
closing of the merger, all of the 2,862,400 shares of our common stock
beneficially owned by the Elliott/Marx Stockholders for a purchase price
of $2.00 per share. These interests are more fully described herein under
"--Interests of Certain Persons in the Merger" and "--The Merger
Transaction--Agreements with Certain Stockholders."
o The opinions delivered by our financial advisor to our Board. Copies of
these opinions are attached as Annexes B, C and D to this proxy
statement/prospectus. See "--The Merger Transaction--Opinions of
Financial Advisor."
o Our holders of $5 Preferred Stock and $4.20 Preferred Stock would be
provided the choice to receive an alternate consideration package in the
merger rather than solely shares of New Avatex Common Stock. This would
provide our preferred stockholders two alternatives to exit their
preferred stock investment, with the ability to determine the extent to
which they wish to continue their investment in us. Although we will be
required to make cash payments in the merger and we probably will be
required to make interest payments on and satisfy the principal
obligations of the Avatex Funding 6.75% notes, the merger will free us
from the financial burdens associated with our preferred stock, which
include liquidation preferences, preferred dividends and sinking fund and
mandatory redemption payments. Our Board concluded that the potential
benefits from the different components of the consideration being offered
to holders of our preferred stock outweighed any negative effect on them.
o The settlement of the Delaware Actions brought by certain preferred
stockholders challenging our originally proposed merger into Xetava.
Our Board of Directors also considered the following potential adverse
consequences relating to the merger and the related transactions:
o the risk that the merger will not be consummated;
o the limitations, qualifications and assumptions that Houlihan Lokey set
forth in its solvency opinion to our Board (see "--The Merger
Transaction--Opinions of Financial Advisor--Solvency Opinion" on
page I-51);
o the risk that we will not have the financial resources to repay the 6.75%
notes at their maturity; and
o the other risks described under "--Risk Factors" beginning on page I-14.
The foregoing discussion of the information and factors considered and
given weight by our Board is not intended to be exhaustive, but includes the
factors considered material by it. Our Board also relied on the experience and
expertise of Houlihan Lokey, its financial advisor, for the fairness and
solvency issues discussed in its opinions. See "Opinions of Financial Advisor"
below. In reaching its decision to approve the merger agreement, the merger and
the related transactions and to recommend your approval of the adoption of the
merger agreement and the related transactions, our Board did not assign any
relative or specific weights to the various factors considered. Instead, our
Board conducted an overall analysis of the factors described above, including
through discussions with and asking questions of our management and legal and
financial advisors. In considering the factors described above, individual
directors may have given different weight to different factors.
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For the reasons discussed above, our Board has approved and deemed
advisable and in your best interests the adoption of the merger agreement, the
merger and the related transactions and recommends that you vote FOR approval of
the adoption of the merger agreement for the reasons described above. Four of
our directors, Messrs. Daniel Gropper, Vincent Intrieri, Ralph Della
Camera, Jr. and Brian Miller, abstained from our Board's discussion and
consideration of, and vote on, the merger and the merger agreement for the
reasons described above. See "--Background of the Merger".
OPINIONS OF FINANCIAL ADVISOR
Houlihan Lokey has acted as our financial advisor in connection with the
merger. Houlihan Lokey is an internationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, restructurings and reorganizations,
negotiated underwritings, competitive bidding, secondary distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes. In addition to acting as our financial advisor in connection
with the merger, Houlihan Lokey has provided certain financial advisory services
to a former Canadian subsidiary of FoxMeyer Corporation in 1996 in connection
with an acquisition, for which they received customary compensation.
In connection with Houlihan Lokey's engagement, we requested that Houlihan
Lokey evaluate:
o the fairness of the consideration to be received by our common
stockholders in the merger from a financial point of view;
o a reasonable range of fair value for the consideration to be received by
our preferred stockholders in the merger; and
o factors affecting our "solvency" after the merger is consummated.
The full text of Houlihan Lokey's written opinions to our Board, each dated
as of May 6, 1999, and the updates thereto as of the date of this proxy
statement/prospectus, which set forth the procedures followed, the
qualifications and assumptions made, the scope of matters considered and the
limitations on the review undertaken by Houlihan Lokey in rendering such
opinions, are attached as Annexes B, C and D to this proxy statement/prospectus
and are incorporated herein by reference. You are urged to read these opinions
carefully in their entirety. Houlihan Lokey's opinions are directed to our Board
only and relate only to (1) the fairness of the merger consideration to our
common stockholders from a financial point of view, (2) a reasonable range of
fair value for the merger consideration to be received by our preferred
stockholders, and (3) factors affecting our solvency after completion of the
merger. The opinions do not address any other aspect of the merger or any
related transaction and do not constitute a recommendation to any stockholder as
to how you should vote at the annual meeting. The summary of the opinions of
Houlihan Lokey set forth in this proxy statement/prospectus is qualified in its
entirety by reference to the full text of such opinions contained in Annexes B,
C and D to this proxy statement/prospectus.
Fairness Opinions
At a meeting of our Board held on May 6, 1999, Houlihan Lokey rendered to
the Board its oral opinions (which were subsequently confirmed in written
opinions dated as of the same date), that, as of such date and based upon and
subject to certain assumptions, qualifications and limitations contained in
those opinions:
o the consideration to be received in the merger by our common stockholders
is fair to them from a financial point of view; and
o the consideration to be received in the merger by the holders of our $5
Preferred Stock and our $4.20 Preferred Stock is within a reasonable
range of fair value of the $5 Preferred Stock and the $4.20 Preferred
Stock, respectively.
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<PAGE>
In connection with rendering these opinions, Houlihan Lokey, among other
things:
o reviewed our Annual Report on Form 10-K for our fiscal year ended
March 31, 1998 and our Quarterly Report on Form 10-Q for the nine-month
period ended December 31, 1998;
o reviewed copies of employment agreements and amendments thereto, real
estate appraisals and the Certificate of Designation for each of the $5
Preferred Stock and the $4.20 Preferred Stock;
o reviewed the general terms and conditions of settlement between us and
certain of our preferred stockholders;
o reviewed drafts of the transaction documents related to the merger;
o held discussions with members of our senior management regarding our
operations, financial condition, future prospects and projected
operations and performance;
o visited certain of our facilities and business offices;
o reviewed forecasts and projections prepared by our management with
respect to us for the period March 1999 to May 2003;
o reviewed the historical market prices and trading volume for our publicly
traded securities;
o reviewed other publicly available financial data for us and certain of
our publicly-held investments; and
o performed such other studies, analyses and investigations as it
considered appropriate.
In connection with its review, Houlihan Lokey did not assume any
responsibility for independent verification of the accuracy and completeness of
the information supplied to it. With respect to the financial forecasts and
projections provided to it, Houlihan Lokey relied upon and assumed, without
independent verification, that such forecasts and projections were reasonably
prepared on bases reflecting the best currently available estimates of our
management as to our future financial results and condition, and that there had
been no material change in our assets, financial condition, business or
prospects since the date of the most recent financial statements made available
to it. Houlihan Lokey's opinions were necessarily based upon information
available to, and business, economic, market and other conditions as they
existed and could be evaluated by, Houlihan Lokey on the date of its opinions.
Houlihan Lokey did not make any physical inspection or independent appraisal of
any of our properties or assets or those of our investees. Houlihan Lokey did
not express any opinion as to our business decision to effectuate the merger, it
did not solicit third party indications of interest in acquiring all or any part
of our corporation, and it did not express an opinion as to whether we or our
assets would in fact be sold for the consideration it believes is our fair
value. Houlihan Lokey was not requested to, and did not, negotiate the terms of
the merger or advise us regarding possible alternatives thereto.
Pursuant to the merger agreement, Houlihan Lokey will update and affirm the
fairness and fair value opinions referred to above as of the mailing of this
proxy statement/prospectus and as of the effective time of the merger.
Solvency Opinion
At a meeting of our Board held on May 6, 1999, Houlihan Lokey rendered to
the Board its oral opinion (which was subsequently confirmed in a written
opinion dated as of the same date), that, as of such date and based upon and
subject to certain assumptions, qualifications and limitations contained in such
opinion, immediately after giving effect to the merger:
o on a pro forma basis, the fair value and present fair saleable value of
our assets would exceed our stated liabilities and identified contingent
liabilities;
o we should be able to pay our debts as they become absolute and mature;
and
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<PAGE>
o our capital remaining after the merger would not be unreasonably small
for the business in which we are engaged, as our management has indicated
it is now conducted and is proposed to be conducted following completion
of the merger.
Houlihan Lokey predicated its opinion, among other things, on the
occurrence of one of the following events occurring prior to the closing of the
merger:
o we obtain a line of credit (or overdraft availability) of at least
$4,000,000 from a financial institution; or
o we complete the sale of our real estate investments for an amount greater
than $10,000,000.
On May 27, 1999, we sold our real estate holdings for a total of $12,000,000, of
which $11,400,000 was paid in cash and $600,000 is evidenced by a one-year
promissory note.
Houlihan Lokey's solvency opinion valued us as a going-concern (including
goodwill), on a pro forma basis, immediately after and giving effect to the
merger and the associated indebtedness. For purposes of their solvency opinion,
Houlihan Lokey defined "fair value" as the amount at which we would change hands
between a willing buyer and a willing seller, each having reasonable knowledge
of the relevant facts, neither being under any compulsion to act, with equity to
both. Houlihan Lokey defined "present fair saleable value" as the amount that
may be realized if our aggregate assets (including goodwill) are sold as an
entirety with reasonable promptness in an arm's length transaction under present
conditions for the sale of comparable business enterprises, as such conditions
can be reasonably evaluated by Houlihan Lokey. Houlihan Lokey defined
"identified contingent liabilities" as the stated amount of contingent
liabilities identified to Houlihan Lokey and valued by responsible officers of
our company. Houlihan Lokey relied upon such valuations of identified contingent
liabilities without independent verification and did not consider any other
contingent liabilities. Being "able to pay our debts as they become absolute and
mature" was defined by Houlihan Lokey to mean that, assuming the merger is
completed as proposed, and including our cash balances after the closing of the
merger, our financial forecasts for the period 1999 to 2003 indicate positive
cash flow for such period, including (and after giving effect to) proceeds from
asset sales and the payment of installments due under loans made pursuant to the
indebtedness incurred in the merger, as such installments are scheduled at the
close of the merger. In rendering its opinion, Houlihan Lokey made no
representation as to any legal matters or as to the sufficiency of the preceding
definitions for any purpose other than setting forth the scope of Houlihan
Lokey's opinion.
In connection with rendering this opinion, Houlihan Lokey, among other
things:
o reviewed our Annual Report on Form 10-K for our fiscal year ended
March 31, 1998 and our Quarterly Report on Form 10-Q for the nine-month
period ended December 31, 1998, and our internal, unaudited results
through February 28, 1999;
o reviewed copies of employment agreements and amendments thereto, certain
real estate appraisals and the Certificate of Designation for each of the
$5 Preferred Stock and the $4.20 Preferred Stock;
o reviewed the general terms and conditions of settlement between us and
certain of our preferred stockholders;
o reviewed drafts of the transaction documents related to the merger;
o held discussions with members of our senior management regarding our
operations, financial condition, future prospects and projected
operations and performance;
o visited certain of our facilities and business offices;
o reviewed forecasts and projections prepared by our management with
respect to us for the period March 1999 to May 2003;
o reviewed other publicly available financial data for us and certain of
our publicly-held investments; and
o performed such other studies, analyses and investigations as it
considered appropriate.
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In connection with its review, Houlihan Lokey did not assume any
responsibility for independent verification of the accuracy and completeness of
the information supplied to it. With respect to the financial forecasts and
projections provided to it, Houlihan Lokey relied upon and assumed, without
independent verification, that such forecasts and projections were reasonably
prepared on bases reflecting the best currently available estimates as to our
future financial results and condition, and that there has been no material
change in our assets, financial condition, business or prospects since the date
of the most recent financial statements made available to it. Houlihan Lokey's
opinion was necessarily based upon information available to, and business,
economic, market and other conditions as they existed and could be evaluated by,
Houlihan Lokey on the date of its opinion. Houlihan Lokey did not make any
physical inspection or independent appraisal of any of our properties or assets.
Although Houlihan Lokey evaluated the "fair value" and the "present fair
saleable value" of our assets, Houlihan Lokey was not requested to, and did not,
identify prospective purchasers or ascertain the actual prices at which and
terms on which our corporation or its assets could currently be sold. Because
the sale of any business enterprise involves numerous assumptions and
uncertainties, not all of which can be quantified or ascertained prior to
engaging in an actual selling effort, Houlihan Lokey expressed no opinion as to
whether we or our assets would actually be sold for the amount Houlihan Lokey
believes to be our fair value and present fair saleable value.
Pursuant to the merger agreement, Houlihan Lokey will update and affirm the
solvency opinion referred to above as of the mailing of this proxy
statement/prospectus and as of the effective time of the merger.
In addition to the assumptions listed above, in connection with rendering
its solvency opinion, Houlihan Lokey assumed, among other things, the following:
o Bonuses. We will make no distribution of cash bonuses until the first
anniversary of the merger, and after that we will limit employee cash
bonuses to certain specified limits based on, among other things, our
cash flows and the satisfaction of our obligations under the $8,000,000
promissory note due in October 2000 that we issued to the trustee in the
bankruptcy estates of FoxMeyer Corporation and FoxMeyer Drug Company.
However, these limitations shall not apply to bonuses related to
litigation income as defined in our Performance Incentive Plan.
o Severance and Other Benefits. Our employment agreements with Messrs.
Butler and Estrin will be amended to limit or defer certain potential
severance payments and other benefits to them if their employment with us
is terminated without just cause.
o Investments in Non-Publicly Traded Securities. We will limit our
investments in certain additional non-publicly traded securities to
certain specified limits that were based on, among other things, our
actual cash flows, cash balances and the satisfaction of our obligations
under the $8,000,000 promissory note due in October 2000 that we issued
to the trustee in the bankruptcy estates of FoxMeyer Corporation and
FoxMeyer Drug Company.
Messrs. Butler and Estrin have agreed to amend their respective employment
agreements to address the second assumption. See "Other Annual Meeting
Proposals--Election of Directors--Employment and Indemnification
Agreements--Avatex" on page III-8. As discussed above, at its May 6, 1999
meeting, our Board of Directors reviewed, discussed and acknowledged these
assumptions when approving the merger.
The foregoing assumptions are described in greater detail in Houlihan
Lokey's solvency opinion, a copy of which is attached to this proxy
statement/prospectus as Annex D. We urge you to read this opinion in its
entirety.
Financial Analyses
In preparing its opinions to our Board, Houlihan Lokey performed a variety
of financial and comparative analyses, including those described below. The
summary of the analyses of Houlihan Lokey set forth below describes the material
analyses performed by Houlihan Lokey but does not purport to be a complete
description of the analyses underlying the opinions of Houlihan Lokey. The
preparation of both a fairness opinion and a solvency opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances, and, therefore, such opinions are not readily
susceptible to partial analysis or summary
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description. In arriving at its opinions, Houlihan Lokey made qualitative
judgments as to the significance and relevance of each analysis and factor they
considered. Accordingly, Houlihan Lokey believes that its analyses must be
considered as a whole and that selecting portions of such analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and opinions. In its
analyses, Houlihan Lokey made numerous assumptions with respect to us, including
industry performance, general business, economic, market and financial
conditions, and other matters, many of which are beyond our control. No company,
transaction or business used in such analyses as a comparison is identical to us
or the merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and judgments
concerning financial and operational characteristics and other factors that
could affect the acquisition, public trading, fair value, present fair saleable
value, or other values of the companies, business segments or transactions being
analyzed. The estimates contained in such analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. In addition,
analysis relating to the value of businesses or securities do not purport to be
appraisals or to reflect or predict the prices at which businesses or securities
actually may be sold currently or in the future. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. The opinions and
financial analyses of Houlihan Lokey were only one of many factors considered by
our Board in its evaluation of the merger and should not be viewed as
determinative of the views of our Board or our management with respect to the
fairness of the merger consideration to the common stockholders from a financial
point of view, the reasonable range of fair value of the merger consideration to
be received by the preferred stockholders or the factors affecting our solvency
upon completion of the merger.
Subject to the limitations mentioned above, the following is a summary of
the material financial analyses reviewed by Houlihan Lokey in its presentation
to the Board with regard to their oral opinions on May 6, 1999.
Valuation Analysis of Our Corporation
As part of its analysis, Houlihan Lokey estimated a range of values for our
corporation, using the adjusted book value methodology. Houlihan Lokey marked
our assets and liabilities (including contingent liabilities that our management
identified to Houlihan Lokey) to their estimated fair market values, based
primarily on publicly available financial data for us and certain of our
publicly-held investments and also on information that our management supplied
to Houlihan Lokey. The difference between the estimated fair market value of our
assets and the estimated fair market value of our liabilities (including
identified contingent liabilities) is the estimated value of our net equity on a
control basis.
Houlihan Lokey estimated that, as of April 28, 1999, and prior to giving
any effect to the consummation of the merger, the fair market value of our
assets was in the range of $105 million to $121 million, and the fair market
value of our liabilities was in the range of $33 million to $35 million. Thus,
without giving effect to the consummation of the merger, Houlihan Lokey
calculated the estimated fair market value of our net equity on a control basis
to be in the range of $73 million to $86 million.
Valuation Analysis of Our Preferred Stock
Houlihan Lokey also estimated a range of value for the $4.20 Preferred
Stock and the $5 Preferred Stock, using two distinct approaches:
o hypothetical restructuring approach, and
o historical trading approach.
Houlihan Lokey considered our $4.20 Preferred Stock and $5 Preferred Stock
to have approximately the same value as a percentage of their liquidation value,
due to their similar rights and privileges as well as their relative public
market trading patterns.
Hypothetical Restructuring Approach. Houlihan Lokey estimated the proceeds
to be received by the holders of our $4.20 Preferred Stock and $5 Preferred
Stock in a hypothetical negotiated financial
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restructuring. Houlihan Lokey concluded that, despite the liquidation
preferences of our $4.20 Preferred Stock and $5 Preferred Stock, the holders of
the preferred stock would receive substantially less than 100% of the available
net asset value of our corporation in a negotiated financial restructuring,
because of their inability to control or dictate our corporate policy and their
inability to force a restructuring transaction upon us. In addition, in a
negotiated restructuring transaction, the assets available to the holders of the
preferred stock would not include amounts of cash that would have to be paid to
certain of our senior executives under change of control provisions in their
employment agreements. Houlihan Lokey estimated that the aggregate fair value of
the outstanding shares of our $4.20 Preferred Stock and $5 Preferred Stock,
using the hypothetical restructuring approach, was in the range of
$45.6 million to $49.2 million.
Historical Trading Approach. Houlihan Lokey also considered the historical
trading values of our $4.20 Preferred Stock and $5 Preferred Stock relative to
the historical trading value of our common stock. Aggregating the total trading
values of all of the outstanding shares of our $4.20 Preferred Stock, $5
Preferred Stock and common stock, Houlihan Lokey calculated our aggregate total
equity value ("ATEV"). Houlihan Lokey calculated that, since January 1, 1997,
the aggregate value of all outstanding shares of our preferred stock as a
percentage of our ATEV has ranged from 51% to 80%, with a median of
approximately 71%. Applying this ratio to the estimated fair market value of our
net equity on a minority interest basis, Houlihan Lokey estimated the aggregate
value of all outstanding shares of our preferred stock, using the historical
trading approach, to be in the range of $38.4 million to $39.3 million.
Based primarily on these two approaches, Houlihan Lokey estimated the
aggregate value of the outstanding shares of our preferred stock to be in the
range of $41 million to $47 million. Houlihan Lokey then used historical trading
patterns to determine the relative values of our $4.20 Preferred Stock and $5.00
Preferred Stock. Houlihan Lokey calculated that, since January 1, 1997, the
aggregate trading value of our $4.20 Preferred Stock has ranged from 74% to 93%
of the aggregate trading value of our preferred stock, with a median proportion
of approximately 84%. Applying this ratio to the estimated aggregate value of
all outstanding shares of our preferred stock, Houlihan Lokey estimated the
aggregate value of the $4.20 Preferred Stock to be in the range of
$34.4 million to $39.5 million, and the aggregate value of the $5.00 Preferred
Stock to be in the range of $6.6 million to $7.5 million.
Valuation Analysis of the Merger Consideration to be Received by the
Holders of Our Preferred Stock
In the merger the holders of our preferred stock are allowed to choose
between alternative forms of consideration in exchange for their shares of
preferred stock. See "--Merger Information Summary--What Our Preferred
Stockholders Will Receive."
As part of its analysis, Houlihan Lokey analyzed the non-cash components of
the $4.20 Preferred Stock Alternate Consideration and of the $5 Preferred Stock
Alternate Consideration. Houlihan Lokey estimated the aggregate value of the
6.75% notes to be in the range of $25 million to $28 million, using discount
rates in line with required rates of return for similar risk securities.
Houlihan Lokey estimated the value of the warrants to purchase shares of New
Avatex Common Stock to be in the range of $0.7 million to $1.0 million, based on
the Black-Scholes option pricing model using assumptions that Houlihan Lokey
deemed reasonable and appropriate. Based on their discussions of the McKesson
litigation with our management, specifically regarding the uncertainties
concerning any amount that we may recover in the McKesson litigation as any such
recovery is dependent on the favorable resolution of many complex factual and
legal issues, Houlihan Lokey attributed no value to the $4.20 Preferred Deferred
Contingent Cash Right or the $5 Preferred Deferred Contingent Cash Right.
Houlihan Lokey estimated the aggregate value of the $4.20 Preferred Stock
Alternate Consideration and the $5 Preferred Stock Alternate Consideration,
including both cash and non-cash components, to be in the range of
$41.6 million to $44.3 million.
Houlihan Lokey also analyzed the value of the merger consideration to be
received by those holders of our preferred stock choosing the shares of New
Avatex Common Stock. Houlihan Lokey estimated the value of this form of merger
consideration utilizing the merger's exchange ratios for outstanding shares of
preferred stock (i.e., 7.253 shares of New Avatex Common Stock for each
outstanding share of $4.20 Preferred Stock and 9.134 shares of New Avatex Common
Stock for each outstanding share of $5.00 Preferred Stock). Utilizing these
exchange ratios and its estimate of the post-merger value of our corporation on
a net equity
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basis, Houlihan Lokey estimated the aggregate value of this form of merger
consideration to be in the range of $44.7 million to $68.1 million.
Valuation Analysis of the Merger Consideration to be Received by the
Holders of Our Common Stock
In determining the fairness of the merger to holders of our common stock
from a financial point of view, Houlihan Lokey considered, among other things,
the estimated value of our common stock prior to the merger and the estimated
value of the New Avatex Common Stock after consummation of the transaction.
On April 28, 1999, our common stock's trading price closed at $0.75 per
share. The average closing price of our common stock for the 30 immediately
preceding trading days was $0.91 per share, and the average closing price during
the six months prior to April 28, 1999 was $0.88 per share.
In estimating the value of shares of New Avatex Common Stock after the
consummation of the merger, Houlihan Lokey considered, among things, the
estimated value of the merger consideration being offered to the holders of our
preferred stock, the minimum and maximum percentages of holders of preferred
stock that can elect the various forms of merger consideration being offered to
them if the conditions to the completion of the merger are to be satisfied, the
estimated value of our corporation on a net equity basis, and the post-merger
lack of control over our corporation of the individual holders of New Avatex
Common Stock.
Analysis of Certain Factors Affecting Our "Solvency" After the Merger
As part of its analysis, Houlihan Lokey analyzed our financial condition as
a going-concern (including goodwill), assuming that the merger is consummated
and giving effect to the merger, using the following three tests: a balance
sheet test; a cash flow test; and a reasonable capital test. Houlihan Lokey
predicated its analysis, among other things, on the assumption that all of our
holders of $4.20 Preferred Stock would elect the $4.20 Preferred Stock Alternate
Consideration and that all of our holders of $5 Preferred Stock would elect the
$5 Preferred Stock Alternate Consideration.
Balance Sheet Test
The balance sheet test analyzed our historical and projected financial
performance, our publicly and privately held assets, our management's estimation
of the fair market value of our assets and liabilities, our capital structure
and debt, our non-operating assets and our contingent liabilities that our
management identified to Houlihan Lokey.
Using the balance sheet test, Houlihan Lokey compared, on a pro forma basis
giving effect to the merger, the fair value and the present fair saleable value
of our assets to our stated liabilities and contingent liabilities that our
management identified to Houlihan Lokey. This analysis was based on the adjusted
book value methodology. Houlihan Lokey attributed fair market values to our
assets, stated liabilities and identified contingent liabilities. Houlihan Lokey
estimated that, immediately after the merger, the fair value and present fair
salable value of our assets would range between $88 million and $98 million, and
estimated that our net equity would range between $21 million and $29 million on
a controlling interest basis.
Cash Flow Test
The cash flow test analyzed whether we should be able to repay our debts as
they become absolute and mature including our debts incurred in connection with
the merger. The cash flow test examines the consistency of the projections made
by our management in the certified forecast with our historical performance,
current marketing strategies and operating cost structure and it tests the
sensitivity of these projections against the possibility that we could
experience unexpected downturns in our ability to generate cash flow.
Using the cash flow test, Houlihan Lokey analyzed, giving effect to the
merger, whether we should be able to pay our debts as they become absolute and
mature immediately after the merger. In its analysis, Houlihan Lokey relied on a
financial forecast for the period March 1999 through May 2003 prepared and
certified by our management for Houlihan Lokey. This certified forecast
estimated the future values of our
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assets and liabilities and our cash inflows and expenditures during that period.
Houlihan Lokey analyzed the reasonableness of, and conducted sensitivity
analyses regarding, certain assumptions in the certified forecast.
The majority of our cash inflows in the certified forecast would result
from asset divestitures. Given the uncertainty associated with the timing and
net proceeds from future divestitures, Houlihan Lokey assumed that we would
either establish a credit facility with a financial institution or liquidate
certain real properties prior to the consummation of the merger to enhance our
liquidity. Houlihan Lokey also assumed we would act in accordance with the
assumptions described in the section above entitled "Solvency Opinion" relating
to cash bonus payments, severance and other benefit payments, and investments in
non-publicly traded securities while our outstanding indebtedness remains in
place after the merger.
Reasonable Capital Test
Using the reasonable capital test, Houlihan Lokey analyzed whether our
equity remaining after the merger would be unreasonably small for the business
in which we engage, as our management indicated to Houlihan Lokey we now conduct
it and as it is proposed to be conducted after the merger. In this analysis,
Houlihan Lokey considered whether, assuming the merger is consummated, our
equity remaining after the merger would be sufficient to meet our anticipated
capital needs as estimated by our management in the certified forecast. In this
regard Houlihan Lokey analyzed: (a) our overall net equity capital as estimated
using the balance sheet test; (b) the degree of sensitivity in the cash flow
test; (c) the volatility in value of our assets and liabilities; (d) the
maturity schedule of our obligations and our ability to refinance those
obligations; (e) the timing, magnitude and nature of the contingent liabilities
that our management identified to Houlihan Lokey; and (f) the nature of our
business and the impact that financial leverage has on our operations. Houlihan
Lokey also compared certain of our leverage ratios to those of other holding and
investment companies.
Miscellaneous
Pursuant to the terms of their engagement, we have agreed to pay Houlihan
Lokey for their financial advisory services in connection with the merger an
aggregate fee of $300,000, of which $175,000 has already been paid. We have also
agreed to reimburse Houlihan Lokey for reasonable out-of-pocket expenses
incurred by Houlihan Lokey in performing their services, including the fees and
expenses of legal counsel retained by Houlihan Lokey, and to indemnify Houlihan
Lokey and certain related persons against certain liabilities arising out of the
engagement of Houlihan Lokey.
Houlihan Lokey has in the past provided financial services to our
affiliates unrelated to the merger, for which services Houlihan Lokey has
received compensation. In the ordinary course of its business, Houlihan Lokey
and its affiliates may actively trade the debt and equity securities of us and
our affiliates for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
ACCOUNTING TREATMENT
The merger will be accounted for as a combination of entities under common
control. Xetava has no operations and no assets or liabilities of any
significance. Information about Xetava is already included in our consolidated
financial statements and is immaterial on a stand-alone basis.
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APPRAISAL RIGHTS
We are a Delaware corporation. Section 262 of the Delaware General
Corporation Law provides appraisal rights (sometimes referred to as "dissenters'
rights") under certain circumstances to stockholders of a Delaware corporation
that is involved in a merger transaction.
Holders of our common stock are not entitled to appraisal rights under
Section 262 in connection with the merger because the common stock is held of
record by more than 2,000 holders and holders of our common stock will only be
entitled to receive shares of New Avatex Common Stock (and cash in lieu of
fractional shares) in the merger and, at the effective date of the merger, the
New Avatex Common Stock will be held of record by more than 2,000 holders.
Record holders of our $5 Preferred Stock and $4.20 Preferred Stock who do not
vote in favor of the adoption of the merger agreement and who properly demand
appraisal of their shares will be entitled to appraisal rights under
Section 262 in connection with the merger.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DELAWARE GENERAL CORPORATION LAW AND IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262, WHICH WE HAVE REPRINTED IN ITS
ENTIRETY AS ANNEX G TO THIS PROXY STATEMENT/PROSPECTUS. ALL REFERENCES IN
SECTION 262 TO A "STOCKHOLDER" AND IN THIS DISCUSSION TO A "RECORD HOLDER" OR A
"HOLDER OF OUR $5 PREFERRED STOCK OR $4.20 PREFERRED STOCK" ARE TO THE RECORD
HOLDER OF THE SHARES OF OUR $5 PREFERRED STOCK AND $4.20 PREFERRED STOCK
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME OF THE MERGER AS TO WHICH APPRAISAL
RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES HELD OF
RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT
PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW
PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under the Delaware General Corporation Law, record holders of our $5
Preferred Stock and $4.20 Preferred Stock who follow the procedures set forth in
Section 262 and who have not voted in favor of the approval and adoption of the
merger agreement will be entitled to have their preferred shares appraised by
the Delaware Court of Chancery and to receive payment of the "fair value" of
such shares, exclusive of any element of value arising from the accomplishment
or expectation of the merger, together with a fair rate of interest, as
determined by the Delaware Court of Chancery.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of our annual meeting,
not less than 20 days prior to the meeting, we must notify each of our
stockholders entitled to appraisal rights that appraisal rights are available
and include in each such notice a copy of Section 262. THIS PROXY
STATEMENT/PROSPECTUS CONSTITUTES NOTICE TO THE HOLDERS OF OUR $5 PREFERRED STOCK
AND $4.20 PREFERRED STOCK THAT APPRAISAL RIGHTS ARE AVAILABLE TO THEM.
Any holder of $5 Preferred Stock and/or $4.20 Preferred Stock who wishes to
exercise appraisal rights or wishes to preserve such holder's right to do so
should review the following discussion and Annex G carefully. Failure to timely
and properly comply with the procedures specified in Section 262 will result in
the loss of appraisal rights under Delaware General Corporation Law.
A holder of our $5 Preferred Stock and/or $4.20 Preferred Stock wishing to
exercise its appraisal rights must deliver to us, before the vote on the
approval and adoption of the merger agreement at our annual meeting, a written
demand for appraisal of such holder's $5 Preferred Stock and/or $4.20 Preferred
Stock which must reasonably inform us of the identity of the holder of record as
well as the intention of the holder to demand an appraisal of the fair value of
the shares held. In addition, a holder of our $5 Preferred Stock and/or $4.20
Preferred Stock wishing to exercise appraisal rights or wishing to preserve such
holder's right to do so must hold of record such shares on the date the written
demand for appraisal is made, must continue to hold such shares through the
effective time of the merger and must either vote against or abstain from voting
on the approval and adoption of the merger agreement. A vote against the
adoption of the merger agreement will not in and of itself constitute a written
demand for appraisal satisfying the requirements of Section 262.
Only a holder of record of $5 Preferred Stock and/or $4.20 Preferred Stock
is entitled to assert appraisal rights for shares of $5 Preferred Stock and/or
$4.20 Preferred Stock registered in such holder's name. A demand for appraisal
should be executed by or on behalf of the holder of record, fully and correctly,
as such
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holder's name appears on such holder's stock certificates, and must state that
such holder intends thereby to demand appraisal of such holder's shares of our
$5 Preferred Stock and/or $4.20 Preferred Stock in connection with the merger.
If the shares of our $5 Preferred Stock and/or $4.20 Preferred Stock are
owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, execution of the demand should be made in that capacity. If the
shares of our $5 Preferred Stock and/or $4.20 Preferred Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be executed by or on behalf of all joint owners. An authorized
agent, including one or more joint owners, may execute a demand for appraisal on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for such
owner or owners. A record holder, such as a broker who holds our $5 Preferred
Stock and/or $4.20 Preferred Stock as nominee for several beneficial owners, may
exercise appraisal rights with respect to the shares of $5 Preferred Stock
and/or $4.20 Preferred Stock held for one or more beneficial owners while not
exercising such rights with respect to the shares of $5 Preferred Stock and/or
$4.20 Preferred Stock held for other beneficial owners. In such case, however,
the written demand should set forth the number of shares of $5 Preferred Stock
and/or $4.20 Preferred Stock as to which appraisal is sought. If no number of
shares of $5 Preferred Stock and/or $4.20 Preferred Stock is expressly
mentioned, the demand will be presumed to cover all $5 Preferred Stock and/or
$4.20 Preferred Stock held in the name of the record owner. Holders of $5
Preferred Stock and/or $4.20 Preferred Stock who hold their shares in brokerage
accounts or other nominee forms and who wish to exercise appraisal rights are
urged to consult with their brokers to determine the appropriate procedures for
making of a demand for appraisal by such nominee.
All written demands for appraisal of $5 Preferred Stock or $4.20 Preferred
Stock should be mailed or delivered to us at 5910 North Central Expressway,
Suite 1780, Dallas, Texas 75206, Attention: Robert H. Stone, Corporate
Secretary, so as to be received before the vote on the approval and adoption of
the merger agreement at our annual meeting.
Within 10 days after the effective time of the merger, we must send a
notice as to the effectiveness of the merger to each person who has satisfied
the appropriate provisions of Section 262 and who has not voted in favor of the
adoption of the merger agreement. Within 120 days after the effective time of
the merger, but not thereafter, we, or any holder of $5 Preferred Stock or $4.20
Preferred Stock entitled to appraisal rights under Section 262 and who has
complied with the foregoing procedures, may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of such shares. We
are not under any obligation, and have no present intention, to file a petition
with respect to the appraisal of the fair value of the $5 Preferred Stock or
$4.20 Preferred Stock. Accordingly, it is the obligation of the holders of the
$5 Preferred Stock or $4.20 Preferred Stock to initiate all necessary action to
perfect their appraisal rights within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, any record holder
of $5 Preferred Stock or $4.20 Preferred Stock who has complied with the
requirements for exercise of appraisal rights will be entitled to request in
writing a statement from us setting forth the aggregate number of shares of $5
Preferred Stock or $4.20 Preferred Stock that were not voted in favor of
adoption of the merger agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
statement must be mailed within 10 days after we have received the written
request or within 10 days after expiration of the period for delivery of demands
for appraisal, whichever is later.
If a holder of $5 Preferred Stock or $4.20 Preferred Stock timely files a
petition for appraisal and serves a copy of such petition upon us, we will then
be obligated, within 20 days, to file with the Delaware Register in Chancery a
duly verified list containing the names and addresses of all stockholders who
have demanded an appraisal of their shares and with whom agreements as to the
value of their shares have not been reached. After notice to such stockholders
as required by the Delaware Court of Chancery, the Delaware Court of Chancery is
empowered to conduct a hearing on such petition to determine those stockholders
who have complied with Section 262 and that have become entitled to appraisal
rights thereunder. The Delaware Court of Chancery may require the holders of
shares of $5 Preferred Stock or $4.20 Preferred Stock who demanded
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payment for their shares to submit their stock certificates to the Delaware
Register in Chancery for notation of the pendency of the appraisal proceeding.
If any stockholder fails to comply with such direction, the Delaware Court of
Chancery may dismiss the proceedings as to such stockholder.
After determining the holders of $5 Preferred Stock and/or $4.20 Preferred
Stock entitled to appraisal, the Delaware Court of Chancery will appraise the
fair value of their shares of $5 Preferred Stock and $4.20 Preferred Stock, as
applicable, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Holders considering
seeking appraisal should be aware that the fair value of their $5 Preferred
Stock or $4.20 Preferred Stock as determined under Section 262 could be more
than, the same as or less than the value of the consideration that they would
otherwise receive in the merger if they did not seek appraisal of their $5
Preferred Stock or $4.20 Preferred Stock and that investment banking opinions as
to fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262. The Delaware Supreme Court has stated that "proof
of value by any techniques or methods which are generally considered acceptable
in the financial community and otherwise admissible in court" should be
considered in the appraisal proceedings. More specifically, the Delaware Supreme
Court has stated that: "Fair value, in an appraisal context, measures 'that
which has been taken from the stockholder, viz., his proportionate interest in a
going concern.' In the appraisal process the corporation is valued 'as an
entity,' not merely as a collection of assets or by the sum of the market price
of each share of its stock. Moreover, the corporation must be viewed as an
on-going enterprise, occupying a particular market position in the light of
future prospects." In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
stockholder's exclusive remedy. The Delaware Court of Chancery will also
determine the amount of interest, if any, to be paid upon the amounts to be
received by persons whose shares of $5 Preferred Stock or $4.20 Preferred Stock
have been appraised. The costs of the action may be determined by the Delaware
Court of Chancery and taxed upon the parties as the Delaware Court of Chancery
deems equitable. The Delaware Court of Chancery may also order that all or a
portion of the expenses incurred by any holder of $5 Preferred Stock or $4.20
Preferred Stock in connection with an appraisal, including, among others,
reasonably attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all of the shares
of $5 Preferred Stock or $4.20 Preferred Stock entitled to appraisal.
Any holder of $5 Preferred Stock or $4.20 Preferred Stock who has duly
demanded an appraisal in compliance with Section 262 will not, after the
effective time of the merger, be entitled to vote such shares of $5 Preferred
Stock or $4.20 Preferred Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record of $5
Preferred Stock or $4.20 Preferred Stock as of a date prior to the effective
time of the merger).
If any holder of $5 Preferred Stock or $4.20 Preferred Stock who demands
appraisal of such holder's shares of $5 Preferred Stock or $4.20 Preferred Stock
under Section 262 fails to perfect, or effectively withdraws or loses such
holder's right to appraisal, as provided in the Delaware General Corporation
Law, the $5 Preferred Stock or $4.20 Preferred Stock of such holder will be
converted into New Avatex Common Stock in accordance with the merger agreement
(without interest), as more fully described under "--The Merger
Agreement--Merger Consideration." A holder of $5 Preferred Stock or $4.20
Preferred Stock will fail to perfect, or will effectively lose, the right to
appraisal if no petition for appraisal is filed within 120 days after the
effective time of the merger. A holder may withdraw a demand for appraisal by
delivering to us a written withdrawal of the demand for appraisal and an
acceptance of the merger. Any such attempt to withdraw made more than 60 days
after the effective time of the merger will, however, require our written
approval. Further, once a petition for appraisal is filed, the appraisal
proceeding may not be dismissed as to any holder absent court approval.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT A HOLDER
OF $5 PREFERRED STOCK OR $4.20 PREFERRED STOCK WILL BE ENTITLED TO RECEIVE ONLY
THE CONSIDERATION SET FORTH IN THE MERGER AGREEMENT FOR EACH SHARE OF $5
PREFERRED STOCK OR $4.20 PREFERRED STOCK ISSUED AND OUTSTANDING IMMEDIATELY
PRIOR TO THE EFFECTIVE TIME OF THE MERGER OWNED BY SUCH HOLDER).
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FEDERAL SECURITIES LAWS CONSEQUENCES
The shares of New Avatex Common Stock, the warrants to purchase shares of
New Avatex Common Stock (including the shares underlying the warrants) and the
6.75% notes that may be received by our stockholders in the merger will be
freely transferable under the Federal securities laws, except that, if any
persons who are deemed to be our "affiliates" under the Securities Act of 1933
at the time of our annual meeting receive any such securities, those persons may
resell those securities only in transactions permitted by Rule 145 under the
Securities Act of 1933, or as otherwise permitted under the Securities Act of
1933. Persons who may be deemed to be our affiliates for such purposes generally
include individuals or entities that control, are controlled by or are under
common control with us and may include our directors and executive officers, as
well as certain of our principal stockholders (including Phar-Mor).
This registration statement and proxy statement/prospectus, as it relates
to the warrants and the shares of New Avatex Common Stock underlying the
warrants, constitutes a reoffer prospectus with respect to resales of the
warrants and the shares of New Avatex Common Stock underlying the warrants.
Pursuant to applicable Federal securities laws, we will be obligated, from time
to time, to update the registration statement and/or this proxy
statement/prospectus to the extent it is a prospectus for the warrants and the
shares of New Avatex Common Stock underlying the warrants.
REGULATORY REQUIREMENTS
Except for (a) the stockholder approvals of the merger, (b) the
effectiveness under the Securities Act of 1933 of the registration statement
containing this proxy statement/prospectus, (c) the filing of a Certificate of
Merger with the Secretary of State of Delaware, and (d) the qualification of the
issuance of the New Avatex Common Stock, the warrants and 6.75% notes in certain
states where we are required to do so, no other federal, state or other
regulatory requirements must be complied with or approvals obtained in
connection with the merger prior to completion of the merger.
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MARKET PRICE AND DIVIDEND INFORMATION
Trading of our common stock, $5 Preferred Stock and $4.20 Preferred Stock
is quoted on the OTC Bulletin Board system under the symbols "AVAX," "AVAXP" and
"AVAXO," respectively.
The following table sets forth the high and low sales prices for a share of
our common stock, $5 Preferred Stock and $4.20 Preferred Stock, and the
dividends declared, for the periods indicated. At June 30, 1999, there were
5,592, 76 and 818 holders of record of our common stock, $5 Preferred Stock and
$4.20 Preferred Stock, respectively. Prior to February 1, 1999, our common stock
and preferred stock were traded on the New York Stock Exchange and the prices
presented for such periods were as reported on the New York Stock Exchange
Composite Transactions Tape. After January 31, 1999, the prices presented are
bid prices which represent bid prices quoted by broker-dealers and do not
necessarily reflect prices from actual transactions.
On June 18, 1999, the last full trading day prior to the public
announcement of the merger, the last bid prices quoted on the OTC Bulletin Board
system for our common stock, $5 Preferred Stock and $4.20 Preferred Stock were
$0.75 per share, $3.00 per share and $3.00 per share, respectively. We publicly
announced the proposed merger after the close of trading on June 18, 1999.
STOCK PRICES FOR FISCAL 2000, 1999 AND 1998
<TABLE>
<CAPTION>
MARKET PRICE RANGE
-------------------------------------------------- DIVIDENDS DECLARED PER
SHARE
FISCAL 2000 FISCAL 1999 FISCAL 1998 --------------------------
------------ ------------- ----------- FISCAL FISCAL FISCAL
HIGH LOW HIGH LOW HIGH LOW 2000 1999 1998
---- --- ---- --- ---- --- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
1st Quarter......................... $1 3/16 $0 17/32 $ 2 11/16 $ 1 13/16 $ 1 1/2 $ 0 3/4 $0 $0 $0
2nd Quarter......................... 2 1/16 0 7/8 2 1/8 0 15/16 0 0
3rd Quarter......................... 1 3/16 0 5/8 2 1/8 1 1/4 0 0
4th Quarter......................... 1 3/8 0 1/2 2 5/16 1 3/16 0 0
$5.00 Preferred Stock
1st Quarter......................... 6 3/4 2 3/8 21 14 1/2 10 3/8 9 3/4 0* 0* 0*
2nd Quarter......................... 16 12 13 1/4 10 0* 0*
3rd Quarter......................... 12 1/2 5 16 1/2 12 1/16 0* 0*
4th Quarter......................... 6 2 15 1/2 13 15/16 0* 0*
$4.20 Preferred Stock
1st Quarter......................... 5 1/2 2 7/8 16 7/8 11 3/4 8 1/2 6 7/8 0* 0* 0*
2nd Quarter......................... 13 3/8 8 11 7 15/16 0* 0*
3rd Quarter......................... 8 3 5/16 13 1/2 9 1/2 0* 0*
4th Quarter......................... 4 1/2 2 3/4 15 12 7/16 0* 0*
</TABLE>
- ------------------
* Dividends were not declared. Both series of preferred stock provide for
cumulative dividends which have been accrued as if declared. For the $5
Preferred Stock, cumulative unpaid dividends due at June 30, 1999 were
$9.0 million (approximately $13.75 per share). For the $4.20 Preferred Stock,
cumulative unpaid dividends due at June 30, 1999 were $56.9 million
(approximately $13.19 per share).
Since July 1, 1999, the high and low bid prices for a share of our common
stock, $5 Preferred Stock and $4.20 Preferred Stock quoted on the OTC Bulletin
Board system were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Common Stock.........................................................................
$5 Preferred Stock...................................................................
$4.20 Preferred Stock................................................................
</TABLE>
On , 1999, the most recent available date prior to the mailing of
this proxy statement/prospectus, the last bid prices quoted on the OTC Bulletin
Board system for our common stock, $5 Preferred Stock and $4.20 Preferred stock
were $ per share, $ per share and $ per share, respectively.
In addition, on , 1999, the most recent available date prior to the
mailing of
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this proxy statement/prospectus, there were , , and
outstanding shares of our common stock, $5 Preferred Stock and $4.20
Preferred Stock, respectively.
WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING ANY
DECISION WITH RESPECT TO THE MERGER.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
In considering the recommendation of our Board of Directors in favor of the
merger, you should be aware that certain members of our Board and management and
certain of our stockholders have interests in the merger that may be viewed
different from, and in addition to, your interests. Our Board was aware of such
interests and considered them, among other matters, when voting to approve the
merger.
STOCK OPTION PLAN
Certain members of our Board and management have been issued options
pursuant to our option plan. If certain events occur with respect to the
composition of our Board or if a stockholder acquires a large block of our
common stock, a "change of control" under our option plan may be deemed to
occur, in which event these options will become immediately exercisable. The
merger in and of itself will not, however, result in a change of control. See
"Information Regarding Avatex--Avatex Stock Option Plan" on page IV-4.
PERFORMANCE INCENTIVE PLAN
Pursuant to our performance incentive plan, we have granted members of our
management awards which total 17.5% of any future income generated from our
litigation against McKesson and certain major pharmaceutical manufacturers. Our
performance incentive plan provides that these grants cannot be changed in any
manner unless the participant voluntarily terminates his or her employment with
us or is terminated for cause. See "Information Regarding Avatex--Avatex
Performance Incentive Plan" on page IV-8.
MAINTENANCE OF BENEFITS
Under the merger agreement, all of our rights and obligations under all
employment agreements and other benefit plans covering our employees will
continue to be the rights and obligations of the Surviving Corporation. For a
description of these employment agreements and benefit plans, see "Other Annual
Meeting Proposals--Election of Directors--Employment and Indemnification
Agreements" on page III-8 and "Other Annual Meeting Proposals--Election of
Directors--Compensation of Directors" on page III-1 of this proxy
statement/prospectus.
DIRECTORS AND OFFICERS
The merger agreement provides that our directors and officers at the
effective time of the merger will be the initial directors of the Surviving
Corporation for the remainder of their terms of office. The directors will not
include Messrs. Gropper, Intrieri, DellaCamera and Miller, each of whom will
resign as directors immediately prior to the effective time of the merger.
INDEMNIFICATION AND INSURANCE
Under the merger agreement, we will:
o indemnify and advance expenses to our present and former officers and
directors and any person that becomes one of our officers or directors
prior to the effective time of the merger for liabilities arising from
the fact that they are or were acting in those capacities pertaining to
matters existing or occurring at or prior to the effective time of the
merger;
o for six years after the effective time of the merger, provide director
and officer liability insurance that provides at least $30 million of
coverage on behalf of our present and former officers and directors
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and other similar coverage as our current policies provide; this policy
must be no less favorable concerning matters existing or occurring at or
prior to the effective time of the merger, except that if the cost of
this insurance is more than twice the cost related to similar coverage in
place prior to June 17, 1999, then we will maintain only that director
and officer liability insurance coverage that costs twice the cost of the
insurance in place on June 17, 1999; and
o for six years after the effective time of the merger, maintain provisions
in our Certificate of Incorporation and By-laws relating to
indemnification and advancement of expenses; these provisions must be no
less favorable than the rights to indemnification and advancement of
expenses that existed in our Certificate of Incorporation or By-laws on
June 17, 1999.
INTERESTS OF CERTAIN STOCKHOLDERS
Elliot Associates, Westgate International and Moses Marx and his
affiliates, Momar Corporation and United Equities Commodities Company, may also
be deemed to have interests in the merger that may be different from, or in
addition to, yours. Following the closing of the merger, we will pay a total of
$600,000 to these persons for the ten-year standstill arrangement to which they
have agreed to be subject. In addition as part of the settlement of litigation
brought by Elliott Associates challenging the original merger, we will reimburse
Elliott Associates $925,000 for attorneys' and advisory fees it incurred in
connection with the litigation. Phar-Mor has agreed to purchase, simultaneously
with the closing of the merger, the shares of our common stock beneficially
owned by Elliott Associates, Westgate International, Moses Marx, Momar
Corporation and United Equities Commodities Company for a purchase price of
$2.00 per share.
Anvil Investment Partners, L.P. may also be deemed to have interests in the
merger that may be different from, or in addition to, yours. Following the
closing of the merger, we will pay $300,000 to Anvil Investment Partners for the
ten-year standstill agreement to which it and certain of its affiliates have
agreed to be subject.
THE MERGER AGREEMENT
The description of the merger agreement set forth below describes the
material terms but does not purport to describe all the terms of the merger
agreement. The full text of the merger agreement is attached to this proxy
statement/prospectus as Annex A and is incorporated herein by reference. Since a
summary cannot provide you with every detail, you are strongly urged to read the
entire merger agreement, so that you will have a complete understanding of its
terms.
STRUCTURE OF THE MERGER
Under the merger agreement, Xetava will merge with and into us. We will
continue as the surviving corporation.
EFFECTIVE TIME AND CLOSING
The merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware. The closing of the merger
will occur on a date following the satisfaction or waiver of the conditions to
the merger. We expect that this will occur promptly following the annual meeting
of stockholders.
CORPORATE MATTERS
The merger agreement provides that our directors immediately prior to the
effective time of the merger will be the initial directors of the Surviving
Corporation and that our officers immediately prior to the effective time will
be the initial officers of the Surviving Corporation.
Our Certificate of Incorporation will be restated as provided in the
Certificate of Merger. The principal effects of this restatement will be to
eliminate the certificates of designation related to our $5 Preferred Stock and
$4.20 Preferred Stock and to authorize another series of our preferred stock,
and to change the par value
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of our common stock from $5.00 to $0.01 per share. Our Certificate of
Incorporation, as so restated, will become the Certificate of Incorporation of
the Surviving Corporation.
Our By-laws in effect immediately prior to the effective time of the merger
will be the By-laws of the Surviving Corporation.
MERGER CONSIDERATION
Our Common Stock
Each share of our common stock will be converted into one share of New
Avatex Common Stock.
$5 Preferred Stock
Each share of $5 Preferred Stock will be converted into the right to
receive:
o 9.134 shares of New Avatex Common Stock; or
o AT THE ELECTION OF THE HOLDER THEREOF, the $5 Preferred Stock Alternate
Consideration.
$4.20 Preferred Stock
Each share of $4.20 Preferred Stock will be converted into the right to
receive:
o 7.253 shares of New Avatex Common Stock; or
o AT THE ELECTION OF THE HOLDER THEREOF, the $4.20 Preferred Stock
Alternate Consideration.
If all of our preferred stockholders elect to receive the applicable
alternate consideration, they will receive a total of $15,250,000 in cash,
$34,000,000 principal amount of 6.75% notes and warrants to purchase 2,750,000
shares of New Avatex Common Stock. The proceeds to pay the cash portion of the
merger consideration and related costs and expenses of the transaction will be
obtained from our cash on hand.
DEFERRED CONTINGENT CASH RIGHTS
For a description of the provisions in the merger agreement relating to the
deferred contingent cash rights, see "--Description of Deferred Contingent Cash
Rights" on page I-89.
TREATMENT OF OUR STOCK OPTIONS; OTHER STOCK-BASED AWARDS
At the effective time of the merger, each outstanding option to purchase
our common stock will be assumed by the Surviving Corporation and converted into
an option to purchase shares of New Avatex Common Stock. Following the effective
time of the merger, each option will continue to have, and be subject to, the
same terms and conditions as in effect immediately prior to the effective time,
except that the stock options will become exercisable for shares of New Avatex
Common Stock.
ELECTION PROCEDURE
We will appoint an exchange agent for the payment of the merger
consideration. Along with this proxy statement/prospectus, our preferred
stockholders will receive the following:
o an election form providing for holders of shares of $5 Preferred Stock or
$4.20 Preferred Stock to make the $5 Preferred Stock Alternate
Consideration election and/or the $4.20 Preferred Stock Alternate
Consideration election, as applicable; and
o a letter of transmittal for delivery of stock certificates.
The deadline for holders of $5 Preferred Stock and $4.20 Preferred Stock to
make an election shall be no later than 5:00 p.m., New York City time, on
[ ], which is the second business day immediately preceding the date of
our annual meeting of stockholders, or at some other time and date as we
determine (the "ELECTION DEADLINE"). If a holder of $5 Preferred Stock or $4.20
Preferred Stock has not submitted to
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the exchange agent an effective, properly completed election form before the
Election Deadline, he, she or it will be deemed not to have made the $5
Preferred Stock Alternate Consideration election or $4.20 Preferred Stock
Alternate Consideration election, as applicable.
Record holders of $5 Preferred Stock or $4.20 Preferred Stock that hold
shares as nominees, trustees or in some other representative capacity may submit
multiple election forms. If a nominee or representative submits multiple
election forms they must certify that each form of election covers all shares
held by the representative for a particular beneficial owner.
An alternate consideration election will be valid only if the exchange
agent has received a properly completed and signed election form, accompanied by
the corresponding certificates and a duly executed letter of transmittal before
the Election Deadline. We will use our reasonable best efforts to make the
election form and letter of transmittal and this proxy statement/prospectus
available to all persons who become record holders of the $5 Preferred Stock and
the $4.20 Preferred Stock during the period between the record date and the
Election Deadline.
Any election form submitted to the exchange agent may be revoked by the
stockholder who submitted it by sending written notice in form and substance
reasonably satisfactory to the exchange agent, or by delivering a revised
election form to the exchange agent received (1) before the Election Deadline or
(2) after the date of this proxy statement/prospectus, but only if the exchange
agent is legally required to permit revocations and the effective time of the
merger has not occurred prior to the date of revocation. All election forms will
be automatically revoked if the merger is abandoned. If an election form is
revoked, the certificate or certificates representing the $5 Preferred Stock or
the $4.20 Preferred Stock to which the election form relates will be returned
promptly to the stockholder revoking the election.
Our good faith determination of whether an alternate consideration election
was properly made or revoked and when an election and/or revocation was received
will be binding. If we make a good faith determination that a preferred
stockholder did not properly make an alternate consideration election, that
stockholder will automatically receive New Avatex Common Stock in exchange for
his, her or its preferred stock.
The election form we deliver to our preferred stockholders will contain an
acknowledgment that:
o we will retain control over the McKesson litigation;
o holders of deferred contingent cash rights have no rights against us or
our officers, directors, attorneys, agents or advisors regarding the
conduct or disposition of the McKesson litigation, subject to our not
artificially arranging our affairs to avoid or minimize payment on the
deferred contingent cash rights; and
o our good faith determination of the amount of net recovery from the
McKesson litigation will be conclusive and binding on holders of deferred
contingent cash rights.
EXCHANGE OF SHARES
Soon after the closing of the merger, if you are a common stockholder or a
preferred stockholder that has not made an alternate consideration election, you
will receive a letter of transmittal for use to exchange and surrender stock
certificates representing our capital stock.
Holders of unexchanged shares of our capital stock will not be entitled to
receive any dividends or other distributions on the New Avatex Common Stock
until their existing stock certificates are surrendered. When a certificate is
surrendered, the person surrendering the certificate will be paid, without
interest, (1) any dividends, payments or other distributions previously paid on
the shares of New Avatex Common Stock as of any record or other applicable
determination or payment date subsequent to the effective time of the merger but
prior to the surrender, and (2) any dividends, payments or other distributions
with respect to record or other applicable determination dates occurring after
the effective time but prior to such surrender and a payment date subsequent to
such surrender.
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If any stock portion of the merger consideration is to be delivered to a
person other than the person in whose name the stock certificate surrendered in
exchange thereof is registered, it is a condition to the delivery of
certificates representing stock that the certificate surrendered be properly
endorsed or accompanied by appropriate stock powers and otherwise be in proper
form for transfer. Furthermore, the transfer must otherwise be proper and the
person requesting the transfer must pay our exchange agent any transfer or other
taxes payable because of the transfer, or satisfy the exchange agent that such
taxes have been paid or are not required to be paid.
We will not issue any fractional shares of New Avatex Common Stock in the
merger. Holders of our capital stock will receive a check for any fractional
shares in an amount based on the average of the last reported sales price (or
the average of the quoted closing bid and ask prices if there were no sales) of
a share of our common stock quoted on the OTC Bulletin Board system during the
30 consecutive trading days ending on the trading day one day before the
effective time of the merger.
Any portion of the merger consideration in the possession of the exchange
agent that remains undistributed to our stockholders for six months after the
effective time of the merger will be delivered to the Surviving Corporation.
After that time, holders of our common stock who have not complied with the
exchange provisions of the merger agreement may receive their merger
consideration only from the Surviving Corporation.
Any shares of our common stock, $5 Preferred Stock or $4.20 Preferred Stock
held by us as treasury stock will be cancelled without consideration.
APPRAISAL RIGHTS
A record holder of $5 Preferred Stock and/or $4.20 Preferred Stock may
exercise dissenter's rights of appraisal if the holder is not satisfied with the
consideration being paid for such stock. For more information about appraisal
rights available to holders of our preferred stock, see "--The Merger
Transaction--Appraisal Rights" on page I-58.
PRINCIPAL COVENANTS
Registration Statement; Proxy Statement/Prospectus
We will use our reasonable best efforts to complete the merger, including
to prepare and file a registration statement (including this proxy
statement/prospectus) and all necessary filings with the SEC with respect to the
New Avatex Common Stock, the warrants (including the New Avatex Common Stock
issuable upon the exercise of such warrants) and the 6.75% notes. We are
required to maintain the effectiveness of the registration statement as it
relates to the warrants (including the shares of New Avatex Common Stock
underlying the warrants) covered by the registration statement until the earlier
of when (1) all the warrants have been exercised or (2) the exercise period for
the warrants expires.
Stockholder Approval
Our Board of Directors will call a meeting of our stockholders and
recommend they approve the adoption of the merger agreement. Our Board will use
its best efforts to obtain the necessary approvals by our stockholders of the
merger agreement and the related transactions.
OTC Bulletin Board System Listing
We have agreed to use our best efforts to list or cause to be quoted the
New Avatex Common Stock, the warrants (including the shares of New Avatex Common
Stock issuable upon the exercise of the warrants) and the 6.75% notes to be
issued in the merger on the OTC Bulletin Board system or on another trading
facility.
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Fees and Expenses
All costs and expenses incurred in connection with the merger agreement and
the related transactions will be paid by the party incurring the costs and
expenses.
Fairness and Solvency Opinions
We will use our reasonable best efforts:
o to have updated, as of the date of mailing of this proxy
statement/prospectus and as of the effective time of the merger, the
opinion of Houlihan Lokey that (1) the consideration that the holders of
our common stock are entitled to receive pursuant to the merger is fair
to such holders from a financial point of view, and (2) the consideration
that the holders of the $5 Preferred Stock and the $4.20 Preferred Stock
are entitled to receive pursuant to the merger is, in the aggregate,
within a reasonable range of fair value of the $5 Preferred Stock or the
$4.20 Preferred Stock, as applicable; and
o to have updated, as of the date of mailing of this proxy
statement/prospectus and as of the effective time of the merger, the
opinion of Houlihan Lokey as to our solvency after giving effect to the
merger.
Organization and Capitalization of Avatex Funding
Prior to the effective time of the merger, we will organize Avatex Funding
as a direct, wholly-owned subsidiary. Prior to the closing of the merger, we
will transfer to Avatex Funding 3,571,533 shares of Phar-Mor common stock that
will secure the 6.75% notes.
CONDITIONS TO THE COMPLETION OF THE MERGER
Our obligation to complete the merger is subject to the satisfaction of or,
to the extent legally permissible, to the waiver of the following conditions:
o the approval of the merger agreement by a majority of the outstanding
shares of our common stock, voting separately as a class;
o the approval of the merger agreement by at least two-thirds of the
outstanding shares of each of the $5 Preferred Stock and the $4.20
Preferred Stock, each voting separately as a class;
o the absence of any writ, order, decree or injunction prohibiting or
restricting the completion of the merger;
o the approval for quotation on the OTC Bulletin Board system or on another
trading facility of the shares of New Avatex Common Stock to be issued in
the merger;
o the registration statement that includes this proxy statement/prospectus
is effective and not subject to any stop order by the SEC;
o the delivery to us of a legal opinion relating to certain federal income
tax consequences of the merger;
o Houlihan Lokey has delivered to our Board and not modified, withdrawn or
revoked its fairness and solvency opinions, including the updates thereof
as of the date of this proxy statement/prospectus and as of the effective
date of the merger;
o each of Daniel Gropper, Vincent Intrieri, Ralph DellaCamera, Jr. and
Brian Miller has resigned as a director effective immediately prior to
the effective time of the merger;
o the litigation in Delaware challenging our originally proposed merger
into Xetava has been settled pursuant to the settlement agreement we
entered into and the settlement receives court approval;
o the agreements that we entered into with certain of our preferred
stockholders continue to be in full force and effect and the stockholders
party to these agreements have not breached any provision thereof;
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o the dissenting shares of $5 Preferred Stock do not constitute more than
5% of the outstanding $5 Preferred Stock;
o the dissenting shares of $4.20 Preferred Stock do not constitute more
than 5% of the outstanding $4.20 Preferred Stock; and
o the stockholders party to the agreements with us described above have
delivered a release of certain claims that they have against us as of the
effective time of the merger.
TERMINATION OF THE MERGER AGREEMENT
We can terminate the merger agreement if:
o the holders of at least 50.1% of each of the shares of $5 Preferred Stock
and $4.20 Preferred Stock outstanding immediately prior to the Election
Deadline have not validly made (and not revoked) a $5 Preferred Stock
Alternate Consideration election or $4.20 Preferred Stock Alternate
Consideration election, as applicable; or
o the dissenting shares of $5 Preferred Stock or $4.20 Preferred Stock
constitute more than 5% of the outstanding $5 Preferred Stock or $4.20
Preferred Stock, as applicable.
We can also terminate the merger agreement for any reason at any time prior
to the effective time of the merger, even if it was previously approved by our
stockholders.
AMENDMENTS
The merger agreement may be amended at any time before stockholder approval
is obtained. After our stockholders have approved the adoption of the merger
agreement, we may not amend the merger agreement in a manner that requires
further approval by our stockholders without their approval.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
For a description of provisions in the merger agreement relating to
indemnification of and insurance for our directors and officers, see "--The
Merger Transaction--Interests of Certain Persons in the Merger."
AGREEMENTS WITH CERTAIN STOCKHOLDERS
SETTLEMENT AGREEMENT
Following the announcement in April 1998 of our originally proposed merger
transaction with Xetava, Elliott Associates filed in the Delaware Court of
Chancery an individual action styled as Elliott Associates, L.P. v. Avatex Corp.
Also in response to the public announcement of the original merger proposal, two
class action lawsuits were commenced in the Delaware Court of Chancery. These
actions were styled as Harbor Finance Partners, Ltd. and Anvil Investment
Partners, L.P. v. Butler, et al. and Strongo v. Butler, and were eventually
consolidated as In re Avatex Shareholders Litigation. Harbor Finance is an
affiliate of Mr. Stephen Mizel and Anvil Investment Partners is an affiliate of
Mr. Mark S. Zuker. Each of these lawsuits, among other things, challenged the
proposed original merger transaction and alleged that the holders of the $5
Preferred Stock and $4.20 Preferred Stock had the right to vote separately as a
class on the proposed merger. On August 28, 1998, the Delaware Supreme Court
ordered that the proposed original merger could not be consummated without the
consent of the holders of at least two-thirds of the $5 Preferred Stock.
As part of the merger, we have agreed to settle these lawsuits. The
plaintiffs in these lawsuits have agreed to the settlement based upon the
increased consideration in the merger as compared to the original merger
transaction. The plaintiffs have also agreed to vote their shares of our capital
stock in favor of the merger agreement and to waive and not exercise their
appraisal rights with respect to their shares of $5 Preferred Stock and $4.20
Preferred Stock. The settlement agreement provides for a general release of us
and our affiliates, directors, officers, attorneys and advisors from all claims
of any kind or nature whatsoever that were, could have been or could be brought
by or on behalf of any of our preferred stockholders in the
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lawsuits and that relate in any way to the original merger transaction, the
merger, the stock purchase agreement between Phar-Mor and Elliott Associates,
Westgate International and Moses Marx, the fairness and solvency opinions
rendered by Houlihan Lokey, and this proxy statement/prospectus and any other
proxy material, public filing or prospectus. The release is not applicable to
the lawsuits styled Stephen Mizel IRA, et al. v. Butler, et al., filed on June
5, 1998 in the Supreme Court of the State of New York, County of New York, and
Zuckerman, et al. v. FoxMeyer Health Corp., filed in the United States District
Court for the Northern District of Texas. For a description of these
proceedings, see pages E-7 and E-8 of our Annual Report on Form 10-K for our
fiscal year ended March 31, 1999, a copy of which is attached as Annex E to this
proxy statement/prospectus. In addition, the release does not prohibit preferred
stockholders other than the named plaintiffs from exercising their appraisal
rights relating to the amended merger.
In the settlement agreement, we agreed to pay up to $175,000 in attorneys'
fees to counsel for the plaintiffs in the two class actions. We will also
reimburse Elliott Associates $925,000 for attorneys' and advisory fees it
incurred in connection with the prosecution of its action. In addition, we
agreed to pay Elliott Associates and Westgate International a total of $300,000
for the ten-year standstill arrangement which they agreed to. We have also
agreed to pay Anvil Investment Partners, L.P. $300,000 for the ten-year
standstill arrangement which they agreed to. For a description of these
standstill arrangements see "--Elliott/Marx Stockholders' Agreement" and
"--Zucker Voting Agreement" below.
The settlement agreement is subject to court approval and completion of the
merger.
ELLIOTT/MARX STOCKHOLDERS' AGREEMENT
General
Concurrently with the execution of the merger agreement, we entered into a
stockholders' agreement (the "ELLIOTT/MARX STOCKHOLDERS AGREEMENT") with Elliott
Associates, Westgate International and certain of their respective affiliates
and Moses Marx and his affiliates, Momar Corporation and United Equities
Commodities Company. The Elliott/Marx Stockholders generally agreed to vote
their shares of preferred stock for adoption of the merger agreement, the merger
and any related action reasonably required in furtherance thereof. As of
June 18, 1999, the Elliott/Marx Stockholders collectively owned approximately
55.3% of the outstanding shares of $4.20 Preferred Stock and 50% of the
outstanding shares of $5 Preferred Stock.
As of the date of this proxy statement/prospectus, Elliott Associates owned
111,637 shares of $5 Preferred Stock and 547,613 shares of $4.20 Preferred
Stock, and Westgate International owned 661,797 shares of $4.20 Preferred Stock.
As of the date of this proxy statement/prospectus, Moses Marx owned 10,100
shares of $5 Preferred Stock and 493,200 shares of $4.20 Preferred Stock, Momar
Corporation owned 26,000 shares of $5 Preferred Stock and 257,026 shares of
$4.20 Preferred Stock, and United Equities Commodities Company owned 178,300
shares of $5 Preferred Stock and 425,974 shares of $4.20 Preferred Stock.
Certain Agreements with Respect to the Merger
The Elliott/Marx Stockholders agreed:
o to vote their shares of preferred stock against any action or agreement
that would result in a material breach of any of our covenants,
representations or warranties in the merger agreement;
o to vote their shares of preferred stock against any action or agreement
that is inconsistent with, or could impede or interfere with, the merger;
o to make an irrevocable and unconditional $5 Preferred Stock Alternate
Consideration election and/or $4.20 Preferred Stock Alternate
Consideration election with respect to all of their preferred stock;
o to appoint us their proxy to vote their preferred stock in favor of the
adoption of the merger;
o to appoint us their attorney-in-fact to make an irrevocable and
unconditional $5 Preferred Stock Alternate Consideration Election and/or
$4.20 Preferred Stock Alternate Consideration Election with respect to
all of their preferred stock;
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o to waive their appraisal rights with respect to any shares of preferred
stock owned by them;
o effective as of the effective time of the merger, to settle and dismiss
(or cause to be settled and dismissed) with prejudice, the lawsuits
relating to our originally proposed merger into Xetava in accordance with
the Settlement Agreement described above;
o except pursuant to the Elliott/Marx Stockholders' Agreement or the merger
agreement, not to, directly or indirectly, sell, pledge, hypothecate,
encumber, grant a participation in, place in trust, grant a proxy or
enter into any voting agreement with respect to, transfer or otherwise
dispose of, or enter into any contract or other arrangement with respect
to any of the actions set forth above, of any preferred stock
beneficially owned by such stockholders other than (1) the 2,862,400
shares of our common stock that the Elliott/Marx Stockholders have agreed
to sell to Phar-Mor, and (2) the irrevocable proxy granted to Phar-Mor by
each such stockholder to vote those same shares of our common stock;
o to use reasonable efforts to assist and cooperate with the parties to the
merger agreement to complete the merger and the related transactions; and
o not to take any action that would or is reasonably likely to result in
any of the conditions to the merger agreement not being satisfied.
The proxies granted by the Elliott/Marx Stockholders may be revoked if the
merger agreement is amended or modified, or if any provision of the merger
agreement is waived or not complied with, in a manner that could adversely
affect the merger consideration to be received in the merger by the Elliott/Marx
Stockholders.
Standstill Agreement
The Elliott/Marx Stockholders agreed from the date of the Elliott/Marx
Stockholders' Agreement until the tenth anniversary of the closing of the
merger, not to do any of the following without the prior written consent of our
Board of Directors:
o subject to certain exceptions for certain hedging and other similar
transactions for trading purposes only, acquire any of our equity
securities or options, rights, warrants or securities to acquire any
equity securities (other than in connection with the merger);
o other than with respect to the merger, propose to enter into, directly or
indirectly, a merger or other business combination involving us, or to
purchase, directly or indirectly, a material portion of our assets;
o make or participate in any solicitation of proxies to vote, consent or
seek to advise or influence any person or entity with respect to the
voting of, or granting any consent with respect to, any of our equity
securities;
o form, join or participate in a "group" (as defined under the Exchange
Act) for the purpose of acquiring, holding, voting or disposing of any of
our equity securities;
o act, alone or with others, to seek to control or influence in any public
manner or public forum our management or policies;
o disclose any intention, plan or arrangement inconsistent with the
foregoing;
o advise, assist or encourage any other person or entity in connection with
any of the foregoing;
o request, directly or indirectly, that we or any of our agents amend or
waive any of these prohibitions; or
o other than with respect to the Elliott/Marx Stockholders' Agreement or
the completion of the merger, take any action which might require us to
make a public announcement regarding the possibility of a transaction
between such stockholder and us or any of our affiliates.
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In consideration for this ten-year standstill agreement, we will pay
(1) an affiliate of Moses Marx $300,000 in cash, and (2) each of Elliott
Associates and Westgate International $150,000 in cash, within one business day
following the effective time of the merger.
Release of Claims
The Elliott/Marx Stockholders agreed to irrevocably waive, release and
discharge, and not to assert, any claim, known or unknown, they have or may have
against us or any of our directors, officers, employees, affiliates,
representatives, successors and assigns based upon:
o the original merger agreement between us and Xetava;
o the approval or adoption of the merger agreement or the completion of the
merger or the related transactions, including, any registration
statement, prospectus, proxy statement, public filing or statement
relating to the merger agreement or the merger; or
o their investment in and/or ownership of our common stock, $5 Preferred
Stock or $4.20 Preferred Stock at any time prior to June 18, 1999.
The release does not constitute a waiver, release or discharge of any claim
or action that any Elliott/Marx Stockholder may have against us based upon any
non-compliance by us or Avatex Funding with any document or agreement comprising
the merger consideration.
It is a condition to our obligation to complete the merger that the
Elliott/Marx Stockholders execute and deliver a release, effective upon the
effectiveness of the merger, that contains substantially the terms described
above.
Moses Marx also unconditionally withdrew his previous demand for the
nomination of Messrs. Charles K. MacDonald and Donald Press for election to our
Board of Directors.
Termination
The Elliott/Marx Stockholders' Agreement will terminate on the earliest to
occur of:
o the mutual consent of the Elliott/Marx Stockholders and us;
o the termination of the merger agreement before the merger is completed;
and
o the tenth anniversary of the closing of the merger.
The Elliott/Marx Stockholders, acting unanimously, can terminate the
Elliott/Marx Stockholders' Agreement if:
o the effective time of the merger does not occur on or before
December 15, 1999, provided that none of them are in breach of the
Elliott/Marx Stockholders' Agreement;
o the merger agreement is amended or modified, or a provision is waived, in
a manner that adversely affects the merger consideration to be received
by them in the merger; or
o Phar-Mor does not purchase their shares of our common stock at $2.00 per
share pursuant to their stock purchase agreement with Phar-Mor.
Stock Purchase Agreement among the Elliott/Marx Stockholders and Phar-Mor
We have been informed that the Elliott/Marx Stockholders have entered into
a stock purchase agreement with Phar-Mor. Phar-Mor will purchase a total of
2,862,400 shares of our common stock from the Elliott/Marx Stockholders for
$2.00 per share. The purchase is expected to close simultaneously with the
closing of the merger. The Elliott/Marx Stockholders have granted Phar-Mor a
proxy to vote the shares being purchased. Phar-Mor is contractually bound to
vote these shares in favor of the merger agreement.
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ZUCKER VOTING AGREEMENT
Concurrently with the execution of the merger agreement, we entered into a
voting agreement (the "ZUCKER VOTING AGREEMENT") with Mark S. Zucker and his
affiliates, Anvil Investment Partners, L.P. and Anvil Investors, Inc.
(collectively, the "ZUCKER STOCKHOLDERS").
The Zucker Voting Agreement contains many of the same provisions as the
Elliott/Marx Stockholders' Agreement. The following is a list of the material
differences in the Zucker Voting Agreement:
o the Zucker Stockholders did not agree at this time that they would elect
to receive the alternate consideration for their preferred stock in the
merger;
o the Zucker Stockholders have no arrangement to sell any of their shares
of our capital stock to Phar-Mor;
o the standstill provisions contained in the Zucker Voting Agreement do not
apply to the claims presently asserted in the derivative lawsuit against
certain of our directors styled Stephen Mizel IRA and Anvil Investment
Partners, L.P. v. Butler, et al. pending in the Supreme Court of the
State of New York, County of New York;
o we will pay Anvil Investment Partners $300,000 in consideration for the
ten-year standstill agreement in the Zucker Voting Agreement;
o the release contained in the Zucker Voting Agreement does not apply to
the derivative action referred to above or the lawsuit styled Zuckerman,
et al. v. FoxMeyer Health Corporation, et al. pending in the United
States District Court for the Northern District of Texas, Dallas
Division; and
o the Zucker Voting Agreement will not prejudice the rights of the Zucker
Stockholders with respect to the claims presently asserted in the
derivative action and will not affect the Zucker Stockholders' ability to
continue to prosecute the derivative action.
The Zucker Voting Agreement will terminate on the earliest to occur of:
o the mutual consent of the Zucker Stockholders and us; and
o the termination of the merger agreement before the merger is completed.
The Zucker Stockholders, acting unanimously, can terminate the Zucker
Voting Agreement if the merger has not become effective on or before the later
of:
o December 31, 1999, provided that no Zucker Stockholder has breached the
Zucker Voting Agreement; and
o the day on which the settlements of each of the lawsuits in Delaware
relating to our originally proposed merger into Xetava become final and
non-appealable.
In addition, the Zucker Stockholders, acting unanimously, can terminate the
Zucker Voting Agreement if the merger agreement is amended or modified, or a
provision is waived, in a manner that adversely affects the merger consideration
to be received by the Zucker Stockholders in the merger.
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DESCRIPTION OF WARRANTS
The warrants will be issued pursuant to a warrant agreement between us and
American Stock Transfer and Trust Company, as warrant agent. The material
provisions of the warrant agreement are summarized below. The statements under
this caption relating to the warrants and the warrant agreement are summaries
only, however, and do not purport to be complete. Such summaries make use of
terms defined in the warrant agreement and are qualified in their entirety by
express reference to the warrant agreement, which has been filed as an exhibit
to the registration statement of which this proxy statement/prospectus is a
part.
EXERCISE PROVISIONS
Each warrant will entitle its holder to purchase one (1) share of New
Avatex Common Stock at a price of $2.25 per share. The exercise price and the
number of shares of New Avatex Common Stock issuable upon exercise of the
warrants are both subject to adjustment in certain cases. See "--Adjustments"
below. The exercise price may be paid either (1) by certified or official bank
or bank cashier's check or (2) by wire transfer to an account designated by the
warrant agent for our benefit.
The warrants are exercisable at any time on or after three months after the
closing of the merger. Unless the warrants are exercised, they will expire at
5:00 p.m., New York City time, on the fifth anniversary of the date that is
three months after the closing of the merger.
We will not issue any fractional shares of New Avatex Common Stock upon the
exercise of any warrant. Warrantholders will receive a check for any fractional
shares in an amount based on the market value of New Avatex Common Stock on the
business day immediately preceding the date the warrant is presented for
exercise.
SPECIAL PROVISION LIMITING OWNERSHIP PERCENTAGE
Warrantholders will not be permitted to acquire shares of New Avatex Common
Stock upon exercise of warrants if that exercise would result in the total
number of shares of New Avatex Common Stock deemed beneficially owned by that
holder, together with all shares of New Avatex Common Stock deemed beneficially
owned by such holder's affiliates that would be aggregated for purposes of
determining a group under the Exchange Act, exceeding 9.9% of the total issued
and outstanding shares of New Avatex Common Stock (the "RESTRICTED OWNERSHIP
PERCENTAGE"). Notwithstanding the preceding sentence, each holder, upon
61 days' prior written notice to us and the warrant agent:
(1) will have the right to reduce or increase its Restricted Ownership
Percentage or otherwise waive, in whole or in part, the restrictions
described above;
(2) may eliminate or reinstate this limitation at any time and from time to
time; and
(3) can make subsequent adjustments pursuant to (1) above any number of
times from time to time.
NO RIGHTS AS STOCKHOLDERS
Holders of unexercised warrants are not entitled to any rights whatsoever
as one of our stockholders.
MERGER, SALE OF ASSETS, ETC.
If we consolidate with, merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our property
or assets, or sell, transfer or dispose of all of our capital stock, each
warrant will become exercisable for the right to receive the greatest amount of
securities, cash or other property to which its holder would have been entitled
as a result of the consolidation, merger or sale had the warrants been exercised
immediately prior thereto. If we enter into a transaction described in this
paragraph prior to three months after the date of the warrant agreement, the
warrants will become exercisable during that period.
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ADJUSTMENTS
The number of shares of New Avatex Common Stock issuable upon the exercise
of the warrants and the exercise price will be subject to adjustment if certain
events occur, including:
o we distribute dividend payments or other distributions on the shares of
New Avatex Common Stock in shares of New Avatex Common Stock;
o we subdivide, combine or reclassify the New Avatex Common Stock; and
o we distribute to holders of New Avatex Common Stock evidences of
indebtedness, shares of another class of our capital stock or assets
(excluding cash dividends payable out of earnings or out of surplus
legally available for dividends) or rights to purchase shares of New
Avatex Common Stock.
No adjustment will be required unless that adjustment would require an
increase or decrease of at least 1% in the exercise price.
DELIVERY OF PROSPECTUS
We will provide the warrant agent copies of the prospectus relating to the
New Avatex Common Stock deliverable upon the exercise of warrants. The warrant
agent will deliver the prospectus to the exercising warrantholder prior to or
concurrently with the delivery of the New Avatex Common Stock issuable upon such
exercise.
AMENDMENT
The warrant agent and we may, without the consent of the warrantholders,
amend or supplement the warrant agreement for certain purposes, including curing
defects or inconsistencies or making changes that do not adversely affect the
rights of any holder. Any amendment or supplement to the warrant agreement that
will have an adverse effect on the interests of the warrantholders will require
us to obtain the consent of the holders of a majority of the then outstanding
warrants.
DESCRIPTION OF THE AVATEX FUNDING 6.75% NOTES
The 6.75% notes will be issued under an indenture among us, Avatex Funding
and Wells Fargo & Company, as trustee (the "TRUSTEE"). We refer to this
indenture as the "6.75% NOTES INDENTURE." The material provisions of the 6.75%
notes and the 6.75% Notes Indenture are summarized below. However, the
statements under this caption relating to the 6.75% notes and the 6.75% Notes
Indenture are summaries only and do not purport to be complete. These summaries
make use of terms defined in the 6.75% Notes Indenture and are qualified in
their entirety by express reference to the 6.75% Notes Indenture, which has been
filed as an exhibit to the registration statement of which this proxy
statement/prospectus is a part.
Avatex Funding is a new wholly-owned subsidiary of us whose purpose will be
to issue the 6.75% notes and to initially own 3,571,533 shares of common stock
of Phar-Mor. Prior to the closing of the merger, we will contribute the shares
of Phar-Mor common stock to the capital of Avatex Funding. Avatex Funding will
pledge these shares to secure the 6.75% notes.
GENERAL
The 6.75% notes:
o will mature on the date that is three years after the date on which the
merger closes;
o will bear interest at the annual rate of 6.75% to be paid semiannually
until maturity or earlier redemption; and
o will be pari passu in right of payment with all existing and future
indebtedness of Avatex Funding that is not by its terms subordinated to
the 6.75% notes; however, Avatex Funding will have no indebtedness other
than the 6.75% notes and will be prohibited under the 6.75% Notes
Indenture from incurring additional indebtedness.
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Avatex Funding will compute interest on the 6.75% notes on the basis of a
360-day year of twelve 30-day months.
Principal and interest on the 6.75% notes will be payable and all of the
6.75% notes will be exchangeable and transferable at the Trustee's office or
agency in the [City and State of New York] located at , or, at
Avatex Funding's option, interest may be paid by check mailed to the address of
the person entitled to payment as its address appears in the security register.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the 6.75%
Notes Indenture. We urge you to read the 6.75% Notes Indenture for the full
definition of all of these terms.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling, or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of the Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control, and the terms "controlling" and "controlled" have the
correlative meanings.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by such Person upon issuance of such preferred
stock, and, in any event with respect to this clause (ii), to the extent that
any such series of preferred stock is not treated or classified as a liability
on such Person's balance sheet in accordance with GAAP, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and write-ups
of tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the date of the 6.75% Notes
Indenture in the book value of any asset owed by such Person or a consolidated
Subsidiary of such Person, and (y) all unamortized debt discount and expenses
and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Collateral Agent" means Wells Fargo & Company, in its capacity as
collateral agent under the Security Agreement.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Depository" means, with respect to the 6.75% notes issuable or issued in
whole or in part in global form, DTC, until a successor has been appointed and
become such pursuant to the applicable provision of the Indenture, and,
thereafter, "Depository" means or includes such successor.
"Extraordinary Dividend" means any dividend or other payment or
distribution declared by Phar-Mor to all holders of Phar-Mor common stock other
than a Regular Dividend.
"FoxMeyer Trustee Note" means that certain promissory note payable to Bart
A. Brown, Jr., as trustee under chapter 7 title 11 of the United States Code of
FoxMeyer Corporation, et al. in the original principal amount of $8,000,000.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under
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applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any indebtedness, including the 6.75% notes.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Pledged Collateral" means, collectively, the 3,571,533 shares of Phar-Mor
common stock that will be pledged to secure Avatex Funding's obligations under
the 6.75% Notes Indenture and the 6.75% notes and, subject to the provisions of
the Security Agreement, all products and proceeds of these shares, and the
additional 1,132,500 shares of Phar-Mor common stock that we are required, in
certain circumstances under the Security Agreement and the Subrogation Agreement
upon the satisfaction of our obligations under the FoxMeyer Trustee Note, to
cause to be pledged to further secure Avatex Funding's obligations under the
6.75% Notes Indenture and the 6.75% notes and, subject to the provisions of the
Security Agreement, all products and proceeds of these shares.
"Regular Dividend" means any regular quarterly cash dividend declared by
Phar-Mor to all holders of Phar-Mor common stock, other than a quarterly cash
dividend that exceeds the immediately preceding quarterly cash dividend by 10%.
"Security Agreement" means the Pledge and Security Agreement to be entered
into simultaneously with the 6.75% Notes Indenture among Avatex Funding, the
Trustee, the Collateral Agent and us, as the same may be amended, amended and
restated, supplemented or modified from time to time, relating to the pledge of
the Pledged Collateral to the Collateral Agent to secure Avatex Funding's
obligations under the 6.75% Notes Indenture and the 6.75% notes.
"Subrogation Agreement" means that certain Subrogation Agreement to be
entered into simultaneously with the 6.75% Notes Indenture by and between Bart
A. Brown, Jr., as trustee under chapter 7 of title 11 of the United States Code
of FoxMeyer Corporation, FoxMeyer Drug Company, Healthcare Transportation
System, Inc., Merchandise Coordinator Services Corporation, FoxMeyer Software,
Inc. and Health Mart, Inc. and their respective estates, as their interests may
appear, and the Trustee, as the same may be amended, amended and restated,
supplemented or otherwise modified from time to time.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of capital stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of that Person (or a combination
thereof) and
(2) any partnership:
(A) the sole general partner or the managing general partner of which
is such Person or a Subsidiary of such Person or
(B) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
GUARANTEE BY AVATEX
We will guarantee Avatex Funding's obligations under the 6.75% notes. Our
guarantee will be a general unsecured obligation and will rank pari passu in
right of payment with all of our existing and future unsubordinated
indebtedness. Our guarantee, however, will be effectively subordinated to our
secured obligations, including our obligations under the FoxMeyer Trustee Note,
to the extent of the assets securing
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such obligations. As of the date of this proxy statement/prospectus, our
guarantee would have only been effectively subordinated to the FoxMeyer Trustee
Note. For a more detailed description of this promissory note, see pages E-38
and E-39 of our Annual Report on Form 10-K for our fiscal year ended March 31,
1999, a copy of which is attached as Annex E to this proxy statement/prospectus.
Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, the guarantee could be voided, or claims in respect of the
guarantee could be subordinated to all of our other debts if, among other
things, at the time we incurred the indebtedness evidenced by the guarantee we:
o received less than reasonably equivalent value or fair consideration for
the incurrence of the guarantee;
o were insolvent or rendered insolvent by reason of that incurrence;
o were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
o intended to incur, or believed that we would incur, debts beyond its
ability to pay such debts as they mature.
In the event that the guarantee would constitute or result in a violation
of federal bankruptcy law or any applicable fraudulent conveyance or similar law
of any relevant jurisdiction, our liability under our guarantee will be reduced
to the maximum amount permissible under the applicable fraudulent conveyance or
similar law. As described above, our Board of Directors has obtained an opinion
as to our solvency after giving effect to the merger. See "--The Merger
Transaction--Opinions of Financial Advisor" above.
Since we will guarantee the 6.75% notes and Avatex Funding will have no
assets other than the Phar-Mor common stock securing the 6.75% notes, we will be
required to make capital contributions to Avatex Funding so it can satisfy its
interest and principal obligations on the notes.
The 6.75% Notes Indenture limits our ability to merge or consolidate or
sell all of or substantially all of our assets, or sell or dispose of more than
80% of our capital stock unless (other than with respect to a merger between us
and a Subsidiary other than Avatex Funding):
o the surviving corporation in the merger or consolidation, or the Person
to whom the sale shall have been made, assumes all of our obligations
under our guarantee and the Indenture;
o immediately after giving effect to such transaction, no Default or Event
of Default exists; and
o except in the case of a merger of us with and into one of our
Subsidiaries, we or the Person formed by or surviving the consolidation
or merger, or to whom the sale was made, has Consolidated Net Worth
immediately after the transaction equal to or greater than our
Consolidated Net Worth immediately preceding the transaction.
Upon the sale of all or substantially all of our assets in compliance with
the preceding paragraph, we will be released from our obligations under our
guarantee.
TRANSFER AND EXCHANGE
Noteholders will be able to transfer or exchange their 6.75% notes in
accordance with the 6.75% Notes Indenture. The registrar and the Trustee may
require them to furnish, among other things, appropriate endorsements and
transfer documents and noteholders may be required to pay any taxes and fees
required by law or permitted by the Indenture. We are not required to transfer
or exchange any 6.75% notes selected for redemption. We are not required to
transfer or exchange any 6.75% note for a period of 15 business days before a
selection of notes to be redeemed.
The registered holder of a registered 6.75% note will be treated as the
owner of the registered 6.75% note for all purposes.
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SPECIAL COMPLIANCE CERTIFICATE
On each day that Avatex Funding is required to pay interest on the 6.75%
notes, it will deliver to the Trustee an officer's certificate certifying to,
among other things, the following;
o that it has maintained separate and distinct accounts, books, records and
financial statements;
o that it has not commingled its funds with those of others;
o that it is not subject to a bankruptcy proceeding;
o except for our obligations under our guarantee and for certain matters
under the Subrogation Agreement described below on page I-87, that none
of Avatex Funding's affiliates has guaranteed or become obligated for its
debts;
o except for capital contributions from us, that it has paid its
liabilities from its own separate assets;
o that it has conducted its business solely in its own name;
o that it has not incurred liabilities of, become liable for or guaranteed
the debts or obligations of any other person, except as may be
contemplated under the Subrogation Agreement; and
o that it has maintained an arm's-length relationship with its affiliates,
except for capital contributions made to it by us.
OPTIONAL REDEMPTION
Avatex Funding may redeem the 6.75% notes, in whole or in part, at any time
or from time to time. If Avatex Funding chooses this optional redemption, it is
required to mail a notice of the redemption not less than 30 nor more than
60 days before the date of redemption to each holder of notes to be redeemed.
Avatex Funding will redeem the 6.75% notes at a redemption price equal to 100%
of the principal amount of the 6.75% notes to be redeemed, plus accrued but
unpaid interest to the redemption date.
If Avatex Funding chooses to redeem less than all the 6.75% notes, the
Trustee will select the notes for redemption in compliance with the requirements
of the principal national securities exchange, if any, on which the notes are
listed or, if the notes are not so listed, on a pro rata basis, by lot or by
such other method as the Trustee deems fair and appropriate. If any 6.75% note
is to be redeemed in part only, the notice of redemption relating to that note
shall state the portion of the principal amount of that note to be redeemed. The
holder of the redeemed 6.75% note will receive a new 6.75% note in principal
amount equal to the unredeemed portion of that note upon cancellation of the
original note.
OPTION TO PURCHASE UPON EXTRAORDINARY DIVIDEND
If Avatex Funding receives an Extraordinary Dividend on the Pledged
Collateral, it may use all or part of the proceeds from the Extraordinary
Dividend to make an offer to all noteholders to purchase their notes at a price
equal to 100% of the principal amount of the 6.75% notes, plus accrued but
unpaid interest to the date of purchase. If the aggregate principal amount of
6.75% notes surrendered by noteholders in an Extraordinary Dividend Offer
exceeds the amount of Extraordinary Dividend Proceeds being used in the
Extraordinary Dividend Offer, the Trustee will select the 6.75% notes to be
purchased on a pro rata basis.
Avatex Funding must make this offer to all holders and keep it open for at
least 20 business days (the "OFFER PERIOD"). No later than 5 business days after
the termination of the Offer Period, Avatex Funding will purchase the amount of
6.75% notes that it offered to purchase pursuant to the Extraordinary Dividend
Offer (the "OFFER AMOUNT"). If less than the Offer Amount is tendered, all 6.75%
notes tendered will be purchased. Payments for 6.75% notes purchased with the
proceeds of an Extraordinary Dividend will be made in the same manner as
interest payments are made.
If the date of purchase is on or after an interest record date and on or
before the related interest payment date, Avatex Funding will pay any accrued
and unpaid interest to the registered holders of 6.75% notes at the close of
business on such record date.
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Avatex Funding will give notice to the Trustee and each of the holders of
the Extraordinary Dividend Offer. This notice will contain all instructions and
materials necessary to allow holders to tender 6.75% notes pursuant to an
Extraordinary Dividend Offer, and will include, among other things, the
following:
o the length of time the Extraordinary Dividend Offer will remain open;
o the Offer Amount, purchase price and purchase date (which must be no
later than 5 business days after termination of the Offer Period);
o that any 6.75% note neither tendered nor accepted for payment will
continue to accrue interest;
o that, unless Avatex Funding fails to make the payment, any 6.75% note
accepted for payment pursuant to the Extraordinary Dividend Offer will
cease to accrue interest after the purchase date;
o that pursuant to certain procedures, a holder is entitled to withdraw its
election;
o that, if the aggregate principal amount of 6.75% notes tendered exceeds
the Offer Amount, the Trustee will select the 6.75% notes to be purchased
on a pro rata basis; and
o that holders whose 6.75% notes are purchased in part will be issued new
6.75% notes equal in principal amount to the unpurchased portion of the
6.75% notes tendered.
MATERIAL OPERATING RESTRICTIONS
Summary
In general, subject to several exceptions, the 6.75% Notes Indenture will
limit, among other things:
o the incurrence of additional debt or liabilities by Avatex Funding;
o the creation of liens by Avatex Funding;
o the corporate activities of Avatex Funding; and
o consolidations, mergers or transfers of any assets of Avatex Funding.
The bullet-point summary above and the summaries set forth below discuss
only material provisions of some of the covenants applicable to the 6.75% notes.
WE URGE YOU TO READ THE 6.75% NOTES INDENTURE AND THE MORE DETAILED DESCRIPTION
OF THESE TERMS SET FORTH BELOW.
Limitation on Incurrence of Indebtedness
Avatex Funding may not create, incur, issue, assume, guarantee or otherwise
become, directly or indirectly, liable, contingently or otherwise, with respect
to any indebtedness or liability. This limitation will not apply to the
incurrence of any of the following indebtedness or liabilities:
(1) indebtedness or liabilities incurred under, or in connection with any
of the transactions contemplated by, or to comply with, the 6.75%
notes, the 6.75% Notes Indenture, the Security Agreement and the
FoxMeyer Trustee Note (as contemplated by the Subrogation Agreement),
in each case after the date of the Indenture;
(2) indebtedness or liabilities arising after the date of the 6.75% Notes
Indenture for fees and expenses of (a) the Trustee or the Collateral
Agent, and (b) Avatex Funding's outside counsel or accountants or other
outside agents or representatives, in connection with the
interpretation of, compliance with, or completion of the transactions
contemplated by the 6.75% Notes Indenture and the related documents,
the Security Agreement, the Subrogation Agreement or the FoxMeyer
Trustee Note; and
(3) indebtedness or liabilities in an aggregate principal amount that does
not exceed $7,500 per calendar year, for incidentals and administrative
services supplied to Avatex Funding.
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Limitation on Liens
Avatex Funding may not, directly or indirectly, create, assume or suffer to
exist any Lien on any of its properties or assets, except for:
(1) Liens in favor of Avatex Funding;
(2) Liens with respect to or contemplated by the Security Agreement and the
Subrogation Agreement;
(3) any Lien securing taxes, assessments or other governmental charges, the
payment of which is not yet due or is being contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and
which are not being foreclosed;
(4) any statutory Lien of a landlord or Lien of a carrier, warehouseman,
mechanic, materialman, supplier, repairman or other similar Lien for a
sum not yet due, or the payment of which is being contested in good
faith by appropriate proceedings promptly initiated and diligently
conducted; and
(5) any Lien being contested in good faith and diligently that:
(A) is not incurred in connection with the borrowing of money or the
obtaining of advances or credit by Avatex Funding; and
(B) does not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
Avatex Funding's business;
provided, however, that, with respect to clauses (4) and (5), to the extent
any such Liens are on the Pledged Collateral, such Liens are removed or released
within 60 days after Avatex Funding is notified of the existence thereof, or to
the extent any such Liens are not on the Pledged Collateral, such Liens are
removed or released within 120 days after Avatex Funding is notified of the
existence thereof.
Corporate Existence; Corporate Actions
Avatex Funding will engage only in acts or activities, directly or
indirectly, related to the following:
o owning the Pledged Collateral and other capital contributions;
o entering into the 6.75% Notes Indenture and the Security Agreement;
o complying with, and performing its obligations under, the 6.75% Notes
Indenture, the 6.75% notes, the issuance of the 6.75% notes, the Security
Agreement, the merger agreement, the merger, the Subrogation Agreement
and the FoxMeyer Trustee Note;
o investing the proceeds derived from the ownership of the Pledged
Collateral or other contributed capital, but only in bank certificates of
deposit, money market instruments or securities issued by the United
States government (as long as such investments mature prior to the
maturity of the 6.75% notes);
o executing, delivering and performing any agreement required in connection
with the activities listed above; and
o engaging in any lawful act or activity and exercising powers permitted to
a Delaware corporation that, in each case, are incidental or necessary to
accomplish the acts and activities listed above.
Notwithstanding any provision of Avatex Funding's certificate of
incorporation, Avatex Funding will not:
(1) engage in any business or activity other than as described in the
paragraph above or its certificate of incorporation;
(2) increase or reclassify its capital stock or issue any additional shares
of its capital stock; or
(3) delete, amend or otherwise modify any provision of its charter, or
delete, amend or otherwise supplement any provision of its by-laws to
frustrate the provisions of its certificate of incorporation.
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Avatex Funding will at all times:
o avoid becoming involved in the day-to-day management of any other person;
o maintain financial statements, books and records separate from any other
person;
o insure that any consolidated financial statements that include Avatex
Funding have notes clearly stating that Avatex Funding is a separate
corporate entity;
o maintain its assets separately from the assets of any other person;
o conduct all business correspondence and communications in its own name;
o avoid acting as agent of any other person; and
o manage its liabilities separately from those of any other person.
Avatex Funding will not declare or pay any dividend or make any other
payment or distribution on account of its capital stock.
Avatex Funding will be allowed to use the proceeds from the Pledged
Collateral, including the proceeds of any Regular or Extraordinary Dividend, and
from any capital contributions to pay the principal of and interest on the 6.75%
notes or to purchase, redeem or otherwise acquire or retire the 6.75% notes. If
the proceeds of an Extraordinary Dividend exceed $2.3 million, Avatex Funding
may not use an amount greater than $2.3 million or 50% of such Extraordinary
Dividend to pay interest on the 6.75% notes.
Merger, Consolidation or Sale of Assets
Without the consent of the holders of at least 66 2/3% in principal amount
of 6.75% notes then outstanding, Avatex Funding will not merge or consolidate,
and will not sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all its assets, or sell, transfer or dispose of any of its
capital stock, unless:
(1) either (A) Avatex Funding will be the surviving corporation in the
merger or consolidation, or (B) the surviving corporation in the merger
or consolidation, or the person to whom the sale, assignment, transfer,
lease, conveyance or other disposition is made, assumes all the
obligations of Avatex Funding under the 6.75% notes and the 6.75% Notes
Indenture; and
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists.
Provision of Reports
The 6.75% Notes Indenture provides that, for so long as any 6.75% notes are
outstanding, Avatex Funding will provide to the Trustee:
(1) annual reports and other reports which Avatex Funding is required to
file with the SEC pursuant to Section 13 or Section 15(d) of the
Exchange Act; or
(2) if Avatex Funding does not remain subject to the reporting requirements
of Section 13 or Section 15(d) of the Exchange Act, Avatex Funding will
nevertheless continue to furnish to the Trustee and file with the SEC,
any such supplementary and periodic information, documents and reports
which may be required pursuant to Section 13 of the Exchange Act, in
respect of a security listed and registered on a national securities
exchange as may be prescribed in such rules and regulations.
Avatex Funding will also comply with the other provisions of Section
314(a) of the Trust Indenture Act of 1939.
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EVENTS OF DEFAULT
Each of the following will be an Event of Default under the 6.75% Notes
Indenture:
(1) Avatex Funding fails to pay interest on the 6.75% notes when due and
the failure continues for a period of 15 days;
(2) Avatex Funding fails to pay principal on the 6.75% notes when due and
the failure continues for a period of 5 days;
(3) Avatex Funding fails or we fail, as applicable, to comply with the
provisions of the 6.75% Notes Indenture relating to:
(A) the limitation on incurrence of indebtedness;
(B) the limitation on Liens;
(C) the limitation on mergers or consolidations of, or sales of assets
by, Avatex Funding; and
(D) the limitation on mergers or consolidations of, or sales of assets
by, us;
(4) Avatex Funding fails to comply for 21 days after written notice with
its other agreements or covenants contained in the 6.75% Notes
Indenture, the 6.75% notes or the Security Agreement, other than those
referred to in clause (3) above;
(5) any of Avatex Funding's representations or warranties contained in the
Security Agreement fails to be true in all material respects and the
failure continues for a period of 21 days after written notice thereof;
(6) we fail to perform any of our covenants contained in our guarantee;
(7) we repudiate any of our obligations under our guarantee;
(8) our guarantee becomes unenforceable against us; and
(9) certain events of bankruptcy or insolvency occur with respect to Avatex
Funding.
A default under clause (6), (7) or (8) is not an Event of Default if we
have no indebtedness for borrowed money outstanding at such time or any time
thereafter.
If an Event of Default, other than an Event of Default under clause (9)
above, occurs and is continuing, the Trustee or the holders of at least 25% in
aggregate principal amount of the then outstanding 6.75% notes, may declare all
unpaid principal of and accrued interest on the 6.75% notes then outstanding to
be due and payable immediately.
If an Event of Default with respect to Avatex Funding specified in clause
(9) above occurs, all unpaid principal of and interest on the 6.75% notes shall
become and be due and payable immediately, without any further action.
If an Event of Default occurs and is continuing, the Trustee may, or may
direct the Collateral Agent to, pursue any available remedy to collect payment
of all unpaid principal of and interest on the 6.75% notes or to enforce any
provision of the 6.75% notes, the 6.75% Notes Indenture or the Security
Agreement.
Subject to certain restrictions, the holders of a majority in principal
amount of the then outstanding 6.75% notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or the Collateral Agent or exercising any trust or power conferred
on the Trustee or the Collateral Agent.
Except to enforce the right to receive payment of principal or interest,
when due, no holder of 6.75% notes may institute any proceeding with respect to
the 6.75% Notes Indenture or for any remedy thereunder, unless:
(1) the holder has previously given the Trustee written notice that an
event of default is continuing;
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(2) holders of at least 25% in principal amount of the then outstanding
6.75% notes have requested in writing that the Trustee pursue the
remedy;
(3) the Trustee has not complied with the request within 15 days after the
receipt of the request; and
(4) the holders of a majority in principal amount of the then outstanding
6.75% notes have not given the Trustee a direction inconsistent with
the request within that 15-day period.
The 6.75% Notes Indenture provides that, if a Default or Event of Default
occurs and is continuing and is known to the Trustee, the Trustee must mail to
each noteholder notice of the default within 30 days after it occurs. Except in
the case of a default in the payment of principal of or interest on any 6.75%
note, the Trustee may withhold notice if and so long as a committee of its trust
officers in good faith determines that withholding notice is in the interests of
the noteholders. In addition, Avatex Funding is required to deliver to the
Trustee, within 90 days after the end of each fiscal year, a certificate
indicating whether those who execute the certificate know of any default that
occurred during the previous year. Avatex Funding is also required to deliver to
the Trustee, promptly after becoming aware thereof, written notice of any
Default or Event of Default and what action it is taking or proposes to take in
respect thereof.
COLLATERAL AND SECURITY
The 6.75% notes will be secured by a pledge of 3,571,533 shares of Phar-Mor
common stock (i.e., the "PLEDGED COLLATERAL"). The Pledged Collateral will be
pledged to the Collateral Agent in accordance with the Security Agreement. Prior
to the closing of the merger, we will contribute these shares to the capital of
Avatex Funding.
Pursuant to the Security Agreement, the Pledged Collateral will be
increased to include an additional 1,132,500 shares of Phar-Mor common stock
under certain circumstances. We pledged the Additional Shares to the FoxMeyer
Trustee to secure the FoxMeyer Trustee Note. We issued this note in connection
with the settlement in October 1997 of certain litigation with the FoxMeyer
Trustee. We have agreed under the Security Agreement that once all of our
obligations under the FoxMeyer Trustee Note are satisfied and the lien on the
Additional Shares is released, we will contribute the Additional Shares to the
capital of Avatex Funding. Avatex Funding will then deliver the Additional
Shares to the Collateral Agent so that they will be added to the Pledged
Collateral securing the 6.75% notes. See also "--Subrogation Agreement" on
page I-87.
The Pledged Collateral will secure the prompt and complete payment and
performance when due of all of Avatex Funding's obligations under the 6.75%
Notes Indenture and the 6.75% notes.
If an Event of Default does not exist, Avatex Funding will be entitled to
exercise any and all voting and other consensual rights pertaining to the
Pledged Collateral and to receive all Regular Dividends paid in respect of the
Pledged Collateral. Avatex Funding, however, will be required to continue to
comply with the provisions of the Indenture that would be otherwise applicable
to the foregoing.
If an Event of Default exists:
(1) the Collateral Agent and not Avatex Funding will have voting and
consensual rights pertaining to the Pledged Collateral, which the
Collateral Agent shall exercise at the direction of the Trustee or the
holders of a majority in principal amount of the then outstanding 6.75%
notes; and
(2) the Collateral Agent and not Avatex Funding will have the right to
receive all dividends and other distributions payable in respect of the
Pledged Collateral.
In addition to the rights and remedies available under applicable law, if
an Event of Default has occurred and is continuing, the Collateral Agent may
sell or cause to be sold the Pledged Collateral at prices that it deems best.
The proceeds of any sale of the Pledged Collateral will be applied by the
Collateral Agent in the following order of priorities:
(1) the payment of expenses of the sale and unreimbursed fees and expenses
due to the Collateral Agent under the Security Agreement;
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(2) the payment of sums due to the Trustee under the 6.75% Notes Indenture;
(3) the ratable payment of any accrued and unpaid interest on the then
outstanding 6.75% notes;
(4) the ratable payment of unpaid principal of the then outstanding 6.75%
notes;
(5) the ratable payment of any other obligations due under the 6.75% Notes
Indenture or the 6.75% notes; and
(6) the payment to Avatex Funding.
Upon the full and final payment and performance of interest, principal and
other obligations under the 6.75% notes, the 6.75% Notes Indenture and the
Security Agreement, including the payment of the Trustee's and the Collateral
Agent's fees and expenses, the Security Agreement will terminate and the Pledged
Collateral and the Liens under the Indenture and the Security Agreement on the
Pledged Collateral will be released.
PROCEDURES TO AMEND, SUPPLEMENT OR WAIVE THE INDENTURE
Modifications and amendments of the 6.75% Notes Indenture, the 6.75% notes,
our guarantee and the Security Agreement may be made by Avatex Funding, us and
the Trustee without the consent of any holder of 6.75% notes:
(1) to cure any manifest error, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to comply with the provisions of the 6.75% Notes Indenture regarding
our guarantee;
(4) to provide additional rights or benefits to holders of the 6.75% notes;
(5) to make any change that does not adversely affect the legal rights of
any holder of 6.75% notes under the 6.75% Notes Indenture;
(6) to comply with the requirements of the SEC to effect or maintain the
qualification of the 6.75% Notes Indenture under the Trust Indenture
Act of 1939; or
(7) to enter into additional or supplemental security documents.
In addition, subject to certain provisions of the 6.75% Notes Indenture,
modifications and amendments of, and waivers with respect to, the 6.75% Notes
Indenture, the 6.75% notes, our guarantee and the Security Agreement may be made
with the consent of the holders of a majority in principal amount of the then
outstanding 6.75% notes (excluding, as part of such majority, consents obtained
in connection with a purchase of, or a tender offer or exchange offer for, the
6.75% notes). However, modifications and amendments of, and waivers with respect
to, the restrictive covenants in the Indenture limiting Avatex Funding's
corporate activities, incurrence of indebtedness and incurrence of Liens and
restricting Avatex Funding's merger or consolidating or selling of its assets
may only be made with the consent of the holders of at least 66 2/3% in
principal amount of the 6.75% notes then outstanding (excluding, as part of such
66 2/3%, consents obtained in connection with a purchase of, or a tender offer
or exchange offer for, the 6.75% notes).
Subject to certain provisions of the following paragraph, the holders of a
majority in aggregate principal amount of the 6.75% notes then outstanding can
waive compliance by Avatex Funding in any particular instance with any provision
of the 6.75% notes, the 6.75% Notes Indenture, our guarantee or the Security
Agreement.
Except in the case of a continuing default or event of default in the
payment of interest on, or principal of, the 6.75% notes, and except in
connection with a purchase of, or a tender offer or exchange offer for, the
6.75% notes, the holders of a majority in aggregate principal amount of the
6.75% notes then outstanding may waive any existing default or event of default
and its consequences under the 6.75% Notes Indenture. Notwithstanding the
previous sentence, the consent of holders of at least 66 2/3% in principal
amount of the 6.75% notes then outstanding (excluding, as part of such 66 2/3%,
consents obtained in connection with a purchase of, or a tender offer or
exchange offer for, the 6.75% notes) shall be required for any amendment or
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supplement of, or waiver of any existing default or event of default with
respect to Avatex Funding's non-compliance with the restrictive covenants in the
6.75% Notes Indenture relating to permitted corporate activities, the incurrence
of indebtedness, the incurrence of Liens and the merger or consolidation or sale
of assets or capital stock of Avatex Funding.
Notwithstanding the four preceding paragraphs, no amendment or waiver may,
without the consent of the holder of each then outstanding 6.75% note affected
thereby:
(1) reduce the percentage in principal amount of the outstanding 6.75%
notes whose holders must consent to an amendment, supplement or waiver;
(2) change the stated maturity of the principal of any 6.75% note or reduce
the principal amount of any 6.75% note;
(3) reduce the rate of interest on any 6.75% note or change the time for
payment of interest;
(4) waive a Default or Event of Default in the payment of principal of or
interest on the 6.75% notes (except a rescission of acceleration of the
6.75% notes by the holders of a majority in aggregate principal amount
of 6.75% notes and a waiver of the payment default that resulted from
such acceleration);
(5) change the currency in which any 6.75% note or the interest on any
6.75% note is payable;
(6) modify any provisions in the 6.75% Notes Indenture relating to the
waiver of past defaults or relating to the rights of holders of the
6.75% notes to receive payment of principal of and interest on any
6.75% note on or after the respective due dates, or to bring suit for
the enforcement of any such payment on or after such respective dates;
(7) except as otherwise permitted by the 6.75% Notes Indenture or in
accordance with the terms of our guarantee, release us from our
obligations under our guarantee, or make any change to our guarantee
that would adversely affect the holders of the 6.75% notes;
(8) modify any of the provisions relating to amendments and waivers; or
(9) release any portion of the Pledged Collateral from the Lien of the
6.75% Notes Indenture or the Security Agreement.
It will not be necessary for the holders to approve the particular form of
any proposed amendment, but it will be sufficient if they approve the substance
of the proposed amendment.
PAYMENTS FOR CONSENTS
No consideration may be paid, directly or indirectly, to any noteholder
for, or as an inducement to, or in connection with the solicitation of, any
consent, waiver or amendment of any terms of the 6.75% notes, the 6.75% Notes
Indenture or the Security Agreement, unless the consideration is to be paid to
all noteholders bound by such consent, waiver or amendment, whether or not such
noteholders consent, waive or agree to amend or tender.
DETERMINING THE OUTSTANDING NOTES
Any 6.75% notes owned by Avatex Funding or any of its Subsidiaries or
Affiliates or any immediate family member of any such Affiliates will not be
considered outstanding for the purposes of determining whether the holders of
the required principal amount of the 6.75% notes have concurred in any
direction, waiver or consent.
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GOVERNING LAW
The 6.75% Notes Indenture, the 6.75% notes, our guarantee and the Security
Agreement will be governed by, and construed in accordance with, the laws of the
State of New York.
FORM OF REGISTERED NOTES
The certificates representing the registered notes will be issued in fully
registered form, without coupons and only in denominations of $1.00 and integral
multiples of $1.00. Except as described in the next paragraph, the registered
notes will initially be deposited with, or on behalf of, the Depository Trust
Company, and registered in the name of Cede & Co., as DTC's nominee in the form
of a global note. Holders of the registered notes will own book-entry interests
in the global note evidenced by records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if:
(1) DTC notifies Avatex Funding that it is unwilling or unable to continue
as Depository and Avatex Funding fails to appoint a successor
Depository within 90 days; or
(2) Avatex Funding, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the 6.75% notes in certificated form.
SUBROGATION AGREEMENT
We have filed a copy of the Subrogation Agreement as an exhibit to the
registration statement of which this proxy statement/prospectus is a part.
General
Concurrently with the execution of the 6.75% Notes Indenture, Bart A.
Brown, Jr., as trustee under chapter 7 title 11 of the United States Code of
FoxMeyer Corporation et al. (the "FoxMeyer Trustee"), and the trustee under the
6.75% Notes Indenture and as collateral agent under the Security Agreement, will
enter into a Subrogation Agreement. We will also be a party to the Subrogation
Agreement.
On October 9, 1997, we settled certain litigation with the FoxMeyer
Trustee, and, in connection therewith, executed and delivered to the FoxMeyer
Trustee the following documents:
(1) a promissory note payable to the FoxMeyer Trustee in the original
principal amount of $8 million; and
(2) a pledge and security agreement.
Pursuant to the pledge and security agreement, we granted the FoxMeyer
Trustee a security interest in, among other things, 1,132,500 shares of Phar-Mar
common stock that we own (the "Trustee Note Collateral") to secure payment of
the FoxMeyer Trustee Note. As we described above in this proxy
statement/prospectus, we intend to transfer to Avatex Funding 3,571,533 shares
of Phar-Mor common stock that we own to secure payment on the 6.75% notes. To
further secure the 6.75% notes, after all of the obligations under the FoxMeyer
Trustee Note are satisfied and the lien on the Trustee Note Collateral is
released, we will transfer the Trustee Note Collateral to Avatex Funding to
further secure the 6.75% notes.
Agreement Relating to Purchasing the FoxMeyer Bankruptcy Trustee Note
A group of holders of 6.75% notes consisting entirely of original
noteholders each holding at least 5% of the aggregate principal amount of the
6.75% notes initially issued (an "ELIGIBLE GROUP") may elect at any time to pay
the FoxMeyer Trustee an amount equal to all of the obligations under the
FoxMeyer Trustee Note. To the extent this payment occurs, the security interest
in all collateral securing the FoxMeyer Trustee Note other than the Trustee Note
Collateral would be terminated.
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An Eligible Group may elect to cause us and/or the collateral agent under
the Security Agreement to use reasonable best efforts, effective upon
satisfaction of the obligations to the FoxMeyer Trustee, to amend, settle and
waive the applicable provisions of the Security Agreement and the 6.75% Notes
Indenture to cause the Trustee Note Collateral to secure the 6.75% notes as well
as the obligations under the FoxMeyer Trustee Note (which obligations would
thereafter run either to the Eligible Group or the collateral agent under the
Security Agreement by virtue of subrogation (a "SECURITY RESTRUCTURING")). While
it is not required, the Subrogation Agreement contemplates that following the
completion of a Security Restructuring, the FoxMeyer Trustee Note would be
amended to substitute Avatex Funding as the maker of the FoxMeyer Trustee Note,
and we would guaranty the obligations of Avatex Funding under the FoxMeyer
Trustee Note under substantially the same terms as our guarantee of the 6.75%
notes in the 6.75% Notes Indenture. Neither Avatex Funding nor we will be
required to consent to the foregoing substitution and guaranty if it would
necessitate registration of any of our securities (including our guaranty),
and/or securities of Avatex Funding under the Securities Act of 1933.
Furthermore, we would not be required to consent to have a default under the
FoxMeyer Trustee Note in and of itself constitute a default under the 6.75%
Notes Indenture.
The FoxMeyer Trustee will confirm in writing any transfer of the
obligations under the FoxMeyer Trustee Note as described in the preceding
paragraph and consent in writing to any Security Restructuring effected under
and in compliance with the Subrogation Agreement, provided that:
o the obligations to the FoxMeyer Trustee have been, or simultaneously will
be, satisfied in full; and
o the FoxMeyer Trustee will have no further obligations in connection with
the FoxMeyer Trustee Note or the pledge and security agreement in favor
of the FoxMeyer Trustee.
In the case where more than one Eligible Group wishes to make a payment to
the FoxMeyer Trustee on account of all of the obligations under the FoxMeyer
Trustee Note as described above, the FoxMeyer Trustee may accept payment from
any Eligible Group, and not from others, in its sole discretion.
The FoxMeyer Trustee's obligations under the Subrogation Agreement will be
subject to the prior approval of the United States Bankruptcy Court for the
District of Delaware.
Nothing contained in the Subrogation Agreement will prevent the FoxMeyer
Trustee and us from restructuring the FoxMeyer Trustee Note or the security
arrangements that secure the obligations under the FoxMeyer Trustee Note.
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CERTIFICATE OF INCORPORATION OF AVATEX FUNDING
The material provisions of Avatex Funding's Certificate of Incorporation
that will be effective at the effective time of the merger are summarized below.
These are summaries only and do not purport to be complete. We have filed this
Certificate of Incorporation as an exhibit to the registration statement of
which this proxy statement/prospectus is a part.
Avatex Funding was organized by us for the sole purpose of issuing the
6.75% notes. For this reason, Avatex Fundings's Certificate of Incorporation
that will be in effect as of the effective time of the merger will contain
provisions that limit Avatex Funding's corporate purposes and restrict its
corporate activities. Specifically, its Certificate of Incorporation contains
covenants that mirror the restrictive covenants contained in the 6.75% Notes
Indenture limiting:
o the incurrence of indebtedness and liabilities by Avatex Funding;
o the creation of liens by Avatex Funding; and
o the corporate purposes and corporate actions of Avatex Funding.
We have summarized these covenants above under "--Description of the Avatex
Funding 6.75% Notes."
As long as any of the 6.75% notes remain outstanding, one of Avatex
Fundings's directors must be one of our independent, non-management directors.
Avatex Funding's initial directors will be Melvyn J. Estrin, Abbey J. Butler and
John L. Wineapple.
The Avatex Funding Certificate of Incorporation provides that as long as
any of the 6.75% notes remain outstanding, neither Avatex Funding nor its board
of directors will take any corporate action without the unanimous approval of
its board of directors.
The Avatex Funding Certificate of Incorporation may only be amended or
modified with the approval of holders of at least 66 2/3% in principal amount of
the 6.75% notes then outstanding.
DESCRIPTION OF DEFERRED CONTINGENT CASH RIGHTS
The provisions governing the deferred contingent cash rights are contained
in the merger agreement, a copy of which we have attached as Annex A to this
proxy statement/prospectus. We are setting forth below a summary of these
provisions. However, this is a summary and does not purport to be complete. We
urge you to review the provisions relating to the deferred contingent cash
rights in the merger agreement in their entirety.
GENERAL
Pursuant to the terms of the merger agreement, holders of $5 Preferred
Stock and $4.20 Preferred Stock that make either a $5 Preferred Stock Alternate
Consideration election or a $4.20 Preferred Stock Alternate Consideration
election will be entitled to $5 Preferred Deferred Contingent Cash Rights or
$4.20 Preferred Deferred Contingent Cash Rights, respectively. A DEFERRED
CONTINGENT CASH RIGHT WILL NOT:
o BE TRANSFERABLE BY ANY RECIPIENT THEREOF, EXCEPT BY WILL OR PURSUANT TO
THE LAWS OF DESCENT AND DISTRIBUTION OR BY OPERATION OF LAW;
o BE EVIDENCED BY A CERTIFICATE OR OTHER INSTRUMENT;
o POSSESS ANY VOTING RIGHTS;
o RECEIVE OR BE ENTITLED TO RECEIVE ANY DIVIDENDS OR INTEREST; OR
o REPRESENT ANY EQUITY INTEREST IN US, XETAVA OR THE SURVIVING CORPORATION.
We will maintain books of record of the recipients of deferred contingent
cash rights based on the information made available to us in connection with the
merger.
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ANY VALUE OF THE DEFERRED CONTINGENT CASH RIGHTS DEPENDS UPON THE OUTCOME
OF OUR PENDING LITIGATION AGAINST MCKESSON HBOC, INC. AND CERTAIN MAJOR
PHARMACEUTICAL MANUFACTURERS, WHICH WE DESCRIBE BELOW. AT THIS TIME, IT IS
IMPOSSIBLE FOR US TO ESTIMATE ANY AMOUNT WE MAY RECOVER IN CONNECTION WITH THE
MCKESSON LITIGATION. ANY RECOVERY IS DEPENDENT ON THE FAVORABLE RESOLUTION OF
MANY COMPLEX FACTUAL AND LEGAL ISSUES. WE CANNOT ASSURE YOU THAT THE DEFERRED
CONTINGENT CASH RIGHTS WILL ULTIMATELY HAVE ANY VALUE RESULTING IN ANY PAYMENT
BEING MADE ON THEM. IN VIEW OF THE MANY UNCERTAINTIES CONCERNING THE DEFERRED
CONTINGENT CASH RIGHTS, IF YOU ARE A PREFERRED STOCKHOLDER DECIDING WHETHER OR
NOT TO ELECT TO RECEIVE THE ALTERNATE CONSIDERATION FOR YOUR SHARES OF PREFERRED
STOCK IN THE MERGER, YOU SHOULD NOT ASSUME THAT WE WILL OBTAIN ANY RECOVERY FROM
THE MCKESSON LITIGATION OR THAT THE DEFERRED CONTINGENT CASH RIGHTS WILL TURN
OUT TO BE OF ANY VALUE.
For the purposes of the discussion of the deferred contingent cash rights
and the definitions of "McKesson Litigation" and "Net Recovery" in this proxy
statement/prospectus, the terms "Avatex" and "Surviving Corporation" shall
include in each case any of their respective subsidiaries.
DESCRIPTION OF THE MCKESSON LITIGATION
On January 10, 1997, we filed a ten-count lawsuit against McKesson and
certain major pharmaceutical manufacturers styled FoxMeyer Health Corporation v.
McKesson Corporation, et al., in the 95th Judicial District Court of Dallas
County, Texas (the "McKESSON LITIGATION"). In November 1998, we filed an amended
petition, in which we withdrew three of the counts asserted in our original
petition. As so amended, we are alleging, among other things, that McKesson and
the pharmaceutical manufacturers conspired to drive our pharmaceutical
distribution subsidiary, FoxMeyer Drug Company, out of business, and that
McKesson obtained confidential financial and competitive information and used
the information to cause damage to us. We are seeking to recover in excess of
$400 million in compensatory damages, plus punitive damages. In February 1997,
certain defendants removed the lawsuit to the United States Bankruptcy Court for
the Northern District of Texas, Dallas Division, and moved to transfer the
McKesson Litigation to the United States Bankruptcy Court for the District of
Delaware as a proceeding related to the Chapter 11 case of FoxMeyer Drug
Company. On August 27, 1997, the Dallas Bankruptcy Court entered an order
denying the defendants' motion to transfer and, on November 17, 1998, the Court
granted our motion to remand the McKesson Litigation back to Texas state court.
As a result of a decision by the Delaware Bankruptcy Court (described below),
the Dallas Bankruptcy Court also dismissed counts one, two and three of the
Texas lawsuit to the extent that the claims were brought by us. On May 18, 1999,
the United States District Court for the Northern District of Texas, Dallas
Division, affirmed the Dallas Bankruptcy Court's decision to remand the McKesson
Litigation back to Texas state court and denied as moot its decision not to
transfer the McKesson Litigation to the Delaware Bankruptcy Court. The District
Court has not yet ruled on our cross-appeal of the Dallas Bankruptcy Court's
order dismissing counts one, two and three. On June 16, 1999, certain of the
defendants filed a notice of appeal of the portion of the District Court's
decision that denied as moot the appeal of the Dallas Bankruptcy Court's
decision not to transfer the McKesson Litigation to the Delaware Bankruptcy
Court.
In addition, on December 3, 1998, McKesson filed a counterclaim against us
and a third-party complaint against Bart A. Brown, Jr., the trustee of FoxMeyer
Corporation and FoxMeyer Drug Company bankruptcy estates, and three of our
current or former officers, Abbey Butler, Melvyn Estrin and Edward Massman,
alleging claims of fraudulent misrepresentation, negligent misrepresentation,
breach of letter agreement and inducing breach of contract. We and the
third-party officer defendants believe that the counterclaim and the third-party
claims are without merit and will vigorously defend ourselves against such
claims.
On February 26, 1997, the Official Unsecured Creditors' Committee of the
FoxMeyer Corporation and FoxMeyer Drug Company bankruptcy estates filed a
lawsuit against us in the Delaware Bankruptcy Court. In this lawsuit, the
committee sought (a) a declaration that the claims asserted by us in the
McKesson Litigation were property of the FoxMeyer Corporation and FoxMeyer Drug
Company estates and (b) an injunction barring us from continuing to prosecute
the McKesson Litigation. The trustee of the FoxMeyer Corporation and FoxMeyer
Drug Company bankruptcy estates has succeeded to the interests of the committee,
and McKesson and the other defendants subsequently intervened in the committee's
lawsuit. McKesson filed its own complaint and asserted that (1) as of the
commencement of the FoxMeyer Corporation and FoxMeyer
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Drug Company chapter 11 bankruptcy cases in August 1996, the claims asserted in
the McKesson Litigation were property of the FoxMeyer Corporation and FoxMeyer
Drug Company estates, and (2) as of November 1996, when McKesson purchased
substantially all of the assets of FoxMeyer Drug Company, the claims were
transferred to McKesson. On August 24, 1998, the Delaware Bankruptcy Court
denied the defendants' first motion for summary judgment and ruled that the
parties should return to Texas and move the McKesson Litigation forward as much
as possible. On November 12 and 16, 1998, the Delaware Bankruptcy Court granted
in part and denied in part the defendants' second motion for summary judgment
and ruled that we are judicially estopped from pursuing counts one, two and
three of the Texas lawsuit (for fraud, negligent misrepresentation and
conspiracy). The Delaware Bankruptcy Court also indicated that, if discovery
shows that there is "substantial overlap" between the factual allegations
underlying counts one, two and three and those underlying the remaining counts
(for breach of confidential relationship, tortuous interference with contract,
interference with business and business disparagement), those counts may be
barred as well. We have filed a motion to revise the November 12 and 16, 1998
order, and the defendants have filed a renewed motion for summary judgment with
respect to the remaining four counts, to which we have objected. The parties are
awaiting a ruling on these motions, both of which were heard on April 14, 1999.
In addition, we have recently entered into a settlement agreement with one of
the manufacturer defendants in the McKesson Litigation, under which we received
a confidential settlement payment.
CALCULATION OF NET RECOVERY AND NET RECOVERY PARTICIPATION CAP
Recipients of the $5 Preferred Deferred Contingent Cash Rights will be
entitled to receive 16% of the Net Recovery Participation Cap (as defined below)
divided by the total number of shares of $5 Preferred Stock outstanding
immediately prior to the effective time of the merger. Recipients of the $4.20
Preferred Deferred Contingent Cash Rights will be entitled to 84% of the Net
Recovery Participation Cap divided by the total number of shares of $4.20
Preferred Stock outstanding immediately prior to the effective time of the
merger.
"NET RECOVERY PARTICIPATION CAP" is an amount, if any, equal to 20% of the
Net Recovery (as defined below), up to a maximum of $7.5 million. "NET RECOVERY"
is an amount, if any, equal to:
(1) all of the cash payments, if any, we actually receive in respect of a
final, nonappealable judgment in, a voluntary dismissal with prejudice
of, or any and all final settlements of, all claims, counterclaims,
third-party claims and other claims asserted in or with respect to the
McKesson Litigation (for ease of reference we refer to any and all such
cash payments as, the "CASH PAYMENT"); minus
(2) the sum of the following:
(A) the aggregate out-of-pocket expenses we incurred up to and after
the date of the merger agreement in prosecuting the McKesson
Litigation and obtaining any such Cash Payment (including any
contingent fee payable to any attorney); plus
(B) any payments, offsets or settlements we make on or with respect to
any counterclaims, third-party claims and other claims with
respect to the McKesson Litigation; plus
(C) an amount equal to any portion of the Cash Payment includible in
our income for federal income tax purposes multiplied by our
effective income tax rate applicable for the taxable year in which
the obligation to pay us the Cash Payment becomes fixed (which
amount will be determined taking into account federal, state and
local taxes and all deductions and credits claimed by us with
respect to such taxable year, and with appropriate adjustments,
including, as to the applicable tax rate, to account for any
actual or imputed interest in respect of the Cash Payment) (for
ease of reference we refer to such amount as the "ACTUAL TAX
AMOUNT").
The Actual Tax Amount will be determined by our independent accountants in
good faith. That determination will be final and binding on all parties.
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PAYMENT ON THE DEFERRED CONTINGENT CASH RIGHTS
Subject to the third paragraph of this subsection, any payment on the
deferred contingent cash rights will be made to the registered recipients of
deferred contingent cash rights within 30 days of the date on which we receive
the full Cash Payment. However, if the Cash Payment is to be received by us in
more than one installment, we will make interim payments on the deferred
contingent cash rights within 30 days of the date on which we actually receive
any portion of the full Cash Payment, individually or in the aggregate with
other Cash Payments with respect to which an interim payment has not yet been
paid, that would result in our being able to make a payment on the deferred
contingent cash rights of at least $500,000 (for ease of reference we refer to
any such payment as an "INTERIM PAYMENT").
We will not be obligated under any circumstances to make any payment on the
deferred contingent cash rights until there has been, with respect to each and
every defendant in the McKesson Litigation, a final, non-appealable judgment, a
voluntary dismissal with prejudice of, or final settlement of all claims,
counterclaims, third-party claims and other claims asserted with respect to the
McKesson Litigation.
For the purposes of calculating an actual payment on the deferred
contingent cash rights, we will exclude from the Cash Payment an amount equal to
any portion of such Cash Payment that is includible in our income for federal
income tax purposes multiplied by the highest, combined marginal rate of
federal, state and local income taxes that is likely to be applicable to us for
the taxable year in which the obligation to pay the Cash Payment to us became
fixed (for ease of reference we refer to such amount as the "RETAINED DCCR
PAYMENT AMOUNT"). The Retained DCCR Payment Amount will be determined by our
independent accountants in good faith and may include appropriate adjustments,
including to account for any actual or imputed interest that is likely to be
includible in income in respect of the Cash Payment. This determination will be
final and binding on all parties. If the Retained DCCR Payment Amount exceeds
the Actual Tax Amount with respect to the Cash Payment upon which such payment
on the deferred contingent cash rights is based, the amount of such excess will
be paid pro rata to the registered recipients of deferred contingent cash rights
(for ease of reference we refer to such payment as the "EXCESS PAYOUT"). The
Excess Payout, including interest thereon at a rate of 5% per annum accruing
from the date on which we receive the Cash Payment upon which such payment on
the deferred contingent cash rights is based to the date of the actual payment
of the Excess Payout, will be made not later than 30 days following the later
of:
(1) the date on which we actually file all of our federal, state and local
income tax returns for the taxable year in which the obligation to pay
the Cash Payment to us became fixed; or
(2) the date on which we actually receive the Cash Payment upon which such
payment on the deferred contingent cash rights is based.
Any payments on the deferred contingent cash rights will be made to the
registered recipients of deferred contingent cash rights at their respective
addresses in our books of record. Other than as set forth in this paragraph and
the 5% interest on the Excess Payout described above, a recipient of a deferred
contingent cash right will not be entitled to any interest for the period of
time between the date on which we receive any portion of the Cash Payment and
the date on which timely payment is made on the deferred contingent cash rights.
Any payments made on the deferred contingent cash rights after expiration of the
30-day periods referred to above will include interest thereon at a rate of 8%
per annum accruing from the first day following the expiration of such
applicable 30-day period to the date of the actual applicable payment on
deferred contingent cash rights. However, in no event shall interest accrue on
any portion of the Retained DCCR Payment Amount until after the expiration of
the 30-day payment period applicable to the payment of the Excess Payout, or on
any payment made on the deferred contingent cash rights during either such
30-day period as long as the applicable payment was made to the registered
recipient of the deferred contingent cash right at its address on our books and
records.
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CONTROL OVER THE MCKESSON LITIGATION
The merger agreement provides that:
(i) we will retain sole and exclusive control of the McKesson
Litigation and may, among other things, dismiss, settle or cease
prosecuting all or any portion of the McKesson Litigation at any
time, including without obtaining any cash or other recovery;
(ii) no recipient of deferred contingent cash rights will have any
rights against us or our directors, officers, agents, attorneys,
representatives, stockholders or affiliates for any decision
regarding the conduct or disposition of the McKesson Litigation,
including any decision to dispose or cease the prosecution of all
or any portion of the McKesson Litigation without a cash recovery
by us (except for any claim for violation or breach of the
covenant described below not to artificially arrange our
affairs); and
(iii) our good faith determination of the amounts of the Net Recovery
and the Net Recovery Participation Cap will be final, conclusive
and binding on the recipients of deferred contingent cash
rights.
In addition, in the event that any applicable law, rule, regulation or
order limits or prevents the distribution of all or any portion of the Net
Recovery, we will have no obligation whatsoever to make any payment in excess of
any allowable amount. Consequently, if all or any portion of the required
payments on the deferred contingent cash rights is in excess of the allowable
amount at the time such payment is to be made, we will not make all or any
portion of the payment, as the case may be, in excess of the allowable amount at
such time or at any future time.
Each of our preferred stockholders electing to receive the alternate
consideration for their shares in the merger will be required to acknowledge and
agree to the provisions of the two preceding paragraphs, and, in connection
therewith, each election form to be signed by such record holders will contain
such acknowledgment and agreement.
We have agreed not to artificially arrange our affairs to avoid or minimize
the payment on the deferred contingent cash rights (including arranging for some
payment of goods or services, directly or indirectly, from the McKesson
Litigation defendants outside of a settlement thereof).
RELATIONSHIP WITH OUR PERFORMANCE INCENTIVE PLAN
No provision of our Performance Incentive Plan will affect any payment on
the deferred contingent cash rights. However, if we amend the Performance
Incentive Plan in a manner that accelerates when payments may be made under our
Performance Incentive Plan with respect to Litigation Income (i.e., net income
generated in connection with the McKesson Litigation), the terms of the merger
agreement will be deemed amended to the extent necessary so that the time when
we become obligated to make any payments on the deferred contingent cash rights
will occur concurrently with the time that we first become obligated to make
payments under our Performance Incentive Plan with respect to Litigation Income.
We have also agreed to calculate Litigation Income under our Performance
Incentive Plan in the same manner as Net Recovery is to be calculated, except
that the provisions described in the third bullet in the definition of Net
Recovery above will not be applicable to the definition of Litigation Income or
otherwise with respect to the calculation or payment of any amount payable under
our Performance Incentive Plan from Litigation Income.
There is a description of our Performance Incentive Plan on page IV-8 of
this proxy statement/ prospectus.
COMPARISON OF STOCKHOLDER RIGHTS
After the merger, all of our common stockholders and our preferred
stockholders that do not make an alternate consideration election will become
common stockholders of the Surviving Corporation. Their rights will be governed
by our restated Certificate of Incorporation that will be in effect immediately
upon the
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effectiveness of the merger. This restated Certificate of Incorporation will be
substantially similar to our current Certificate of Incorporation. The par value
of the New Avatex Common Stock will be $0.01 per share as compared to the $5.00
par value per share of our existing common stock. Except for that, there will be
no substantive difference between the rights of holders of New Avatex Common
Stock and the rights of holders of our existing common stock. For a description
of the rights of holders of New Avatex Common Stock, see "--Description of New
Avatex Common Stock."
The merger will effect a recapitalization of our capital stock resulting in
the elimination of our $5 Preferred Stock and $4.20 Preferred Stock. We have not
declared or paid any dividends on either the $5 Preferred Stock or the $4.20
Preferred Stock since October 15, 1996. The dividends on both series of
preferred stock are cumulative. The cumulative dividends accrued and not paid as
of March 31, 1999, are $8.2 million (approximately $12.50 per share) and
$51.0 million (approximately $11.83 per share) on the $5 Preferred Stock and
$4.20 Preferred Stock, respectively. In addition, we did not make the sinking
fund payments of $4.4 million with respect to 88,000 shares of the $5 Preferred
Stock that were scheduled for each of January 1998 and January 1999.
We have not declared or paid dividends on either series of our preferred
stock for more than six consecutive quarterly periods. As a result, the
Certificate of Designation of the $4.20 Preferred Stock entitles its holders,
voting separately as a class, to elect two directors to our Board. In addition,
the Certificate of Designation of the $5 Preferred Stock entitles its holders,
voting separately as a class with the holders of the $4.20 Preferred Stock, to
elect two directors to our Board. As a result of these provisions, Messrs.
Daniel Gropper, Vincent Intrieri, Ralph DellaCamera, Jr. and Brian Miller were
elected to our Board in April 1998. It is a condition to the completion of the
merger that each of these directors resign from our Board immediately prior to
the effective time of the merger.
As a result of the elimination of the $5 Preferred Stock and the $4.20
Preferred Stock in the merger, any and all rights and preferences of these
stocks, including to any accumulated dividends or sinking fund arrearage,
liquidation preference, and the election of directors under certain
circumstances, will be extinguished automatically upon the effectiveness of the
merger.
THE FOLLOWING SUMMARY OF CERTAIN TERMS OF THE $5 PREFERRED STOCK AND THE
$4.20 PREFERRED STOCK DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO OUR CURRENT CERTIFICATE OF INCORPORATION. COPIES OF OUR
CHARTER WILL BE SENT TO HOLDERS OF OUR STOCK UPON REQUEST. SEE "WHERE YOU CAN
FIND MORE INFORMATION" ON PAGE I.
$4.20 PREFERRED STOCK
Dividends
Holders of the $4.20 Preferred Stock are currently entitled to receive
cumulative dividends at an annual rate of $4.20 per share, payable quarterly in
arrears. Prior to October 15, 1996, these dividends were payable, at our option,
by the issuance of additional shares of $4.20 Preferred Stock with a liquidation
preference equal to the aggregate dollar value of the dividends to be paid on
such date, rather than in cash. Dividends are payable on these additional
shares. Since October 15, 1996, we are required to pay these dividends in cash.
Whenever the dividends payable on the $4.20 Preferred Stock are in arrears, as
they currently are, we may not declare or pay any dividend on any shares of a
class junior to the $4.20 Preferred Stock or on the $5 Preferred Stock until all
dividends on shares of $4.20 Preferred Stock have been paid in full. In
addition, as long as any shares of $4.20 Preferred Stock are outstanding, we
cannot redeem or purchase any shares of the $5 Preferred Stock or any other
class or series of our stock ranking on a parity with the $4.20 Preferred Stock,
nor may we make sinking-fund redemption payments or purchase of any such shares
unless, in each such instance, we have paid or set aside for payment all
dividends payable for all past dividend periods on all outstanding shares of
$4.20 Preferred Stock.
Liquidation Rights
If we liquidate, dissolve or otherwise wind-up our company, the holders of
$4.20 Preferred Stock will rank senior to the right of the holders of any shares
ranking junior to the $4.20 Preferred Stock (including our common stock) and on
a parity with the $5 Preferred Stock with respect to dividends and distribution
of
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assets. Furthermore, taking into account such ranking, holders of $4.20
Preferred Stock would receive $40 per share, plus all accrued and unpaid
dividends thereon to the date of distribution or payment. If, upon any such
liquidation, dissolution or other winding-up, our assets distributable among the
holders of the $4.20 Preferred Stock and the $5 Preferred Stock are insufficient
to permit full payment to such holders of the amounts to which they are
entitled, the distributable assets would then be distributed among holders of
the outstanding $4.20 Preferred Stock, $5 Preferred Stock and any other
preferred stock ranking pari passu with the $4.20 Preferred Stock upon
liquidation, dissolution or winding up ratably in proportion to the amounts to
which they are respectively entitled.
Redemption
To the extent permissible under Delaware law, we are required to redeem for
cash the $4.20 Preferred Stock on November 30, 2003. The $4.20 Preferred Stock
is currently redeemable at our option in whole or in part for cash at a
redemption price equal to $40 per share plus accrued and unpaid dividends
thereon (whether or not declared) to the date fixed for redemption.
Optional Exchange
The $4.20 Preferred Stock is exchangeable at our option in whole but not in
part, on any dividend payment date into 10 1/2% Subordinated Notes of Avatex due
2003 (the "EXCHANGE NOTES"). We may only require such an exchange if, so long as
on or prior to the date of exchange, we have paid, or declared and set aside for
payment, all accrued and unpaid dividends on shares of the $4.20 Preferred Stock
through the date of exchange. Holders of outstanding $4.20 Preferred Stock are
entitled to receive, in exchange for their shares of $4.20 Preferred Stock, a
principal amount of Exchange Notes equal to the liquidation value of such
holder's shares of $4.20 Preferred Stock which is currently $40 per share plus
accrued and unpaid dividends. After any exchange, the rights of the holder of
the $4.20 Preferred Stock as a stockholder would cease (except the right to
exchange), and the person or persons entitled to receive the Exchange Notes
issuable upon exchange are treated for all purposes as the registered holder or
holders of Exchange Notes. The Exchange Notes would be issued pursuant to the
terms of an indenture. The Exchange Notes would mature on November 20, 2003 and
bear interest at the rate of 10 1/2% per annum payable quarterly. We would be
able to redeem the Exchange Notes at our option in whole or in part, at a
redemption price equal to 100% of principal amount thereof. Upon any redemption,
all accrued but unpaid interest to the date of redemption would need to be paid.
No Exchange Notes are currently outstanding.
Voting Rights
The holders of the $4.20 Preferred Stock are not entitled to any voting
rights except as otherwise provided in our current Certificate of Incorporation,
the Certificate of Designation of the $4.20 Preferred Stock or as required by
law. The affirmative vote of the holders of at least two-thirds of the
outstanding shares of the $4.20 Preferred Stock, voting separately as a class,
is necessary to authorize, issue, create, or increase the authorized or issued
amount of any class or series of stock ranking prior to the $4.20 Preferred
Stock. In addition, the affirmative vote of the holders of at least two-thirds
of the outstanding shares of the $4.20 Preferred Stock, voting separately as a
class, is necessary to amend, alter, waive or repeal our Certificate of
Incorporation or the Certificate of Designation of the $4.20 Preferred Stock, if
the change would adversely affect any preference, right, privilege, voting
powers, or special rights of the $4.20 Preferred Stock.
In the event that dividends on the $4.20 Preferred Stock are in arrears and
unpaid for six full quarterly dividend periods, which they are currently, the
holders of the $4.20 Preferred Stock, voting separately as a class, are entitled
to elect two directors until such cumulative dividends have been paid in full.
These voting rights and the term of office of such two directors ceases when all
dividends in arrears have been paid in full, or when we have redeemed the $4.20
Preferred Stock in full in accordance with its Certificate of Designation.
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$5 PREFERRED STOCK
Dividends
Holders of the $5 Preferred Stock are currently entitled to receive
cumulative dividends at the annual rate of $5.00 per share, payable quarterly in
arrears. Whenever quarterly dividends payable on the $5 Preferred Stock are in
arrears, as they currently are, we may not declare or pay any dividends on the
$4.20 Preferred Stock or on any shares of a class junior to the $5 Preferred
Stock, until all dividends, including accrued dividends, on shares of $5
Preferred Stock, have been paid in full. No dividends may be declared on any
other series or classes of stock ranking on a parity with the $5 Preferred Stock
as to dividends for any quarterly dividend period unless we have paid or
declared like dividends on all shares of the $5 Preferred Stock at the time
outstanding for all quarterly periods coinciding with or ending before such
quarterly period, ratably in proportion to the respective annual dividend rates
per annum fixed therefor.
Liquidation Rights
If we liquidate, dissolve or otherwise wind-up our company, the holders of
$5 Preferred Stock will be entitled to receive, before any distribution or
payment is made upon any shares ranking junior to the $5 Preferred Stock
(including our common stock), $50 per share together with an amount equal to all
accrued and unpaid dividends thereon to the date of distribution or payment. If,
upon any such liquidation, dissolution or other winding-up, our assets
distributable among the holders of the $5 Preferred Stock and the $4.20
Preferred Stock are insufficient to permit the full payment to such holders of
the amounts to which they are entitled, the distributable assets would then be
distributed among the holders of the $4.20 Preferred Stock and the $5 Preferred
Stock then outstanding ratably in proportion to the amounts to which they are
respectively entitled.
Sinking Fund
On or prior to the business day preceding January 15 in each of the years
1994 through and including 2002, we are required to set aside for a mandatory
sinking fund on each such January 15, $4,400,000 to redeem 88,000 shares of $5
Preferred Stock at a redemption price of $50 per share. In addition, on or
before January 15, 2003, we are required to set aside $11,000,000 to redeem
220,000 shares of $5 Preferred Stock.
Redemption
The $5 Preferred Stock is redeemable at any time at our option, in whole or
in part, at a redemption price equal to $50 per share plus accrued and unpaid
dividends thereon (whether or not declared) to the date fixed for redemption.
Conversion
The $5 Preferred Stock is currently convertible, at the option of the
holders, into shares of our common stock at a conversion price of $25.80 per
share.
Voting Rights
The holders of the $5 Preferred Stock are not entitled to any voting rights
except as otherwise provided in our current Certificate of Incorporation, the
Certificate of Designation of the $5 Preferred Stock or as required by law. The
consent of the holders of at least two-thirds of the outstanding shares of the
$5 Preferred Stock, voting separately as a class with the holders of any other
pari passu preferred stock is necessary to authorize the issuance, creation or
increase of any class or series of stock ranking prior to the $5 Preferred
Stock. In addition, the consent of the holders of at least two-thirds of the
outstanding shares of the $5 Preferred Stock, voting separately as a class with
the holders of any other pari passu preferred stock is necessary to amend, alter
or repeal, whether by merger, consolidation or otherwise, of any provision of
the Certificate of Incorporation or the Certificate of Designation of the $5
Preferred Stock, which would materially and adversely affect any right,
preference, privilege or voting power of the $5 Preferred Stock.
In the event that dividends on the $5 Preferred Stock are in arrears and
unpaid for six full quarterly dividend periods, which they currently are, the
holders of the $5 Preferred Stock, voting separately as a class with the holders
of any other pari passu preferred stock, will be entitled to elect two
additional directors at
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the next annual meeting of stockholders until such cumulative dividends have
been paid in full. These voting rights and the term of office of such two
directors ceases when all dividends in arrears have been paid in full, or when
we have declared such dividends and an amount sufficient to pay the full amount
of such dividends has been irrevocably set aside for payment.
DESCRIPTION OF NEW AVATEX COMMON STOCK
The following summary of certain terms of the New Avatex Common Stock does
not purport to be complete and is qualified in its entirety by reference to our
restated Certificate of Incorporation that will be in effect at the effective
time of the merger. A copy of this restated Certificate of Incorporation is
filed as an exhibit to the registration statement of which this proxy
statement/prospectus forms a part. See "Where You Can Find More Information" on
page i.
As discussed above, except for the reduction in the par value of our common
stock from $5.00 to $0.01 per share and the elimination of the Certificates of
Designation of our currently designated preferred stocks, our restated
Certificate of Incorporation will be substantially similar to our current
Certificate of Incorporation.
General
We will be authorized to issue 60 million shares of capital stock,
consisting of 50 million shares of New Avatex Common Stock and 10 million shares
of preferred stock. Our Board will have authority to issue, without any
stockholder action, one or more series of preferred stock. Our Board will
determine at the time of issuance of any series the rights and preferences of
that series, including dividend rate, liquidation priority, and conversion and
voting rights, if any.
Dividends
Subject to any preferential rights of any outstanding series of our
preferred stock created by our Board, holders of New Avatex Common Stock will be
entitled to receive such dividends as may be declared from time to time by our
Board from funds legally available therefor.
Voting Rights
Holders of New Avatex Common Stock will be entitled to one vote for each
share on all matters voted on by stockholders, including elections of directors,
and, except as otherwise required by law or provided in any resolution adopted
by our Board with respect to any series of preferred stock issued by us, holders
of New Avatex Common Stock possess all voting power. Our restated charter does
not provide for cumulative voting in the election of directors.
Our restated Certificate of Incorporation will require (a) the affirmative
vote of 80% in voting power of record holders of our capital stock to approve
certain events relating to transactions with interested stockholders, and
(b) the affirmative vote of holders of record of at least 66 2/3% in voting
power of the total number of shares of our capital stock at any time issued and
outstanding to amend our Certificate of Incorporation.
Liquidation
Subject to any preferential rights of any outstanding series of our
preferred stock created by our Board, holders of New Avatex Common Stock, upon
liquidation, will be entitled to receive, after payment of all our debts and
liabilities and other payments, if any, all of our assets available for
distribution. Such stockholders would be entitled to participate ratably in the
net assets available for distribution.
Transfer Agent
American Stock Transfer & Trust Company will be the transfer agent and
registrar for shares of New Avatex Common Stock.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a discussion of the material federal income tax
consequences of the merger, including the receipt of the applicable alternate
consideration by holders of our preferred stock that elect to receive it (for
purposes of this section we refer to such shares as the "ELECTING SHARES"). This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"CODE"), Treasury Regulations promulgated and proposed thereunder, judicial
decisions and published administrative rules and pronouncements of the Internal
Revenue Service (the "IRS") in effect on the date hereof. Changes in such rules
or new interpretations thereof may have retroactive effect and could
significantly affect the federal income tax consequences described below.
The following discussion does not purport to address (a) foreign, state or
local tax consequences or (b) the federal income tax consequences to special
classes of taxpayers, such as dealers in securities or currencies, foreign
persons, tax-exempt organizations, real estate investment trusts, insurance
companies, other financial institutions, pass-through entities, regulated
investment companies, foreign stockholders, stockholders holding our capital
stock as part of a conversion transaction or a hedging transaction, or as a
position in a straddle for tax purposes, or stockholders who acquired their
shares of our capital stock pursuant to the exercise of employee stock options
or otherwise as compensation. The discussion below concerning the federal income
tax consequences of the alternate consideration is generally limited to initial
holders of the alternate consideration.
No rulings have been requested from the IRS with respect to any of the tax
aspects of or relating to the merger. As set forth below, we and Xetava have
received from our counsel, Weil, Gotshal & Manges LLP, an opinion regarding
certain federal income tax consequences of the merger to us, Xetava and our
stockholders (other than holders of Electing Shares). However, that opinion is
not binding on the IRS. In addition, the federal income tax consequences of
receipt of the alternate consideration pursuant to the merger is uncertain. In
particular, the presence of the deferred contingent cash rights as a component
of the alternate consideration may affect, for federal income tax purposes, the
timing and/or character of the gain or loss that would be recognized by a holder
of Electing Shares pursuant to the merger, as well as the timing and/or
character of any gain or loss with respect to any amounts that may be payable
under the deferred contingent cash rights or upon the disposition, termination
or expiration of such deferred contingent cash rights.
The following discussion assumes that our capital stock is, and that any
shares of New Avatex Common Stock, 6.75% notes, warrants and deferred contingent
cash rights to be received pursuant to the merger will be, held as capital
assets within the meaning of Section 1221 of the Code.
THE FOLLOWING SUMMARY IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND
ADVICE BASED UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. ACCORDINGLY,
EACH STOCKHOLDER IS URGED TO CONSULT WITH HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF ANY
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
A. CONSEQUENCES OF THE MERGER (OTHER THAN TO HOLDERS OF ELECTING SHARES)
We and Xetava have received an opinion of our counsel, Weil, Gotshal &
Manges LLP, to the effect that, for federal income tax purposes:
(1) the exchange of our capital stock for shares of New Avatex Common
Stock pursuant to the merger will constitute a reorganization of us
within the meaning of Section 368(a) of the Code;
(2) no gain or loss will be recognized by us or Xetava pursuant to the
merger (other than possibly with respect to the deferred contingent
cash rights);
(3) no gain or loss will be recognized by a holder of our capital stock
upon the exchange of such shares solely for shares of New Avatex
Common Stock pursuant to the merger (except with respect to any cash
received in lieu of fractional shares and any shares of New Avatex
Common Stock received by a holder of $5 Preferred Stock or $4.20
Preferred Stock on account of dividend arrearages);
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(4) the aggregate tax basis of the shares of New Avatex Common Stock
received by a holder of our capital stock in the merger will be the
same as the aggregate tax basis of shares of our capital stock
surrendered in exchange therefor (increased by the fair market value
of any New Avatex Common Stock received on account of dividend
arrearages and decreased by the amount of such tax basis allocable to
fractional shares for which cash is received);
(5) a holder's holding period in such shares of New Avatex Common Stock
(other than to the extent received on account of dividend arrearages)
will include its holding period in our existing shares of capital
stock, provided the shares of our capital stock were held as a capital
asset on the date of the merger; and
(6) any shares of New Avatex Common Stock received pursuant to the merger
in exchange for $5 Preferred Stock or $4.20 Preferred Stock will be
treated as received on account of dividend arrearages to the extent
(if any) that the fair market value of the shares of New Avatex Common
Stock at the effective time of the merger received exceeds the issue
price of the $5 Preferred Stock or the $4.20 Preferred Stock exchanged
therefor.
In rendering its opinion, Weil, Gotshal & Manges LLP has relied upon
representations made by us and Xetava. The foregoing opinion does not address
the federal income tax consequences of the merger to holders of Electing Shares.
See "Treatment of Holders of Electing Shares," below.
With respect to opinion (6) above, we do not anticipate that the fair
market value of the New Avatex Common Stock to be received in exchange for the
$5 Preferred Stock and the $4.20 Preferred Stock in the merger will exceed the
issue price of such preferred stock. Accordingly, we do not expect any holder of
shares of our capital stock to recognize gain or loss with respect to the
receipt of New Avatex Common Stock in the merger.
Cash received by a stockholder of ours in lieu of a fractional share will
be treated as received in exchange for such fractional share, and gain or loss
will be recognized for federal income tax purposes, measured by the difference
between the amount of cash received and the portion of the basis of the shares
of our capital stock allocable to such fractional share. Such gain or loss will
be capital gain or loss, and will be long term capital gain or loss if the
shares of our capital stock have been held for more than one year at the
effective time of the merger.
The tax treatment of the deferred contingent cash rights is uncertain. We
currently intend to take the position that the grant of the deferred contingent
cash rights is a distribution of a contractual obligation of ours for federal
income tax purposes and, accordingly, that no gain would be recognized by us
upon the completion of the merger. In the event that the foregoing is determined
not to be the appropriate federal income tax treatment of the deferred
contingent cash rights, we may be required to recognize gain upon the
consummation of the merger in an amount equal to the excess of the fair market
value of the deferred contingent cash rights over our tax basis, if any, in the
deferred contingent cash rights. As a result of the existing limitations on our
tax loss and credit carryforwards, it is unclear to what extent, if any, our
NOLs would be available to offset any such gain.
Along with our consolidated subsidiaries, we have claimed substantial tax
loss and credit carryforwards for federal income tax purposes which are subject
to significant limitations under the Code and remain subject to examination and
adjustment by the IRS. In particular, Section 382 of the Code imposes an annual
limitation upon the amount of a corporation's tax carryforwards that may be used
to reduce future taxable income or offset future tax liability of the
corporation and its consolidated subsidiaries following an "ownership change" of
the corporation. We believe that we underwent an ownership change in our 1995
fiscal year and again between January and April 1998, and that, as a result, our
ability to utilize our tax loss and credit carryforwards has been severely
limited. See Note M to our Annual Report on Form 10-K for the fiscal year ended
March 31, 1999, a copy of which is attached as Annex E to this
proxy statement/prospectus.
Moreover, we anticipate that, upon completion of the merger, we will
undergo a new ownership change, resulting in a further limitation upon the
utilization of our tax loss and credit carryforwards (including any tax losses
incurred since the date of its previous ownership change). Whether an ownership
change actually occurs depends on the extent to which holders of $5 Preferred
Stock and $4.20 Preferred Stock elect the
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alternate consideration. The more holders that so elect, the more likely an
ownership change will occur. Accordingly, following the merger, it is possible
that our tax loss and credit carryforwards may be rendered effectively unusable
to offset our future taxable income.
B. TREATMENT OF HOLDERS OF ELECTING SHARES
Pursuant to the merger, holders of our preferred stock can elect to receive
the $5 Preferred Stock Alternate Consideration and/or the $4.20 Preferred Stock
Alternate Consideration. The receipt of the alternate consideration will be a
taxable event to holders who elect to receive it. As discussed below, the
federal income tax consequences of the merger to holders of Electing Shares,
including the timing and character of any gain or loss recognized, depend on a
number of factors, including the extent to which the alternate consideration is
treated as received in "exchange" for the Electing Shares or, alternatively, as
a "distribution" under Section 301 of the Code in respect of a holder's actual
or constructive continuing stock ownership in us, and the federal income tax
treatment of the deferred contingent cash rights.
HOLDERS OF ELECTING SHARES ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE MERGER TO THEM. SUCH CONSEQUENCES ARE
COMPLEX AND, TO A SIGNIFICANT EXTENT, SUBJECT TO LEGAL AND FACTUAL
UNCERTAINTIES.
1. Characterization of Transaction; Exchange Versus Distribution
Treatment. The receipt of the alternate consideration by holders of Electing
Shares pursuant to the merger generally will be treated as an "exchange" of the
Electing Shares--rather than as a distribution of the alternate consideration in
respect of such holder's actual or constructive continuing stock ownership in
us--if the amount received is "substantially disproportionate" or otherwise "not
essentially equivalent to a dividend" with respect to the holder (the
"Section 302 tests"). These tests are discussed more fully below.
For purposes of these tests, a holder of Electing Shares must take into
account in determining its stock ownership of us before and after the merger not
only shares actually owned by the holder, but also any shares constructively
owned pursuant to Sections 318 and 302(c) of the Code. Accordingly, a holder
generally is treated as constructively owning (i) shares that are actually owned
(and, in some cases, constructively owned) by certain related individuals or
entities and (ii) shares that may be acquired by exercise of an option or by
conversion (such as pursuant to a conversion of the $5 Preferred Stock or the
exercise of the warrants, whether or not currently exercisable or economically
advantageous).
In addition, substantially contemporaneous dispositions and acquisitions of
our capital stock or shares of New Avatex Common Stock or warrants by a holder
of Electing Shares and related individuals or entities (including market
purchases and sales) may be deemed to be part of a single integrated transaction
with the merger and taken into account in determining whether any of the
Section 302 tests has been satisfied.
The Section 302 tests are as follows:
(1) SUBSTANTIALLY DISPROPORTIONATE TEST. The receipt of the alternate
consideration by a holder of Electing Shares will be
"substantially disproportionate" with respect to the holder if the
percentage of the outstanding shares of New Avatex Common Stock
actually and constructively owned by the holder immediately
following the exchange of Electing Shares pursuant to the merger
is less than 80% of the percentage of the outstanding voting stock
of ours actually and constructively owned by the holder
immediately before the merger. Voting stock for this purpose means
stock whose holders are entitled to vote for the election of one
or more directors. Accordingly, given that both classes of our
preferred stock currently entitle their holders to vote for the
election of one or more directors and that the $5 Preferred Stock
is convertible into our common stock, such classes of stock, in
addition to our common stock, should be taken into account for
purposes of determining the percentage of our outstanding voting
stock actually and constructively owned immediately before the
merger.
(2) NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND TEST. The receipt of the
alternate consideration by a holder of Electing Shares will be
"not essentially equivalent to a dividend" if the holder's
exchange of our capital stock pursuant to the merger results in a
"meaningful reduction" in the holder's interest in Avatex (both
actual and constructive) as compared to such
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holder's interest immediately before the merger. Whether the
receipt of the alternate consideration by a holder will be "not
essentially equivalent to a dividend" will depend upon the
individual holder's facts and circumstances. The IRS has indicated
that even a small reduction in the proportionate common stock
interest of a small minority stockholder in a publicly held
corporation who exercises no control over corporate affairs may
constitute such a "meaningful reduction." In a published ruling,
the IRS held that a reduction in the percentage ownership interest
of a common stockholder in a publicly held corporation from
.0001118% to .0001081% (only a 3.3% reduction of the stockholder's
prior percentage ownership interest) constituted a "meaningful
reduction."
In furtherance of our information reporting obligations to the holders of
Electing Shares and the IRS, and the significance to us of the treatment of a
holder's receipt of the alternate consideration, each holder shall be requested
in the letter of transmittal to indicate the number of shares of each class of
our capital stock it owns both actually and constructively. Such information
will be relied upon by us for purposes of our information and tax reporting.
Each holder should therefore consult its tax advisor to ensure accurate
information is provided.
(a) Consequences of "Exchange" Treatment. If either of the Section 302
tests is satisfied, the receipt of the alternate consideration by holders of
Electing Shares will be treated as a taxable "exchange" of the Electing Shares.
Accordingly, the holder generally will recognize capital gain or loss (subject
to the "wash sale" rules discussed below) equal to the difference between the
amount realized in respect of its Electing Shares and its tax basis in the
Electing Shares exchanged therefor pursuant to the merger. The "amount realized"
by a holder generally will equal the sum of the amount of cash received, the
issue price of the 6.75% notes received and the fair market value of the
warrants and the deferred contingent cash rights received. See "Treatment of the
6.75% Notes," below. The computation of gain or loss is done on a share-
by-share basis; accordingly, a holder may recognize gain on the exchange of some
shares and loss on the exchange of other shares. Any gain or loss recognized
will be long term capital gain or loss if the exchanged shares are held for more
than one year at the effective time of the merger.
To the extent a loss would otherwise be recognizable on the exchange by a
holder of $5 Preferred Stock, such loss may be deferred under the "wash sale"
rules of the Code. Section 1091(a) of the Code provides for the disallowance of
a loss on the sale or other disposition of shares of stock or securities where
it appears that, within a period beginning 30 days before the date of such sale
or disposition and ending 30 days after such date, the holder acquired (or has
entered into a contract or option to acquire) substantially identical stock or
securities. If the $5 Preferred Stock and the New Avatex Common Stock receivable
upon exercise of the warrants are considered "substantially identical" and the
exchange of the $5 Preferred Stock by a holder pursuant to the merger would
result in a loss to the holder, such loss would be partially disallowed and
added to the tax basis of the warrants received therefor.
A holder generally will have a tax basis in the 6.75% notes received equal
to their issue price and in the warrants and deferred contingent cash rights
received equal to their respective fair market values. As discussed in the prior
paragraph, to the extent (if any) that the "wash sale" rules apply to such
exchange, a holder's tax basis in the warrants received would be increased by
the amount of the tax loss that is disallowed by reason of such provision. A
holder's holding period in the 6.75% notes, warrants and deferred contingent
cash rights received generally will begin the day after such holder receives the
6.75% notes and the warrants. However, with respect to any warrants received in
exchange for $5 Preferred Stock as to which the "wash sale" rules apply, a
holder's holding period in the warrants received would include the holder's
holding period in the $5 Preferred Stock exchanged therefor.
As indicated above, gain or loss in respect of a holder's exchange of its
Electing Shares pursuant to the merger generally will be determined with
reference to the amount realized by the holder, including the fair market value
of the deferred contingent cash rights. This assumes that the deferred
contingent cash rights have a readily ascertainable fair market value when
issued pursuant to the merger. In the event that it is determined that the
deferred contingent cash rights do not have a readily ascertainable fair market
value when issued, the amount, timing and character of a holder's gain or loss
may differ from that described above.
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(b) Consequences of "Distribution" Treatment. If a holder does not satisfy
either of the Section 302 tests, the holder will be treated as receiving the
alternate consideration as a "distribution" under Section 301 of the Code in
respect of its actual or constructive continuing stock ownership in us. The
amount of such distribution would be equal to the sum of the cash and the fair
market value of the other alternate consideration received. Such distribution
would be treated as a "dividend" for federal income tax purposes to the extent
(if any) of our earnings and profits for the taxable year of the distribution or
our accumulated earnings and profits. We cannot predict whether, for the taxable
year in which the merger occurs, it will have any current earnings and profits.
The availability of current earnings and profits will depend upon numerous
factors, including our profitability during the taxable year in which the merger
occurs.
To the extent the amount of the distribution exceeds our earnings and
profits, the distribution generally will be treated first as a return of
capital, reducing the holder's adjusted tax basis in its shares of our capital
stock (including any of our common stock). Any amount in excess of the holder's
adjusted tax basis is treated as capital gain from the sale or exchange of its
shares of our capital stock. To the extent that any portion of a holder's
adjusted tax basis in its shares of our capital stock remains, such holder's
remaining tax basis in its shares of our capital stock will become the aggregate
tax basis of any New Avatex Common Stock actually held by it or, assuming the
holder holds no New Avatex Common Stock, likely would increase the holder's tax
basis in the warrants received.
In general, a holder who is treated as receiving the alternate
consideration as a distribution will have a tax basis in the alternate
consideration received equal to its fair market value at the time of the
distribution, and the holding period for such alternate consideration will begin
the day after the distribution.
The federal income tax treatment of the deferred contingent cash rights is
uncertain. See "Ownership and Disposition of Deferred Contingent Cash Rights,"
below. We currently intend to take the position (and the foregoing discussion
generally assumes) that the distribution of the deferred contingent cash rights
is a distribution at the effective time of the merger of a contractual
obligation of ours.
Under Section 243 of the Code, dividends received by corporate shareholders
may be eligible for the 70% dividends-received deduction, to the extent they are
made out of current or accumulated earnings and profits. However, the
applicability of the dividends-received deduction is subject to certain holding
period limitations set forth in Section 246 of the Code. Moreover, under
Section 246A of the Code, if a corporate stockholder has incurred indebtedness
"directly" attributable to an investment in our capital stock, the 70%
dividends-received deduction may be reduced or eliminated. In addition,
President Clinton's fiscal year 2000 budget contains a proposal which would
cause the 70% dividends-received deduction to be reduced or eliminated if a
corporate stockholder has "indirectly" financed an investment in our capital
stock. The proposal would be effective for shares of our capital stock acquired
on or after the date of enactment of the proposal. Furthermore, Section 1059 of
the Code requires a corporate shareholder to reduce its basis (but not below
zero) in its shares of our capital stock by the "nontaxed portion" of any
"extraordinary dividend" if the corporate shareholder has not held its stock for
more than two years as of the date the amount or payment of such dividend is
announced, declared or agreed to. Generally, the nontaxed portion of an
extraordinary dividend is the amount of the dividends-received deduction. The
extent (if any) by which the nontaxed portion of an extraordinary dividend
exceeds the holder's tax basis in its shares of our capital stock would be
treated as current gain from the sale or exchange of such shares. Also, in the
case of any redemption of stock which would not have been treated (in whole or
in part) as a dividend if any options had not been taken into account under
Section 318(a)(4) of the Code, any amount treated as a dividend with respect to
such redemption would be treated as an extraordinary dividend without regard to
the period the taxpayer held such stock. Corporate shareholders should also
consider the possible reduction or elimination of the benefit of the
dividends-received deduction due to the corporate alternative minimum tax
provisions of the Code.
2. Treatment of the 6.75% Notes. Although not free from doubt, we believe,
and the discussion herein of the federal income tax consequences to holders of
Electing Shares assumes, that the 6.75% notes will be respected as debt for
federal income tax purposes.
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(a) Interest and Original Issue Discount. The 6.75% notes provide for
stated interest at 6.75% per annum. Accordingly, a holder of the 6.75% notes
generally will be required to include in its gross income for federal income tax
purposes the stated interest in accordance with the holder's method of tax
accounting.
In addition, the 6.75% notes may be issued with original issue discount.
Subject to a de minimis exception, the original issue discount will equal the
excess, if any, of (i) the "stated redemption price at maturity" of the 6.75%
notes over (ii) the "issue price" of the 6.75% notes.
The "stated redemption price at maturity" of the 6.75% notes will include
all payments to be made in respect of such 6.75% notes other than "qualified
stated interest payments." A "qualified stated interest" payment includes any
stated interest payment on a note that is unconditionally payable at least
annually at a single fixed rate that appropriately takes into account the length
of the interval between interest payments. Avatex expects that all payments of
stated interest on the 6.75% notes will be "qualified stated interest payments"
and that, accordingly, the stated redemption price at maturity of the 6.75%
notes would be equal to its principal amount.
Because the Electing Shares are traded "over the counter," the issue price
of the 6.75% notes will be equal to (or approximate) the fair market value of
the 6.75% notes at the effective time of the merger. Under governing Treasury
Regulations, our determination of the issue price is binding on all holders
(other than a holder that explicitly discloses otherwise on its federal income
tax return in accordance with such regulations).
If the 6.75% notes are determined to be issued with original issue
discount, an initial holder of the 6.75% notes must accrue the original issue
discount into income over the term of the 6.75% notes using the constant yield
method (regardless of the holder's normal method of accounting). As a result,
the holders of the 6.75% notes generally will include amounts in gross income
for federal income tax purposes in advance of the receipt of cash in respect of
such income.
In general, a holder's tax basis in the 6.75% notes will be increased by
the amount of original issue discount that is included in such holder's income
pursuant to the foregoing rules and will be decreased by the amount of any cash
payments received, other than payments of qualified stated interest.
(b) Bond Premium. If a holder of the 6.75% notes has an adjusted tax basis
in the 6.75% notes that exceeds the sum of all remaining amounts then payable
under the 6.75% notes other than qualified stated interest (which, at the time
of issuance, would be the "stated redemption price at maturity" of the 6.75%
notes), the holder does not include any of the original issue discount in
income. Moreover, the holder may elect to deduct such "bond premium" over the
period from its acquisition of the 6.75% notes to the maturity date of such
6.75% notes (or, if it results in a smaller amount of amortizable bond premium,
until an earlier call date).
If such bond premium is amortized, the amount of stated interest on the
6.75% notes that must be included in the holder's income for each period ending
on an interest payment date or at the maturity date, as the case may be, will
(except as Treasury Regulations may otherwise provide) be reduced by the portion
of bond premium allocable to such period based on the 6.75% note's yield to
maturity. If such an election to amortize bond premium is not made, a holder
will receive a tax benefit from the premium only in computing such holder's gain
or loss upon the sale or other taxable disposition of the 6.75% notes, or upon
the full or partial payment of principal.
An election to amortize bond premium will apply to amortizable bond premium
on all notes and other bonds the interest on which is includible in the holder's
gross income and that are held at, or acquired after, the beginning of the
holder's taxable year as to which the election is made. The election may be
revoked only with the consent of the IRS. A holder who elects to amortize bond
premium must reduce its adjusted basis in the 6.75% notes by the amount of such
allowable amortization.
(c) Acquisition Premium. A complimentary concept to bond premium is
acquisition premium. A debt is acquired at an "acquisition premium" if the
holder's adjusted tax basis in the debt exceeds the adjusted issue price of the
debt but is less than or equal to the sum of all remaining amounts then payable
under the 6.75% notes other than qualified stated interest. If a holder acquires
the debt at an acquisition premium, the amount
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of original issue discount includible in the holder's gross income generally is
reduced in each period in proportion to the percentage of the unamortized
original issue discount at the date of acquisition represented by the
acquisition premium. Alternatively, a holder may elect to accrue the discount on
a constant yield basis.
(d) Market Discount. If instead of a premium a holder of the 6.75% notes
acquires the 6.75% notes at a "market discount," some or all of any gain
recognized by the holder upon a subsequent sale or other disposition of the
6.75% notes, or upon the full or partial payment of principal, may be treated as
ordinary income, and not capital gain. Subject to a statutory de minimis
exception, "market discount" is the excess (if any) of (i) the stated redemption
price at maturity of a debt obligation (less any original issue discount) over
(ii) the taxpayer's adjusted tax basis in such debt obligation immediately after
its acquisition.
A holder of a 6.75% note acquired at a market discount may elect to
amortize the market discount into income, through the use of either the
straight-line inclusion method or the elective constant yield method. The
election will apply to all notes and other obligations acquired by the electing
holder at a market discount during the taxable year for which the election is
made, and all subsequent taxable years, unless the IRS consents to a revocation
of the election. If an election is made to include market discount in income
currently, the basis of the Note in the hands of the holder will be increased by
the market discount thereon as it is included in income.
Unless a holder who acquires a 6.75% note at a market discount elects to
amortize the market discount into income, such holder may be required to defer
deductions for any interest paid on indebtedness incurred or continued to
purchase or carry such 6.75% note in an amount not exceeding the deferred
income, until such income is realized.
President Clinton's fiscal year 2000 budget contains a proposal which would
require accrual method holders to include market discount in income as it
accrues. The proposal would be effective for debt instruments acquired on or
after the date of enactment of the proposal.
(e) Sale or Redemption. The sale, exchange, redemption (including pursuant
to an offer by the Surviving Corporation) or other disposition of the 6.75%
notes generally will be a taxable event for federal income tax purposes. A
holder generally will recognize gain or loss equal to the difference between (i)
the amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition of the 6.75% notes
(other than in respect of accrued and unpaid interest thereon) and (ii) the
holder's adjusted tax basis in such 6.75% notes (other than any tax basis
attributable to accrued and unpaid interest). Subject to the discussion above
under the caption "Market Discount", such gain or loss will be capital gain or
loss and will be long term capital gain or loss if the 6.75% notes will have
been held by the holder for more than one year.
3. Ownership and Disposition of Warrants. A holder of a warrant to
purchase shares of New Avatex Common Stock will not recognize gain or loss upon
the exercise of the warrant (except possibly in respect of any cash received in
lieu of fractional shares). The holder's tax basis in the shares of New Avatex
Common Stock received upon exercise of a warrant would be equal to the sum of
the holder's tax basis in the warrant and the exercise price (less the sum of
the portion of the holder's tax basis allocable to any fractional share and the
exercise price paid for the fractional share, as discussed below). The holding
period of the shares of New Avatex Common Stock received upon exercise of a
warrant would commence on the date following the date of the exercise of such
warrant. Upon the lapse or disposition of the warrant, the holder generally
should recognize gain or loss equal to the difference between the amount
received (nothing in the case of a lapse) and its tax basis in the warrant. In
general, such gain or loss should be a capital gain or loss, long-term or
short-term depending on whether the requisite holding period was satisfied.
If a holder receives cash in lieu of a fractional share upon exercise of a
warrant, such holder will recognize gain or loss equal to the difference between
the amount of cash received and the sum of the exercise price paid for the
fractional share and the portion of such holder's tax basis in the warrant
allocable to such fractional share.
4. Tax Treatment of the Deferred Contingent Cash Rights
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The federal income tax treatment of the deferred contingent cash rights is
subject to significant uncertainty. Given the wholly contingent nature and
uncertain term of the deferred contingent cash rights, we intend to take the
position, that the deferred contingent cash rights are a contractual obligation
of ours that is not a "debt instrument" for federal income tax purposes. In
addition, we intend to take the position, absent future clarification, that any
amounts ultimately paid under the deferred contingent cash rights (to the extent
in excess of a holder's tax basis in the deferred contingent cash rights) should
be taxed independently of, and not treated as further consideration for, the
Electing Shares.
So treated, it appears that any amounts received under a deferred
contingent cash right in excess of a person's adjusted tax basis in such
deferred contingent cash right generally would be ordinary income, unless the
receipt of the payment terminates all rights of the recipient under the deferred
contingent cash right. Where the receipt of a payment terminates all rights of
the recipient under the deferred contingent cash right, any gain or loss
attributable to the payment generally would be capital gain or loss under
Section 1234A of the Code. It is not clear whether the same treatment would
apply to a partial payment. Any such income, gain or loss would be calculated
with reference to the recipient's adjusted tax basis in the deferred contingent
cash right (which, as discussed above, would equal the fair market value of the
deferred contingent cash right at the effective time of the merger, assuming the
deferred contingent cash rights have a readily ascertainable fair market value
at such time). The timing of such income, gain or loss depends upon, among other
things, whether the settlement or resolution of the litigation's underlying
payments with respect to the deferred contingent cash right occurs at one time
or over an extended period of time, and upon the structuring of any settlement
or resolution. If a recipient receives a payment that is less than its basis in
the deferred contingent cash right, the recipient may not be allowed a loss
until it is determined that no further payments will be made. If identifiable
events occur which establish the worthlessness of the deferred contingent cash
rights, a deferred contingent cash right recipient would be entitled to deduct
as a capital loss, in the year of such identifiable event, such recipient's
adjusted tax basis in its deferred contingent cash rights.
There can be no assurance that the IRS will not take a contrary position to
ours. If, contrary to our position, payments under the deferred contingent cash
rights are treated, in the case of holders who are considered to have had a
taxable "exchange" of their Electing Shares, as additional payments under a
single contract for the sale or exchange of the Electing Shares, a portion of
such payments may be treated as imputed interest under Section 483 of the Code
with the remainder treated as additional amount realized in respect of each
holder's sale of its Electing Shares.
Alternatively, if the deferred contingent cash rights constitute "debt
instruments" for federal income tax purposes, the character of a holder's income
in respect of the receipt of the deferred contingent cash rights, and the timing
and character of a recipient's income in respect of payment under the deferred
contingent cash rights, may differ, regardless of whether the recipient is
considered to receive the alternate consideration in exchange for its Electing
Shares or as a shareholder "distribution." In such instance, each recipient may
be required to accrue imputed interest income (on a projected basis) over time
with the result that interest income may be recognized earlier than the actual
receipt of a payment, and that the excess of any payment received over the
amount of interest imputed would be treated as additional interest income.
In addition, in the event it is determined that the deferred contingent
cash rights do not have a readily ascertainable fair market value, the amount,
timing and character of a recipient's gain or loss with respect to both the
receipt of the deferred contingent cash rights and any payments thereunder also
may differ from that described above.
5. Backup Withholding.
A holder of Electing Shares may be subject to backup withholding at the
rate of 31% with respect to the receipt of the alternate consideration. Backup
withholding generally applies if the holder (a) fails to furnish a taxpayer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails
properly to report interest or dividends, or (d) under certain circumstances,
fails to provide a certified statement, signed under penalty of perjury, that
the TIN provided is its correct number and that it is not subject to backup
withholding. Backup withholding is not an additional tax but merely an advance
payment, which may be refunded to the extent it results in an overpayment of
tax. Certain persons are exempt from backup withholding, including, in certain
circumstances, corporations and financial institutions.
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6. Reporting Requirements.
Information returns (including statements on Form 1099) will be made
annually or otherwise as may be required to the IRS and state taxing authorities
and to the holders of record that are not excepted from such reporting
requirements with respect to the distribution of the alternate consideration and
thereafter with respect to the 6.75% notes, warrants and deferred contingent
cash rights (including, but not limited to, the amortization of original issue
discount).
As discussed above, each holder shall be requested, in the letter of
transmittal, for certain stock ownership information (relating to both actual
and constructive ownership) which information will be relied on by us for
purposes of our information and tax reporting. See "--Characterization of
Transaction: Exchange Versus Distribution Treatment," above.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. HOLDERS OF OUR CAPITAL STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS TO DETERMINE THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF EXCHANGES MADE BY THEM PURSUANT TO THE MERGER IN VIEW OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
STOCK EXCHANGE LISTING; DELISTING OF OUR PREFERRED STOCK
We have been advised that market makers who participate in the OTC Bulletin
Board system intend to quote and cause to be traded on the OTC Bulletin Board
system the New Avatex Common Stock, the warrants and the 6.75% Notes to be
issued in the merger. If the merger is completed, both the $5 Preferred Stock
and the $4.20 Preferred Stock will cease to be quoted on the OTC Bulletin Board
system. With respect to the New Avatex Common Stock, the 6.75% notes and the
warrants, we will continue to be subject to the information and reporting
requirements of Sections 13 and 15 of the Exchange Act.
LEGAL MATTERS
The validity of the New Avatex Common Stock, the warrants and the 6.75%
notes to be issued in connection with the merger is being passed upon for us by
Weil, Gotshal & Manges LLP. It is a condition to the completion of the merger
that we receive an opinion from Weil, Gotshal & Manges LLP relating to certain
federal income tax consequences of the merger. See "--The Merger
Agreement--Conditions to the Completion of the Merger" on page [I-68] and
"--Material Federal Income Tax Consequences of the Merger" on page [I-98].
EXPERTS
The consolidated financial statements for the fiscal year ended March 31,
1999 and the related financial statement schedules included in Annex E to this
proxy statement/prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report also appearing in Annex E to
this proxy statement/prospectus (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to our ability to continue as a
going concern), and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and the related consolidated
financial statement schedule included in Avatex Corporation Prospectus of
Phar-Mor, Inc. and subsidiaries have been audited by Deloitte and Touche LLP,
independent auditors, as stated in their report, which is included herein (which
report expresses an unqualified opinion on the consolidated balance sheets of
Phar-Mor and subsidiaries as of June 27, 1998 and June 28, 1997 and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the fifty-two weeks ended June 27, 1998, the
fifty-two weeks ended June 28, 1997 and the forty-three weeks ended June 29,
1996, expresses a qualified opinion on the consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows of
Phar-Mor and subsidiaries for the nine weeks ended September 2, 1995 as reliable
accounting records and sufficient evidential matter to support the acquisition
cost of property and equipment were not available, and their report includes an
explanatory paragraph relating to the comparability of financial information
prior to September 2, 1995 as a result of Phar-Mor's emergence from bankruptcy
and the creation of a new entity), and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
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CHAPTER TWO--INFORMATION ABOUT THE MEETING AND VOTING
THE ANNUAL MEETING
Our Board is using this document to solicit proxies from the holders of our
common stock, $5 Preferred Stock and $4.20 Preferred Stock for use at our annual
meeting. We are first mailing this proxy statement/prospectus and accompanying
form of proxy to stockholders on or about , 1999.
WHEN AND WHERE THE ANNUAL MEETING WILL BE HELD
The meeting will be held on [ , 1999], at
a.m., local time, at [ ].
WHAT WILL BE VOTED UPON
At our annual meeting, holders of our $5 Preferred Stock and $4.20
Preferred Stock will be asked to consider and vote upon the adoption of the
merger agreement.
Our common stockholders will be asked to consider and vote upon the
following proposals:
o to consider and vote upon the adoption of the merger agreement;
o to elect two directors to serve until our year 2001 annual meeting;
o to elect two directors to serve until our year 2002 annual meeting; and
o to act upon any other matters properly coming before the annual meeting
and any adjournment or postponement of the meeting.
ONLY STOCKHOLDERS OF RECORD AS OF [ ] ARE ENTITLED TO
VOTE
Stockholders who hold their stock of record as of the close of business on
[ ] are entitled to receive notice of the annual meeting
and to vote on the matters for which they have a vote at the annual meeting. On
the record date, there were approximately [ ] shares of our common
stock, [ ] shares of $5 Preferred Stock and [ ] shares of
$4.20 Preferred Stock outstanding and entitled to vote, as appropriate, at the
annual meeting.
LIST OF STOCKHOLDERS
A list of stockholders entitled to vote at the meeting will be available
for examination by any stockholder for purposes germane to the meeting during
normal business hours at our offices at 5910 North Central Expressway, Suite
1780, Dallas, Texas. We will begin to make this list available on or about
[ , 1999], and the list will also be available for
examination by stockholders present at the meeting.
QUORUM
A quorum of stockholders is necessary to hold a valid meeting. The presence
in person or by proxy of holders of shares representing 40% of votes entitled to
be cast by holders of our issued and outstanding common stock entitled to vote
at the meeting is a quorum with respect to our common stock. The presence in
person or by proxy of holders of shares representing 50% of votes entitled to be
cast by holders of issued and outstanding shares of each or our $5 Preferred
Stock and $4.20 Preferred Stock entitled to vote at the meeting is a quorum with
respect to each class of our preferred stock.
Abstentions and broker "non-votes" count as present for establishing a
quorum. A broker "non-vote" occurs on an item when a broker is not permitted to
vote on that item without instructions from the beneficial owner of the shares
and no instruction is given.
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SHARES BENEFICIALLY OWNED BY DIRECTORS, EXECUTIVE OFFICERS AND PHAR-MOR
On , 1999, Melvyn J. Estrin and Abbey J. Butler,
our Co-Chairmen and Co-Chief Executive Offers, and their respective affiliates,
owned and were entitled to vote 1,507,811 shares of our common stock, or
approximately 11% of the outstanding shares of our common stock. The Master
Trust for the National Intergroup, Inc. Retirement Program and Davenport, Inc.
Pension Plan, of which we are the sponsor, currently beneficially owns
approximately 10% of the outstanding shares of our common stock. In addition, on
, 1999, Phar-Mor was entitled to vote 4,948,600 shares
of our common stock (including the shares it has agreed to purchase from Elliott
Associates, Westgate International and Moses Marx and his affiliates, Momar
Corporation and United Equities Commodities Company, as described above), or
approximately 35.8% of the outstanding shares of our common stock.
These persons and entities have indicated that they will vote in favor of
the merger proposal and for each of the directors nominated for election to our
Board. If all of these persons and entities vote in favor of the merger
agreement, we will obtain one of the requisite stockholder approvals of the
merger agreement, i.e., approval by the holders of the majority of a outstanding
shares of our common stock.
VOTE NECESSARY TO APPROVE MERGER PROPOSAL
The merger proposal must be approved by the affirmative vote of the
following, each voting separately as a class:
o holders of a majority of the outstanding shares of our common stock,
o holders of at least two-thirds of the outstanding shares of $5 Preferred
Stock; and
o holders of at least two-thirds of the outstanding shares of $4.20
Preferred Stock.
Each share of our common stock, $5 Preferred Stock and $4.20 Preferred
Stock is entitled to one vote on the merger proposal. The failure to vote or a
vote to abstain has the same effect as a vote against the adoption of the merger
agreement.
If your broker holds your shares in its name, your broker may not vote your
shares on the merger proposal absent instruction from you. Without your voting
instructions, a broker non-vote will occur on the merger proposal and will have
the effect of a vote against the adoption of the Merger Agreement.
VOTE NECESSARY TO ELECT DIRECTORS
A nominee for director must receive a plurality of the votes cast by
holders of our common stock to be elected. Each share of our common stock is
entitled to one vote for each nominee. Cumulative voting is not permitted.
Holders of $5 Preferred Stock and $4.20 Preferred Stock are NOT entitled to vote
for the election of directors at the meeting.
The election of directors is not conditioned upon approval of the merger
proposal. Accordingly, a vote against the merger agreement will have no effect
on the vote to elect directors.
PROXIES
Voting Your Proxy
You may vote in person at the meeting or by proxy. We recommend you vote by
proxy even if you plan to attend the meeting. You can always change your vote at
the meeting.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to us in time to vote, one of the individuals named as
your proxy will vote your shares as you have directed.
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How to Vote by Proxy
You may vote by proxy by completing, signing, dating and returning your
proxy card in the enclosed envelope.
Revoking Your Proxy
You may revoke your proxy before it is voted by:
o sending in a new proxy with a later date;
o notifying our Secretary in writing before the meeting that you have
revoked your proxy; or
o voting in person at the meeting.
You will not revoke your proxy by simply attending the annual meeting
unless you complete a ballot.
Voting in Person
If you plan to attend the meeting and wish to vote in person, we will give
you a ballot at the meeting. However, if your shares are held in the name of
your broker, bank or other nominee, you must bring a proxy from your nominee
authorizing you to vote your "street name" shares on ,
1999, the record date for voting.
How Proxies Are Counted
If you return a signed and dated proxy card but do not indicate how the
shares are to be voted, those shares represented by your proxy card will be
voted as recommended by our Board. A valid proxy also gives the individuals
named as proxies authority to vote in their discretion when voting the shares on
any other matters that are properly presented for action at the annual meeting.
A properly executed proxy card marked "abstain" will not be voted. However, it
may be counted to determine whether there is a quorum present. Accordingly,
since the affirmative vote of a majority of our common stock and at least
two-thirds of each class of our preferred stock outstanding and entitled to vote
at the annual meeting is required to approve the merger proposal, a proxy marked
"abstain" will have the effect of a vote against the merger proposal.
Abstentions are not counted in determining the number of shares voted for or
against any nominee for director.
Confidential Voting
Your individual vote is kept confidential from us unless special
circumstances exist. For example, a copy of your proxy card will be sent to us
if you write comments on the card.
Proxy Solicitation
We will pay the costs of soliciting proxies.
The extent to which these proxy soliciting efforts will be necessary
depends entirely upon how promptly proxies are submitted. You should submit your
proxy by mail without delay. We also reimburse brokers and other nominees for
their expenses in sending these materials to you and obtaining your voting
instructions.
Unless you are making an alternate consideration election for your
preferred stock, you should not send in any stock certificates with your proxy
card. The exchange agent will mail transmittal forms with instructions for the
surrender of stock certificates for our stock to stockholders as soon as
practicable after the completion of the merger.
OTHER BUSINESS; ADJOURNMENTS
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. An adjournment may be made from time to time by the chairman
of the meeting or by approval of the holders of shares representing a majority
of the votes present in person or by proxy at the meeting, whether or not a
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quorum exists, without further notice other than by an announcement made at the
meeting. If the meeting is postponed or adjourned for any reason, when it is
reconvened all proxies will be voted in the same manner as they would have been
voted at the original convening of the annual meeting (except proxies that have
been effectively withdrawn or revoked). If any other matters are properly
presented at the meeting for consideration, the persons named in your proxy card
will have discretion on how to vote on such matters in their best judgment. We
do not currently intend to seek an adjournment of our meeting.
Each year, a stockholder may submit proposals to be included in the proxy
materials. These proposals must meet the stockholder eligibility and other
requirements of the SEC. To be included in our 2000 annual meeting proxy
materials, your proposal must be received no later than
[ ] at our offices at 5910 North Central Expressway,
Suite 1780, Dallas, Texas 75206, Attention: Secretary.
Our bylaws provide that if you intend to nominate a candidate for election
as a director, you must deliver written notice of your intention to our
Secretary. The notice must be delivered at least 45 days before the date of a
stockholders meeting. The notice must contain the following information:
o your name and address and the name and address of the nominee for
election as a director;
o a representation by you that you are a record holder of our stock
entitled to vote at the meeting to nominate the specified nominee;
o a description of any arrangements between you and the nominee and any
other person regarding the nomination; and
o such other information concerning the nominee as would be required to be
included in a proxy statement soliciting proxies for the election of the
nominee.
In addition, the notice must include the nominee's consent to serve as a
director if elected.
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CHAPTER THREE--OTHER ANNUAL MEETING PROPOSALS
ELECTION OF DIRECTORS
BOARD OF DIRECTORS
Our Board of Directors manages our business. It establishes the overall
policies and standards for us and reviews management's performance. The
directors are kept informed of our operations at meetings of our Board and
committees of our Board and through reports and analyses and discussions with
management.
Our Board of Directors meets on a regularly scheduled basis and also holds
special meetings. During 1998, they met on four occasions. Significant
communications between our directors and us also occur apart from regularly
scheduled meetings of our Board and our board committees. Accordingly,
management does not regard attendance at meetings to be the primary criterion in
evaluating the contributions a director makes. Each of our directors attended
all meetings of the Board and committee meetings during the time he was a member
of the Board or a committee during our fiscal year ended March 31, 1999.
Our fiscal year ends on March 31. All references to fiscal 1999, fiscal
1998, etc. herein refer to our fiscal year ending on March 31 of that year.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our Board of Directors established three standing committees and assigned
certain responsibilities to each of those committees.
Audit Committee. The Audit Committee reviews the work of our independent
auditors and management to ensure that each is properly discharging its
responsibilities in the area of financial controls and reporting. This committee
is presently comprised of Mr. Fred S. Katz, who is the Chairman, and Mr. John L.
Wineapple. This committee did not meet during fiscal 1999.
Executive and Nominating Committee. The Executive and Nominating Committee
has the authority to exercise substantially all of the powers of the Board of
Directors in our management and business affairs, except it does not have the
authority to declare dividends, authorize the issuance of common stock, modify
our certificate of incorporation or by-laws, adopt any agreement of merger or
consolidation or recommend to the stockholders the sale, lease or exchange of
all or substantially all of our assets or our dissolution. In addition, this
committee recommends prospective nominees for election to the Board of
Directors. As a consequence, the occasions on which this committee is required
to take action are limited. The members of this committee are Messrs. Butler and
Estrin. This committee did not meet in fiscal 1999.
Finance and Personnel Committee. The Finance and Personnel Committee (the
"FINANCE COMMITTEE") reviews and monitors our financial planning and structure
and our management's performance. The Finance Committee also determines the
compensation of our management and makes recommendations with respect to the
establishment of management compensation plans. The Finance Committee is
presently comprised of Mr. Wineapple, who is the Chairman, and Messrs. Katz and
William A. Lemer. This committee did not meeting during fiscal 1999.
COMPENSATION OF OUR DIRECTORS
Non-employee directors who are not 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 or of a committee of the Board (other than the Executive
and Nominating Committee) they attend. The Chairman of each of the committees
receives an additional $1,000 for each meeting of the committee they attend.
Employee directors are not paid for serving on our Board or any of the Board
committees. Directors are reimbursed for travel and lodging expenses in
connection with board and committee meetings.
Under the terms of our 1993 Restated Stock Option and Performance Award
Plan, non-employee directors are automatically granted options to purchase
15,000 shares of our common stock when they are
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first elected. In addition, in each year a director continues to serve as a
member of the Board, he is granted options to purchase 1,000 shares of our
common stock following our annual stockholders' meeting.
We maintain 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 for us 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 a director during such director's years of service on the
Board of Directors.
Each of the directors who was elected to the Board by our common
stockholders is also a party to an indemnification agreement with us dated as of
October 23, 1997, the terms of which are substantially the same as the
indemnification agreements between us and our executive officers. See
"--Employment and Indemnification Agreements."
One of our outside directors, Dr. Hyman H. Frankel, has also served as a
business consultant to us since February 1992. We are parties to a written
agreement with Dr. Frankel that is terminable by either party on thirty days
prior written notice. Under the agreement, we paid Dr. Frankel a monthly
consulting fee of $7,500 until March 31, 1999, after which it was reduced to
$3,750.
ELECTION OF OUR DIRECTORS
Our Board is divided into three classes. Each class of directors is elected
for a three-year term. The term of one class of directors expires each year.
Currently, our Board consists of eleven members, seven elected by our common
stockholders and four elected by our preferred stockholders. However, it is a
condition to the completion of the merger that these four members of our Board,
Daniel Gropper, Vincent Intrieri, Ralph DellaCamera, Jr., and Brian Miller, will
resign from the Board effective immediately prior to the effectiveness of the
merger.
Because we did not hold an annual meeting in 1998, no directors were
elected in 1998. Therefore, two classes of directors will be elected at the
meeting:
o one class of directors to serve until our annual meeting in 2001; and
o one class of directors to serve until our annual meeting in 2002.
William A. Lemer and John L. Wineapple are nominated for election by our
Board to serve until our annual meeting in 2001 or when their successors are
elected and qualified. Abbey J. Butler and Melvyn J. Estrin are nominated for
election by our Board to serve until our annual meeting to be held in 2002 or
when their successors have been elected and qualified. The remaining members of
our Board are Hyman H. Frankel, Fred S. Katz, and Charles C. Pecarro, who were
previously elected to serve until our year 2000 annual meeting.
Pursuant to the Elliot/Marx Stockholders' Agreement, Moses Marx
unconditionally withdrew his previous demand to nominate Messrs. Charles K.
MacDonald and Donald Press for election to our Board.
We will vote properly executed proxies received in response to this
solicitation. Unless otherwise specified in the proxy, it is the intention of
the persons named in the proxies solicited by the Board to vote FOR the
re-election of Messrs. Lemer, Wineapple, Butler and Estrin. If you do not wish
your shares to be voted for particular nominees, please identify the exceptions
in the designated space provided on the proxy card. Directors will be elected by
a plurality of the votes cast by our common stockholders. Any shares not voted
(by abstention, broker non-vote or otherwise) have no impact on the vote.
If at the time of the meeting one or more of the nominees have become
unable to serve, shares represented by proxies will be voted for the remaining
nominees and for any substitute nominee or nominees designated by the Executive
and Nominating Committee or, if none, the size of our Board will be reduced. Our
Board knows of no reason why any of the nominees will be unavailable or unable
to serve.
YOUR BOARD RECOMMENDS A VOTE FOR ALL NOMINEES.
III-2
<PAGE>
BIOGRAPHICAL INFORMATION OF OUR DIRECTORS
The following provides information about the nominees for directors as well
as our other directors. The first seven directors listed were elected by our
common stockholders. The last four were elected by our preferred stockholders in
April 1998. At the time of their election to the Board, these four directors
were employed by Stonington Management Corp. Stonington Management Corp. is
controlled by Mr. Paul Singer, who also controls Elliott Associates and Westgate
International. Those entities taken together are significant holders of both our
common and preferred stock.
Abbey J. Butler, age 62, has served as a director since 1990. Mr. Butler
has also served as Co-Chairman of the Board since March 1991 and was appointed
Co-Chief Executive Officer in October 1991. He also serves as Co-Chairman of the
Board and Co-Chief Executive Officer of Phar-Mor; as managing partner of Centaur
Partners, L.P., an investment partnership with ownership interests in us; and 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., the holding company of Grand Bank, Maryland, and,
in connection with investments by us and our subsidiaries, as a director of
Carson, Inc., RAS Holding Corp., Caring Technologies, Inc., HPD Holdings Corp.
and Cyclone, Incorporated, and as a member of the Board of Managers of Chemlink
Laboratories LLC. 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 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 since March 1991 and was
Co-Chief Executive Officer of FoxMeyer Corporation from May 1993 to November
1996, and also served as Co-Chairman of the Board of Ben Franklin Retail Stores,
Inc. from November 1991 until March 1997. FoxMeyer Corporation, FoxMeyer Drug
Company and Ben Franklin Retail Stores, Inc. each filed for relief under the
Bankruptcy Code in 1996.
Melvyn J. Estrin, age 56, has served as a director since 1990. Mr. Estrin
has also served as Co-Chairman of the Board since March 1991 and was appointed
Co-Chief Executive Officer in October 1991. He also serves as Co-Chairman of the
Board and Co-Chief Executive Officer of Phar-Mor; 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, Inc. as a
director of Washington Gas Light Company and, in connection with investments by
us and our subsidiaries, as a director of Carson, Inc., RAS Holding Corp.,
Caring Technologies, Inc., and HPD Holdings Corp., and as a member of the Board
of Managers of Chemlink Laboratories LLC. 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 Corporation since March 1991
and was Co-Chief Executive Officer of FoxMeyer Corporation from May 1993 to
November 1996, and also served as Co-Chairman of the Board of Ben Franklin
Retail Stores, Inc. from November 1991 until March 1997. FoxMeyer Corporation,
FoxMeyer Drug Company and Ben Franklin Retail Stores, Inc. each filed for relief
under the Bankruptcy Code in 1996.
Hyman H. Frankel, Ph.D., age 78, has served as a director since February
1997. Dr. Frankel holds a Ph.D. in Sociology, and has served as a consultant to
us since 1992. See "-Compensation of Directors." 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 Co, LLC 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 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 61, has served as a director since February 1997.
Mr. Katz is President of First Taconic Capital Corporation, a private merchant
banking and consulting firm, since 1996. Mr. Katz has also
III-3
<PAGE>
served as a Managing Director of Whale Securities, L.P., a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., from June 1991 to December 1996, and as Chairman of the Board of Cyclone,
Incorporated, a former business unit of USX Corporation, since 1994. Mr. Katz is
also a director of UNSI Corporation. In 1994 and 1995, a subsidiary of ours, M &
A Investments, Inc., invested in UNSI Corporation and Cyclone. See
"-Compensation Committee Interlocks and Insider Participation." 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 58, has served as a director 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 Retail Stores, Inc., 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 61, has served as a director since February 1997.
Mr. Pecarro is the Chief Financial Officer of Human Service Group, Inc. and
President of University Research Co, LLC, 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 59, has served as a director since February 1997.
Mr. Wineapple 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., Kellwood Company, Chateau
International, Moretz, Inc., Sara Lee Corporation, Wal-Mart Stores, Inc.,
Mondani, Inc. and Fabrictex, Inc. From 1988 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 Corporation, during a portion of fiscal 1997.
Daniel Gropper, age 28, has served as a director since April 1998.
Mr. Gropper joined Stonington Management Corp. as an Analyst in 1995 and is
currently a Portfolio Manager, working on a variety of projects, including
bankruptcies, restructurings, liquidations, activist positions and distressed
high-yield situations. Prior to joining Stonington Management Corp.,
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 also serves as a director of
Atlantic Gulf Communities Corp. Mr. Gropper has a Bachelor of Science in
Commerce with Distinction from the University of Virginia.
Vincent Intrieri, age 42, has served as a director since April 1998.
Mr. Intrieri is a portfolio manager at a New York investment firm. Prior
thereto, Mr. Intrieri was a Portfolio Manager with Stonington Management Corp.
since 1995, where he analyzed investments and managed a portfolio of stocks and
high-yield bonds in a variety of industries. Prior to joining Stonington
Management Corp., Mr. Intrieri was a Partner in the Corporate Recovery Services
Group in the Chicago office of Arthur Andersen & Co., where he had extensive
experience in accounting, finance and consulting services for major Fortune 500
corporations. Prior to Arthur Andersen & Co., Mr. Intrieri was a Director in the
Bankruptcy and Reorganization Services Group of PricewaterhouseCoopers.
Mr. Intrieri has a Bachelor of Science in Accounting with Distinction from
Pennsylvania State University, and was previously a director of Australian Food
and Fiber Limited, Marvel Holdings, Inc. and Marvel (Parent) Holding, Inc.
Ralph DellaCamera, Jr., age 45, has served as a director since June 1998.
Mr. DellaCamera is currently President and Chief Executive Officer of Brean
Murray & Co., Inc., a New York City-based brokerage firm that is a member of the
New York Stock Exchange. Prior thereto, Mr. DellaCamera was employed by
Stonington Management Corp., most recently as Head Trader and Senior Risk
Manager where he was
III-4
<PAGE>
responsible for managing investments in distressed securities, equities,
commodities and currencies. Mr. DellaCamera holds a Bachelor of Science in
Business Administration from the University of New Haven.
Brian Miller, age 33, has served as a director since June 1998. Mr. Miller
joined Stonington Management Corp. as a trader in 1991 and is currently a
Portfolio Manager specializing in equity arbitrage strategies. Prior to joining
Stonington Management Corp., 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.
BIOGRAPHICAL INFORMATION OF OUR EXECUTIVE OFFICERS
The following provides information about our executive officers (other than
the Co-Chairmen of the Board and Co-Chief Executive Officers, whose biographies
are set forth above). Executive officers are typically elected by the Board at
our annual meeting and hold office until the next annual meeting or until their
successors have been duly elected and qualified. All of these individuals were
also formerly officers of FoxMeyer Corporation and FoxMeyer Drug Company, which
filed for relief under Chapter 11 of the Bankruptcy Code in 1996.
John G. Murray, age 44, has served as Vice President--Finance since July
1997. Prior thereto, he was a consultant to us from July 1996 to July 1997 and
served as our Vice President and Assistant Treasurer 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 Corporation 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.
Mr. Murray also serves as a member of the Board of Managers of Chemlink
Laboratories, LLC.
Grady E. Schleier, age 47, has served as Vice President and Treasurer since
November 1995. Effective as of June 28, 1999, Mr. Schleier also became our Chief
Financial Officer. He also served as Vice President and Treasurer of FoxMeyer
Corporation 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 ours, 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. Mr. Schleier also serves as a director of Presby Corp., a
subsidiary of RAS Holding Corp.
Robert H. Stone, age 39, has served as our Vice President, General Counsel
and Secretary since November 1996. From November 1994 to November 1996, he
served as Associate General Counsel and Assistant Secretary of us, FoxMeyer
Corporation and FoxMeyer Drug Company. Mr. Stone was an attorney with the law
firm of Jones, Day, Reavis & Pogue from 1986 to November 1994.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our directors, executive
officers and persons who beneficially own more than 10 percent of a registered
class of our equity securities to file reports of beneficial ownership and
changes in beneficial ownership with the SEC. Directors, executive officers and
10% owners are also required by SEC rules to furnish us with copies of all forms
they file pursuant to Section 16(a).
Based only upon a review of the copies of the forms filed pursuant to
Section 16(a) furnished to us, or written representations that no year-end Form
5 filings were required for transactions occurring during fiscal 1999, we
believe that our directors, executive officers and 10% owners complied with
Section 16(a) filing requirements during fiscal 1999 and prior fiscal years,
except that United Equities Commodities Company, Momar Corporation and Moses
Marx (collectively, "United") is a 10% owner which increased their beneficial
ownership of our common stock, $5 Preferred Stock and $4.20 Preferred Stock
during fiscal 1999 and did not furnish us with a Form 4 with respect to that
increase.
III-5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information about the compensation of our
Co-Chief Executive Officers and our next three most highly compensated executive
officers:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(A) ---------------------
------------------------------------------- AWARDS
OTHER ---------- PAYOUTS
ANNUAL SECURITIES ------- ALL OTHER
COMPENSA- UNDERLYING LTIP COMPENSA-
NAME AND FISCAL BONUS TION OPTIONS/ PAYOUTS TION
PRINCIPAL POSITION YEAR SALARY($) ($) ($) SARS(#) ($) ($)(B)
- ------------------------------------- ------ --------- ------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbey J. Butler(C) .................. 1999 790,484 203,900 -- 410,000 0 130,445
Co-Chairman of the 1998 370,833 750,000 -- 400,000 451,404 26,751
Board and Co-Chief 1997 649,765 0 -- 994,640 0 17,773
Executive Officer
Melvyn J. Estrin(C) ................. 1999 790,484 203,900 -- 410,000 0 112,269
Co-Chairman of the 1998 370,833 750,000 -- 400,000 451,404 7,064
Board and Co-Chief 1997 649,765 0 -- 994,640 0 7,274
Executive Officer
Edward L. Massman(D) ................ 1999 300,000 100,000 -- 0 0 6,170
Former Senior Vice President 1998 237,500 600,000 -- 400,000 341,973 7,410
and Chief Financial Officer 1997 203,364 500,000 -- 52,000 0 4,184
Robert H. Stone(E) .................. 1999 200,000 0 -- 0 0 5,741
Vice President, General 1998 158,333 300,000 -- 100,000 177,826 6,728
Counsel and Secretary 1997 129,200 80,400 -- 21,834 0 2,360
Grady E. Schleier(F) ................ 1999 200,000 0 -- 0 0 5,643
Vice President, Chief 1998 158,333 200,000 -- 100,000 177,826 6,784
Financial Officer and 1997 153,168 82,500 -- 20,000 0 3,199
Treasurer
</TABLE>
- ------------------
(A) The amounts listed under fiscal 1999 consist of compensation we paid during
fiscal 1999 and that Phar-Mor paid during its fiscal year ended June 27,
1998. This is the most recent fiscal year for which we have available
information. No amounts are provided under the column entitled "Other Annual
Compensation" because the aggregate amount of perquisites and personal
benefits did not exceed the lesser of $50,000 or 10 percent of such
executive officer's total salary and bonus for the fiscal year.
(B) In fiscal 1999, All Other Compensation consisted of: (v) for Mr. Butler,
(i) $7,094 for company-paid split-dollar life insurance, (ii) $1,656 for
company-paid term life insurance, (iii) $4,904 in company matching
contributions to its Employees' Savings and Profit Sharing Plan (the
"401(k) PLAN"), (iv) $111,691 for Phar-Mor-paid life insurance premiums, and
(v) $5,100 in Phar-Mor contributions to its non-qualified deferred
compensation plan; (w) for Mr. Estrin, (i) $6,435 for company-paid
split-dollar life insurance, (ii) $1,656 for company-paid term life
insurance, (iii) $99,078 for Phar-Mor-paid life insurance premiums, and
(iv) $5,100 in Phar-Mor contributions to its non-qualified deferred
compensation plan; (x) for Mr. Massman, (i) $4,928 in company matching
contributions to the 401(k) Plan and (ii) $1,242 for company-paid term life
insurance; (y) for Mr. Stone, (i) $4,913 in company matching contributions
to the 401(k) Plan and (ii) $828 for company-paid term life insurance; and
(z) for Mr. Schleier, (i) $4,856 in company matching contributions to the
401(k) Plan and (ii) $787 for company-paid term life insurance. In fiscal
1998, All Other Compensation consisted of: (v) for Mr. Butler, (i) $17,897
for company-paid split-dollar life insurance, (ii) $1,268 for company-paid
term life insurance and (iii) $7,586 in company matching contributions to
the 401(k) Plan; (w) for Mr. Estrin, (i) $5,796 for company-paid
split-dollar life insurance and (ii) $1,268 for company-paid term life
insurance; (w) for Mr. Massman, (i) $6,553 in company matching contributions
to the 401(k) Plan and (ii) $857 for company-paid term life insurance;
(y) for Mr. Stone, (i) $6,163 in company matching contributions to the
401(k) Plan and (ii) $565 for company-paid term life insurance; and (z) for
Mr. Schleier, (i) $6,192 in company matching contributions to the
401(k) Plan and (ii) $592 for company-paid term life insurance. In fiscal
1997, All Other Compensation consisted of: (x) for Mr. Butler (i) $13,619
for company-paid split-dollar life insurance and (ii) $4,154 in company
matching contributions to FoxMeyer Corporation's 401(k) plan; (y) for
Mr. Estrin, (i) $3,120 for company-paid split-dollar life insurance and
(ii) $4,154 in company matching contributions by FoxMeyer Corporation to its
401(k) plan through November 1996; and (z) for Messrs. Massman, Stone and
Schleier, matching contributions by FoxMeyer Corporation to its 401(k) plan
through November 1996. The de minimis amounts of FoxMeyer Corporation paid
term life insurance during fiscal 1997 are not readily available to us and
are not included in the table.
(Footnotes continued on next page)
III-6
<PAGE>
(Footnotes continued from previous page)
(C) In fiscal 1999, we paid Mr. Butler and Mr. Estrin each $475,000 in salary
and they each received $315,484 in salary and a $203,900 bonus from
Phar-Mor, and were each granted options to purchase 410,000 shares of
Phar-Mor common stock. In fiscal 1998, we paid all of the compensation
received by Mr. Butler and Mr. Estrin and they were each granted options to
purchase 400,000 shares of our common stock. In fiscal 1997, Mr. Butler and
Mr. Estrin each received $350,000 from us, $231,314 from FoxMeyer
Corporation, and $68,451 from Ben Franklin Retail Stores, Inc., and all of
the options to purchase 994,640 shares of our common stock that were
previously granted to each of Mr. Butler and Mr. Estrin, including options
to purchase 99,440 shares of our common stock that expired in fiscal 1997,
were repriced and/or replaced by us. In addition, in fiscal 1997,
Mr. Butler and Mr. Estrin received severance payments from McKesson, which
assumed FoxMeyer Corporation's obligations under their respective employment
agreements with FoxMeyer Corporation in connection with McKesson's
acquisition of substantially all of the assets of FoxMeyer Corporation and
FoxMeyer Drug Company.
In addition, Mr. Butler and Mr. Estrin have each received compensation for
serving as outside directors of the following companies in which we own an
interest. In fiscal 1999, (i) Carson, Inc. awarded Mr. Butler 22,125 shares
and Mr. Estrin 10,125 shares of restricted stock and granted each of them
options to purchase 5,000 shares of common stock and (ii) Caring
Technologies, Inc. granted Mr. Estrin options to purchase 20,000 shares of
common stock. In fiscal 1998, (i) Phar-Mor paid each of Mr. Butler and
Mr. Estrin $12,500 as his pro rata portion of annual director fees, plus per
meeting fees, and granted each of them options to purchase 10,000 shares of
common stock and credited each with 7,703 shares of common stock under its
Phantom Stock Plan, (ii) Imagyn Medical Technologies, Inc. paid each of
Mr. Butler and Mr. Estrin $21,000 in director fees and granted each of them
options to purchase 7,500 shares of common stock, (iii) Carson, Inc. awarded
each of Mr. Butler and Mr. Estrin 2,710 shares of restricted stock and
options to purchase 5,000 shares of common stock, and (iv) Caring
Technologies, Inc. granted Mr. Estrin options to purchase 10,000 shares of
common stock. In fiscal 1997, (i) Phar-Mor paid each of Mr. Butler and
Mr. Estrin $25,000 in annual director fees, plus per meeting fees, and
granted each of them options to purchase 5,000 shares of common stock and
credited each with 4,050 shares of common stock under its Phantom Stock
Plan, (ii) Imagyn Medical Technologies, Inc. paid each of Mr. Butler and
Mr. Estrin $11,000 and $10,000 in director fees, respectively, and granted
each of them options to purchase 7,500 shares of common stock, and
(iii) Carson, Inc. granted each of Mr. Butler and Mr. Estrin options to
purchase 1,500 shares of common stock. In addition, Mr. Butler served as an
outside director of CST Entertainment, Inc. during fiscal 1997, and we have
been unable to obtain any information from CST Entertainment, Inc. regarding
director fees because it liquidated its assets and filed for relief under
Chapter 7 of the Bankruptcy Code during fiscal 1997.
(D) FoxMeyer Drug Company paid all compensation through November 1996, including
$100,000 pursuant to an August 8, 1996 incentive agreement. In fiscal 1997,
we paid $300,000 and assigned to Mr. Massman a 50% interest in all amounts
received by us from the proceeds of any sale of any assets of, or our
interests in, the Alumet Partnership. As of the date of the assignment, its
fair market value was estimated to be $100,000. Certain mineral rights of
the Alumet Partnership were subsequently sold in fiscal 1998, thereby
increasing the value of the assignment. Mr. Massman was separated from us
effective as of June 28, 1999.
(E) FoxMeyer Drug Company paid all compensation through November 1996, including
a $5,400 stay pay bonus.
(F) FoxMeyer Drug Company paid all compensation through November 1996, including
a $7,500 stay pay bonus.
OPTION/SAR GRANTS IN FISCAL YEAR 1999 TO OUR EXECUTIVE OFFICERS
We did not grant any options during fiscal 1999 to any of our executive
officers.
AGGREGATE OPTIONS/SAR-EXERCISES IN FISCAL 1999 BY EXECUTIVE OFFICERS AND FISCAL
YEAR-END OPTION/SAR VALUES
The executive officers named in the Summary Compensation Table did not
exercise any options during fiscal 1999. Because the market value of our common
stock on March 31, 1999 was less than the exercise price of all of the
outstanding options held by the named executive officers, there were no
in-the-money unexercised options held at the end of fiscal 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS/SAR'S AT FY-END
(#)
------------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------- ----------- -------------
<S> <C> <C>
Abbey J. Butler..................................... 1,127,973 266,667
Melvyn J. Estrin.................................... 1,127,973 266,667
Edward L. Massman................................... 185,333 266,667
Robert H. Stone..................................... 55,167 66,667
Grady E. Schleier................................... 53,333 66,667
</TABLE>
III-7
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
Our Performance Incentive Plan (the "INCENTIVE PLAN") previously provided
for the distribution of amounts to participants based on specified percentages
of (a) Net Income (as defined in the Incentive Plan) and (b) Litigation Income,
which consists of net income generated in connection with the McKesson
litigation. In fiscal 1998, we granted awards which total 17.5% of any future
Litigation Income to all participants, and the Incentive Plan provides that
neither the percentage of Litigation Income nor the percentage award levels
applicable to such participants can be changed in any manner whatsoever,
irrespective of when Litigation Income is accrued or received by us, unless the
participant has voluntarily terminated his or her employment with us or is
terminated by us for cause. Thus, although the Incentive Plan has not been
renewed with respect to Net Income for the fiscal year beginning April 1, 1999,
the Incentive Plan continues to be effective with respect to Litigation Income.
See "Information Regarding Avatex-Avatex Performance Incentive Plan" for a
description of the operation of the Incentive Plan.
EMPLOYMENT AND INDEMNIFICATION AGREEMENTS
Avatex
Abbey J. Butler and Melvyn J. Estrin, our Co-Chairmen and Co-Chief
Executive Officers, each has an employment agreement with us 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 our Board. Mr. Butler and Mr. Estrin
are also entitled to participate in the benefits generally available to our
senior executives, 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 us, 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 us is terminated "Without Just
Cause" (as such term is defined in the agreements, including, among other
things, in the event of a change of control of our 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%) of 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 payment of certain allocated
office overhead expenses, payment of premiums payable by us 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:
(1) 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 our common
stock, or
(y) securities representing thirty-five percent (35%) of the combined
voting power of our then outstanding voting securities; or
(2) during any period of two consecutive years, individuals who at the
beginning of such period constitute our Board cease, at any time after
the beginning of such period, for any reason to constitute a majority
of our Board, 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.
Each of Messrs. Butler and Estrin have agreed to amend their respective
employment agreements concurrently with the closing of the merger to defer
payment of severance or other benefits if his employment with us terminated
without just cause, provided that (i) the deferral will not apply to any
termination resulting from the change-in-control events described in
clauses (1) and (2) of the preceding paragraph (other than as a result of the
merger, in which case no severance or other benefits will be paid or deferred,
or actions involving Phar-Mor or other entities affiliated with Mr. Butler or
Mr. Estrin, in which
III-8
<PAGE>
case severance and other benefits will be deferred), and (ii) any severance and
other benefits that are deferred will be paid after the promissory note due
October 2000 that we issued to the trustee for the bankruptcy estates of
FoxMeyer Corporation and FoxMeyer Drug Company and the 6.75% notes are paid or
otherwise satisfied.
Edward L. Massman, our former Senior Vice President and Chief Financial
Officer, entered into a Separation Agreement with us, effective as of June 28,
1999. As of June 28, 1999, Mr. Massman was no longer an employee of ours. In
full satisfaction of our obligations under Mr. Massman's prior employment
agreement with us, Mr. Massman was paid $50,000 as a prorated portion of his
contractual bonus that would otherwise be payable in November 1999. We are also
obligated to pay Mr. Massman a bonus of $150,000 for each of the next two years.
We have already paid the first $150,000 payment to Mr. Massman. In addition, for
each of our fiscal years ending on March 31, 2000 and March 31, 2001 (or, in
certain limited circumstances, for the fiscal year ending on March 31, 2002), we
will pay Mr. Massman an amount equal to the total amount of bonuses paid and/or
accrued by us with respect to our General Counsel and our Chief Financial
Officer for the applicable fiscal year. Mr. Massman will also generally retain
his existing options to purchase our common stock, which will be exercisable
until their expiration dates in 2002, and his existing 2.86% interest in
Litigation Income under our Performance Incentive Plan.
Robert H. Stone, our Vice President, General Counsel and Secretary, has an
employment agreement with us dated as of November 12, 1996, and amended
effective as of February 1, 1998. Under his 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 our senior
executives. If Mr. Stone's employment with us is terminated "Without Cause" (as
such term is defined in the agreement), he would be entitled to receive, at his
option (1) 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 (2) monthly severance payments for a period of eighteen months. In
addition, under his agreement, in fiscal 1997 we paid Mr. Stone $75,000 in
respect of his agreement to be employed by us and thereby forego additional
compensation and severance benefits to which he was entitled under his
Employment Agreement with FoxMeyer Corporation, which had been assumed by
McKesson.
Grady E. Schleier, our Vice President, Chief Financial Officer and
Treasurer, and John G. Murray, our Vice President--Finance, each has an
employment agreement with us that is substantively identical to the employment
agreement described above between us and Mr. Stone.
Each executive officer has entered into an indemnification agreement with
us dated as of October 23, 1997. Each agreement terminates upon the later of
(1) ten years following the date that such officer ceases to serve in his
capacity with us, any of our majority-owned subsidiaries, other of our
enterprises or an employee benefit plan or trust related thereto on which such
officer served at our request and (2) the final termination of any proceeding to
which indemnification or advancement of expenses relates pursuant to such
agreements. Under each indemnification agreement, the executive officer is
entitled to indemnification for damages and expenses in any proceeding involving
us (whether or not brought by or in our right), 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, we
are 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 that 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
III-9
<PAGE>
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 Phar-Mor 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 27, 1998; provided, however, that if the performance objectives are
exceeded, then 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, which options vest with respect
to 33.34% of the underlying shares on the date of grant (October 1, 1997), and
with respect to an additional 33.33% on each of the first and second
anniversaries of the date of grant. The term of the options is seven years and,
unless Messrs. Butler and Estrin elect otherwise, to the fullest extent
permitted by law and under the plan, such options will be treated and reported
as incentive stock options. Each of Messrs. Butler and Estrin was granted
incentive stock options to purchase 200,000 shares of common stock of Phar-Mor
at an exercise price of $9.625 per share on June 23, 1998 on terms similar to
the earlier grants.
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 (1) 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 (2) 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 is 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, among others, 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.
Each of the agreements with Messrs. Butler and Estrin provides that, if
their employment is terminated without cause (as defined), 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 the "Black-Scholes' Formula"), tax reimbursement in respect of any
termination payments
III-10
<PAGE>
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 Committee of our Board 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 of the Board and is a shareholder of Cyclone,
Incorporated. Abbey J. Butler is our Co-Chairman and Co-Chief Executive Officer
and serves in the same capacity for our subsidiary, M&A Investments, Inc.
Mr. Butler is also a director of Cyclone Incorporated.
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 our executive officers consists of base salary, annual
performance incentive payments, long-term incentive awards, stock option grants,
and participation in our 401(k) Plan and other employee health and welfare
benefit plans. Executive officers are also eligible to receive discretionary
bonuses as an incentive for superior performance. The goals of our executive
compensation policy are to motivate and reward our executive officers for
overseeing and managing our 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
attempts to recognize our unique financial history during the past three years,
as well as the extensive knowledge of our executive officers with respect to the
events and circumstances which occurred during that time. Absent the continued
employment of and involvement by these individuals, the Finance Committee
believes that we would be significantly hindered, if not entirely precluded,
from moving forward effectively on our most critical strategies and initiatives.
In particular, these individuals have extensive and critical knowledge and
experience regarding the facts and circumstances underlying:
(a) the McKesson litigation;
(b) the consolidated class action shareholder lawsuits pending against us
in federal and state court in Dallas, which relate to actions of
ourselves and FoxMeyer Corporation that occurred in 1995 and 1996; and
(c) the FoxMeyer Trustee's lawsuits against certain third parties that
significantly harmed the FoxMeyer entities, of which 30% of the
proceeds are payable to us and are pledged as collateral by us to
secure our $8 million obligation to the FoxMeyer Trustee.
In addition, a number of the executive officers were instrumental in bringing
certain investment opportunities to our attention. The Finance Committee
believes that the involvement of these and other executive officers is and will
continue to be essential to the ongoing development of, and ultimate realization
of value from, these investments.
During fiscal 1999, each of our officers and key employees was paid a
specified salary pursuant to the terms of his or her employment agreement with
us. All of these employment agreements were executed and/or amended prior to
fiscal 1999. Except with respect to a contractual bonus paid to our former
Senior Vice President and Chief Financial Officer and fiscal 1998 bonuses that
were paid in May 1998, the Finance Committee did not approve, and we did not
pay, any bonus to any of our officers and key employees for fiscal 1999.
III-11
<PAGE>
Our officers and key employees were also covered by the Incentive Plan
during fiscal 1999. The Incentive Plan, which was adopted and approved by the
Finance Committee beginning in fiscal 1997, provided for a fixed percentage of
our Net Income and Litigation Income (as such terms are defined in the Incentive
Plan) to be paid to such officers and employees based on a fixed allocation
schedule. There was no Net Income or Litigation Income under the Incentive Plan
during fiscal 1999 and, accordingly, no amounts were awarded or paid to any
persons thereunder. With respect to fiscal 2000, the Finance Committee has
recently determined that the Incentive Plan provisions regarding Net Income will
not be renewed, and that bonuses, if any, should be awarded and paid on a
discretionary basis. The Incentive Plan's provisions regarding Litigation
Income, however, provide that awards granted in prior fiscal years may not be
changed. Accordingly, to the extent that we receive any net recovery from the
McKesson litigation in fiscal 2000 and future years, our executive officers and
key employees will receive incentive payments based on awards granted in fiscal
1998.
Co-Chief Executive Officers
The finance committee also makes compensation decisions regarding Abbey J.
Butler and Melvyn J. Estrin, our Co-Chief Executive Officers. During fiscal
1999, in accordance with amendments to their respective employment agreements
entered into in fiscal 1998, we paid each of Messrs. Butler and Estrin an annual
salary of $475,000. With respect to other annual compensation, Messrs. Butler
and Estrin were treated substantially the same as our other executive officers.
The Finance Committee did not approve, and we did not pay, any bonus to either
Mr. Butler or Mr. Estrin for fiscal 1999, whether under the Incentive Plan or
otherwise.
Section 162(m) of the Code limits the deductibility on our tax return of
compensation over $1 million to any of our 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 stockholders. Because the
compensation of certain executive officers may exceed $1 million in any one
year, the Code may limit the deductibility of such compensation unless an
exception to such limitation is available. In such event, and because of the
uncertainties surrounding the application and interpretation of these limits, no
assurance can be given that any such compensation will be fully deductible. In
addition, we and each of Messrs. Butler and Estrin have entered into amendments
to their respective employment agreements that contain certain severance
provisions applicable in the event of a change of control of our corporation. To
the extent benefits received by Messrs. Butler or Estrin 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 us and the amount of the
parachute payments will reduce the $1 million limit under Section 162(m).
JOHN L. WINEAPPLE (CHAIRMAN)
FRED S. KATZ
WILLIAM A. LEMER
III-12
<PAGE>
PERFORMANCE GRAPH
The following table compares the performance of our common stock, the
Standard & Poor's 500 Index and the Standard & Poor's SmallCap 600 Index for our
last five fiscal years. The table assumes that $100 was invested on April 1,
1994, and that all dividends were reinvested.
[LINE GRAPH]
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------
4/1/94 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Avatex.................................. $ 100.00 $ 121.09 $ 113.28 $ 6.25 $ 12.89 $ 6.25
S&P 500 Index........................... 100.00 115.57 152.67 182.93 270.74 320.71
S&P SmallCap 600........................ 100.00 105.28 138.11 149.70 221.07 186.08
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of , 1999
with respect to the beneficial ownership of our common stock by:
o persons believed by us to be the beneficial owners of more than 5% of the
outstanding shares of our common stock;
o all directors and nominees for election as directors;
o each of the named executive officers; and
o all directors and named executive officers as a group.
The number of shares of our common stock beneficially owned by each
individual set forth below is determined under SEC rules, and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
these 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 [ , 1999], 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 our common
stock set forth in the following table.
III-13
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES
NUMBER OF NUMBER OF NEW PERCENTAGE OF PERCENTAGE OF
SHARES OF PERCENTAGE OF SHARES THAT COMMON STOCK OUTSTANDING OUTSTANDING
COMMON STOCK OF MAY BE ACQUIRED TO BE SHARES SHARES
NAME AND ADDRESS BENEFICIALLY OUTSTANDING WITHIN SIXTY BENEFICIALLY ASSUMING 50% ASSUMING 75%
OF BENEFICIAL OWNER(1) OWNED(2) SHARES(3) DAYS(2) OWNED(4) ELECTION(5) ELECTION(6)
- ----------------------------------- ------------ ----------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Centaur Group(8)
c/o Centaur Partners IV
17 Battery Place, Suite 709
New York, New York 10004......... 1,504,055 8.6% 0 1,504,055 4.2% 5.7%
<CAPTION>
DIRECTORS AND NOMINEES FOR DIRECTOR
(INCLUDING THOSE WHO ARE ALSO
EXECUTIVE OFFICERS):
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Abbey J. Butler(9)................. 2,765,361 15.8% 1,261,306 2,765,361 7.8% 10.6%
Melvyn J. Estrin(9)................ 2,769,117 15.8% 1,261,306 2,769,117 7.8% 10.6%
Hyman H. Frankel................... 16,000 * 16,000 16,000 * *
Fred S. Katz....................... 16,000 * 16,000 16,000 * *
William A. Lemer................... 16,000 * 16,000 16,000 * *
Charles C. Pecarro................. 16,000 * 16,000 16,000 * *
John L. Wineapple.................. 21,000 * 16,000 21,000 * *
Ralph DellaCamera, Jr.(10)......... 0 0.0% 0 0 0% 0%
Daniel Gropper(10)................. 0 0.0% 0 0 0% 0%
Vincent Intrieri(10)............... 0 0.0% 0 0 0% 0%
Brian Miller(10)................... 0 0.0% 0 0 0% 0%
<CAPTION>
NAMED EXECUTIVE OFFICERS:
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Massman.................. 318,666 1.8% 318,666 318,666 * 1.2%
Robert H. Stone.................... 88,500 * 88,500 88,500 * *
Grady E. Schleier.................. 86,666 * 86,666 86,666 * *
All Directors and Named Executive
Officers as a Group.............. 4,609,255 26.3% 3,096,444 4,609,255 13.0 17.6%
<CAPTION>
OTHER HOLDERS(11):
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
BEA Associates
153 East 53rd Street
New York, NY 10022............... 712,000 4.1% 0 712,000 2.0% 2.7%
Elliott Associates, L.P.(10)(13)
712 Fifth Ave. 36th Floor
New York, NY 10019............... 633,951 3.6% 216,351 0 0% 0%
Westgate International,
L.P.(10)(13)
712 Fifth Avenue, 36th Floor
New York, NY 10019............... 416,300 2.4% 0 0 0% 0%
National Intergroup, Inc.
Retirement Program and Davenport,
Inc. Pension Plan................ 1,361,500 7.8% 0 1,361,500 3.8% 5.2%
Phar-Mor, Inc.(13)
20 Federal Plaza West
P O Box 400
Youngstown, Ohio 44501........... 2,086,200 11.9% 0 4,948,600 13.9% 18.9%
United Equities Commodities
Company, et. al.(12)(13)
160 Broadway
New York, NY 10038............... 2,444,003 13.9% 415,503 0 0% 0%
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES
NAME AND ADDRESS ASSUMING 100%
OF BENEFICIAL OWNER(1) ELECTION(7)
- ----------------------------------- -------------
<S> <C>
The Centaur Group(8)
c/o Centaur Partners IV
17 Battery Place, Suite 709
New York, New York 10004......... 8.9%
<CAPTION>
DIRECTORS AND NOMINEES FOR DIRECTOR
(INCLUDING THOSE WHO ARE ALSO
EXECUTIVE OFFICERS):
- -----------------------------------
<S> <C>
Abbey J. Butler(9)................. 16.4%
Melvyn J. Estrin(9)................ 16.4%
Hyman H. Frankel................... *
Fred S. Katz....................... *
William A. Lemer................... *
Charles C. Pecarro................. *
John L. Wineapple.................. *
Ralph DellaCamera, Jr.(10)......... 0%
Daniel Gropper(10)................. 0%
Vincent Intrieri(10)............... 0%
Brian Miller(10)................... 0%
<CAPTION>
NAMED EXECUTIVE OFFICERS:
- -----------------------------------
<S> <C>
Edward L. Massman.................. 1.9%
Robert H. Stone.................... *
Grady E. Schleier.................. *
All Directors and Named Executive
Officers as a Group.............. 27.3%
<CAPTION>
OTHER HOLDERS(11):
- -----------------------------------
<S> <C>
BEA Associates
153 East 53rd Street
New York, NY 10022............... 4.2%
Elliott Associates, L.P.(10)(13)
712 Fifth Ave. 36th Floor
New York, NY 10019............... 0%
Westgate International,
L.P.(10)(13)
712 Fifth Avenue, 36th Floor
New York, NY 10019............... 0%
National Intergroup, Inc.
Retirement Program and Davenport,
Inc. Pension Plan................ 8.1%
Phar-Mor, Inc.(13)
20 Federal Plaza West
P O Box 400
Youngstown, Ohio 44501........... 29.3%
United Equities Commodities
Company, et. al.(12)(13)
160 Broadway
New York, NY 10038............... 0%
</TABLE>
- ------------------
* Indicates less than 1%.
(1) Except as provided in the table, the business address of the directors and
executive officers, the National Intergroup, Inc. Retirement Program, and the
Davenport, Inc. Pension Plan is c/o Avatex Corporation, 5910 North Central
Expressway, Suite 1780, Dallas, Texas 75206.
(Footnotes continued on next page)
III-14
<PAGE>
(Footnotes continued from previous page)
(2) Includes shares of common stock underlying $5 Preferred Stock and options
that are exercisable within 60 days of , 1999.
(3) Percentages are based on a total of 17,534,785 shares of common stock,
which consists of (a) 13,806,487 shares outstanding as of July 31, 1999,
(b) 3,096,444 shares underlying options that are exercisable within 60 days of
, 1999 held by directors and named executive officers, and
(c) 631,854 shares into which the $5 Preferred Stock held by the entities listed
in the Table is convertible.
(4) These amounts assume that the merger and Phar-Mor's purchase of a total of
2,862,400 shares of our common stock from Elliott Associates, Westgate
International, Moses Marx, Momar Corporation and United Equities Commodities
Company are completed, and exclude warrants to purchase New Avatex Common Stock.
(5) Assumes that holders of 50% of the $5 Preferred Stock elect to receive the
$5 Preferred Stock Alternate Consideration and holders of 50% of the $4.20
Preferred Stock elect to receive the $4.20 Preferred Stock Alternate
Consideration. Percentages are based on 35,520,603 shares of common stock
outstanding, which consists of (a) 13,806,487 shares outstanding as of the
record date, (b) 3,096,444 shares underlying options that are exercisable within
60 days of the record date, (c) 2,978,931 shares issuable in exchange for
326,136.5 shares of $5 Preferred Stock (i.e., one-half of the outstanding shares
of $5 Preferred Stock), and (d) 15,638,741 shares issuable in exchange for
2,156,175.5 shares of $4.20 Preferred Stock (i.e., one-half of the outstanding
shares of $4.20 Preferred Stock).
(6) Assumes that holders of 75% of $5 Preferred Stock elect to receive the $5
Preferred Stock Alternate Consideration and holders of 75% of the $4.20
Preferred Stock elect to receive the $4.20 Preferred Stock Alternate
Consideration. Percentages are based on 26,211,766 shares of common stock
outstanding, which consists of (a) 13,806,487 shares outstanding as of the
record date, (b) 3,096,444 shares underlying options that are exercisable within
60 days of the record date, (c) 1,489,465 shares issuable in exchange for
163,068 shares of $5 Preferred Stock (i.e., one-quarter of the outstanding
shares of $5 Preferred Stock), and (d) 7,819,370 shares issuable in exchange for
1,078,087.75 shares of $4.20 Preferred Stock (i.e., one-quarter of the
outstanding shares of $4.20 Preferred Stock).
(7) Assumes that holders of 100% of the $5 Preferred Stock elect to receive the
$5 Preferred Stock Alternate Consideration and holders of 100% of the $4.20
Preferred Stock elect to receive the $4.20 Preferred Stock Alternate
Consideration. Percentages are based on 16,902,931 shares of common stock
outstanding, which consists of (a) 13,806,487 shares outstanding as of the
record date and (b) 3,096, 444 shares underlying options that are exercisable
within 60 days of the record.
(8) The Centaur Group is comprised of Messrs. Butler and Estrin, Centaur
Partners IV, a New York general partnership, 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 Partners 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 our common
stock, which are held directly by the persons and entities described above as
follows:
o Centaur Partners IV, 1,000 shares;
o Mr. Butler, 1,185,600 shares;
o 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
o Estrin Equities, 7,000 shares.
Pursuant to the terms of the Centaur Partners IV partnership agreement,
neither Estrin Equities nor Butler Equities may acquire or dispose of shares of
our common stock without the consent of Centaur Partners IV. In addition,
pursuant to the Centaur Partners IV partnership agreement, Estrin Equities and
Butler Equities must vote all shares of our common stock owned by each such
entity as directed by Centaur Partners IV. Accordingly, Centaur Partners 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 Partners IV
partnership agreement. Messrs. Estrin and Butler, acting together, manage the
affairs of Centaur Partners IV and have the authority to make all decisions
concerning Centaur Partners IV's interest in our common stock.
Estrin Equities disclaims beneficial ownership of the shares of our common
stock owned by Mr. Butler individually, and Butler Equities disclaims beneficial
ownership of the shares of our common stock owned by Estrin Equities and
Mr. Estrin individually.
(9) Includes beneficial ownership of our common stock through The Centaur Group
and, for Mr. Estrin, 3,756 shares of our common stock owned through FoxMeyer
Corporation's 401(k) plan.
(10) Elliott Associates and Westgate International stated in filings with the
SEC that Paul E. Singer and Braxton Associates, L.P., which is controlled by
Mr. Singer, are the general partners of Elliott Associates and that Hambledon,
Inc. is the sole general partner of Westgate International. Messrs. Gropper and
Miller are employees of Stonington Management Corp., and Messrs. DellaCamera and
Intrieri were formerly employees of Stonington Management Corp. Stonington
Management Corp. is also controlled by Mr. Singer. Elliott Associates, Westgate
International and Martley International, Inc. have acted as a group (within the
meaning of Rule 13d-1 of the Exchange Act) for the purpose of acquiring our
securities. Martley International, Inc. is the investment advisor for Westgate
International. Martley International, Inc. disclaims equitable ownership of and
pecuniary interest in our common stock. Mr. Singer is the president of Martley
International, Inc. The business address of Messrs. Gropper and Miller is
Elliott Associates, L.P., 712 Fifth Ave., 36th Floor, New York, NY 10019. The
business address of Mr. DellaCamera is Brean Murray & Co. Inc., 570 Lexington
Avenue, New York, NY 10002. The address of Mr. Intrieri is 235 East
95th Street, Apt. 17B-C, New York, NY 10128.
(Footnotes continued on next page)
III-15
<PAGE>
(Footnotes continued from previous page)
(11) The information provided for "Other Holders" is based on Schedule 13D and
Schedule 13G reports filed with the SEC and other written information provided
to us.
(12) United stated in filings with the SEC that Moses Marx, as a result of his
position with and ownership interest in United Equities Commodities Company and
Momar Corporation, could be deemed to have voting and/or investment power with
respect to our shares beneficially owned by those entities.
(13) We have been advised that Elliott Associates, Westgate International and
United have entered into a stock purchase agreement, dated June 18, 1999, with
Phar-Mor. Subject to the completion of the merger, Phar-Mor has agreed to
purchase the 2,862,400 shares of our common stock owned by Elliott Associates,
Westgate International and United for $2.00 per share, with the closing to
occur simultaneously with the closing of the merger. The remaining shares of our
common stock that are beneficially owned by Elliott Associates, Westgate
International and United are based on their respective ownership of $5 Preferred
Stock. Pursuant to the Elliott/Marx Stockholders' Agreement, the holders of
these shares will make alternate consideration elections.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With respect to Hyman H. Frankel, Ph.D., who is a director of ours, see
"--Compensation of Directors." With respect to Fred S. Katz, who is a director
of ours, see "--Compensation Committee Interlocks and Insider Participation."
In April 1998, 13 persons and entities (the "PURCHASERS") committed to
purchase a total of $3 million of Series B preferred stock of RAS Holding Corp.
The securities were purchased in three separate closings that occurred in April
1998, July 1998 and February 1999. The Purchasers also received warrants to
purchase additional shares of Series B convertible preferred stock for an
aggregate exercise price of $2 million. The Purchasers included us; Cabot Noble,
Inc., which is a wholly-owned subsidiary of Phar-Mor; all of our executive
officers and our Director of Accounting (and/or their designees); one of our
non-officer directors, Charles Pecarro; and two additional parties related to,
or referred to by, Abbey Butler or Melvyn Estrin. Of the total amount invested,
our share was approximately 46.7%, Cabot Noble Inc.'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 ours (or his designee) was 5% of the total amount
invested. Mr. Butler and Mr. Estrin are directors of RAS Holding Corp., and
Mr. Butler and Mr. Schleier are directors of Presby Corp., a RAS Holding Corp.
subsidiary.
In April 1999, RAS Holding Corp. distributed to its stockholders, including
the Purchasers, shares of common stock in two RAS Holding Corp. subsidiaries,
PC Lens Corp. and Medical Internet Technologies, Inc. These stockholders also
purchased additional shares of common stock of these entities based on the
number of shares they were entitled to purchase had they exercised their
warrants to purchase RAS Holding Corp. preferred stock. The purchase price for
these shares was based on their $.001 par value per share. In addition, we are a
party to a consulting agreement with RAS Holding Corp., under which we provide
certain financial, accounting and other management consulting services to
RAS Holding Corp. and also license to RAS Holding Corp. a portion of the office
space leased by us in Dallas, Texas.
In April 1998, Cabot Noble, Inc. and we each purchased $1.25 million of
preferred stock of HPD Holdings Corp. in connection with the acquisition by a
HPD Holdings Corp. subsidiary of certain assets of Block Drug Company, Inc. used
in or related to the manufacture, sale or distribution of its household product
lines. In addition, Cabot Noble, Inc. and we each acquired 2.5% of the common
stock of HPD Holdings Corp. as part of the transaction. The largest shareholder
of HPD Holdings Corp. is HPD Holdings Corp. Partners, LP, a Delaware limited
partnership, and Mr. Butler and Mr. Estrin are limited partners of
HPD Partners, LP and directors of HPD Holdings Corp.
In March and December 1998, certain persons and entities purchased a total
of $7.2 million of membership interests in Chemlink Acquisition Company, LLC,
which in turn purchased a total of 50% of the membership interests in Chemlink
Laboratories LLC. These persons and entities included us; Phar-Mor; four of our
officers, Mr. Butler, Mr. Estrin, Mr. Massman and Mr. Schleier (and/or their
designees); one of our non-officer directors, Mr. Pecarro; and five additional
parties related to, or referred to by, Mr. Butler or Mr. Estrin. Of the total
amount invested in Chemlink Acquisition Company, LLC, our share was
approximately 41.1%, Phar-Mor's share was approximately 35.8%, the
officers/designees' share was approximately 14.4%, the non-officer director's
share was approximately 0.7%, and the related parties' share
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was approximately 8.0%. The largest share invested by an officer or director of
ours (or his designee) was approximately 6.1% of the total amount invested. In
May 1999, each of the members of Chemlink Acquisition Company, LLC, along with
the other members of Chemlink Laboratories LLC (or their respective
stockholders), loaned a total of $250,000 to Chemlink Laboratories LLC on a pro
rata basis based on their ultimate ownership interests in Chemlink Laboratories
LLC, in the form of one-year interest bearing notes. Messrs. Butler, Estrin,
Murray and Massman are members of the Board of Managers of Chemlink Laboratories
LLC. In addition, we are a party to a consulting agreement with Chemlink
Laboratories LLC, under which we provide certain financial, accounting and other
management consulting services to Chemlink Laboratories LLC.
In May 1999, we purchased a $1 million secured promissory note from Caring
Technologies, Inc. We have been advised that certain other stockholders of
Caring Technologies, Inc. may also exercise their rights under Caring
Technologies, Inc.'s stockholders agreement to purchase notes on the same terms
and conditions as the note purchased by us. Along with six of our officers and
seven additional parties related to or referred by Mr. Butler, Mr. Estrin or
Mr. Massman, we currently own Series B preferred stock of Caring Technologies,
Inc. Mr. Butler and Mr. Estrin are directors of Caring Technologies, Inc. In
addition, we license to Caring Technologies, Inc. a portion of the office space
leased by us in Dallas, Texas along with certain personal property located
therein. In June 1999, Mr. Massman became the Chief Executive Officer of Caring
Technologies, Inc.
Through a number of wholly-owned subsidiaries, we engage in the buying,
holding, operating and disposing of real estate, notes secured by real estate
and other similar investments. These activities are conducted through limited
partnerships in which one or more of our subsidiaries is a general and/or
limited partner. The other partner in each of the limited partnerships is an
affiliate of The Bernstein Companies, a real estate development firm based in
Washington, D.C. Mr. Estrin, our Co-Chairman and our Co-Chief Executive Officer,
is a director of each of our 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.
In March 1999, along with our real estate subsidiaries, we entered into a
letter agreement with The Bernstein Companies under which (1) a hotel and
related property located in northwest Washington, D.C., owned by one of the
limited partnerships, would be sold and (2) upon the sale of the Washington,
D.C. property, The Bernstein Companies would purchase the subsidiaries'
interests in the other two limited partnerships, which own a hotel located in
the Scott Circle area of Washington, D.C. and a hotel and an adjoining office
building located in Annapolis, Maryland. As contemplated by the letter
agreement, in May 1999, the Washington, D.C. property was sold to a third party,
and our subsidiaries sold their interests in the limited partnerships and the
stock of one of the subsidiaries to affiliates of The Bernstein Companies. As a
result of these transactions, we and the remaining development subsidiaries
received a total of $12 million, of which $11.4 million was in cash and $600,000
is evidenced by a one-year promissory note and a guaranty executed by The
Bernstein Companies and certain of its affiliates, the payment of which is
secured by the partnership interests that were sold by our subsidiaries to
affiliates of The Bernstein Companies. As of May 31, 1999, our only remaining
investment involving The Bernstein Companies was a $200,000 investment made in
1995 in one non-real estate joint venture.
OTHER MATTERS
Our Board of Directors does not intend to bring any matters before our
annual meeting other than those listed in the notice of the annual meeting and
does not know of any other matters to be brought before our annual meeting by
others. If any other matters properly come before the annual meeting, the
persons named in the accompanying proxy card will vote any proxies we receive as
recommended by our Board of Directors.
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CHAPTER FOUR--INFORMATION REGARDING AVATEX
BUSINESS
We are a holding company that, along with our subsidiaries, owns interests
in other corporations and partnerships. Through Phar-Mor, our 38% owned
affiliate, we are involved in operating a chain of discount retail drugstores.
We were incorporated in Delaware on September 27, 1982, to effect a
corporate restructuring of National Steel Corporation and its subsidiaries in
which National Steel Corporation's steel industry assets were separated from its
non-steel assets. On September 13, 1983, National Steel Corporation merged into
our subsidiary and stockholders of National Steel Corporation became our
stockholders. We sold substantially all of our investment in National Steel
Corporation and related metals operations by fiscal 1991 and invested in
distribution businesses, principally FoxMeyer Corporation. On August 27, 1996,
our subsidiary, FoxMeyer Corporation, 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 Corporation and FoxMeyer Drug Company
to McKesson. On March 18, 1997, the chapter 11 cases were converted into chapter
7 liquidation cases. In September 1995 and September 1997, we directly and
indirectly acquired certain equity investments in Phar-Mor and currently own
approximately 38.4% of Phar-Mor's outstanding common stock.
REAL ESTATE
We made certain investments in real estate through limited partnerships.
Certain of our wholly-owned subsidiaries controlled those limited partnerships
and held 50% of the partnership interests. The limited partnerships were engaged
in the buying, holding, operating and disposing of real estate. At March 31,
1999, we owned interests in three real estate developments consisting of hotels
and an office building. On May 12, 1999, we announced that we reached an
agreement to sell our interests in these three real estate developments. At the
closing of the sale on May 27, 1999, we received $11.4 million in cash and a
one-year, secured note in the amount of $0.6 million. The real estate
developments were as follows:
o 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 approximately 84% occupied and the
hotel was approximately 63% occupied during fiscal 1999.
o A 194 room hotel located in Washington, D.C. in the Watergate area. A
partnership in which we were a general partner assumed operating control
of the hotel in November 1995 and refurbished the property. The fiscal
1999 occupancy rate was approximately 78%.
o A 103,000 square foot office building with adjoining townhouse located in
the Scott Circle area of Washington, D.C. was purchased in May 1996. The
townhouse was sold in January 1998. The office building was renovated
into a 156 room hotel which opened in October 1998. Since its opening,
the occupancy rate has been approximately 65%.
EQUITY INVESTMENT IN PHAR-MOR
We own approximately 38.4% of Phar-Mor's outstanding common stock.
Phar-Mor operates a chain of 138 discount retail drugstores in 24 states,
under the names "Phar-Mor," "Pharmhouse" and "The Rx Place," devoted to the sale
of prescription and over-the-counter drugs, health and beauty care products, and
other general merchandise and grocery items. Approximately 40% of Phar-Mor's
stores are located in Pennsylvania, Ohio and West Virginia; 20% are located in
Virginia, North Carolina and South Carolina; and 14% are located in New York and
New Jersey.
During fiscal 1999, Phar-Mor acquired 2,086,200 shares of our common stock
(15.1% of the currently issued shares of common stock) at a cost of
approximately $5.0 million. Pursuant to the stock purchase agreement between
Phar-Mor and Elliott Associates, Westgate International and United that we
described above, Phar-Mor will acquire an additional 2,862,400 shares of our
common stock (20.7% of the currently issued shares) at $2.00 per share upon
completion of the merger.
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OTHER
We hold an approximate 11.4% common stock interest in Carson, Inc., a
global manufacturer and marketer of ethnic hair-care products.
At March 31, 1999, we had an approximate 3.2% common stock interest in JW
Genesis Financial Corp., a full service securities broker and investment banking
firm that provides securities transaction processing and other related services.
We have since sold our interest at then prevailing market prices.
We have an approximate 5.0% common stock interest in Imagyn Medical
Technologies, Inc., a developer, manufacturer and distributor for the urology,
minimally invasive and general surgery, and gynecology markets. In May 1999,
Imagyn consented to the entry of an order of relief in a Chapter 11 bankruptcy
proceeding and indicated that holders of its outstanding common stock would
likely receive no distributions as a result of any reorganization plan.
We hold the equivalent of an approximate 12.9% fully-diluted interest in
RAS Holding Corp., assuming conversion of all the outstanding RAS Holding
preferred stock and the exercise of all the outstanding RAS Holding options and
warrants. RAS Holding is a privately held corporation involved in the
development and distribution of medical optical devices.
We hold the equivalent of an approximate 6.3% interest in Caring
Technologies, Inc., a privately held corporation that develops, manufactures and
markets miniature continuous-wear vital signs monitors that combine proprietary
sensor and wireless data transmission technologies. In addition, in May 1999, we
made a one year, secured loan for $1.0 million to Caring Technologies, Inc. and
also received five-year warrants to purchase 1.0 million shares of its common
stock at $1.30 per share.
We hold through a limited liability company the equivalent of an
approximate 20.5% interest in Chemlink Laboratories LLC, which is principally
engaged in the development, manufacture and distribution of effervescent tablet
formulations for use in cleaning, disinfectant and sterilization applications as
well as in various household products.
We have an approximate 12.3% indirect ownership interest in AM Cosmetics,
Inc., a leading privately held manufacturer of low cost cosmetics. Subsequent to
the fiscal year end, AM Cosmetics, Inc. undertook a reorganization plan which
has reduced our ownership interest to approximately 3.9%.
We own $1.25 million of preferred stock of HPD Holdings Corp., which is a
privately held corporation whose subsidiary manufactures, sells and distributes
household product lines. We also own 2.5% of the common stock of HPD Holdings.
The interests in Chemlink Laboratories, HPD Holdings and RAS Holding
described above are our direct interests and do not give effect to Phar-Mor's
investments in these same companies. Phar-Mor has an approximate 6.9% interest
in RAS Holding on a fully-diluted basis, a 17.9% interest in Chemlink
Laboratories, and also owns $1.25 million of preferred stock and 2.5% of the
common stock of HPD Holdings.
We owned 17.4% of Ben Franklin Retail Stores, Inc. which filed for
protection under the Bankruptcy Code in July 1996 and subsequently liquidated
its assets under chapter 7 of the Bankruptcy Code. We wrote off our investment
in Ben Franklin Retail Stores in fiscal 1997 as a result of the bankruptcy
filing.
ADDITIONAL INFORMATION
For more detailed information concerning our business operations, we have
attached our Annual Report on Form 10-K for our fiscal year ended March 31,
1999, as Annex E to this proxy statement/prospectus.
Specifically, for a description of our properties see page E-5 of Annex E
and for a description of legal proceedings that we have either commenced or are
subject to see pages E-5 through E-10 of Annex E.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For our Management's Discussion and Analysis of Financial Condition and
Results of Operations, see pages E-13 through E-20 of our Annual Report on Form
10-K for our fiscal year ended March 31, 1999, a copy of which is attached as
Annex E to this proxy statement/prospectus.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For our quantitative and qualitative disclosures about market risk, see
page of our Annual Report on Form 10-K for our fiscal year ended March 31,
1999, a copy of which is attached as Annex E to this proxy statement/prospectus.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary data, including our statements
of comprehensive loss and consolidated statements of cash flows for each of the
three fiscal years ended March 31, 1999, and our consolidated balance sheets and
statements of stockholders' equity interest at March 31, 1999 and March 31, 1998
and the notes related thereto, are located on pages E-23 through E-57 of our
Annual Report on Form 10-K for our fiscal year ended March 31, 1999, a copy of
which is attached as Annex E to this proxy statement/prospectus.
Certain rules of the SEC require us to include in this proxy
statement/prospectus certain financial information about Phar-Mor. We have
excerpted this information from Phar-Mor's Annual Report on Form 10-K for its
fiscal year ended June 27, 1998 and from its Quarterly Report on Form 10-Q for
its fiscal quarter ended March 27, 1999. We have attached this information as
Annex F to this proxy statement/prospectus.
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AVATEX STOCK OPTION PLAN
GENERAL
Terms
We have adopted an option plan (the "OPTION PLAN") with respect to
4,000,000 shares of our common stock. Our obligations under the Option Plan will
be assumed by the Surviving Corporation.
The Option Plan became effective on July 21, 1993 and will remain in effect
until July 21, 2003.
Shares Subject to the Option Plan
The total number of options which may be granted under the Option Plan is
4,000,000, subject to adjustments in order to prevent dilution or enlargement of
rights. If an option or award of restricted shares is terminated unexercised,
other than in connection with the exercise of a stock appreciation right, or is
forfeited, the unpurchased or forfeited shares will be available for future
awards.
Eligibility
All of our officers, key employees and all of our non-employee directors
are eligible to receive options under the Option Plan. Officers and other
employees are also eligible to receive:
o stock appreciation rights;
o performance shares;
o restricted shares; and
o performance units.
The Finance Committee determines which employees will be granted awards and
the number of shares subject to such awards. Grants of options to non-employee
directors are automatic. When elected to serve on our Board, a director will
receive options to purchase 15,000 shares as well as options to purchase 1,000
shares in each year that the Option Plan is in effect following our annual
meeting of stockholders. It is not possible to predict the number, names or
positions of employees who may be selected for participation or the extent of
their participation within the Option Plan's limitations, since no determination
has been made with respect to these matters. Seven current employees and two
former employees are currently eligible to participate in the Option Plan.
Option Price
The option price is established by the Finance Committee at the time of
grant. The option price cannot be less than 100% of the fair market value of our
common stock on the date of grant for options granted to outside directors. For
grants of incentive stock options to employees, the option price cannot be less
than 100% of the fair market value of our common stock, unless the employee
possesses more than 10% of the total combined voting power of all classes of our
stock, in which case the option price cannot be less than 110% of the fair
market value. The option price is payable at the time of exercise in cash or, at
the discretion of the Finance Committee, by delivery of other shares of our
common stock already owned by the optionee. In the case of the cashless
exercise, the shares surrendered will be valued at their fair market value on
the day preceding the date of the exercise of the options.
Change of Control
Pursuant to the Option Plan, a "change of control" is deemed to have
occurred if:
o 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
o a majority of our outstanding shares of common stock; or
o securities of ours representing a majority of the combined voting
power of our then outstanding voting securities; or
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o during any two-year period, individuals, who at the beginning of that
period constitute our Board, cease, at any time after the beginning of
that period, for any reason, to constitute a majority of our Board,
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 the two-year period.
In the event of a change of control, all options previously issued pursuant
to the Option Plan become immediately exercisable. Notwithstanding the previous
sentence, in the event of a merger between us and another corporation in which
we are not the surviving entity, any options or other plan awards issued
pursuant to the Option Plan which have not been exercised will, in the sole
discretion of the Finance Committee, either (1) be cancelled and replacement
awards will be issued by the surviving entity in accordance with
Rule 16b-3(f)(1) under the Exchange Act or (2) all such options will become
immediately exercisable.
Our Board does not believe, as of the date of this proxy
statement/prospectus, that the merger will, at the present time, result in any
of the events set forth above and, thus, the merger, in and of itself, would not
constitute a change of control under the Option Plan.
Terms and Conditions of Options
Options granted under the Option Plan to employees may be either options
which are intended to satisfy the definitional requirements for incentive
options under Section 422(b) of the Code or non-qualified options, which are
options that do not satisfy those requirements. Non-employee directors may only
be granted non-qualified options. No option granted under the Option Plan to an
employee or a non-employee director is transferable other than by will or by the
laws of descent and distribution and each option is exercisable during the
lifetime of the optionee only by the optionee. Options expire no later than
10 years from the date of grant to an employee and no later than five years from
the date of grant to a non-employee director and no later than five years from
the date of grant in the case of incentive stock options.
In the event of the death, permanent disability or retirement of a
non-employee director or an employee, all outstanding options become exercisable
and may be exercised by the estate of such optionee or such optionee, as the
case may be, for one year after the date of death, disability or retirement.
Notwithstanding the previous sentence, in the case of retirement, incentive
options must be exercised within three months. If the employment of the optionee
is terminated for good cause or the optionee voluntarily terminates employment
without our consent, his option rights will terminate immediately, except as to
shares already purchased. If the employment of the optionee is terminated for
any other reason, the optionee has 30 days after the date of the termination (or
three months in the case of an incentive option) to exercise the option with
respect only to the number of shares which the optionee was entitled to purchase
immediately prior to the termination; provided, however, that our Finance
Committee has complete discretion to amend any option previously granted to an
optionee so as to extend the period during which his or her option is
exercisable and/or remove any restrictions applicable to such option, including
the acceleration of the vesting thereof. In no event may any option be exercised
after the expiration date of that option.
Each option granted to an employee requires the optionee to remain in our
or one of our subsidiaries' employ for at least six months from the date of
grant before any part of the option may be exercised. Except in the event of the
death, permanent disability or retirement of an optionee, each option granted to
employees is exercisable in various installments as may be determined by the
Finance Committee at the time of grant. Fifty percent of the options granted to
non-employee directors become exercisable one year after the date of grant, with
the remainder becoming exercisable two years after the date of grant. The right
to purchase shares is cumulative so that when the right to purchase any shares
has accrued, those shares or any part of those shares may be purchased at any
time thereafter until the expiration or termination of the option.
Stock Appreciation Rights
In connection with the grant of any option to an employee under the Option
Plan, the Finance Committee, either at the time of grant or by amendment, may
include a stock appreciation right. Stock appreciation rights entitle the
optionee to surrender to us, unexercised, a portion or all of the related
option,
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or any portion of the related option in exchange for that number of shares
having an aggregate value equal to:
(x) the excess of the fair market value of one share, on the date preceding
the surrender of the option, less
(y) the option price per share, multiplied by the number of shares called
for by the option, or portion of the option, which is surrendered.
No fractional shares may be issued and the number of shares received may not
exceed the number of shares called for by the option. Each stock appreciation
right relates to and is subject to the terms and conditions of the specific
option granted under the Option Plan. The Finance Committee has the choice of
setting our obligation arising out of the exercise of stock appreciation rights
in cash, or part in cash and part in shares.
Performance Shares, Restricted Shares and Performance Units
Awards of performance shares, restricted shares or performance units may be
granted either separately or in combination with other awards authorized by the
Option Plan to employee participants.
The duration of the restriction is determined by the Finance Committee at
the time each grant is made. More than one grant may be outstanding at any time
and performance periods may be of different lengths. At the time of each grant,
the Finance Committee establishes the performance targets at which performance
shares or units are earned or times at which restrictions placed on restricted
shares or units lapse. Performance measures and targets may vary among grants
but, once established for a grant, may not be modified with respect to that
grant, except in the event of a change in our common stock or in the capital
stock of our subsidiaries by reason of a reorganization, recapitalization, stock
dividend, stock split or other corporate change and except that, with respect to
performance shares and performance units, the Finance Committee may, in its sole
discretion, make such adjustments to performance targets, the number of
performance shares or the number or value of performance units which may be
earned, or such other changes as it deems necessary or advisable in the event of
material changes in the criteria used for establishing performance targets which
would result in the dilution or enlargement of an award outside the goals
intended by the Finance Committee at the time of grant.
The Finance Committee may provide that amounts equivalent to dividends are
payable with respect to performance or restricted shares or performance units.
These amounts are credited to the participant's performance account and are
payable at the time that restrictions on the award are removed and the award is
distributed.
Performance or restricted shares and performance units may not be sold or
transferred during any restriction period, provided that if a holder thereof
dies, becomes disabled, retires or terminates employment with the consent of the
Finance Committee, the number of performance or restricted shares or performance
units earned will be determined by the Finance Committee. If a holder's
employment is terminated for any other reason, all shares or units subject to
restrictions are forfeited.
FEDERAL INCOME TAX CONSEQUENCES
The statements in the following paragraphs of the principal federal income
tax consequences of awards under the Option Plan are based on statutory
authority and judicial and administrative interpretations, as of the date of
this Proxy Statement, which are subject to change at any time (possibly with
retroactive effect). The law is technical and complex, and the discussion below
represents only a general summary.
Incentive Stock Options. Incentive stock options ("ISOs") granted under
the Option Plan are intended to meet the definitional requirements of
Section 422(b) of the Code for "incentive stock options." An employee who
receives an ISO does not recognize any taxable income upon the grant of such
ISO. Similarly, the exercise of an ISO generally does not give rise to federal
income tax to the employee, provided that (i) the federal "alternative minimum
tax," which depends on the employee's particular tax situation, does not apply
and (ii) the employee is employed by us from the date of grant of the option
until three months prior to the exercise thereof, except where such employment
terminates by reason of disability (where the three month period is extended to
one year) or death (where this requirement does not apply). If an employee
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exercises an ISO after these requisite periods, the ISO will be treated as an
NSO (as defined below) and will be subject to the rules set forth below under
the caption "Non-Qualified Stock Options and Stock Appreciation Rights."
Further, if after exercising an ISO, an employee disposes of the shares of stock
so acquired more than two years from the date of grant and more than one year
from the date of transfer of the shares of stock pursuant to the exercise of
such ISO (the "applicable holding period"), the employee will generally
recognize capital gain or loss equal to the difference, if any, between the
amount received for the shares and the exercise price. If, however, an employee
does not hold the shares so acquired for the applicable holding period--thereby
making a "disqualifying disposition"--the employee would recognize ordinary
income equal to the excess of the fair market value of the shares at the time
the ISO was exercised over the exercise price and the balance, if any, would
generally be treated as capital gain. If the disqualifying disposition is a sale
or exchange that would permit a loss to be recognized under the Code (were a
loss in fact to be realized), and the sales proceeds are less than the fair
market value of the shares on the date of exercise, the employee's ordinary
income therefrom would be limited to the gain (if any) realized on the sale. An
employee who exercises an ISO by delivering shares of stock previously acquired
pursuant to the exercise of another ISO is treated as making a "disqualifying
disposition" of such stock if such shares are delivered before the expiration of
their applicable holding period. Upon the exercise of an ISO with previously
acquired shares as to which no disqualifying disposition occurs, despite some
uncertainty, it appears that the employee would not recognize gain or loss with
respect to such previously acquired shares. We will not be allowed a federal
income tax deduction upon the grant or exercise of an ISO or the disposition,
after the applicable holding period, of the shares of stock acquired upon
exercise of an ISO. In the event of a disqualifying disposition, we generally
will be entitled to a deduction in an amount equal to the ordinary income
included by the employee, provided that such amount constitutes an ordinary and
necessary business expense to the Company and is reasonable and the limitations
of Sections 280G and 162(m) of the Code (discussed below) do not apply.
Non-Qualified Stock Options and Stock Appreciation Rights. Non-qualified
stock options ("NSOs") granted under the Option Plan are options that do not
qualify as ISOs. An employee who receives an NSO or an SAR will not recognize
any taxable income upon the grant of such NSO or SAR. However, the employee
generally will recognize ordinary income upon exercise of an NSO in an amount
equal to the excess of the fair market value of the shares of stock at the time
of exercise over the exercise price. Similarly, upon the receipt of cash or
shares pursuant to the exercise of an SAR, the individual generally will
recognize ordinary income in an amount equal to the sum of the cash and the fair
market value of the shares received. As a result of Section 16(b) of the
Exchange Act, under certain circumstances, the timing of income recognition may
be deferred (the "Deferral Period") for any individual who is an executive
officer or director of the Company or a beneficial owner of more than ten
percent (10%) of any class of our equity securities of the Company. Absent a
Section 83(b) election (as described below under "Other Awards"), recognition of
income by the individual will be deferred until the expiration of the Deferral
Period, if any. The ordinary income recognized with respect to the receipt of
shares or cash upon exercise of an NSO or an SAR will be subject to both wage
withholding and other employment taxes. In addition to the customary methods of
satisfying the withholding tax liabilities that arise upon the exercise of an
SAR for shares or upon the exercise of an NSO, we may satisfy the liability in
whole or in part by withholding shares of stock from those that otherwise would
be issuable to the individual or by the employee tendering other shares owned by
him or her, valued at their fair market value as of the date that the tax
withholding obligation arises. A federal income tax deduction generally will be
allowed to us in an amount equal to the ordinary income included by the
individual with respect to his or her NSO or SAR, provided that such amount
constitutes an ordinary and necessary business expense to the Company and is
reasonable and the limitations of Sections 280G and 162(m) of the Code do not
apply. If an individual exercises an NSO by delivering shares of stock, other
than shares previously acquired pursuant to the exercise of an ISO which is
treated as a "disqualifying disposition" as described above, the individual will
not recognize gain or loss with respect to the exchange of such shares, even if
their then fair market value is different from the individual's tax basis. The
individual, however, will be taxed as described above with respect to the
exercise of the NSO as if he or she had paid the exercise price in cash, and we
likewise generally will be entitled to an equivalent tax deduction.
IV-7
<PAGE>
Other Awards. With respect to other awards under the Option Plan that are
settled either in cash or in shares of stock that are either transferable or not
subject to a substantial risk of forfeiture (as defined in the Code and the
regulations thereunder), employees generally will recognize ordinary income
equal to the amount of cash or the fair market value of the shares of stock
received. With respect to awards under the Option Plan that are settled in
shares of stock that are restricted as to transferability or subject to a
substantial risk of forfeiture--absent a written election pursuant to
Section 83(b) of the Code filed with the Internal Revenue Service within
30 days after the date of transfer of such shares pursuant to the award (a
"Section 83(b) election")--an individual will recognize ordinary income at the
earlier of the time at which (i) the shares become transferable or (ii) the
restrictions that impose a substantial risk of forfeiture of such shares lapse,
in an amount equal to the excess of the fair market value (on such date) of such
shares over the price paid for the award, if any. If a Section 83(b) election is
made, the individual will recognize ordinary income, as of the transfer date, in
an amount equal to the excess of the fair market value of the stock as of that
date over the price paid for such award, if any. The ordinary income recognized
with respect to the receipt of cash, shares of stock or other property under the
Option Plan will be subject to both wage withholding and other employment taxes.
We generally will be allowed a deduction for federal income tax purposes in an
amount equal to the ordinary income recognized by the employee, provided that
such amount constitutes an ordinary and necessary business expense and is
reasonable and the limitations of Sections 280G and 162(m) of the Code do not
apply.
Dividends and Dividend Equivalents. To the extent awards under the Option
Plan earn dividends or dividend equivalents, whether paid currently or credited
to an account established under the Option Plan, an individual generally will
recognize ordinary income with respect to such dividends or dividend
equivalents.
Change in Control
As described above, upon a Change of Control of our corporation, all
options previously issued under the Option Plan will become immediately
exercisable, except that with respect to certain mergers, the Finance Committee,
in its discretion, has the right, with respect to outstanding options or other
awards under the Option Plan to (a) cancel such options or other plan awards and
arrange for issuance by the surviving entity in the merger of replacement awards
or (b) permit such options or other plan awards to become immediately
exercisable. In general, if the total amount of payments to optionees that are
contingent upon a "change of control" of our corporation (as defined in Section
280G of the Code), including payments upon the exercise of options under the
Option Plan that vest upon a "change in control," equals or exceeds three times
the recipient's "base amount" (generally, such recipient's average annual
compensation for the five years preceding the change in control), then, subject
to certain exceptions, the payments may be treated as "parachute payments" under
the Code, in which case a portion of such payments would be non-deductible to us
and the recipient would be subject to a 20% excise tax on such portion of the
payments.
Certain Limitations on Deductibility of Executive Compensation
With certain exceptions, Section 162(m) of the Code denies a deduction to
publicly held corporations for compensation paid to certain executive officers
in excess of $1 million per executive per taxable year (including any deduction
with respect to the exercise of a non-qualified option or the disqualifying
disposition of stock purchased pursuant to an incentive option).
The Option Plan is not qualified under the provisions of Section 401(a) of
the Internal Revenue Code, and is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974, as amended.
AVATEX PERFORMANCE INCENTIVE PLAN
We had adopted our Performance 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 Performance Incentive Plan
presently consist of our executive officers and certain key employees. Under the
Performance Incentive Plan, amounts are distributed to participants based on
specified percentages of (i) our net income, which is calculated in accordance
with generally accepted accounting principles, after all applicable taxes but
before accrual of any dividends on our
IV-8
<PAGE>
preferred stock, and exclusive of any activities relating to our relationship
with National Steel Corporation and our settlement with the trustee for the
FoxMeyer Corporation and FoxMeyer Drug Company bankruptcy estates, and
(ii) Litigation Income, which consists of net income generated in connection
with our litigation against McKesson and certain major pharmaceutical
manufacturers. Although Performance Incentive Plan distributions may be made on
an annual basis, our Performance 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. Our Performance Incentive Plan
has not been renewed with respect to net income for our fiscal year beginning
April 1, 1999, but it remains effective with respect to Litigation Income.
IV-9
<PAGE>
ANNEXES
<TABLE>
<S> <C>
ANNEX A Amended and Restated Agreement and Plan of Merger
ANNEX B Fairness Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc. with respect to Avatex
common stock
ANNEX C Fairness Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc. with respect to Avatex
$5 cumulative convertible preferred stock and $4.20 cumulative exchangeable series A preferred
stock
ANNEX D Solvency Opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc.
ANNEX E Our Annual Report on Form 10-K for our fiscal year ended March 31, 1999
ANNEX F Certain financial statements of Phar-Mor, Inc. excerpted from Phar-Mor's Annual Report on Form 10-K
for its fiscal year ended June 27, 1998 and from its Quarterly Report on Form 10-Q for its
quarterly period ended March 27, 1999
ANNEX G Section 262 of the General Corporation Law of the State of Delaware
</TABLE>
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
AVATEX CORPORATION
AND
XETAVA CORPORATION
DATED AS OF JUNE 18, 1999
A-1
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
ARTICLE I -- THE MERGER.................................................................................. A-2
SECTION 1.1 The Merger........................................................................ A-2
SECTION 1.2 Effective Time.................................................................... A-2
SECTION 1.3 Effects of the Merger............................................................. A-2
SECTION 1.4 Certificate of Incorporation...................................................... A-2
SECTION 1.5 By-Laws........................................................................... A-2
SECTION 1.6 Directors......................................................................... A-2
SECTION 1.7 Officers.......................................................................... A-2
ARTICLE II -- CONVERSION OF SHARES....................................................................... A-2
SECTION 2.1 Conversion of Shares.............................................................. A-2
SECTION 2.2 Alternate Consideration Elections................................................. A-4
SECTION 2.3 Exchange of Shares................................................................ A-6
SECTION 2.4 Closing of Transfer Books......................................................... A-8
SECTION 2.5 Stock Options..................................................................... A-8
SECTION 2.6 Employment Agreements and Related Arrangements.................................... A-8
SECTION 2.7 Certain Matters Relating to Deferred Contingent Cash Rights....................... A-9
SECTION 2.8 Dissenting Shares................................................................. A-11
ARTICLE III -- COVENANTS................................................................................. A-11
SECTION 3.1 Registration Statement; Proxy Statement/Prospectus................................ A-11
SECTION 3.2 Stockholder Approval.............................................................. A-12
SECTION 3.3 OTCBB/Other Exchange Listing...................................................... A-12
SECTION 3.4 Fees and Expenses................................................................. A-12
SECTION 3.5 Fairness and Solvency Opinions.................................................... A-12
SECTION 3.6 Organization and Capitalization of Newco.......................................... A-12
SECTION 3.7 Newco Certificate of Incorporation................................................ A-12
SECTION 3.8 Authorization of Issuance of Merger Consideration................................. A-12
ARTICLE IV -- CONDITIONS TO THE OBLIGATIONS OF AVATEX AND XETAVA......................................... A-13
SECTION 4.1 Stockholder Approval.............................................................. A-13
SECTION 4.2 Certain Proceedings............................................................... A-13
SECTION 4.3 Listing of New Avatex Common Stock................................................ A-13
SECTION 4.4 Registration Statement............................................................ A-13
SECTION 4.5 Blue Sky Laws..................................................................... A-13
SECTION 4.6 Tax Opinion....................................................................... A-13
SECTION 4.7 Fairness and Solvency Opinions.................................................... A-13
SECTION 4.8 Resignations of Certain Directors................................................. A-13
SECTION 4.9 Settlements of Certain Litigation................................................. A-13
SECTION 4.10 Stockholders' Agreement; Voting Agreement......................................... A-14
SECTION 4.11 Dissenting Shares................................................................. A-14
SECTION 4.12 Releases.......................................................................... A-14
</TABLE>
A-2
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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PAGE
<S> <C>
ARTICLE V -- CLOSING..................................................................................... A-14
SECTION 5.1 Time and Place.................................................................... A-14
SECTION 5.2 Filings at the Closing............................................................ A-14
ARTICLE VI -- TERMINATION................................................................................ A-14
SECTION 6.1 Termination....................................................................... A-14
ARTICLE VII -- MISCELLANEOUS............................................................................. A-14
SECTION 7.1 Amendment and Modification........................................................ A-14
SECTION 7.2 Indemnification................................................................... A-15
SECTION 7.3 Assignment........................................................................ A-15
SECTION 7.4 Governing Law..................................................................... A-15
SECTION 7.5 Counterparts...................................................................... A-16
SECTION 7.6 Interpretation; Definitions....................................................... A-16
SECTION 7.7 Entire Agreement.................................................................. A-17
</TABLE>
EXHIBITS AND SCHEDULES
Exhibit A--Form of Stockholders' Agreement
Exhibit B--Form of Voting Agreement
Exhibit C--Certificate of Merger of Xetava Corporation with and into Avatex
Corporation
Exhibit D--Form of 6.75% Notes Indenture Exhibit
Exhibit E--Form of Warrant Agreement Exhibit
Exhibit F--Form of Certificate of Incorporation of Avatex Funding, Inc. Exhibit
Exhibit G--Form of Closing Releases
Schedule 2.6--Employment Agreements, Benefit Plans
A-3
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of June 18, 1999, by and between AVATEX CORPORATION, a Delaware corporation
("Avatex"), and XETAVA CORPORATION, a Delaware corporation ("Xetava"). Avatex
and Xetava are sometimes collectively referred to herein as the "Constituent
Corporations".
W I T N E S S E T H:
WHEREAS, the Constituent Corporations have entered into an Agreement and
Plan of Merger, dated as of April 9, 1998 (the "Original Merger Agreement");
WHEREAS, the Constituent Corporations wish to amend and restate the
Original Merger Agreement in its entirety as hereinafter set forth;
WHEREAS, Avatex has authorized capital stock consisting of (i) 50,000,000
shares of common stock, $5.00 par value per share (the "Old Avatex Common
Stock"), of which 13,806,375 shares are issued and outstanding as of the date
hereof, and (ii) 10,000,000 shares of Preferred Stock, $5.00 par value, of which
(a) 652,273 shares of $5 Cumulative Convertible Preferred Stock (the
"Convertible Preferred Stock"), and (b) 4,312,352 shares of $4.20 Cumulative
Exchangeable Series A Preferred Stock (the "Series A Preferred Stock" and
together with the Old Avatex Common Stock and the Convertible Preferred Stock,
the "Avatex Shares") are issued and outstanding as of the date hereof;
WHEREAS, Xetava is a direct, wholly-owned subsidiary of Avatex;
WHEREAS, in connection with the consummation of the transactions
contemplated hereby, Avatex will organize Avatex Funding, Inc., a Delaware
corporation, as a direct, wholly-owned subsidiary of Avatex ("Newco");
WHEREAS, the Board of Directors of Avatex and Xetava believe it is in the
best interest of each respective corporation and their respective stockholders
to consummate the merger of Xetava with and into Avatex (the "Merger") pursuant
to the applicable provisions of the General Corporation Law of the State of
Delaware ("DGCL");
WHEREAS, concurrently with the execution of this Agreement and in order to
induce Avatex and Xetava to enter into this Agreement, certain holders of Avatex
Shares have executed and delivered an agreement, substantially in the form of
Exhibit A hereto, pursuant to which, among other things, such stockholders
granted to Avatex their proxy to vote all of the votes entitled to be cast by
such stockholders with respect to the Avatex Shares that they own in favor of
the adoption of this Agreement, and such stockholders have agreed, among other
things, that, in connection with the Merger, they will elect to receive the
Convertible Preferred Stock Alternate Consideration (as defined in Section 2.1
hereof) and the Series A Preferred Stock Alternate Consideration (as defined in
Section 2.1 hereof), as applicable (the "Stockholders' Agreement");
WHEREAS, concurrently with the execution of this agreement and in order to
induce Avatex and Xetava to enter into this Agreement, certain holders of Avatex
Shares have executed and delivered an agreement, substantially in the form of
Exhibit B hereto, pursuant to which, among other things, such stockholders have
agreed to vote all Avatex Shares that they own in favor of the adoption of this
Agreement (the "Voting Agreement");
WHEREAS, the Board of Directors of Avatex, pursuant to the applicable
provisions of the DGCL, has declared the Merger advisable, has approved this
Agreement, and has recommended adoption of this Agreement by the stockholders of
Avatex entitled to vote thereon;
WHEREAS, the Board of Directors of Xetava, pursuant to the applicable
provisions of the DGCL, has declared the Merger advisable, has approved this
Agreement and has recommended adoption of this Agreement by its sole
stockholder; and
WHEREAS, capitalized and other defined terms used in this Agreement are
defined in Section 7.6 hereof.
A-4
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the termsand subject to the conditions
hereof and in accordance with the DGCL, at the Effective Time (as defined in
Section 1.2 hereof) Xetava shall be merged with and into Avatex in accordance
with the applicable provisions of the DGCL, and the separate corporate existence
of Xetava shall thereupon cease. Following the Merger, Avatex shall continue as
the surviving corporation (hereinafter referred to for periods from and after
the Effective Time as the "Surviving Corporation") under the laws of the State
of Delaware under the name "Avatex Corporation." Unless the context requires
otherwise, any references herein to Avatex with respect to periods from and
after the Effective Time shall be deemed to refer to Avatex as the Surviving
Corporation.
SECTION 1.2 EFFECTIVE TIME. The Merger shall be consummated by and shall
be effective at the time (the "Effective Time") of the filing with the Secretary
of State of the State of Delaware of a certificate of merger substantially in
the form annexed as Exhibit C hereto (the "Certificate of Merger"), or in such
other form as is required by the relevant provisions of the DGCL, and executed
in accordance with the relevant provisions of the DGCL, and such other documents
as may be required by the provisions of the DGCL (which filings shall be made as
soon as practicable following the satisfaction or waiver of the conditions set
forth in Article IV hereof).
SECTION 1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 259 of the DGCL.
SECTION 1.4 CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of Avatex shall be amended in its entirety to read as set forth in
the Restated Certificate of Incorporation of Avatex attached as Annex A to the
Certificate of Merger, and as so amended, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter duly amended in
accordance with the terms thereof and the DGCL.
SECTION 1.5 BY-LAWS. The By-Laws of Avatex, as in effect immediately
prior to the Effective Time, shall be the By-Laws of the Surviving Corporation
until thereafter amended as provided by the terms thereof and of the Certificate
of Incorporation of the Surviving Corporation and as provided by applicable law.
SECTION 1.6 DIRECTORS. The directors of Avatex at the Effective Time
shall be the initial directors of the Surviving Corporation and will hold office
from the Effective Time for the duration of their terms of office and until
their respective successors are thereafter duly elected or appointed and
qualified in the manner provided in the Certificate of Incorporation and By-Laws
of the Surviving Corporation, or as otherwise provided by law.
SECTION 1.7 OFFICERS. The officers of Avatex immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation and
will hold office from the Effective Time until their respective successors are
thereafter duly elected or appointed and qualified in the manner provided in the
Certificate of Incorporation and By-Laws of the Surviving Corporation, or as
otherwise provided by law.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1 CONVERSION OF SHARES. (a) At the Effective Time, by virtue of
the Merger and without any action on the part of Avatex or Xetava or their
respective stockholders:
(i) Each share of Old Avatex Common Stock issued and outstanding
immediately prior to the Effective Time shall automatically be converted
into one (1) share (the "Common Stock Exchange
A-5
<PAGE>
Ratio") of class A common stock, par value $0.01 per share (the "New Avatex
Common Stock"), of the Surviving Corporation.
(ii) (A) Each share of Convertible Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Convertible
Preferred Stock Electing Shares (as defined below), which shall be
converted as described in clause (B) below, and other than Dissenting
Shares (as defined below), which shall be converted as described in
Section 2.8 below) shall automatically be converted into 9.134 shares (the
"Convertible Preferred Exchange Ratio") of New Avatex Common Stock, and
(B) each share of Convertible Preferred Stock issued and outstanding with
respect to which a Convertible Preferred Stock Alternate Consideration
Election (as defined below) has been effectively made and not revoked on or
prior to the Election Deadline (as defined below) pursuant to Section 2.2
below (the "Convertible Preferred Stock Electing Shares") shall be
automatically converted into the right to receive the Convertible Preferred
Stock Alternate Consideration (as defined in subparagraph (I) below).
(I) For the purposes of this Agreement, the term "Convertible
Preferred Stock Alternate Consideration" shall mean, for each
Convertible Preferred Stock Electing Share, (1) $ 3.7408 in cash,
(2) $ 8.340 (rounded to the nearest whole dollar) principal amount of
6.75% Notes due 2002 of Newco (the "6.75% Notes"), which 6.75% Notes
shall be issued in accordance with and governed by an Indenture
substantially in the form annexed hereto as Exhibit D (the "6.75%
Notes Indenture") and will be guaranteed by the Surviving Corporation
as provided in the 6.75% Notes Indenture, (3) warrants to purchase
0.67456 shares (rounded to the nearest whole share) of New Avatex
Common Stock exercisable on or after the day that is the three-month
anniversary of the Closing Date (except as otherwise set forth in the
Warrant Agreement (as defined below)) and until the day that is the
five-year and three-month anniversary of the Closing Date at a price
per share equal to $2.25, which warrants shall be issued pursuant to
a Warrant Agreement substantially in the form annexed hereto as
Exhibit E (the "Warrant Agreement"), and (4) a deferred contingent
cash right (rounded to the nearest whole number) (a "Convertible
Preferred Deferred Contingent Cash Right") equal to 16% of the Net
Recovery Participation Cap (as defined in subparagraph (II) below)
divided by the total number of shares of Convertible Preferred Stock
outstanding immediately prior to the Effective Time.
(II) For the purposes of this Agreement, the term "Net Recovery
Participation Cap" shall mean an amount equal to 20% of the Net
Recovery (as defined below), provided that the Net Recovery
Participation Cap shall in no event exceed $7.5 million; and the term
"Net Recovery" shall mean the amount obtained from the following
equation: (1) all of the cash payments, if any, actually received by
the Surviving Corporation in respect of a final, non-appealable
judgment in, a voluntary dismissal with prejudice of, or any and all
final settlements of, all claims, counterclaims, third-party claims
and other claims asserted in or with respect to the lawsuit styled
FoxMeyer Health Corporation v. McKesson Corporation, et al., Case
No. 9700311, filed by Avatex on January 10, 1997, in the 95th
Judicial District Court of Dallas County, Texas (the "McKesson
Litigation") (any and all such cash payments are hereinafter referred
to collectively (if applicable) as, the "Cash Payment"); minus
(2) the sum of the following: (x) the aggregate out-of-pocket
expenses incurred previously and hereafter by Avatex in prosecuting
the McKesson Litigation and obtaining any such Cash Payment
(including, but not limited to, any contingent fee payable to any
attorney); (y) any payments, offsets or settlements made by the
Surviving Corporation on or with respect to any counterclaims,
third-party claims and other claims in connection with or with
respect to the McKesson Litigation; and (z) an amount (the "Actual
Tax Amount") equal to any portion of the Cash Payment includible in
income by the Surviving Corporation for federal Income Tax (as
defined below) purposes multiplied by the effective Income Tax rate
applicable to the Surviving Corporation for the taxable year in which
the obligation to pay the Cash Payment to the Surviving Corporation
becomes fixed (determined taking into account federal, state and
local taxes and all deductions and credits claimed by the Surviving
Corporation with respect to such taxable year, and with appropriate
adjustments, including, but not limited to, as to the
A-6
<PAGE>
applicable tax rate, to account for any actual or imputed interest in
respect of the Cash Payment). The Actual Tax Amount shall be
determined by the Surviving Corporation's independent accountants in
good faith and such determination shall be final and binding on all
parties. For the purposes of this Agreement, the term "Income Tax"
shall mean any tax on or measured by income or gross receipts.
(iii) (A) Each share of Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Series A
Preferred Stock Electing Shares (as defined below, which shall be converted
as described in clause (B) below, and other than Dissenting Shares, which
shall be converted as described in Section 2.8 below) shall automatically
be converted into 7.253 shares (the "Series A Preferred Exchange Ratio") of
New Avatex Common Stock, and (B) each share of Series A Preferred Stock
issued and outstanding with respect to which a Series A Preferred Stock
Alternate Consideration Election (as defined below) has been effectively
made and not revoked on or prior to the Election Deadline pursuant to
Section 2.2 below (the "Series A Preferred Stock Electing Shares") shall be
automatically converted into the right to receive the Series A Preferred
Stock Alternate Consideration (as defined in subparagraph (I) below).
(I) For the purposes of this Agreement, the term "Series A
Preferred Stock Alternate Consideration" shall mean, for each Series
A Preferred Stock Electing Share, (1) $ 2.9705 in cash, (2) $ 6.623
(rounded to the nearest whole dollar) principal amount of 6.75%
Notes, which 6.75% Notes shall be issued in accordance with and
governed by the 6.75% Notes Indenture and will be guaranteed by the
Surviving Corporation as provided in the 6.75% Notes Indenture, (3)
warrants to purchase 0.53567 shares (rounded to the nearest whole
share) of New Avatex Common Stock exercisable on or after the day
that is the three-month anniversary of the Closing Date (except
otherwise set forth in the Warrant Agreement) and until the day that
is the five-year and three-month anniversary of the Closing Date at a
price per share equal to $2.25, which warrants shall be issued
pursuant to the Warrant Agreement, and (4) a deferred contingent cash
right (rounded to the nearest whole number) (a "Series A Preferred
Deferred Contingent Cash Right") equal to 84% of the Net Recovery
Participation Cap divided by the total number of shares of Series A
Preferred Stock outstanding immediately prior to the Effective Time.
(iv) The Series A Preferred Contingent Cash Rights and the Convertible
Preferred Contingent Cash Rights are hereinafter referred to, collectively,
as the "Deferred Contingent Cash Rights". The shares of New Avatex Common
Stock, the Convertible Preferred Stock Alternate Consideration and/or the
Series A Preferred Stock Alternate Consideration to be received in the
Merger are sometimes hereinafter referred to, collectively, as the "Merger
Consideration."
(v) Notwithstanding the foregoing, each share of Old Avatex Common
Stock, each share of Convertible Preferred Stock and each share of Series A
Preferred Stock that immediately prior to the Effective Time is held in the
treasury of Avatex shall be cancelled by virtue of the Merger without any
payment of any consideration therefor and shall cease to exist, and no
shares of New Avatex Common Stock or other consideration shall be delivered
in exchange for such shares.
(vi) Each share of common stock, $0.01 par value per share, of Xetava
issued and outstanding immediately prior to the Effective Time shall
automatically be cancelled by virtue of the Merger without any payment of
any consideration therefor and shall cease to exist.
(b) Between the date hereof and immediately prior to the Effective Time,
(i) the outstanding shares of Old Avatex Common Stock, Convertible Preferred
Stock or Series A Preferred Stock shall not be changed into a different number
of shares by reason of any reclassification, split-up, combination or exchange
of shares, and (ii) no dividend payable in stock or other securities shall be
declared thereon with a record date within such period.
SECTION 2.2 ALTERNATE CONSIDERATION ELECTIONS. (a) Each person who, on or
prior to the Election Deadline (as defined in Section 2.2(c) below), is a record
holder of shares of Convertible Preferred Stock shall be entitled to make an
unconditional election (the "Convertible Preferred Stock Alternate Consideration
A-7
<PAGE>
Election") with respect to any or all of such person's shares of Convertible
Preferred Stock (such shares thereby becoming Convertible Preferred Stock
Electing Shares, subject to the provisions of this Section 2.2) on or prior to
the Election Deadline to receive, for each Convertible Preferred Stock Electing
Share of such person, Convertible Preferred Stock Alternate Consideration.
(b) Each person who, on or prior to the Election Deadline, is a record
holder of shares of Series A Preferred Stock shall be entitled to make an
unconditional election (the "Series A Preferred Stock Alternate Consideration
Election") with respect to any or all of such person's shares of Series A
Preferred Stock (such shares thereby becoming Series A Preferred Stock Electing
Shares, subject to the provisions of this Section 2.2) on or prior to the
Election Deadline to receive, for each Series A Preferred Stock Electing Share
of such person, Series A Preferred Stock Alternate Consideration.
(c) Avatex shall prepare and mail a form of election (the "Form of
Election") and a letter of transmittal (which shall specify that delivery of the
certificates representing shares of Convertible Preferred Stock or Series A
Preferred Stock shall be effected, and risk of loss and title to such
certificates shall pass only upon proper delivery of such certificates to the
Exchange Agent, and shall contain or request any information that Avatex may
reasonably require) with the Proxy Statement (as defined in Section 3.1 below)
to the record holders of Convertible Preferred Stock and Series A Preferred
Stock as of the record date (the "Record Date") for the Stockholders' Meeting
(defined in Section 3.2(a) below), which Form of Election shall be used by each
record holder of shares of Convertible Preferred Stock or Series A Preferred
Stock who wishes to make a Convertible Preferred Stock Alternate Consideration
Election or a Series A Preferred Stock Alternate Consideration Election, as
applicable, and shall contain therein the acknowledgment and agreement referred
to in Section 2.7(e) below and may request any other information that Avatex may
reasonably require. Avatex will use reasonable best efforts to make the Form of
Election, a letter of transmittal and the Proxy Statement available to all
persons who become record holders of Convertible Preferred Stock or Series A
Preferred Stock during the period between the Record Date and the Election
Deadline. Any election by any such record holder of Convertible Preferred Stock
or Series A Preferred Stock to receive Convertible Preferred Stock Alternate
Consideration or Series A Preferred Stock Alternate Consideration, respectively,
shall have been properly made only if such record holder has affirmatively made
an election on the Form of Election to receive the Convertible Preferred Stock
Alternate Consideration or the Series A Preferred Stock Alternate Consideration,
as the case may be, and the Exchange Agent (as defined in Section 2.3 below)
shall have received at its designated office, by 5:00 p.m., New York City time,
on the second business day next preceding the date of the Stockholders' Meeting
(or such other time and date as Avatex shall determine, including, but not
limited to, as a result of any adjournment or postponement of the Stockholders'
Meeting, the "Election Deadline"), a Form of Election properly completed and
signed and accompanied by the stock certificates representing the Convertible
Preferred Stock Electing Shares or the Series A Preferred Stock Electing Shares,
as the case may be, to which such Form of Election relates, and a duly executed
letter of transmittal. Holders of record of shares of Convertible Preferred
Stock or Series A Preferred Stock who hold such shares as nominees, trustees or
in other representative capacities (a "Representative") may submit multiple
Forms of Election, provided that such Representative certifies that each such
Form of Election covers all of the shares of Convertible Preferred Stock or
Series A Preferred Stock held by each Representative for a particular beneficial
owner.
(d) Any Form of Election submitted to the Exchange Agent may be revoked or
changed by the stockholder submitting it to the Exchange Agent only by written
notice in form and substance reasonably satisfactory to the Exchange Agent, or
by a revised, duly executed, Form of Election received by the Exchange Agent (i)
prior to the Election Deadline or (ii) after the date of the Proxy Statement, if
(and to the extent that) the Exchange Agent is legally required to permit
revocations and the Effective Time of the Merger shall not have occurred prior
to such date. In addition, all Forms of Election shall automatically be revoked
if the Exchange Agent is notified in writing by Avatex that the Merger has been
abandoned. If a Form of Election is revoked, the certificate or certificates
representing the Convertible Preferred Stock Electing Share or the Series A
Preferred Stock Electing Shares to which such Form of Election relates shall be
promptly returned to the stockholder submitting the same to the Exchange Agent.
(e) The good faith determination of Avatex as to whether or not a
Convertible Preferred Stock Alternate Consideration Election or a Series A
Preferred Stock Alternate Consideration Election has been properly
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made or revoked pursuant to this Section 2.2 with respect to Convertible
Preferred Stock Electing Shares or Series A Preferred Stock Electing Shares and
when elections and/or revocations were received by it shall be binding. If
Avatex determines in good faith that any Convertible Preferred Stock Alternate
Consideration Election or Series A Preferred Stock Alternate Consideration
Election was not properly made with respect to shares of Convertible Preferred
Stock or Series A Preferred Stock, as the case may be, such shares shall be
treated by the Exchange Agent as shares which were not Convertible Preferred
Stock Electing Shares or Series A Preferred Stock Electing Shares, as the case
may be, at the Election Deadline, and such shares will be automatically
converted into shares of New Avatex Common Stock in accordance with, and
pursuant to, clause (A) of Section 2.1(a)(ii) or clause (A) of
Section 2.1(a)(iii), as applicable. The Exchange Agent may, with the agreement
of Avatex, make such rules as are consistent with this Section 2.2 for the
implementation of the elections provided for herein as shall be necessary or
desirable fully to effect such elections. Avatex, in its sole discretion, may,
but in no circumstance will be obligated to, accept any Form of Election
received by it or the Exchange Agent after the Election Deadline.
SECTION 2.3 EXCHANGE OF SHARES. (a) Prior to the mailing to the record
holders of capital stock of Avatex entitled to vote at the Stockholders'
Meeting, Avatex shall designate a bank or trust company to act as exchange agent
(the "Exchange Agent") in connection with the Merger. Promptly following the
Effective Time, Avatex shall take all steps necessary to enable and cause the
Exchange Agent to deliver the applicable Merger Consideration as and when
certificates for Avatex Shares are properly surrendered in accordance with this
Section 2.3 and the provisions of the letter of transmittal referred to in
Section 2.3(b) below. Notwithstanding anything herein to the contrary, New
Avatex Common Stock into which Avatex Shares shall be converted in the Merger,
or the Convertible Preferred Stock Alternate Consideration or Series A Preferred
Stock Alternate Consideration into which Convertible Preferred Stock Electing
Shares or Series A Preferred Stock Electing Shares shall be converted in the
Merger, shall be deemed to have been received, issued and/or paid as of the
Effective Time. No dividends, payments or other distributions with a record or
other applicable determination or payment date after the Effective Time with
respect to shares of New Avatex Common Stock, or, if applicable, 6.75% Notes or
Deferred Contingent Cash Rights, shall be paid to the holder of any
unsurrendered stock certificate previously representing Avatex Shares (in any
such case, a "Certificate") with respect to which shares of New Avatex Common
Stock, or, if applicable, Convertible Preferred Stock Alternate Consideration or
Series A Preferred Stock Alternate Consideration, shall be issuable in the
Merger until such Certificate shall be surrendered for exchange as provided
herein, but (i) upon such surrender there shall be paid, without interest, to
the person in whose name the Certificates representing such shares of New Avatex
Common Stock, or, if applicable, 6.75% Notes or Deferred Contingent Cash Rights,
shall be issued the amount of dividends, payments or other distributions
theretofore paid with respect to such shares of New Avatex Common Stock, or, if
applicable, 6.75% Notes or Deferred Contingent Cash Rights, as of any record or
other applicable determination or payment date subsequent to the Effective Time
(but prior to such surrender) and the amount of any cash payable to such person
in lieu of fractional shares of New Avatex Common Stock, pursuant to this
Section 2.3, and (ii) at the appropriate payment date or as soon as practicable
thereafter, there shall be paid to such person the amount of dividends, payments
or other distributions with a record or other applicable determination date
after the Effective Time but prior to such surrender and a payment date
subsequent to such surrender payable with respect to such shares of New Avatex
Common Stock, or, if applicable, 6.75% Notes or Deferred Contingent Cash Rights,
subject in any case to any applicable abandoned property, escheat or similar
laws.
(b) Promptly after the Effective Time, Avatex shall cause the Exchange
Agent to mail to each former record holder of Avatex Shares (other than holders
of Convertible Preferred Stock Electing Shares and Series A Preferred Stock
Electing Shares), a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass only upon proper delivery of the Certificates to the Exchange Agent, and
shall contain or request any information that Avatex may reasonably require) and
instructions for use in effecting the surrender of the Certificates.
(c) Upon surrender to the Exchange Agent of a Certificate, together with
such letter of transmittal and, if applicable, a Form of Election, duly executed
and completed in accordance with the instructions thereto, and such other
documents as may be requested, the holder of such Certificate shall, following
the Effective Time, be entitled to receive in exchange therefor the applicable
Merger Consideration deliverable in respect of the
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Avatex Shares formerly evidenced by such Certificate or Certificates (together
with any cash in lieu of fractional shares of New Avatex Common Stock, if
applicable, pursuant to Section 2.3(e)) and any other amounts payable pursuant
to Section 2.3(a) hereof, and such Certificate or Certificates shall forthwith
be cancelled. Until surrendered in accordance with the provisions of this
Section 2.3, each Certificate shall represent for all purposes the right to
receive the applicable Merger Consideration and the right to receive cash in
lieu of fractional shares of New Avatex Common Stock, if applicable, and any
other amounts payable pursuant to Section 2.3(a) hereof. If a Certificate or
Certificates formerly evidencing more than one Avatex Share shall be surrendered
for exchange as provided in this Agreement at one time by the same holder,
(x) certificates representing the number of full shares of New Avatex Common
Stock, or, in the case of Convertible Preferred Stock Electing Shares or Series
A Preferred Stock Electing Shares, the amount of Convertible Preferred Stock
Alternate Consideration or Series A Preferred Stock Alternate Consideration,
(y) the amount of cash in lieu of fractional shares of New Avatex Common Stock,
if applicable, and (z) any other amounts payable pursuant to
Section 2.3(a) hereof deliverable upon the surrender thereof shall be computed
on the basis of the aggregate number of Avatex Shares formerly evidenced by such
Certificates so surrendered. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto shall be liable to a holder of Avatex Shares for any
Merger Consideration or any other consideration payable pursuant to this Article
II delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(d) If any stock portion of the applicable Merger Consideration is to be
delivered to a person other than the person in whose name the Certificate
surrendered in exchange thereof is registered, it shall be a condition to the
delivery of such certificates representing stock that the Certificate so
surrendered shall be properly endorsed or accompanied by appropriate stock
powers and otherwise in proper form for transfer, that such transfer otherwise
be proper and that the person requesting such transfer pay to the Exchange Agent
any transfer or other taxes payable by reason of the foregoing or establish to
the satisfaction of the Exchange Agent that such taxes have been paid or are not
required to be paid.
(e) Notwithstanding anything herein to the contrary, no certificates
representing fractional shares of New Avatex Common Stock shall be issued upon
the surrender for exchange of Certificates pursuant to this Section 2.3, and no
fractional shares of New Avatex Common Stock shall be issued in the Merger. Such
fractional share interests shall not entitle the holder thereof to vote or to
any rights as a security holder of Avatex or the Surviving Corporation. In lieu
of any fractional shares of New Avatex Common Stock, each person who otherwise
would have been entitled to receive any such fractional shares shall be entitled
to receive at the time Merger Consideration is paid pursuant to this Article II,
an amount in cash equal to the product obtained by multiplying the fractional
share interest to which such person would otherwise be entitled by the average
of the last reported sales prices (or the average of the quoted closing bid and
ask prices if there were no sales) of a share of Old Avatex Common Stock quoted
on the OTC Bulletin Board System (the "OTCBB") (or any other stock exchange,
over-the-counter market or trading facility (in any such case, an "Other
Exchange") on which the Old Avatex Common Stock is primarily listed or admitted
for trading) during the 30 consecutive Trading Days (as defined below) ending on
the Trading Day next preceding the Effective Time. For the purposes of this
paragraph, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any of such days on which securities are
generally not traded or quoted on the OTCBB or the applicable Other Exchange.
(f) As soon as practicable after the determination of the amount of the
applicable Merger Consideration to be received, paid and/or issued to the
persons who would otherwise have been entitled to such amounts, without
interest, shall be received, paid and/or issued to such persons; provided,
however, that no such amount will be received, paid and/or issued to any such
person prior to the surrender by such person of the Certificates formerly
representing such person's Avatex Shares. Notwithstanding the foregoing, neither
the Exchange Agent nor any party hereto shall be liable for any cash proceeds
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(g) Promptly following the date that is six months after the Effective
Time, the Exchange Agent shall return to the Surviving Corporation all
certificates, instruments or documents representing or otherwise evidencing the
Merger Consideration issuable pursuant to this Article II in its possession, and
the Exchange Agent's duties shall terminate. Thereafter, each holder of a
Certificate formerly representing an Avatex Share
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may surrender such Certificate to the Surviving Corporation and (subject to
applicable abandoned property, escheat or similar laws) receive in exchange
therefor Shares of New Avatex Common Stock issuable pursuant to this Article II,
any cash in lieu of fractional shares, if applicable, pursuant to the terms
hereof and any other amounts payable pursuant to Section 2.3(a) hereof.
(h) Notwithstanding anything to the contrary contained in the Agreement, in
the event any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed, the Surviving Corporation shall issue (or cause
the Exchange Agent to issue) in exchange for such lost, stolen or destroyed
certificate, certificates or other instruments representing the applicable
Merger Consideration, any cash in lieu of fractional shares, if applicable, and
any other amounts payable pursuant to Section 2.3(a) hereof, deliverable in
respect thereof as determined in accordance with this Article II; provided,
however, that the Board of Directors of the Surviving Corporation may, in its
discretion and as a condition precedent to the delivery thereof, require the
owner of such lost, stolen or destroyed Certificate to give the Surviving
Corporation a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against the Surviving Corporation with respect to the
Certificate alleged to have been lost, stolen or destroyed.
(i) The issuance and/or payment of Merger Consideration in accordance with
the terms of this Article II shall be deemed to have been issued and/or paid in
full satisfaction of all rights pertaining to the Avatex Shares theretofore
represented by such Certificates representing such Avatex Shares.
SECTION 2.4 CLOSING OF TRANSFER BOOKS. After the Effective Time there
shall be no transfers on the stock transfer books of Avatex of the Avatex Shares
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be cancelled and exchanged for certificates or other instruments
representing the applicable Merger Consideration, any cash in lieu of fractional
shares, if applicable, as provided in this Article II and any other amounts
payable pursuant to Section 2.3(a) hereof.
SECTION 2.5 STOCK OPTIONS. At the Effective Time and without limiting the
generality of the matters referred to in Section 1.3, Avatex's obligations with
respect to each outstanding option to purchase shares of Old Avatex Common Stock
(collectively, the "Stock Options") granted pursuant to Avatex's 1993 Stock
Option and Performance Award Plan, as amended (the "Avatex Option Plan"), or any
of Avatex's other stock option plans or agreements (the "Avatex Stock Option
Plans") shall continue to be obligations of the Surviving Corporation. The Stock
Options shall continue to have, and be subject to, the same terms and conditions
set forth in the Avatex Stock Option Plans and agreements pursuant to which such
Stock Options were issued as in effect immediately prior to the Effective Time,
except that the Stock Options shall thereupon be exercisable for shares of New
Avatex Common Stock and (a) the number of shares for which such Stock Option
shall be exercisable shall equal the product of the Common Stock Exchange Ratio
and the number of shares of Old Avatex Common Stock subject to the Stock Option
immediately prior to the Effective Time (rounded to the nearest whole number),
and (b) the per share exercise price for the shares of New Avatex Common Stock
issuable upon the exercise of such assumed Stock Option shall be equal to the
aggregate exercise price for the shares of Old Avatex Common Stock subject to
the Stock Option, divided by the number of shares of New Avatex Common Stock
deemed to be purchasable pursuant to the Stock Option. The date of grant shall
be the date on which the Stock Option was originally granted. The Surviving
Corporation shall (i) reserve for issuance the number of shares of New Avatex
Common Stock that will become issuable upon the exercise of such Stock Options
pursuant to this Section 2.5 and (ii) at the Effective Time, execute a document
acknowledging the Surviving Corporation's obligations with respect thereto under
this Section 2.5. Nothing in this Section 2.5 shall affect the schedule of the
vesting (or the acceleration thereof) with respect to the Stock Options, in
accordance with the terms thereof, to be assumed by the Surviving Corporation as
provided in this Section 2.5.
SECTION 2.6 EMPLOYMENT AGREEMENTS AND RELATED ARRANGEMENTS. (a) At the
Effective Date and without limiting the generality of the matters referred to in
Section 1.3 hereof, all of Avatex's rights and obligations under the employment
agreements and other benefit plans and arrangements applicable to or covering
current employees of Avatex listed on Schedule 2.6 hereto shall continue to be
the rights and obligations of the Surviving Corporation.
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(b) Without limiting the generality of the matters referred to in Section
1.3 or 2.6(a) hereof, after the Effective Time, Avatex's Performance Incentive
Plan, effective as of January 1, 1997 (as amended by Amendment No. 1 thereto,
effective as of June 23, 1997, and by Amendment No. 2 thereto, effective as of
January 22, 1998, and as the same may be further amended, supplemented or
modified from time to time, the "Incentive Plan"), shall continue in effect
after the Effective Time as a benefit plan of the Surviving Corporation and the
rights and obligations of Avatex thereunder shall continue after the Effective
Time to be the rights and obligations of the Surviving Corporation in accordance
with, and pursuant to, this Section 2.6. For the purposes of clarification, it
is understood that, for the purposes of determining any amount payable under the
Incentive Plan with respect to Litigation Income (as such term is defined in the
Incentive Plan), Litigation Income shall be calculated in the same manner as Net
Recovery is to be calculated herein, provided that the provisions of
Section 2.1 (a)(ii) (II) (z) hereof shall not be deemed applicable with respect
to the definition of Litigation Income or otherwise with respect to the
calculation or payment of any amounts payable under the Incentive Plan with
respect to Litigation Income.
SECTION 2.7 CERTAIN MATTERS RELATING TO DEFERRED CONTINGENT CASH RIGHTS.
(a) No Deferred Contingent Cash Right shall (i) be transferable by any recipient
thereof in connection with the Merger, except by will or pursuant to the laws of
descent and distribution or by operation of law, (ii) be evidenced by a
certificate or other instrument, (iii) possess any voting rights, (iv) receive
or be entitled to receive any dividends or interest, or (v) represent any equity
interest in Avatex, Xetava or the Surviving Corporation.
(b) The Surviving Corporation will maintain (or cause to be maintained)
books of record of the recipients of Deferred Contingent Cash Rights in the
Merger as provided by this Agreement. Such books of record shall show the names
and addresses of the respective recipients of Deferred Contingent Cash Rights,
as the same are made available to Avatex in connection with the consummation of
the Merger.
(c) Notwithstanding anything to the contrary contained herein or in the
Incentive Plan, no provision of the Incentive Plan shall affect or be deemed to
affect any payment on the Deferred Contingent Cash Rights hereunder; provided,
however, that if the Surviving Corporation amends the Incentive Plan in such a
manner that accelerates when payments under the Incentive Plan with respect to
Litigation Income may be made, the terms of this Agreement shall be deemed
amended to the extent necessary so that the time at which the Surviving
Corporation becomes obligated to make any payments on the Deferred Contingent
Cash Rights hereunder shall occur concurrently with the time that the Surviving
Corporation first becomes obligated to make payments under the Incentive Plan
with respect to Litigation Income.
(d) (i) Subject to subparagraph (ii) below, payment, if any, on the
Deferred Contingent Cash Rights shall be made to the registered recipients
thereof as of a date that is not later than 30 days following the date on which
the Surviving Corporation receives the full Cash Payment; provided, however,
that, if the Cash Payment is to be received by the Surviving Corporation in more
than one installment, the Surviving Corporation shall make interim payments on
the Deferred Contingent Cash Rights not later than 30 days following the date on
which the Surviving Corporation actually receives any portion of the full Cash
Payment, individually or in the aggregate with other Cash Payments with respect
to which an Interim Payment (as defined below) has not yet been paid, that would
result in the Surviving Corporation being able to make, in accordance with the
applicable provisions of Sections 2.1(a)(ii)(I), 2.1(a)(ii)(II) and
2.1(b)(iii)(I) hereof and this Section 2.7, a payment on the Deferred Contingent
Cash Rights at such time of at least $500,000 (each of any such payments, an
"Interim Payment"). Notwithstanding anything to the contrary herein and to avoid
any confusion herein, under no circumstances will the Surviving Corporation be
obligated to make any payment on the Deferred Contingent Cash Rights until such
time as there has been, with respect to each and every defendant in the McKesson
Litigation, a final, non-appealable judgment, a voluntary dismissal with
prejudice of, or final settlement of all claims, counterclaims, third-party
claims and other claims asserted in or with respect to the McKesson Litigation.
(ii) Notwithstanding anything to the contrary contained in this
Agreement, for the purposes of calculating an actual payment on the
Deferred Contingent Cash Rights, Avatex shall exclude from the Cash Payment
upon which such payment on the Deferred Contingent Cash Rights is to be
based an amount equal to any portion of such Cash Payment that is
includible in income by the Surviving Corporation for federal Income Tax
purposes multiplied by the highest, combined marginal rate of
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federal, state and local Income Taxes that is likely to be applicable to
the Surviving Corporation for the taxable year in which the obligation to
pay the Cash Payment to the Surviving Corporation became fixed (such
amount, the "Retained DCCR Payment Amount"), which Retained DCCR Payment
Amount shall be determined by the Surviving Corporation's independent
accountants in good faith and may include appropriate adjustments,
including, but not limited to, to account for any actual or imputed
interest that is likely to be includible in income in respect of the Cash
Payment, and such determination shall be final and binding on all parties.
If the Retained DCCR Payment Amount exceeds the Actual Tax Amount with
respect to the Cash Payment upon which such payment on the Deferred
Contingent Cash Rights is based, the amount of such excess shall be paid
pro rata to the registered recipients of Deferred Contingent Cash Rights
(such payment, the "Excess Payout"). The Excess Payout, including interest
thereon at a rate of 5% per annum accruing from the date on which the
Surviving Corporation receives the Cash Payment upon which such payment on
the Deferred Contingent Cash Rights is based to the date of the actual
payment of the Excess Payout, shall be made not later than 30 days
following the later of (x) the date on which the Surviving Corporation
actually files all of its federal, state and local Income Tax returns for
the taxable year in which the obligation to pay the Cash Payment to the
Surviving Corporation became fixed, and (y) the date on which the Surviving
Corporation actually receives the Cash Payment upon which such payment on
the Deferred Contingent Cash Rights is based.
(iii) Any payments on the Deferred Contingent Cash Rights shall be
made to the registered recipients of Deferred Contingent Cash Rights at
their respective addresses in the books of record of the Surviving
Corporation. A recipient of a Deferred Contingent Cash Right shall not be
entitled to any interest for the period of time between the date on which
the Surviving Corporation receives any portion of the Cash Payment and the
date on which timely payment is made on the Deferred Contingent Cash Rights
in accordance with the terms hereof; provided, however, that any payments
made on the Deferred Contingent Cash Rights after expiration of the 30-day
periods referred to in the subparagraphs (i) and (ii) above shall include
interest thereon at a rate of 8% per annum accruing from the first day
following the expiration of such applicable 30-day period to the date of
the actual applicable payment on Deferred Contingent Cash Rights in
accordance with the terms hereof; provided further, however, that such
interest shall in no event accrue on any portion of the Retained DCCR
Payment Amount until after the expiration of the 30-day payment period
applicable to the payment of the Excess Payout referred to in subparagraph
(ii) above, or on any payment made on the Deferred Contingent Cash Rights
during either such 30-day period so long as such applicable payment was
made to the registered recipient of Deferred Contingent Cash Rights at
their respective addresses in the books and records of the Surviving
Corporation.
(e) Notwithstanding anything to the contrary in this Agreement or
otherwise, (i) the Surviving Corporation shall retain sole and exclusive control
of the McKesson Litigation and may, among other things, dismiss, settle or cease
prosecuting all or any portion of the McKesson Litigation at any time,
including, without limitation, without obtaining any cash or other recovery,
(ii) no recipient of Deferred Contingent Cash Rights shall have any rights
against the Surviving Corporation or its directors, officers, agents, attorneys,
representatives, stockholders or affiliates for any decision regarding the
conduct or disposition of the McKesson Litigation, including, without
limitation, any decision to dispose or cease the prosecution of all or any
portion of the McKesson Litigation without a cash recovery by the Surviving
Corporation (except for any claim for violation or breach of Section 2.7(f)
below), and (iii) the Surviving Corporation's good faith determination of the
amounts of the Net Recovery and the Net Recovery Participation Cap will be
final, conclusive and binding on the recipients of Deferred Contingent Cash
Rights. In addition, in the event that any applicable law, rule, regulation or
order limits or prevents the distribution of all or any portion of the Net
Recovery, the Surviving Corporation shall have no obligation whatsoever to make
any payment in excess of the allowable amount, if any. Consequently, should all
or any portion of the payments on the Deferred Contingent Cash Rights required
by this Agreement be in excess of the allowable amount at the time such payment
is to be made, the Surviving Corporation will not make all or any portion of the
payment, as the case may be, in excess of the allowable amount at such time or
at any future time. Each record holder of shares of Convertible Preferred Stock
or Series A Preferred Stock electing to receive the Convertible Preferred Stock
Alternate Consideration or the Series A Preferred Stock Alternate Consideration,
as applicable, in accordance with this Agreement will be required to acknowledge
and agree to the foregoing
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provisions of this Section 2.7(e), and, in connection therewith, each Form of
Election to be signed by such record holders will contain such acknowledgment
and agreement.
(f) Avatex agrees and covenants not to artificially arrange its affairs so
as to avoid or minimize the payment on the Deferred Contingent Cash Rights
(including, without limitation, arranging for some payment of goods or services,
directly or indirectly, from the McKesson Litigation defendants outside of a
settlement thereof).
SECTION 2.8 DISSENTING SHARES. Notwithstanding any other provision of
this Agreement to the contrary, the shares of Convertible Preferred Stock and
Series A Preferred Stock that are outstanding immediately prior to the Effective
Time and which are held by stockholders who shall be entitled to perfect
appraisal rights pursuant to Section 262 of the DGCL and who have fully complied
with all of the requirements of Section 262 of the DGCL for perfecting appraisal
rights (any such shares, the "Dissenting Shares"), shall not be converted into
or represent the right to receive the applicable Merger Consideration unless
such stockholders fail to perfect, withdraw or otherwise lose their right to
appraisal. Such stockholders shall be entitled to receive payment of the
appraised value of such Dissenting Shares in accordance with the provisions of
Section 262 of the DGCL. If, after the Effective Time, any such stockholder
fails to perfect, withdraws or loses its right to appraisal, such shares of
Convertible Preferred Stock and Series A Preferred Stock shall be treated as if
they had been converted as of the Effective Time into a right to receive the
applicable Merger Consideration, without interest thereon, upon surrender of the
Certificate or Certificates that formerly evidenced such shares of Convertible
Preferred Stock or Series A Preferred Stock in the manner set forth in Section
2.1.
ARTICLE III
COVENANTS
SECTION 3.1 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. After the
execution of this Agreement, Avatex and Newco shall prepare and file with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act"), a registration statement (the "Registration
Statement") with respect to the New Avatex Common Stock, warrants to purchase
shares of New Avatex Common Stock (including the shares of New Avatex Common
Stock issuable upon the exercise of such warrants) and the 6.75% Notes to be
issued in the Merger and shall use all reasonable efforts to have the
Registration Statement declared effective by the SEC as promptly as practicable.
Avatex also shall take any action required to be taken under state blue sky or
securities laws in connection with the issuance of New Avatex Common Stock,
warrants to purchase shares of New Avatex Common Stock (including the shares of
New Avatex Common Stock issuable upon the exercise of such warrants) and the
6.75% Notes pursuant to the Merger, and Avatex, Xetava and Newco shall furnish
all information concerning Avatex, Xetava and Newco and the holders of Avatex
Shares and shall take such other action as may be reasonably requested by the
SEC. Avatex shall maintain the effectiveness of the Registration Statement as it
relates to the warrants to purchase shares of New Avatex Common Stock (including
the shares of New Avatex Common Stock issuable upon the exercise of such
warrants) covered thereunder until the earlier of when (i) all of such warrants
have been exercised or (ii) the exercise period for the exercise of such
warrants under the Warrant Agreement has expired. Avatex shall prepare for
inclusion in the Registration Statement, shall file with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or before
the time the Registration Statement is filed as provided above, and shall use
all reasonable efforts to have cleared by the SEC, a proxy statement with
respect to the meeting of stockholders of Avatex as provided in Section 3.2
below (the "Proxy Statement"), and shall mail the Proxy Statement to such
stockholders as promptly as practicable after clearance of the Proxy Statement
with the SEC. The Proxy Statement shall include the recommendation of the Board
of Directors of Avatex in favor of adoption of this Agreement and the Merger.
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SECTION 3.2 STOCKHOLDER APPROVAL. (a) Avatex shall take all steps
necessary to call, give notice of in accordance with the DGCL, convene and hold
a meeting of its stockholders entitled to vote on the Merger (the "Stockholders'
Meeting") as soon as practicable for the purpose of adopting this Agreement,
approving the Merger and for such other purposes as may be necessary or
desirable.
(b) The Board of Directors of Avatex shall recommend to its stockholders
the adoption of this Agreement and shall use its reasonable best efforts to
obtain the necessary approvals by its stockholders of this Agreement and the
transactions contemplated hereby.
SECTION 3.3 OTCBB/OTHER EXCHANGE LISTING. Avatex and Newco shall use
their respective reasonable best efforts to effect, at or before the Effective
Time, approval for quotation or listing on the OTCBB or an Other Exchange, upon
official notice of issuance, of the New Avatex Common Stock, warrants to
purchase shares of New Avatex Common Stock (including the shares of New Avatex
Common Stock issuable upon the exercise of such warrants) and the 6.75% Notes to
be issued pursuant to the Merger.
SECTION 3.4 FEES AND EXPENSES. Each party hereto shall pay all costs and
expenses incurred by it in connection with this Agreement and the transactions
contemplated hereby.
SECTION 3.5 FAIRNESS AND SOLVENCY OPINIONS. (a) The Board of Directors of
Avatex shall use its reasonable best efforts to have updated in form and
substance satisfactory to the Board of Directors of Avatex, as of the time of
the mailing of the Proxy Statement and as of the Effective Time, the opinions of
Houlihan Lokey Howard & Zukin Financial Advisors, Inc., financial advisor to the
Board of Directors of Avatex (the "HL"), that the Board of Directors of Avatex
received to the effect that (i) the consideration that the holders of the Old
Avatex Common Stock are entitled to receive pursuant to the Merger is fair to
such holders from a financial point of view, and (ii) the consideration that the
holders of the Convertible Preferred Stock and the Series A Preferred Stock are
entitled to receive pursuant to the Merger is, in the aggregate, within a
reasonable fair value of the Convertible Preferred Stock or the Series A
Preferred Stock, as applicable (such opinions as of the date hereof and as so
updated, collectively, the "Fairness Opinions").
(b) The Board of Directors of Avatex shall use its reasonable best efforts
to have updated in form and substance satisfactory to the Board of Directors of
Avatex, as of the time of the mailing of the Proxy Statement and as of the
Effective Time, the opinion of HL that the Board of Directors of Avatex received
as to the solvency of the Surviving Corporation after giving effect to the
Merger and the consummation of the other transactions contemplated herein (such
opinion as of the date hereof and as so updated, the "Solvency Opinion").
SECTION 3.6 ORGANIZATION AND CAPITALIZATION OF NEWCO. (a) Prior to the
Effective Time, Avatex will organize Newco as a direct, wholly-owned subsidiary
of Avatex. At all times after such organization and prior to the transfer of the
Phar-Mor Stock (as defined below) contemplated by this Section 3.6, Newco will
have no assets or liabilities of any kind whatsoever and will not have conducted
any business operations of any kind whatsoever, other than the activities
associated with its incorporation, its authorization of any agreement, document
or instrument it is to execute or be subject to in connection with the
consummation of the transactions contemplated by this Agreement, and its
consummation of transactions contemplated by this Agreement.
(b) On or prior to the tenth business day after the Election Deadline,
Avatex shall, in the form of a contribution to the capital of Newco, assign,
transfer, convey and deliver to Newco, and Newco shall acquire and accept from
Avatex, free and clear of all liens, claims and encumbrances (other than those
created under the 6.75% Notes Indenture and the Pledge and Security Agreement
contemplated thereby) all of Avatex's right, title and interest in and to
3,571,533 shares of common stock, par value $0.01 per share, of Phar-Mor, Inc.,
a Pennsylvania corporation (the "Phar-Mor Stock").
SECTION 3.7 NEWCO CERTIFICATE OF INCORPORATION. Prior to the Effective
Time, Avatex shall cause Newco to file with the Secretary of State of the State
of Delaware the Newco Certificate of Incorporation substantially in the form
annexed hereto as Exhibit F.
SECTION 3.8 AUTHORIZATION OF ISSUANCE OF MERGER CONSIDERATION. Avatex
shall use reasonable efforts to obtain any authorizations and consents
necessary, and shall use reasonable efforts to take such further actions as may
be required, for the payment and/or issuance of the Merger Consideration to
holders of Avatex Shares pursuant to the terms of this Agreement.
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<PAGE>
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF AVATEX
AND XETAVA
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
SECTION 4.1 STOCKHOLDER APPROVAL. This Agreement shall have been adopted
by the affirmative vote of the holders (collectively, the "Stockholder
Approval") of (i) at least a majority of the outstanding shares of Old Avatex
Common Stock, (ii) at least two thirds of the outstanding shares of Convertible
Preferred Stock, and (iii) at least two thirds of the outstanding shares of
Series A Preferred Stock, in each case, voting separately as a class, at the
Stockholders' Meeting or any other meeting of Avatex stockholders, and by
written consent of the sole stockholder of Xetava.
SECTION 4.2 CERTAIN PROCEEDINGS. Neither Avatex nor Xetava shall be
subject to any writ, order, decree or injunction of a court of competent
jurisdiction prohibiting or restricting the consummation of the Merger.
SECTION 4.3 LISTING OF NEW AVATEX COMMON STOCK. The New Avatex Common
Stock to be issued in the Merger shall have been approved for quotation or
listing on the OTCBB, subject to official notice of issuance, or on an Other
Exchange as so provided for in Section 3.3.
SECTION 4.4 REGISTRATION STATEMENT. The Registration Statement shall have
been declared effective, shall be effective at the Effective Time, and no stop
order suspending such effectiveness or the use of the Proxy Statement shall have
been issued or proceedings for either such purpose shall have been instituted.
SECTION 4.5 BLUE SKY LAWS. Avatex shall have received all Blue Sky
authorizations necessary to issue the Merger Consideration.
SECTION 4.6 TAX OPINION. Avatex and Xetava shall have received an opinion
of their counsel, Weil, Gotshal & Manges LLP, to the effect that, for federal
income tax purposes, (i) the Merger will constitute a recapitalization of Avatex
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"); (ii) no gain or loss will be recognized by Avatex or
Xetava pursuant to the Merger (other than possibly with respect to the issuance
of Deferred Contingent Cash Rights); and (iii) no gain or loss will be
recognized by a holder of Avatex Shares upon the exchange of such shares solely
for shares of New Avatex Common Stock pursuant to the Merger (except with
respect to any cash received in lieu of fractional shares and any New Avatex
Common Stock received by a holder of Series A Preferred Stock or Convertible
Preferred Stock on account of dividend arrearages). In rendering such opinion,
Weil, Gotshal & Manges LLP may receive and rely upon representations contained
in certificates.
SECTION 4.7 FAIRNESS AND SOLVENCY OPINIONS. The Fairness Opinions and the
Solvency Opinion, including the updates thereof referred to in Section 3.5
above, shall have been received and shall not have been modified, withdrawn or
revoked (i) as of the time of the mailing of the Proxy Statement to the
stockholders of Avatex or (ii) before the Effective Time.
SECTION 4.8 RESIGNATIONS OF CERTAIN DIRECTORS. Each of Messrs. Daniel
Gropper, Vincent Intrieri, Ralph DellaCamera, Jr. and Brian Miller shall have
delivered a written letter to Avatex providing for the resignation of each of
them as directors of Avatex effective immediately prior to the Effective Time.
SECTION 4.9 SETTLEMENTS OF CERTAIN LITIGATION. The lawsuits, filed in
April 1998 in the Delaware Chancery Court, 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, each of which lawsuits was consolidated by the Delaware Chancery
Court in May 1998 under the caption In re: Avatex Corporation Shareholders
Litigation, C.A. No. 16334, and Elliott Associates, L.P. v. Avatex Corporation,
et. al., C.A. No. 16336, shall be settled pursuant to a settlement agreement
with terms and provisions satisfactory to Avatex and such settlement agreement
shall be approved by a court of competent jurisdiction and, in connection
therewith, such litigation shall be dismissed with prejudice, and such
settlement, approval and dismissal shall be final and non-appealable.
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<PAGE>
SECTION 4.10 STOCKHOLDERS' AGREEMENT; VOTING AGREEMENT. Neither the
Stockholders' Agreement nor the Voting Agreement shall have terminated or been
terminated, and no notice of any such termination shall have been delivered to
Avatex by any stockholder party thereto. There shall not have been a breach of
the Stockholders' Agreement or the Voting Agreement by any of the stockholders
of Avatex party thereto.
SECTION 4.11 DISSENTING SHARES. On the Closing Date, shares of
Convertible Preferred Stock that constitute Dissenting Shares shall aggregate no
more than 5% of the then outstanding shares of Convertible Preferred Stock, or
shares of Series A Preferred Stock that constitute Dissenting Shares shall
aggregate no more than 5% of the then outstanding shares of Series A Preferred
Stock.
SECTION 4.12 RELEASES. Each of the stockholders of Avatex party to the
Stockholders' Agreement or the Voting Agreement, for themselves and each of
their respective affiliates, shall have executed and delivered to Avatex a
written release, substantially in the form of Exhibit G hereto, which release
shall be as of, and effective upon, the effectiveness of the Merger.
ARTICLE V
CLOSING
SECTION 5.1 TIME AND PLACE. The closing of the Merger (the "Closing")
shall take place at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue,
New York, New York 10153, on a date agreed to by Avatex and Xetava following
satisfaction or waiver by Avatex or Xetava, as the case may be, of the
conditions set forth in Article IV. The date on which the Closing actually
occurs is herein referred to as the "Closing Date."
SECTION 5.2 FILINGS AT THE CLOSING. Avatex and Xetava shall immediately
after the Closing (a) file with the Delaware Secretary of State the Certificate
of Merger and (b) take all such other and further actions as may be required by
law to make the Merger effective.
ARTICLE VI
TERMINATION
SECTION 6.1 TERMINATION. Avatex may terminate this Agreement (a) if
holders of at least 50.1% of each of the shares of Convertible Preferred Stock
and Series A Preferred Stock outstanding as of immediately prior to the Election
Deadline have not effectively made (and not revoked) prior to the Election
Deadline a Convertible Preferred Stock Alternate Consideration Election or
Series A Preferred Stock Alternate Consideration Election, as the case may be,
pursuant to Section 2.2 hereof, or (b) if shares of Convertible Preferred Stock
that constitute Dissenting Shares shall aggregate more than 5% of the then
outstanding shares of Convertible Preferred Stock or shares of Series A
Preferred Stock that constitute Dissenting Shares shall aggregate more than 5%
of the then outstanding shares of Series A Preferred Stock. In addition, this
Agreement may be terminated at any time prior to the Effective Time, whether
before or after Stockholder Approval, by the Board of Directors of either of
Avatex or Xetava, including, without limitation, because of the non-fulfillment
of any of the conditions set forth in Article IV hereof. In the event of
termination of the Merger pursuant to the foregoing sentences, this Agreement
shall terminate and the Merger shall be abandoned, without further action by any
of the parties hereto.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified or supplemented, before or after Stockholder
Approval, only by written agreement of Avatex and Xetava at any time prior to
the Effective Time with respect to any of the terms contained herein; provided,
however, that, after this Agreement is adopted by Avatex's stockholders pursuant
to Section 3.2, no such amendment or modification shall be made that by law
requires further approval by the stockholders of Avatex entitled to vote thereon
without the further approval of such stockholders.
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<PAGE>
SECTION 7.2 INDEMNIFICATION. (a) The Surviving Corporation shall
maintain, for a period of at least six years from the Effective Time, (i)
director and officer liability insurance providing at least $30 million of
coverage with respect to Avatex's present and former officers and directors and
other similar coverage as the current policies maintained by or on behalf of
Avatex, and containing terms and conditions which are no less advantageous with
respect to matters existing or occurring at or prior to the Effective Time, and
in the event any claim is made against present or former directors or officers
of Avatex that is covered, in whole or in part, or potentially so covered by
insurance, the Surviving Corporation shall not do anything that would forfeit,
jeopardize, restrict or limit the insurance coverage available for that claim
until the final disposition of that claim; provided, however, that if the cost
of maintaining such insurance exceeds twice the current cost related to
providing such insurance (the "Current Cost"), then the Surviving Corporation
shall maintain such director and officer liability insurance with the maximum
amount of coverage obtainable at twice such Current Cost, and (ii) provisions in
its certificate of incorporation and by-laws relating to indemnification,
exculpation and advancement of expenses no less favorable than the rights to
indemnification, exculpation and advancement of expenses now existing in favor
of the present and former directors and officers of Avatex and its subsidiaries
as provided in its certificate of incorporation or by-laws or otherwise in
effect on the date hereof; provided, however, that with respect to any claim
asserted, made or originated prior to the expiration of such six-year period
until the final disposition of such Claim (as hereinafter defined), and that
during such period, the Certificate of Incorporation and By-Laws of the
Surviving Corporation shall not be amended to reduce or limit the rights of
indemnity or advancement of expenses of the present and former directors or
officers of Avatex, or the ability of the Surviving Corporation to indemnify (or
advance expenses to) them, nor to hinder, delay or make more difficult the
exercise of such rights of indemnity or advancement of expenses or the ability
to indemnify or advance expenses.
(b) From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the date of this Agreement or who becomes prior to the Effective
Time, an officer or director of Avatex against all losses, claims, damages,
costs, expenses or liabilities, or in connection with any claim, action, suit,
proceeding or investigation (a "Claim"), arising out of the fact that such
person is or was an officer or director of Avatex (or out of any action taken by
any such person on behalf of Avatex), pertaining to any matter existing or
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement), whether asserted or claimed prior
to, or at or after, the Effective Time. In each case such indemnification shall
be to the fullest extent that a corporation is permitted under applicable law to
indemnify its own directors and officers, as the case may be (and the Surviving
Corporation will pay expenses in advance of the final disposition of any such
action or proceeding to each such present or former director or officer of
Avatex seeking indemnification hereunder to the full extent permitted by law).
(c) Without limiting the foregoing, in any case in which approval by the
Surviving Corporation is required to effectuate any indemnification under this
Section 7.2, it shall direct, at the election of the director or officer of
Avatex seeking indemnification hereunder, that the determination of any such
approval shall be made by independent counsel acceptable to the Surviving
Corporation selected by such present or former director or officer of Avatex
seeking indemnification hereunder.
(d) This Section 7.2 shall survive the consummation of the Merger. The
provisions of this Section 7.2 are intended to be for the benefit of, and shall
be enforceable by the present and former directors and officers of Avatex. The
rights provided under this Section 7.2 shall be in addition to, and not in lieu
of, any rights to which any party may have under the Certificate of
Incorporation or By-Laws of Avatex or the Surviving Corporation, any other
agreements or otherwise.
SECTION 7.3 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other party, nor is
this Agreement intended to confer upon any other person except the parties
hereto any rights or remedies hereunder.
SECTION 7.4 GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of
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<PAGE>
conflicts of law) as to all matters, including, but not limited to, matters of
validity, construction, effect, performance and remedies.
SECTION 7.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 7.6 INTERPRETATION; DEFINITIONS. (a) The article and section
headings contained in this Agreement are solely for the purpose of reference,
are not part of the agreement of the parties and shall not in any way affect the
meaning or interpretation of this Agreement. As used in this Agreement, (i) the
term "person" shall mean and include an individual, a partnership, a limited
liability company, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof; (ii) the term
"subsidiary" of any specified corporation shall mean any corporation of which
the outstanding securities having ordinary voting power to elect a majority of
the board of directors are directly or indirectly owned by such specified
corporation; and (iii) the term "business day" shall mean any day of the week
other than a Saturday, Sunday or other day on which commercial banks in New York
City are authorized or required by law to close. Terms defined herein in the
singular shall have a comparable meaning when used in the plural, and vice
versa.
(b) Each of the following terms shall have the respective meaning ascribed
such term in the section of this Agreement set forth opposite such term below:
<TABLE>
<CAPTION>
TERM SECTION
- ----------------------------------------------------------------- -------------------------
<S> <C>
Actual Tax Amount 2.1(a)(ii)(A)(II)
Agreement Introductory Paragraph
Avatex Introductory Paragraph
Avatex Option Plan 2.5
Avatex Shares Recitals
Avatex Stock Option Plans 2.5
Cash Payment 2.1(a)(ii)(A)(II)
Certificate 2.3(a)
Certificate of Merger 1.2
Claim 7.2(b)
Closing 5.1
Closing Date 5.1
Code 4.6
Common Stock Exchange Ratio 2.1(a)(i)
Constituent Corporations Introductory Paragraph
Convertible Preferred Deferred Contingent Cash Right 2.1(a)(ii)(A)(I)
Convertible Preferred Exchange Ratio 2.1(a)(ii)
Convertible Preferred Stock Recitals
Convertible Preferred Stock Alternate Consideration 2.1(a)(ii)(A)(I)
Convertible Preferred Stock Alternate Consideration Election 2.2(a)
Convertible Preferred Stock Electing Shares 2.1(a)(ii)
Current Cost 7.2(a)
Deferred Contingent Cash Rights 2.1(a)(iv)
DGCL Recitals
Dissenting Shares 2.8
Effective Time 1.2
Election Deadline 2.2(c)
Excess Payout 2.7(d)
Exchange Act 3.1
Exchange Agent 2.3(a)
Fairness Opinion 3.5(a)
Form of Election 2.2(c)
HL 3.5(a)
Incentive Plan 2.6(b)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ----------------------------------------------------------------- -------------------------
<S> <C>
Interim Payment 2.7(d)
Income Tax 2.1(a)(ii)(A)(II)
Litigation Income 2.6(b)
McKesson Litigation 2.1(a)(ii)(A)(II)
Merger Recitals
Merger Consideration 2.1(a)(iv)
Net Recovery 2.1(a)(ii)(A)(II)
Net Recovery Participation Cap 2.1(a)(ii)(A)(II)
New Avatex Common Stock 2.1(a)(i)
Newco Recitals
Old Avatex Common Stock Recitals
Original Merger Agreement Recitals
Other Exchange 2.3(e)
OTCBB 2.3(e)
Phar-Mor Stock 3.6(b)
Proxy Statement 3.1
Record Date 2.2(c)
Registration Statement 3.1
Retained DCCR Payment Amount 2.7(d)
Representative 2.2(c)
SEC 3.1
Securities Act 3.1
Series A Preferred Deferred Contingent Cash Right 2.1(a)(iii)(A)(I)
Series A Preferred Exchange Ratio 2.1(a)(iii)(A)
Series A Preferred Stock Recitals
Series A Preferred Stock Alternate Consideration 2.1(a)(iii)(A)(I)
Series A Preferred Stock Alternate Consideration Election 2.2(b)
Series A Preferred Stock Electing Shares 2.1(a)(iii)(A)
6.75% Notes 2.1(a)(ii)(A)(I)
6.75% Notes Indenture 2.1(a)(ii)(A)(I)
Solvency Opinion 3.5(b)
Stock Options 2.5
Stockholder Approval 4.1
Stockholders' Agreement Recitals
Stockholders' Meeting 3.2
Surviving Corporation 1.1
Trading Day 2.3(e)
Voting Agreement Recitals
Warrant Agreement 2.1(a)(ii)(A)(I)
Xetava Introductory Paragraph
</TABLE>
SECTION 7.7 ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits hereto and the documents and instruments referred to herein, embodies
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no covenants or undertakings, other
than those expressly set forth or referred to herein. This Agreement supersedes
all prior agreements and the understandings between the parties with respect to
such subject matter, including the Original Merger Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, Avatex and Xetava have caused this Agreement to be
signed by their respective duly authorized officers on the date first above
written.
AVATEX CORPORATION
By: /s/ Abbey J. Butler
----------------------------------
Abbey J. Butler,
Co-Chief Executive Officer
XETAVA CORPORATION
By: /s/ Melvyn J. Estrin
----------------------------------
Melvyn J. Estrin,
Co-Chief Executive Officer
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<PAGE>
ANNEX B
[LETTERHEAD]
May 6, 1999
To The Board of Directors of
Avatex Corporation
Dear Directors:
We understand that Avatex Corporation (hereinafter the "Company") is
considering a merger with Xetava Corporation, a Delaware corporation and
wholly-owned subsidiary of the Company ("Xetava"), or another transaction,
pursuant to which (x) shares of the Company's common stock, par value $5.00 per
share (the "Old Avatex Common Stock"), will be converted into common shares of
the surviving company in such merger or other transaction; and (y) (1) shares of
the Company's $4.20 Cumulative Exchangeable Series A Preferred Stock (the "$4.20
Preferred") and shares of the Company's $5.00 Cumulative Convertible Preferred
Stock (the "$5.00 Preferred") will be converted into common shares of the
surviving company in such merger or other transaction, or (2) holders of shares
of the $4.20 Preferred and $5.00 Preferred could elect to receive in such merger
or other transaction for their shares of $4.20 Preferred and/or $5.00 Preferred
a pro rata share of (i) a cash amount, (ii) debt and/or other securities of the
Company or of a subsidiary of the Company, and/or (iii) a portion of any
recovery the Company receives from certain litigation. The foregoing or any
other transaction pursuant to which the Company or any other party issues cash
or debt or equity securities in exchange for or in consideration of, or the
purchase or redemption, directly or indirectly, by the Company or any other
party, of all or a substantial portion of the Old Avatex Common Stock, the $4.20
Preferred and the $5.00 Preferred, is referred to collectively herein as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it. We understand that the terms and
conditions of the Transaction have not been finalized. Our Opinion is
necessarily based on the latest available information as of the date of this
Opinion.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's form 10-K for the fiscal year ended
March 31, 1998, the Company's form 10-Q for the nine month period ending
December 31, 1998, and the Company's internal, unaudited results through
February 28, 1999, which the Company's management has identified as the
most current information available;
2. reviewed copies of the following agreements: Employment Agreements
and Amendments, Real Estate Appraisals, Certificate of Designation of $5.00
Cumulative Preferred Stock, Certificate of Designation of the $4.20
Cumulative Exchangeable Series A Preferred Stock;
3. reviewed the General Terms and Conditions of Settlement Between
Avatex Corp. and Certain Preferred Shareholders;
4. reviewed the Company's Draft Stockholders Agreement, the Draft
Amended and Restated Agreement And Plan of Merger, Draft Pledge and
Security Agreement, Draft Voting Agreement, Draft Warrant Agreement, and
Draft Promissory Note;
5. met with certain members of the senior management of the Company
to discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
6. visited certain facilities and business offices of the Company;
B-1
<PAGE>
7. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the period March 1999 to May
2003;
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed other publicly available financial data for the Company
and certain publicly-held investments of the Company; and
10. conducted such other studies, analyses and investigations as we
have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us. We have
not independently verified the accuracy and completeness of the information
supplied to us with respect to the Company and do not assume any responsibility
with respect to it. We have not made any physical inspection or independent
appraisal of any of the properties or assets of the Company. Our opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by public common stockholders of the Company,
pursuant to the Transaction, is fair to them from a financial point of view.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
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<PAGE>
ANNEX C
[LETTERHEAD]
May 6, 1999
To The Board of Directors of
Avatex Corporation
Dear Directors:
We understand that Avatex Corporation (hereinafter the "Company") is
considering a merger with Xetava Corporation, a Delaware corporation and
wholly-owned subsidiary of the Company ("Xetava"), or another transaction,
pursuant to which (x) shares of the Company's common stock, par value $5.00 per
share (the "Old Avatex Common Stock"), will be converted into common shares of
the surviving company in such merger or other transaction; and (y) (1) shares of
the Company's $4.20 Cumulative Exchangeable Series A Preferred Stock (the "$4.20
Preferred") and shares of the Company's $5.00 Cumulative Convertible Preferred
Stock (the "$5.00 Preferred") will be converted into common shares of the
surviving company in such merger or other transaction, or (2) holders of shares
of the $4.20 Preferred and $5.00 Preferred could elect to receive in such merger
or other transaction for their shares of $4.20 Preferred and/or $5.00 Preferred
a pro rata share of (i) a cash amount, (ii) debt and/or other securities of the
Company or of a subsidiary of the Company, and/or (iii) a portion of any
recovery the Company receives from certain litigation. The foregoing or any
other transaction pursuant to which the Company or any other party issues cash
or debt or equity securities in exchange for or in consideration of, or the
purchase or redemption, directly or indirectly, by the Company or any other
party, of all or a substantial portion of the Old Avatex Common Stock, the $4.20
Preferred and the $5.00 Preferred, is referred to collectively herein as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it. We understand that the terms and
conditions of the Transaction have not been finalized. Our Opinion is
necessarily based on the latest available information as of the date of this
Opinion.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's form 10-K for the fiscal year ended
March 31, 1998, the Company's form 10-Q for the nine month period ending
December 31, 1998, and the Company's internal, unaudited results through
February 28, 1999, which the Company's management has identified as the
most current information available;
2. reviewed copies of the following agreements: Employment Agreements
and Amendments, Real Estate Appraisals, Certificate of Designation of $5.00
Cumulative Preferred Stock, Certificate of Designation of the $4.20
Cumulative Exchangeable Series A Preferred Stock;
3. reviewed the General Terms and Conditions of Settlement Between
Avatex Corp. and Certain Preferred Shareholders;
4. reviewed the Company's Draft Stockholders Agreement, the Draft
Amended and Restated Agreement And Plan of Merger, Draft Pledge and
Security Agreement, Draft Voting Agreement, Draft Warrant Agreement, and
Draft Promissory Note;
5. met with certain members of the senior management of the Company
to discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
6. visited certain facilities and business offices of the Company;
C-1
<PAGE>
7. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the period March 1999 to May
2003;
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed other publicly available financial data for the Company
and certain publicly-held investments of the Company; and
10. conducted such other studies, analyses and investigations as we
have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by the $4.20 Preferred shareholders, pursuant
to the Transaction, is within a reasonable range of fair value of the $4.20
Preferred; and the consideration to be received by the $5.00 Preferred
shareholders, pursuant to the Transaction, is within a reasonable range of fair
value of $5.00 Preferred.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
C-2
<PAGE>
ANNEX D
[LETTERHEAD]
May 6, 1999
To The Board of Directors
of Avatex Corporation
Dear Directors:
We understand that Avatex Corporation (hereinafter the "Company") is
considering a merger with Xetava Corporation, a Delaware corporation and
wholly-owned subsidiary of the Company ("Xetava"), or another transaction,
pursuant to which (x) shares of the Company's common stock, par value $5.00 per
share (the "Old Avatex Common Stock"), will be converted into common shares of
the surviving company in such merger or other transaction; and (y) (1) shares of
the Company's $4.20 Cumulative Exchangeable Series A Preferred Stock (the "$4.20
Preferred") and shares of the Company's $5.00 Cumulative Convertible Preferred
Stock (the "$5.00 Preferred") will be converted into common shares of the
surviving company in such merger or other transaction, or (2) holders of shares
of the $4.20 Preferred and $5.00 Preferred could elect to receive in such merger
or other transaction for their shares of $4.20 Preferred and/or $5.00 Preferred
a pro rata share of (i) a cash amount, (ii) debt and/or other securities of the
Company or of a subsidiary of the Company, and/or (iii) a portion of any
recovery the Company receives from certain litigation. The foregoing or any
other transaction pursuant to which the Company or any other party issues cash
or debt or equity securities in exchange for or in consideration of, or the
purchase or redemption, directly or indirectly, by the Company or any other
party, or all or a substantial portion of the Old Avatex Common Stock, the $4.20
Preferred and the $5.00 Preferred, is referred to collectively herein as the
"Transaction." It is our understanding that the initial cash requirements for
the Transaction will be obtained from the Company's currently existing cash
balances.
You have requested our written opinion (the "Opinion") as to the matters
set forth below. This Opinion values the Company as a going-concern (including
goodwill), on a pro forma basis, immediately after and giving effect to the
Transaction and the associated indebtedness. For purposes of this Opinion, "fair
value" shall be defined as the amount at which the Company would change hands
between a willing buyer and a willing seller, each having reasonable knowledge
of the relevant facts, neither being under any compulsion to act, with equity to
both; and "present fair saleable value" shall be defined as the amount that may
be realized if the Company's aggregate assets (including goodwill) are sold as
an entirety with reasonable promptness in an arm's length transaction under
present conditions for the sale of comparable business enterprises, as such
conditions can be reasonably evaluated by Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. ("Houlihan Lokey"). We have used the same valuation
methodologies in determining fair value and present fair saleable value for
purposes of rendering this Opinion. The term "identified contingent liabilities"
shall mean the stated amount of contingent liabilities identified to us and
valued by responsible officers of the Company, upon whom we have relied upon
without independent verification; no other contingent liabilities will be
considered. Being "able to pay its debts as they become absolute and mature"
shall mean that, assuming the Transaction has been consummated as proposed, and
including the Company's cash balances after the close of the Transaction, the
Company's financial forecasts for the period 1999 to 2003 indicate positive cash
flow for such period, including proceeds from asset sales (and after giving
effect to) the payment of installments due under loans made pursuant to the
indebtedness incurred in the Transaction, as such installments are scheduled at
the close of the Transaction. It is Houlihan Lokey's understanding, upon which
it is relying, that the Company's Board of Directors and any other recipient of
the Opinion will consult with and rely solely upon their own legal counsel with
respect to said definitions. No representation is made herein, or directly or
indirectly by the Opinion, as to any legal matter or as to the sufficiency of
said definitions for any purpose other than setting forth the scope of Houlihan
Lokey's Opinion hereunder.
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers or
to ascertain the actual prices at which and terms on
D-1
<PAGE>
which the Company can currently be sold, and we know of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, we express no opinion as to
whether the Company would actually be sold for the amount we believe to be its
fair value and present fair saleable value.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's form 10-K for the fiscal year ended
March 31, 1998, the Company's form 10-Q for the nine month period ending
December 31, 1998, and the Company's internal, unaudited results through
February 28, 1999, which the Company's management has identified as the
most current information available;
2. reviewed copies of the following agreements: Employment Agreements
and Amendments, certain real estate appraisals, Certificate of Designation
of $5.00 Cumulative Preferred Stock, Certificate of Designation of the
$4.20 Cumulative Exchangeable Series A Preferred Stock;
3. reviewed the General Terms and Conditions of Settlement Between
Avatex Corp. and Certain Preferred Shareholders, the Draft Amended and
Restated Merger Agreement, Draft Shareholders Agreement, Draft Warrant
Agreement, and Draft Promissory Note;
4. reviewed the Company's Performance Incentive Plan;
5. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and projected
operations and performance of the Company;
6. visited certain facilities and business offices of the Company;
7. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the period March 1999 to May
2003 ("Certified Forecast");
8. reviewed other publicly available financial data for the Company
and certain publicly-held investments of the Company; and
9. conducted such other studies, analyses and investigations as we
have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material
adverse change in the assets, financial condition, business or prospects of the
Company since the date of the most recent financial statements made available to
us. In addition, we have assumed the following:
1. The Company will limit employee cash bonuses to 25% of the
cumulative excess, after tax, cash flow from the sale of assets (or from
other sources not included in the forecast) since the Transaction
settlement in excess of the cumulative estimated, after tax, cash proceeds
projected for the respective period subsequent to the Transaction in the
Certified Forecast. Further, the Company will make no distribution of cash
bonuses until the 1-year anniversary of the Transaction. In addition, the
Company will make no cash bonuses if the Company's cash balance after
payment of such cash bonuses is less than $10 million prior to the
extinguishment of the Foxmeyer Bankruptcy Trustee note ("Trustee Note"
hereinafter). Once the Trustee Note is extinguished, the Company will make
no cash bonuses if the Company's cash balance after payment of such cash
bonuses is less than $5 million. Upon extinguishment of the Trustee Note
and the 6.75% note to the Company's pre-Transaction preferred shareholders
("Preferred Note" hereinafter), the above limitations on the Company's cash
bonuses will be terminated. In addition, the above limitations shall not
apply to Litigation Income related bonuses as defined in the Company's
Performance Incentive Plan;
2. The Company and Mssrs. Butlers and Estrin will enter into
additional amendments to their respective employment agreements under which
Messrs. Butler or Estrin, as the case may be, will agree to the deferred
payment of severance or other benefits if he is terminated without just
cause under Section 5(d) of his employment agreement, provided that
(i) the agreement to defer payment will not apply to any termination
pursuant to the terms of the paragraph immediately preceding Section 6 of
the
D-2
<PAGE>
employment agreement (other than as a result of the Transaction, in which
case no severance or other benefits will be paid of deferred, or actions
involving Phar-Mor or other entities affiliated with Mr. Butler or
Mr. Estrin, in which case severance and other benefits will be deferred),
and (ii) any severance and other benefits that are deferred will be paid
after the Trustee note and the Preferred Note are paid or otherwise
satisfied.
3. The Company will limit investments in non-publicly traded
securities (not included in the Certified Forecast) to the greater of
$2 million or 50% of the cumulative excess, after tax, cash flow from the
sale of assets (or from other sources not included in the forecast) since
the Transaction settlement in excess of the cumulative estimated, after
tax, cash proceeds projected for the respective period subsequent to the
Transaction in the Certified Forecast until the Trustee Note is
extinguished. However, the Company will make no cash investments in
non-publicly traded securities (not included in the Certified Forecast) if
the Company's aggregate cash balances (excluding cash related to the
Company's real estate interests) after such investments is less than
$10 million before the Trustee Note is extinguished. Once the Trustee Note
is extinguished, the Company will not make investments in non-publicly
traded securities (not included in the Certified Forecast) if the cash
balance after such investments is less than $5 million. Upon extinguishment
of the Trustee Note and the 6.75% note to the Company's pre-Transaction
preferred shareholders ("Preferred Note" hereinafter), the above
limitations on the Company's investments in non-publicly traded securities
(not included in the Certified Forecast) will be terminated.
In addition, our analysis was predicated on the one of the following events
occurring prior to closing:
a) The Company obtaining a line of credit (or overdraft availability)
of at least $4MM from a financial institution; or
b) The Company completing the sale of its real estate investments for
an amount greater than $10MM before the transaction closing.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion as of
the date of this letter that, assuming the Transaction had been consummated as
proposed, immediately after and giving effect to the Transaction: (a) on a pro
forma basis, the fair value and present fair saleable value of the Company's
assets would exceed the Company's stated liabilities and identified contingent
liabilities; (b)the Company should be able to pay its debts as they become
absolute and mature; and (c) the capital remaining in the Company after the
Transaction would not be unreasonably small for the business in which the
Company is engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the Transaction.
This Opinion is furnished solely for your benefit and may not be relied
upon by any other person without our express, prior written consent. This
Opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in this Opinion and our
engagement letter dated January 8, 1999, and subject to the understanding that
the obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or on
behalf of you or your affiliates.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
D-3
<PAGE>
ANNEX E
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
AVATEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 25-1425889
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5910 NORTH CENTRAL EXPRESSWAY, SUITE 1780, DALLAS, TEXAS 75206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-365-7450
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Common Stock, par value $5 per share
$5 Cumulative Convertible Preferred Stock
$4.20 Cumulative Exchangeable Series A Preferred Stock
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 23, 1999, the aggregate value of voting stock held by
non-affiliates of the registrant was approximately $7,343,000.
On June 23, 1999, there were 13,806,487 shares of the registrant's common
stock outstanding before deducting 801,101 shares which represent the
Corporation's 38.4% equity interest in common stock of the Corporation owned by
Phar-Mor, Inc.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
E-1
<PAGE>
PART I
ITEM 1. BUSINESS
Avatex Corporation is a holding company that, along with its subsidiaries,
owns interests 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.
The Corporation was incorporated in Delaware on September 27, 1982, to
effect 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. 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,
the Corporation's subsidiary, FoxMeyer, 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 and FoxMeyer Drug Company ("FoxMeyer
Drug") to McKesson Corporation ("McKesson"). On March 18, 1997, the Chapter 11
cases were converted into Chapter 7 liquidation cases. In September 1995 and
September 1997, the Corporation directly and indirectly acquired certain equity
investments in Phar-Mor and currently owns approximately 38.4% of Phar-Mor's
outstanding common stock.
On June 18, 1999, the Corporation announced that it had reached an
agreement with the holders of a majority of its two series of preferred stock on
the terms of a revised merger between the Corporation and Xetava Corporation
("Xetava"), a wholly-owned subsidiary of the Corporation, and the settlement of
three lawsuits brought by certain holders of the Corporation's preferred stock
against the Corporation and Xetava relating to a prior merger transaction
announced in April 1998. See disclosures in Items 3, 7 and 8 concerning the
proposed merger and its impact on the Corporation.
DESCRIPTION OF BUSINESS
Cautionary Statement under the Private Securities Litigation Reform Act of
1995: This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on the assumptions, beliefs and opinions of the
Corporation's management. When used in this document, the words "anticipate,"
"believe," "continue," "estimate," "expect," "intend," "may," "should," and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Corporation with respect to future
events and are subject to certain risks and uncertainties, including, but not
limited to, the risk that the Corporation may be unable to implement its
strategies to reduce the possibility it may not continue as a going concern. In
industries in which the Corporation operates or invests, it also faces risks
associated with currently unforeseen competitive pressures; the ability of the
Corporation's and investees' management to develop, implement and market their
products and services; and other such risks. These other risks include decreased
consumer spending, customer concentration issues, millennium compliance issues
and the effects of general economic conditions. In addition, the Corporation's
business, operations and financial condition are subject to the risks,
uncertainties and assumptions which are described in the Corporation's reports
and statements filed from time to time with the Securities and Exchange
Commission, including this report. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein. The
forward-looking statements made in this document speak only to the date on which
such statements are made, and the Corporation undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events.
The Corporation's fiscal year ends on March 31; therefore, references to
fiscal 1999, fiscal 1998, etc. herein refer to the Corporation's fiscal year
ending on March 31 of that year.
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<PAGE>
REAL ESTATE
The Corporation made certain investments in real estate through limited
partnerships. These limited partnerships were controlled by wholly-owned
subsidiaries of the Corporation which held 50% partnership interests in these
limited partnerships. The limited partnerships were engaged in the buying,
holding, operating and disposing of real estate. At March 31, 1999, the
Corporation owned interests in three real estate developments consisting of
hotels and an office building. On May 12, 1999, the Corporation announced it had
reached an agreement to sell its interests in these three real estate
developments. At the closing of the sale on May 27, 1999, the Corporation
received $11.4 million in cash and a one-year, secured note in the amount of
$0.6 million. See "Item 7. Overview" and Note S to the consolidated financial
statements. The real estate developments were 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 approximately 84% occupied and the hotel
was approximately 63% occupied during fiscal 1999.
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 had refurbished the property. The
fiscal 1999 occupancy rate was approximately 78%.
A 103,000 square foot office building with adjoining townhouse located in
the Scott Circle area of Washington, D.C. was purchased in May 1996. The
townhouse was sold in January 1998. The office building was renovated into a 156
room hotel which opened in October 1998. The occupancy rate since opening has
been approximately 65%.
EQUITY INVESTMENT IN PHAR-MOR, INC.
The Corporation owns approximately 38.4% of Phar-Mor's outstanding common
stock.
Phar-Mor operates a chain of 138 discount retail drugstores in 24 states,
under the names "Phar-Mor", "Pharmhouse" and "The Rx Place", devoted to the sale
of prescription and over-the-counter drugs, health and beauty care products, and
other general merchandise and grocery items. Approximately 40% of Phar-Mor
stores are located in Pennsylvania, Ohio and West Virginia; 20% are located in
Virginia, North Carolina and South Carolina; and 14% are located in New York and
New Jersey.
During fiscal 1999, Phar-Mor acquired 2,086,200 shares of the Corporation's
common stock (15.1% of the currently issued shares of common stock) at a cost of
approximately $5.0 million. The Corporation has been advised by Phar-Mor that it
will acquire, from certain preferred stockholders of the Corporation, an
additional 2,862,400 shares of the Corporation's common stock (20.7% of the
currently issued shares) at $2.00 per share upon consummation of the proposed
Avatex and Xetava merger. See "Item 7. Overview" and Note S to the consolidated
financial statements.
OTHER
The Corporation holds an approximate 11.4% common stock interest in Carson,
Inc. ("Carson"), a global manufacturer of cosmetics.
At March 31, 1999, the Corporation had an approximate 3.2% common stock
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 sold a substantial portion of its interest
during April and May 1999 at prevailing market prices.
The Corporation has an approximate 5.0% common stock interest in Imagyn
Medical Technologies, Inc. ("Imagyn"), a developer, manufacturer and distributor
for the urology, minimally invasive and general surgery, and gynecology markets.
In May 1999, Imagyn consented to the entry of an order of relief in a
Chapter 11 bankruptcy proceeding and indicated that the currently outstanding
common stock would probably be canceled and the common stockholders would likely
receive no distributions as a result of any reorganization plan.
E-3
<PAGE>
The Corporation holds the equivalent of an approximate 12.9% fully-diluted
interest in RAS Holding Corp. ("RAS"), assuming conversion of all the
outstanding RAS preferred stock and the exercise of all the outstanding RAS
options and warrants. RAS is a privately held corporation involved in the
development and distribution of medical optical devices.
The Corporation holds the equivalent of an approximate 6.3% interest in
Caring Technologies, Inc. ("Caring"), 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. In addition, in May 1999, the Corporation made a one year, secured
loan for $1.0 million to Caring and also received five-year warrants to purchase
1.0 million shares of common stock at $1.30 per share.
The Corporation, through a limited liability company, holds the equivalent
of an approximate 20.5% 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 as well as in various household products.
The Corporation has an approximate 12.3% indirect ownership interest in AM
Cosmetics, Inc. ("AM"), a leading privately held manufacturer of low cost
cosmetics. Subsequent to the fiscal year end, AM undertook a reorganization plan
which has reduced the Corporation's ownership interest to approximately 3.9%.
The Corporation owns $1.25 million of preferred stock of HPD Holdings Corp.
("HPD"), which is a privately held corporation whose subsidiary manufactures,
sells and distributes household product lines. The Corporation also owns 2.5% of
the common stock of HPD.
The interests in Chemlink, HPD and RAS noted above are the Corporation's
direct interest and do not give effect to Phar-Mor's investments in these same
companies. Phar-Mor has an approximate 6.9% interest in RAS on a fully-diluted
basis, a 17.9% interest in Chemlink, and also owns $1.25 million of preferred
stock and 2.5% of the common stock of HPD.
The Corporation owned 17.4% of Ben Franklin Retail Stores, Inc. ("Ben
Franklin") which filed for protection under the 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.
It is anticipated that compliance with statutory requirements related to
environmental quality will continue to necessitate cash outlays by the
Corporation for certain of its 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 that 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
that further information may ultimately change management's current assessment.
See Note N to the consolidated financial statements of the Corporation and
"Item 3. Legal Proceedings" contained herein for a discussion of outstanding
environmental actions involving the Corporation.
E-4
<PAGE>
EMPLOYEES
The number of persons employed by the Corporation and its consolidated
subsidiaries was 13 at March 31, 1999. This number does not include 151
employees of the consolidated real estate limited partnerships who were employed
at March 31, 1999 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 8,997 square feet
of space under a lease agreement that expires in December 2001. The Corporation
licenses approximately 57% of such office space to other entities in which the
Corporation has invested.
The following additional information is provided for the real estate
properties discussed in Item 1 under the caption "Real Estate". As stated in
Item 1, the Corporation sold its interests in these properties on May 27, 1999.
The Corporation had an investment in a hotel and office building located in
Annapolis, Maryland that had a book value of $4.9 million and was encumbered by
a $5.1 million loan. The occupancy rate for the hotel for fiscal 1995 through
fiscal 1999 was 43%, 65%, 64%, 66% and 63%, respectively. The occupancy rate at
year end for the office building for fiscal 1995 through fiscal 1999 was 95%,
100%, 100%, 91% and 84%, respectively. The loan was assumed by the other partner
in the development when the Corporation's interest in the property was sold to
that partner in May 1999. The office building had two tenants which occupied
more than 10% of the 38,510 net rentable square feet. Fleet Business School
occupied approximately 29% and NationsBank approximately 16% of the lease space.
The average rental per square foot at the office building was $22.46 at March
31, 1999. 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
- ------------------- ----------------- -------------------- ------------- ------------------
<S> <C> <C> <C> <C>
2000 4 21,119 $ 493,359 72.9%
2002 1 2,900 63,800 9.4%
2003 4 6,114 119,744 17.7%
</TABLE>
The Corporation had an investment in a hotel located in the Watergate area
of Washington, D.C. that had a book value of $8.4 million and was encumbered by
two loans totaling $7.3 million. The occupancy rate for the hotel since its
acquisition in fiscal 1995 was 66%, 62%, 79% and 78%, respectively, for fiscal
1996 through fiscal 1999. The loans were repaid when the property was sold in
May 1999.
The Corporation had an investment in another hotel located in the Scott
Circle area of Washington, D.C. that had a book value of $16.9 million and was
encumbered by a construction loan of $13.2 million. The occupancy rate since the
opening of the hotel in October 1998 was approximately 65%. The partnership that
owns the property redeemed the Corporation's partnership interest in May 1999,
and the lenders agreed to release the Corporation's subsidiary from liability on
the construction loan.
ITEM 3. LEGAL PROCEEDINGS
MCKESSON\VENDOR LITIGATION
On January 10, 1997, the Corporation filed a ten count lawsuit against
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 "McKesson Litigation"). In
November 1998, the Corporation filed an amended petition, in which it withdrew
three of the counts asserted in its original petition. As so amended, the
Corporation alleges in the McKesson Litigation, among other things, that
McKesson and the pharmaceutical manufacturers conspired to drive the
Corporation's pharmaceutical distribution subsidiary, FoxMeyer Drug, out of
business, and that McKesson obtained confidential financial and competitive
information and used the information to cause damage to the Corporation. The
Corporation seeks to recover in excess of $400 million in compensatory damages,
plus punitive damages. In February 1997, certain defendants removed the lawsuit
to the United States Bankruptcy
E-5
<PAGE>
Court for the Northern District of Texas, Dallas Division, and moved to transfer
the McKesson Litigation to the United States Bankruptcy Court for the District
of Delaware as a proceeding related to the Chapter 11 case of FoxMeyer Drug. On
August 27, 1997, the Dallas Bankruptcy Court entered an order denying the
defendants' motion to transfer and, on November 17, 1998, the Court granted the
Corporation's motion to remand the McKesson Litigation back to Texas state
court. As a result of a decision by the Delaware Bankruptcy Court (described
below), the Dallas Bankruptcy Court also dismissed counts one, two and three of
the Texas lawsuit to the extent that the claims were brought by the Corporation.
On May 18, 1999, the United States District Court for the Northern District of
Texas, Dallas Division, affirmed the Dallas Bankruptcy Court's decision to
remand the McKesson Litigation back to Texas state court and denied as moot its
decision not to transfer the McKesson Litigation to the Delaware Bankruptcy
Court. The District Court has not yet ruled on the Corporation's cross-appeal of
the Dallas Bankruptcy Court's order dismissing counts one, two and three. On
June 16, 1999, certain of the defendants filed a notice of appeal of the portion
of the District Court's decision that denied as moot the appeal of the Dallas
Bankruptcy Court's decision not to transfer the McKesson Litigation to the
Delaware Bankruptcy Court.
In addition, on December 3, 1998, McKesson filed a counterclaim against the
Corporation and a third party complaint against Bart A. Brown, Jr., the Chapter
7 Trustee (the "Trustee") of FoxMeyer and FoxMeyer Drug, and three of the
Corporation's current or former officers, Abbey Butler, Melvyn Estrin and Edward
Massman, alleging claims of fraudulent misrepresentation, negligent
misrepresentation, breach of letter agreement and inducing breach of contract.
The Corporation and the third party officer defendants believe that the
counterclaim and the third party claims are without merit and will vigorously
defend themselves against such claims.
On February 26, 1997, the Official Unsecured Creditors' Committee of the
FoxMeyer and FoxMeyer Drug bankruptcy estates (the "Committee") filed a lawsuit
against the Corporation in the Delaware Bankruptcy Court under Adversary No.
97-20. In the Delaware lawsuit, the Committee sought a declaration that the
claims asserted by the Corporation in the McKesson Litigation are property of
the FoxMeyer and FoxMeyer Drug estates and an injunction barring the Corporation
from continuing to prosecute the McKesson Litigation. The Trustee has succeeded
to the interests of the Committee, and McKesson and the other Texas defendants
subsequently intervened in the Committee's lawsuit. McKesson filed its own
complaint and asserted that (a) as of the commencement of the Chapter 11 cases
in August 1996, the claims asserted in the McKesson Litigation were property of
the FoxMeyer and FoxMeyer Drug estates, and (b) as of November 1996, when
McKesson purchased substantially all of the assets of FoxMeyer Drug, the claims
were transferred to McKesson. On August 24, 1998, the Delaware Bankruptcy Court
denied the Texas defendants' first motion for summary judgment and ruled that
the parties should return to Texas and move the McKesson Litigation forward as
much as possible. On November 12 and 16, 1998, the Delaware Bankruptcy Court
granted in part and denied in part the Texas defendants' second motion for
summary judgment and ruled that the Corporation is judicially estopped from
pursuing counts one, two and three of the Texas lawsuit (for fraud, negligent
misrepresentation and conspiracy). The Delaware Bankruptcy Court also indicated
that, if discovery shows that there is "substantial overlap" between the factual
allegations underlying counts one, two and three and those underlying the
remaining counts (for breach of confidential relationship, tortious interference
with contract, interference with business and business disparagement), those
counts may be barred as well. The Corporation has filed a motion to revise the
November 12 and 16, 1998 order, and the Texas defendants have filed a renewed
motion for summary judgment with respect to the remaining four counts, to which
the Corporation has objected. The parties are awaiting a ruling on these
motions, both of which were heard on April 14, 1999. In addition, the
Corporation has recently entered into a settlement agreement with one of the
manufacturer defendants in the McKesson Litigation, under which the Corporation
received a confidential settlement payment.
1994 MERGER LITIGATION
On March 1, 1994, the Corporation and FoxMeyer announced that the
Corporation had proposed a merger in which FoxMeyer would be merged with and
into a wholly-owned subsidiary of the Corporation, 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 in the Delaware Court of Chancery.
Following a number of procedural matters, and the execution (and
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<PAGE>
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. The amended complaint
alleged 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 alleged that
the proxy statement issued in connection with the merger failed to disclose
certain matters relating to the proposed merger. In fiscal 1999, the parties
reached a tentative settlement of the lawsuit in which the Corporation will pay
the class the amount of $1,450,000, a portion of which will be paid by the
directors' insurance carrier. The settlement is subject to definitive
documentation and approval by the Delaware Court of Chancery.
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. Discovery is proceeding in the lawsuit, and the parties are
awaiting a ruling on the plaintiffs' class certification motion. 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. Discovery is proceeding in the lawsuit, and the
Corporation intends to continue to vigorously defend itself in the lawsuit.
PREFERRED STOCKHOLDER LITIGATION
In April 1998, three lawsuits were filed by certain of the Corporation's
preferred stockholders relating to the proposed merger of the Corporation into
Xetava. 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 Delaware Court of Chancery. In this lawsuit, Elliott sought to enjoin the
proposed merger by alleging that (i) the proposed merger required 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 Court of Chancery. In this lawsuit, Harbor
alleged the same allegations contained in the first two counts of the Elliott
lawsuit, and further alleged that (i) the defendants breached the implied
covenant of good faith in the "organic corporate documents" applicable to the
preferred stock and (ii) the defendants' actions constituted 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 Court of Chancery, which was substantially identical to the Harbor
lawsuit. In August 1998,
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<PAGE>
the Delaware Supreme Court ruled in these lawsuits that the holders of the
Corporation's convertible preferred stock have the right to vote separately as a
class on the proposed merger of the Corporation into Xetava, as it was
structured and announced by the Corporation on April 14, 1998. On June 18, 1999,
the Corporation announced an agreement with the plaintiffs to settle and dismiss
the lawsuits in connection with the revised proposed merger of Xetava into the
Corporation. The settlement of the lawsuits is subject to various conditions,
including the approval of the Delaware Court of Chancery and the closing of the
proposed merger transaction, which in turn is subject to various conditions,
including the approval of the transaction by the Corporation's common and two
series of preferred stockholders, voting separately as a class. See Note S to
the consolidated financial statements.
DERIVATIVE LITIGATION
On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed a
lawsuit, allegedly on behalf of the Corporation, against seven of the
Corporation's current directors and three of its former directors who were
members of its Personnel and Compensation Committee, under No. 602773198 in the
Supreme Court of New York, County of New York. The plaintiffs were originally
two 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 Butler and Melvyn Estrin. The
plaintiffs allege that, in connection with such agreements and transactions,
(i) the defendants 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 common stock based on confidential non-public information. The
plaintiffs seek damages, injunctive relief and an accounting. In January 1999, a
stipulation was executed providing that the litigation, insofar as brought by
Stephen Mizel IRA, was voluntarily discontinued with prejudice. In April 1999,
the Court denied the remaining plaintiff's motion to amend its complaint to
allege additional claims. Discovery is proceeding in the lawsuit. The
Corporation has been paying the defense costs of the defendants in accordance
with Delaware General Corporation Law, the Corporation's charter and by-laws,
and the terms and conditions of Indemnification Agreements between the
Corporation and certain of the defendants.
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 (g) 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. Assuming final
approval of the cleanup by the State of Arkansas, NAC does not anticipate any
additional material costs at the site.
(b) FISHER-CALO. In October 1990, the Environmental Protection Agency (the
"EPA") sent a Special Notice Letter to approximately 350 PRPs, including NAC,
demanding payment of the EPA's past costs and requesting voluntary participation
in performing or financing the remedial design/remedial action at the
Fisher-Calo Chemical and Solvent Recovery Site located in Kingsbury, Indiana. In
August 1991, approximately 52 PRPs, including NAC, executed a Consent Decree to
perform the remedial design/remedial action. Under the Consent Decree and Cost
Sharing Agreement among the PRPs, NAC paid its allocated share of approximately
$890,000 of the estimated $25 to $35 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
approximately $4,000, NAC does not anticipate any additional material costs at
the site.
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<PAGE>
(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 approximately $8.5 million, and
NAC's allocated share is likely to be approximately 1.0% of the total cost and
the related litigation assessments for cost recovery actions against
non-participating PRPs.
(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 $267,000 of the total estimated costs, and expects to
pay in the future a small amount 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 necessary, 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 approximately $530,000 of response
costs incurred to date at the site, and expects to pay at least $300,000
depending on the status of the water treatment plan at the site, plus ongoing
operating and maintenance costs.
(f) NORTHEAST GRAVEL. NAC is one of 25 PRPs participating in a RI/FS at the
Northeast Gravel Site located in Plainfield, Michigan. Based on its 0.19%
allocated share among the PRP group, NAC had paid its $955 share of the $300,000
total cost of the RI/FS at the site. The PRP group has completed the remedy at
the site and expects to receive the final settlement agreement in the near
future. NAC does not anticipate any additional material costs at the site.
(g) 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, the EPA issued an Administrative
Order requiring NAC and approximately 150 other PRPs to perform remediation of
operating unit one at the site. A group of PRPs, including NAC, is performing
the first remediation at the operating unit one and, in March 1999, executed a
Consent Decree with respect to remediation of operating unit two. NAC
anticipates that its remaining costs at the site will consist of (i) NAC's 2.0%
allocated percentage of at least $500,000 in ongoing pump and treatment costs at
operating unit one to be paid over a number of years, (ii) approximately $66,000
of costs attributable to NAC's share of operating unit two remediation costs,
(iii) NAC's 2.0% allocated percentage of future EPA oversight costs permitted
under the Consent Decree, which NAC estimates are likely to be de minimus, and
(iv) NAC's share of assessments attributable to cost recovery action brought
against non-participating PRPs.
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BULL MOOSE TUBE COMPANY
In August 1988, the Corporation sold all of the outstanding stock of Bull
Moose Tube Company to Caparo, Inc. (collectively, "Caparo"). Caparo has
indicated that it 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
Caparo, which may then seek recovery of such costs, along with defense costs,
from the Corporation. In 1997, Caparo 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, the Trustee filed a lawsuit against the five former
directors of FoxMeyer, alleging that the defendants breached their fiduciary
duties in connection with the June 19, 1996 dividend of certain assets to the
Corporation. The defendants have denied liability in the lawsuit and, in
connection with the October 1997 settlement of a separate lawsuit brought by the
Trustee against the Corporation relating to the dividend, the defendants
received covenants not to execute from the Trustee. The Corporation is paying
the initial defense costs of the 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, filed lawsuits against certain former
officers and directors of Ben Franklin, the Corporation and certain current and
former officers and directors of the Corporation. The Corporation and its
officers and directors have since been dropped as defendants in the lawsuits. In
connection with paying its own defense costs and those of its officers and
directors, the Corporation also initially paid a portion of the defense costs of
certain individuals who are named as defendants in these lawsuits by reason of
the fact that they may have been serving at the request of the Corporation as a
director or officer of Ben Franklin. On October 13, 1998, the United States
Bankruptcy Court for the Northern District of Illinois issued Memorandum
Opinions that dismissed two of the lawsuits against all of the defendants except
David Brainard. On December 1, 1998, the Bankruptcy Court denied a motion to
reconsider one of these opinions, and the plaintiffs have filed objections to
both opinions with the United States District Court for the Northern District of
Illinois. In the third lawsuit, pending in Illinois state court, the court
struck the plaintiffs' second amended complaint and ordered a third amended
complaint to be filed. If liability is ever imposed in any of the lawsuits, the
Corporation may, if appropriate, agree at a future date to indemnify certain of
the remaining defendants in the lawsuit in accordance with Delaware law.
OTHER
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
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PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the OTC Bulletin Board system.
Prior to February 1, 1999, the Corporation's common and its two series of
preferred stocks traded on the New York Stock Exchange ("NYSE"). At May 31,
1999, the Corporation had 5,688 common stock holders of record. Information
concerning the high and low market prices of the Corporation's common and
preferred stocks and dividends declared on such stocks for each quarter in the
last two fiscal years are shown below. Prior to February 1, 1999, the prices
presented are the high and low sales price as reported on the NYSE Composite
Tape. After January 31, 1999, the prices presented are bid prices which
represent prices quoted by broker-dealers on the OTC Bulletin Board system and
do not necessarily reflect prices from actual transactions.
STOCK PRICES FOR FISCAL 1999 AND 1998
<TABLE>
<CAPTION>
MARKET PRICE RANGE DIVIDENDS
-------------------------------- DECLARED
PER SHARE
FISCAL 1999 FISCAL 1998 -------------
------------------- ---------------- FISCAL FISCAL
HIGH LOW HIGH LOW 1999 1998
----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Common Stock (Symbol: AVAX)
1st Quarter................................ $ 2 11/16 $ 1 13/16 $ 1 1/2 $ 0 3/4 $ 0 $ 0
2nd Quarter................................ 2 1/16 0 7/8 2 1/8 0 15/16 0 0
3rd Quarter................................ 1 3/16 0 5/8 2 1/8 1 1/4 0 0
4th Quarter................................ 1 3/8 0 1/2 2 5/16 1 3/16 0 0
--------- --------- ------- --------- ---- ----
Convertible Preferred Stock (Symbol: AVAXP)
1st Quarter................................ 21 14 1/2 10 3/8 9 3/4 0* 0*
2nd Quarter................................ 16 12 13 1/4 10 0* 0*
3rd Quarter................................ 12 1/2 5 16 1/2 12 1/16 0* 0*
4th Quarter................................ 6 2 15 1/2 13 15/16 0* 0*
--------- --------- ------- --------- ---- ----
Preferred Stock Series A (Symbol: AVAXO)
1st Quarter................................ 16 7/8 11 3/4 8 1/2 6 7/8 0* 0*
2nd Quarter................................ 13 3/8 8 11 7 15/16 0* 0*
3rd Quarter................................ 8 3 5/16 13 1/2 9 1/2 0* 0*
4th Quarter................................ 4 1/2 2 3/4 15 12 7/16 0* 0*
--------- --------- ------- --------- ---- ----
--------- --------- ------- --------- ---- ----
</TABLE>
- ------------------
* 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, cumulative unpaid dividends due at
March 31, 1999 were $12.50 per share. For the Preferred Stock Series A,
cumulative unpaid dividends due at March 31, 1999 were approximately
$11.83 per share.
Information with respect to restrictions on the payment of dividends on the
common stock, the unpaid cumulative dividends on the preferred stock and the
proposed merger with Xetava are incorporated herein by reference to Note I to
the consolidated financial statements contained herein in Item 8.
On January 28, 1999, the NYSE informed the Corporation that it no longer
met the continued listing requirements of the NYSE and that trading of its
common (symbol AAV), convertible preferred (symbol AAVPr) and Series A preferred
(symbol AAVA) stocks would be suspended prior to the opening of the NYSE on
Monday, February 1, 1999. The Corporation's common and preferred stocks now
trade on the OTC Bulletin Board system under the symbols set forth in the table.
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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
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues............................................. $ 10.5 $ 12.2 $ 12.5 $ 10.4 $ 4.2
Operating costs...................................... 16.3 21.8 14.9 17.5 14.3
Operating loss....................................... (5.8) (9.6) (2.4) (7.1) (10.1)
Other income (expense)............................... (1.5) (11.3) 19.2 21.8 47.4
Financing costs, net................................. 0.5 3.5 4.7 3.6 1.5
National Steel Corporation........................... -- (53.2) 9.6 3.3 5.4
Equity in income (loss) of affiliates................ 1.3 (3.3) (5.2) (4.2) 0.8
Income tax provision................................. -- 0.1 29.9 3.0 0.3
Minority interest in results of operations of
consolidated subsidiaries......................... 0.1 0.2 (1.1) 2.1 2.3
Income (loss) from continuing operations............. (6.6) (81.2) (12.3) 5.1 39.4
Discontinued operations.............................. -- 3.7 (267.1) (68.8) 2.2
Net income (loss).................................... $ (6.6) $ (77.5) $ (279.4) $ (63.7) $ 41.6
COMMON SHARE DATA
Basic Earnings per share:
Continuing operations............................. $ (2.65) $ (7.74) $ (2.10) $ (0.97) $ 1.38
Discontinued operations........................... -- 0.27 (17.89) (4.16) 0.15
Earnings (loss) per share......................... $ (2.65) $ (7.47) $ (19.99) $ (5.13) $ 1.53
Diluted earnings per share:
Continuing operations............................. $ (2.65) $ (7.74) $ (2.10) $ (0.97) $ 1.37
Discontinued operations........................... -- 0.27 (17.89) (4.16) 0.15
Earnings (loss) per share......................... $ (2.65) $ (7.47) $ (19.99) $ (5.13) $ 1.52
Cash dividends per share............................. -- -- -- -- --
Average number of common shares outstanding (in
thousands):
Basic............................................. 13,102 13,806 14,931 16,521 14,711
Diluted........................................... 13,102 13,806 14,931 16,521 14,821
FINANCIAL INFORMATION
Working capital...................................... $ 27.3 $ 40.6 $ 46.4 $ 276.4 $ 444.5
Total assets......................................... 117.2 119.3 167.2 1,577.1 1,777.0
Capital expenditures................................. 12.4 5.6 34.7 40.8 59.1
Long-term debt....................................... 34.3 22.9 27.5 403.8 422.8
Redeemable preferred stock........................... 243.2 215.0 189.4 187.3 175.0
Stockholders' equity (deficit)....................... $ (177.9) $ (141.9) $ (113.5) $ 202.5 $ 304.2
KEY FINANCIAL RATIOS
Current ratio........................................ 6.19:1 5.36:1 4.80:1 1.38:1 1.57:1
Long-term debt as a percent of total
capitalization ................. ................. 34.4% 23.9% 26.6% 50.9% 46.9%
</TABLE>
The comparability of the information 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 278.8%, 247.8%, 209.8%, 74.5%, and
66.3%, respectively, for each of the five years ended March 31, 1999.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
The Corporation is a holding company that, along with its subsidiaries,
owns interests in hotels, an office building and other corporations and
partnerships. Through Phar-Mor, its 38% owned affiliate, the Corporation is
involved in operating a chain of discount retail drugstores.
On June 18, 1999, the Corporation announced that it had entered into an
Amended and Restated Agreement and Plan of Merger (the "Revised Merger
Agreement") with its wholly-owned subsidiary, Xetava. The Revised Merger
Agreement amends and restates the Agreement and Plan of Merger between the
Corporation and Xetava dated April 9, 1998. Under the Revised Merger Agreement,
which was approved by the Corporation's Board of Directors, Xetava will merge
with and into the Corporation, and the Corporation's existing preferred
stockholders will receive new Class A common stock of the Corporation or,
alternately, a combination of cash, secured notes, warrants and other
consideration. The Corporation's common stockholders will receive new Class A
common stock of the Corporation on a one-for-one basis for their current common
stock. Consummation of the proposed merger is subject to, among other things,
(i) the approval of the merger by holders of a majority of the Corporation's
common stock and by the holders of at least two-thirds of each series of
preferred stock, voting separately as a class, (ii) the effectiveness of a
registration statement filed with the Securities and Exchange Commission with
respect to the Class A shares, the notes and warrants described below, and
(iii) the dismissal of Delaware lawsuits filed in connection with the April 1998
merger agreement. The Corporation anticipates a stockholder meeting to approve
the merger will take place in the fall of 1999.
Under the Revised Merger Agreement, each share of existing convertible
preferred stock will be converted into 9.134 shares of Class A common stock of
the Corporation or, at the election of the holder, into $3.7408 in cash, $8.34
principal amount of a 6.75% note to be issued by Avatex Funding, Inc.
("Funding"), a new wholly-owned subsidiary of the Corporation, and warrants to
purchase 0.67456 shares of Class A common at $2.25 per share. Each share of
Series A preferred stock will be converted into 7.253 shares of Class A common
stock of the Corporation or, at the election of the holder, into $2.9705 in
cash, $6.623 principal amount of a 6.75% note, and warrants to purchase 0.53567
shares of Class A common at $2.25 per share. In addition, the shareholders of
the two series of preferred stock who elect the cash, note and warrant option
will receive a deferred contingent right to a portion of any net recovery, up to
$7,500, that the Corporation may receive in certain litigation brought by the
Corporation against McKesson and a number of large pharmaceutical manufacturers.
The amount will be equal to 20% of such net recovery, up to $7,500, with 84% of
such recovery available to all the Series A preferred stockholders and 16%
available to all the convertible preferred stockholders, with the per share
amount to be received by each preferred stockholder equal to its pro rata share
of an amount that is calculated based on the total number of shares of preferred
stock outstanding immediately before the merger.
Funding will be a new subsidiary whose purpose will be to issue the new
6.75% notes and to own 3,571,533 shares of common stock of Phar-Mor, which are
now owned by the Corporation. The shares of Phar-Mor will be pledged to secure
the notes. The principal of the notes will be due in three years from the date
of issuance, and the interest will be payable semi-annually in cash. The
Corporation will also guarantee the notes. The warrants to be issued in the
merger will expire 5 years and 3 months after closing of the proposed merger.
Assuming each of the preferred stockholders elects to receive the cash,
note and warrant option in the proposed merger, the Corporation will be required
to pay approximately $15,250 in cash and issue warrants to purchase
approximately 2,750,000 shares of Class A common stock. Funding will be required
to issue
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<PAGE>
approximately $34,000 principal amount of the 6.75% notes. Under one of the
agreements discussed below, stockholders who represent approximately 48.5% of
the convertible preferred and 50.1% of the Series A preferred stock outstanding
have agreed to elect this cash, note and warrant option.
The Corporation has also entered into settlement, stockholder and voting
agreements with the preferred stockholder plaintiffs in the three Delaware
lawsuits pending against the Corporation, Xetava and certain of their directors.
Under the Stipulation of Settlement entered into by the Corporation and the
plaintiffs in the class action lawsuits on behalf of all holders of existing
preferred stock and for the plaintiff in the non-class action lawsuit, subject
to court approval and effective upon the closing of the merger, all three
Delaware lawsuits will be settled and the Corporation will pay up to $1,100 in
plaintiffs' attorneys' fees. Under a voting agreement with one of the named
plaintiffs in one of the class action lawsuits, such plaintiff and its
affiliates have agreed to vote in favor of the proposed merger and to waive any
appraisal rights in connection with the proposed merger. Such plaintiff will
also receive $300 in exchange for a ten year standstill agreement, a general
release of liabilities (subject to certain specified exceptions) and other
consideration. Under a separate agreement with the plaintiff in the third
Delaware lawsuit and another party, these parties and their affiliates and
associated companies have agreed to vote in favor of the merger, to elect to
receive the cash, note and warrant option and to waive any appraisal rights in
connection with the proposed merger. These parties will also receive $600 in
exchange for a ten year standstill agreement, a general release of liabilities
and other consideration. In addition, these parties have entered into a stock
purchase agreement with Phar-Mor, under which, subject to the consummation of
the proposed merger, Phar-Mor has agreed to purchase 2,862,400 shares of the
Corporation's common stock from these parties at $2.00 per share with closing to
occur at the same time as the Xetava merger. Phar-Mor has been granted a proxy
to vote these shares of the Corporation's common stock in favor of the merger.
During the fiscal year ended March 31, 1999, the Corporation made private
equity investments in three entities. A brief description of these investments
follows.
In April 1998, the Corporation invested in RAS by purchasing 10% Series B
convertible preferred stock ("Series B Stock"). In July 1998 and February 1999,
the Corporation made additional purchases of the Series B Stock after RAS met
certain performance goals. The Corporation's total investment was approximately
$1,400. The Corporation also received two-year warrants to purchase additional
Series B Stock for an additional investment of $934. On a fully-diluted basis,
assuming the exercise of all convertible preferred stock, warrants and options
outstanding, the Corporation would own approximately 12.9% of the common stock
of RAS. RAS, through its wholly-owned subsidiary Presby Corp., has developed a
surgical technique called the Surgical Reversal of Presbyopia ("SRP"), which
uses a patented medical device, the Scleral Expansion Band ("SEB"), to treat
presbyopia in the human eye. Presbyopia is, in general, the loss of the ability
of the human eye to focus on near objects due to aging. RAS is in the process of
marketing the SEBs in certain international markets where the SEB has received
regulatory approval. The Corporation has been advised that in March 1999 RAS
received conditional approval from the FDA to begin its SRP clinical trials in
the United States, but that the outcomes of the trials and achieving commercial
success of the technique are each highly uncertain. The Corporation has a
consulting contract with RAS and also licenses office space at its Dallas, Texas
office to RAS.
In March and December 1998, the Corporation invested a total of
$3.0 million to acquire a 41% interest in a Delaware limited liability company,
Chemlink Acquisition Company LLC ("CLAC"), which in turn acquired a 50% interest
in Chemlink. Chemlink is a privately held Atlanta based company that develops
and manufactures products that use a proprietary, and often patented,
effervescent formulation. These products include specialty cleaning,
disinfecting and sterilant products for the medical and dental professions and
certain other consumer and commercial products which are under development. The
effervescent formulation will supposedly allow easier packaging, less costly
shipping and potentially higher effectiveness of enzyme products than pre-mixed
solutions. The Corporation has been advised that Chemlink believes that it will
be able to enter into several new distribution and/or marketing agreements
during the Corporation's next fiscal year, but that Chemlink has not yet
achieved commercial success with its product lines and such success remains
uncertain. The Corporation has a consulting contract with Chemlink.
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<PAGE>
In April 1998, the Corporation invested $1,250 in preferred and common
stock of HPD. The Corporation acquired 2.5% of the common stock of HPD. HPD
Laboratories ("HPD Labs"), a wholly-owned subsidiary of HPD, purchased the
assets associated with Block Drug Company's household product lines. The
Corporation has been advised that HPD Labs intends to continue and extend the
current product lines and expand into compatible lines.
On May 12, 1999, the Corporation announced that it had entered into an
agreement to sell its interests in its three remaining real estate developments.
On May 27, 1999, one property was sold to a third party and the Corporation's
interests in the partnerships that owned the other two properties were sold to
the other partners or their affiliates. As a result of these sales, the
Corporation received $11,400 in cash and a one-year, $600 secured note. The note
is secured by the Corporation's former interests in the two partnerships that
were sold to its partners or their affiliates. As a result of these
transactions, the Corporation will recognize a gain in fiscal 2000 of
approximately $6,175 ($5,565 net of taxes).
On January 28, 1999, the NYSE informed the Corporation that it no longer
met the continued listing requirements of the NYSE and that trading of its
common (symbol AAV), convertible preferred (symbol AAVPr) and Series A preferred
(symbol AAVA) stocks would be suspended prior to the opening of the NYSE on
Monday, February 1, 1999. The Corporation's common and preferred stocks started
trading on the OTC Bulletin Board system effective February 1, 1999 under the
following symbols: AVAX for the common stock, AVAXP for the convertible
preferred stock and AVAXO for the Series A preferred stock.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999 COMPARED
TO YEAR ENDED MARCH 31, 1998
OPERATING LOSS
Revenues from real estate operations decreased $1,719 to $10,509 for the
year ended March 31, 1999 compared to $12,228 for the year ended March 31, 1998.
The decrease was primarily the result of the loss of revenues due to the
disposal of the Arlington, Virginia property in fiscal 1998 ($3,884) partially
offset by revenues from a new Washington, D.C. hotel opened in October 1998
($1,930). The remainder of the change represents increased revenues at
properties that were open in both years. As discussed above, the sale of the
remaining real estate properties in May 1999 will result in a significant
decrease in revenues in fiscal year 2000.
For the year ended March 31, 1999, operating costs, including depreciation
and amortization, decreased $778 to $16,282 compared to $17,060 for the year
ended March 31, 1998. The decrease was due to a reduction in real estate
operating costs of $1,410 partially offset by an increase in corporate overhead
costs of $632. Real estate costs decreased primarily as a result of the
Arlington, Virginia property disposed of in fiscal 1998 partially offset by
increased expenses for the Washington, D.C. hotel opened in October 1998.
Increased corporate expenses were primarily the result of the costs associated
with the proposed merger with Xetava as well as increased legal, insurance and
certain other operating costs, partially offset by lower expenses for
compensation, pensions, consultants and travel. The sale of the Corporation's
interests in real estate properties in May 1999 will result in only two months
of operating expenses during fiscal 2000 related to real estate operations. The
sale of these properties will have only a minimal impact on corporate expenses
in the next fiscal year. The consummation of the merger with Xetava and the
settlement with preferred stockholders may result in reductions in legal and
consulting expenses associated with the merger and accompanying lawsuits. The
extent of the savings depends on the timing of the settlement and the costs
associated with the final negotiations in fiscal 2000. In fiscal 1999, these
expenses were approximately $2,170.
Unusual items for the year ended March 31, 1998 consisted of $33,292 in
charges incurred in connection with the settlement reached in litigation with
the Trustee, as discussed in Note N to the consolidated financial statements.
This charge was partially offset by $1,715 in income from the settlement of
litigation, principally from payments received from insurance carriers related
to the settlement of environmental liability claims,
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<PAGE>
and $26,831 in gains in connection with the settlement of certain pension and
other postretirement benefit obligations for former officers and employees.
OTHER EXPENSE
Other expense of $1,475 for the year ended March 31, 1999 related to a
$3,386 reduction in the carrying value of certain of the Corporation's
investments, including a $1,795 reduction in the carrying value of Imagyn,
partially offset by $1,911 in gains primarily from recoveries on investments
which had been written-off in prior years, a royalty payment from a property
sold in the prior fiscal year and dividends on investments. In the year ended
March 31, 1998, other expense of $11,337 related primarily to the $12,938
reduction in the carrying value of the Corporation's investment in Imagyn to its
market value, partially offset by $1,601 in gains principally from the sale of
other assets.
INTEREST INCOME (EXPENSE)
Interest income increased $165 to $1,874 for the year ended March 31, 1999
compared to $1,709 for the year ended March 31, 1998. The average amount of
funds invested increased compared to the prior year due to cash received in
November 1997 from the NSC settlement and the sale of US HealthData Interchange,
Inc. ("USHDI") and interest earned on the note received as part of the NSC
settlement (see Notes B and G to the consolidated financial statements).
Interest expense decreased $2,816 to $2,417 for the year ended March 31,
1999 compared to $5,233 for the year ended March 31, 1998. $536 of the decrease
related to real estate operations. This decrease was primarily due to the
absence of debt on the property disposed of in fiscal 1998 partially offset by
interest incurred in the current fiscal year in connection with the property
opened in October 1998. The $1,649 expense incurred in fiscal 1999 related to
these real estate properties will be substantially reduced in fiscal 2000 as a
result of the sale of the Corporation's real estate investments discussed above.
Interest expense related to corporate activities declined $2,280 due primarily
to the termination or settlement of certain employee deferred compensation plans
and other benefit plans of subsidiaries of the Corporation, which obligations
had originally been recorded at a discount, and the repayment of a secured debt
facility during fiscal 1998. This decline in interest expense for corporate
activities was partially offset by additional interest expense related to the
note payable to the Trustee.
NATIONAL STEEL CORPORATION RESULTS
The decrease in net preferred dividend income as compared to the prior year
and the "Loss on National Steel Corporation settlement" are due to the November
1997 redemption by NSC of the NSC preferred stock and the settlement of all
related liabilities (see Note G to the consolidated financial statements).
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income was $1,263 for the year ended March 31, 1999 compared to
an equity in loss of $3,336 for the year ended March 31, 1998. The increase was
primarily due to an improvement in Phar-Mor's operating results for the current
year compared to the prior year. For the most part, the improved results related
to severance expense paid to Phar-Mor's former chief executive officer and a
write-down of fixed assets both of which occurred in the prior fiscal year.
INCOME TAXES
The Corporation recorded no federal income tax provision for the current or
prior year. Any income tax benefit related to the current or prior year's loss
was offset by a corresponding change in the deferred tax asset valuation
allowance. The tax expense for the current and prior years represents state
income taxes related to real estate operations. The fiscal 1998 amount also
reflects a $40 refund of federal income taxes.
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<PAGE>
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
For the year ended March 31, 1999, the minority interest decreased $169 to
$51 compared to $220 in the prior year. The decrease related primarily to
reduced earnings on real estate still owned. The minority interest was
eliminated in May 1999 with the sale of the real estate properties.
DISCONTINUED OPERATIONS
The gain on discontinued operations for the year ended March 31, 1998
resulted from the sale of USHDI in November 1997.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends have increased to $28,178 for the year ended
March 31, 1999 compared to $25,604 for the year ended March 31, 1998. The
increase was due to an increase of $407 in the amortization of discount on the
Series A preferred stock, and an increase of $2,167 in the dividend on the
Series A preferred stock attributable to the required compounding of dividends
on previously unpaid amounts. If the proposed merger with Xetava is consummated
in fiscal year 2000, the Corporation will no longer be obligated to pay such
preferred stock dividends.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED
TO YEAR ENDED MARCH 31, 1997
OPERATING LOSS
Revenues from real estate operations decreased $235 to $12,228 for the year
ended March 31, 1998, compared to $12,463 for the year ended March 31, 1997. The
decrease was the result of the disposal of several properties in fiscal 1997
($4,934) partially offset by increased revenues at the remaining properties
($815) and the purchase of an additional interest in a property in June 1997
($3,884).
Total operating costs including depreciation and amortization increased
$2,206 to $17,060 for the year ended March 31, 1998 compared to $14,854 for the
year ended March 31, 1997. Real estate operating costs increased $518. Such
increase is primarily attributable to an increase in operating costs at existing
properties ($680), as well as incremental costs for the property purchased in
fiscal 1998 ($3,519), somewhat offset by a decline in operating costs associated
with properties sold in fiscal 1997 ($3,681). An increase in corporate operating
costs of $1,688 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 $33,292 in
charges incurred in connection with the settlement reached in litigation with
the Trustee. This charge was partially offset by $1,715 in income from the
settlement of litigation, principally from payments received from insurance
carriers related to the settlement of environmental liability claims, and
$26,831 in gains in connection with the settlement of certain pension and other
postretirement benefit obligations for former officers and employees.
OTHER INCOME (EXPENSE)
Other income (expense) was an expense of $11,337 for the year ended March
31, 1998, compared to income of $19,228 for the year ended March 31, 1997. In
fiscal 1998, the loss was primarily related to a $12,938 charge for the year
from the Corporation's adjustment in the carrying value of its investment in
Imagyn to its market value partially offset by $1,601 in gains principally from
the sale of other assets. In fiscal 1997, the Corporation recognized gains of
$34,019 from the sale of FoxMeyer Canada Inc. ("FoxMeyer Canada") and $7,350
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 $13,394, the write-off of the
Corporation's investment in Ben Franklin of $2,043 and $6,704 in other losses
primarily from marketable securities (including $4,830 in losses related to
Imagyn).
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<PAGE>
NET FINANCING COSTS
Net financing costs decreased $1,214 to $3,524 for the year ended March 31,
1998, compared to $4,738 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
settlement with the Trustee. Interest expense decreased $1,183. 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
settlement with the Trustee.
NATIONAL STEEL CORPORATION RESULTS
The net preferred income for NSC was $5,854 for the year ended March 31,
1998, compared to $9,620 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.
The $59,038 loss in connection with the NSC settlement is explained in Note G to
the consolidated financial statements.
EQUITY IN LOSS OF AFFILIATES
The equity in loss of affiliates decreased $1,863 to a loss of $3,336 for
the year ended March 31, 1998, compared to a loss of $5,199 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 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 fiscal year 1998 for
state taxes incurred by its real estate subsidiaries, net of a federal income
tax refund received. The Corporation recorded an income tax provision of $29,870
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 $220
for the year ended March 31, 1998, compared to a minority interest in net loss
of $1,106 for the year ended March 31, 1997. The minority interest related to
real estate partnerships and the Corporation's investment in Hamilton Morgan
LLC. The increase in the minority interest resulted from the purchase of the
minority interest in Hamilton Morgan LLC in the 1998 fiscal year, eliminating
the impact of the Phar-Mor losses subsequent to the purchase. The increase was
partially offset by a decrease in the minority interest in real estate
partnerships in the 1998 fiscal year, primarily as a result of earnings
recognized in the 1997 fiscal year from properties sold during fiscal 1997.
DISCONTINUED OPERATIONS
The loss from discontinued operations for fiscal 1997 was $21,057. The loss
represented FoxMeyer's operating loss of $17,467 to June 30, 1996, the effective
date for treating FoxMeyer as a discontinued operation, and USHDI's loss from
operations of $3,590 through March 31, 1997, the effective date for treating
USHDI as a discontinued operation.
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 ($254,472) and USHDI
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<PAGE>
($4,932) partially offset by a gain on the sale of the Corporation's pharmacy
benefit management operations ($13,349).
PREFERRED STOCK DIVIDENDS
Preferred stock dividends increased to $25,604 for the year ended March 31,
1998, compared to $19,081 for the year ended March 31, 1997. The increase for
the year was primarily due to the Series A preferred stock's 1998 fiscal year
charge to equity based on the cash dividend that would have been paid if
declared being substantially higher than the 1997 fiscal year charge based on
the market value of the additional preferred stock issued as a pay-in-kind
dividend.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Corporation had cash and short-term investments
of approximately $27,993. During the fiscal year, the Corporation committed
approximately $5,004 to new investments and $1,650 to real estate development.
As of March 31, 1999, the debt of the Corporation consisted of the note
payable to the Trustee and the debt of consolidated real estate partnerships,
which debt was without recourse to the parent company, Avatex Corporation. The
debt related to real estate operations was either repaid, transferred to or
assumed by another party in connection with the sale of all the Corporation's
real estate in May 1999. See Note H to the consolidated financial statements.
The Corporation has two series 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 payments on the convertible preferred stock due January 1998 and
January 1999. See the "Overview" section above for a discussion of a proposed
merger of the Corporation with its Xetava subsidiary. If the proposed merger is
consummated as proposed, the preferred stockholders would receive New Class A
common stock in exchange for their preferred stock or, at their election, the
preferred stockholders may receive a combination of cash, a 6.75% note, warrants
to purchase common stock of the merged company and other consideration. The
issuance of the notes will require Funding to pay interest semi-annually in cash
with the principal balance due in three years from the date of issuance. Since
the Corporation will guarantee the 6.75% notes and Funding will have no assets
other than the Phar-Mor common stock securing the notes, the Corporation may be
required to make capital contributions to Funding so it can satisfy its interest
and principal obligations on the notes. The potential cash outlay, if the merger
is consummated as currently contemplated and all preferred stockholders elect
the package of cash, notes and warrants, will be approximately $17,250 at the
time of the merger and $1,148 semi-annually for interest on the notes.
For corporate operations, cash requirements include the funding of monthly
operating activities, the payment of benefit obligations, and the funding of
environmental liabilities of previously owned businesses, the amounts and timing
of which are uncertain. The next fiscal year will require funding any cash to be
paid to preferred stockholders as a result of the proposed merger as well as
interest payments on any notes issued in that transaction. The Corporation
received $11,400 in cash from the sale of real estate in May 1999, and expects
to receive cash from collection of receivables and interest income it earns on
its investments.
The Corporation continuously evaluates current and potential investments in
connection with an ongoing review of its investment strategies and, as
opportunities arise, may continue to invest in publicly and privately held
companies which the Corporation believes would be a strategic fit. The
Corporation, from time to time, may decide to liquidate those investments which
no longer fit its investment criteria. The Corporation may also pursue the
acquisition of an operating company. In addition, there may be restrictions
imposed on the Corporation's ability to make certain types of investments and on
other activities as a result of the proposed merger with Xetava.
The Corporation will rely on cash on hand and, if necessary, the sale of
investments to meet its future obligations. For a discussion of current
litigation which, if the Corporation were to lose, would have a
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material impact on the Corporation's financial condition, liquidity and results
of operations, see Note N to the consolidated financial statements and "Item 3.
Legal Proceedings".
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 R to the consolidated
financial statements.
OTHER
The Corporation has approximately $1,471 in reserves in connection with
environmental claims relating to businesses that were disposed of or
discontinued (see Note N to the consolidated financial statements and "Item 3.
Legal Proceedings"). During fiscal 1999, the Corporation paid approximately $357
with respect to environmental claims and related legal fees.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after June 15, 2000. Therefore, the Corporation will be required to
adopt SFAS No. 133 for its fiscal year beginning April 1, 2001. The Corporation
believes there will be no material impact on the financial results or condition
of the Corporation due to the adoption of SFAS No. 133.
What is commonly referred to as the "Year 2000" issue relates, in part, to
many hardware and software systems that use only two digits to represent the
year being unable to recognize dates beyond 1999. The Corporation's internal
systems, both hardware and software, are Year 2000 compliant in all material
respects. The Year 2000 readiness of the Corporation's vendors, and companies in
which the Corporation has invested, however may vary. The Corporation is
currently trying to ascertain and monitor the Year 2000 readiness of these
companies. If any of the companies in which the Corporation has made a
significant investment are not Year 2000 compliant, there may be a material
impact on the value of that investment and, correspondingly, on the
Corporation's results of operations and financial condition. If certain vendors
are not Year 2000 compliant, especially vendors that provide electricity,
telephone services and management services, the Corporation may suffer
potentially significant disruptions to its overall operations, depending upon
the length and severity of the problems. At this time, it is still uncertain to
what extent the Corporation may be affected by such matters at these other
entities.
The foregoing Year 2000 discussion and the information contained therein
are provided as a "Year 2000 Readiness Disclosure" and contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on management's best current estimates, which
were derived from numerous assumptions about future events, including the
continued availability of certain resources, representations received from third
parties and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors which might cause such material differences
include, but are not limited to, the ability to identify and remediate all
relevant systems; adequate resolution of Year 2000 issues by government
agencies, businesses and other third parties who are outsourcing service
providers, suppliers and vendors of the Corporation; the adequacy of Year 2000
remediation by investees; and the adequacy and ability to implement contingency
plans. The forward-looking statements made in the foregoing Year 2000 discussion
speak only to the date on which such statements are made, and the Corporation
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On Balance Sheet Financial Instruments (in thousands except interest
rates):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------------------------ FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE (3)
------- ------ ------- ------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities available for sale (1)
Fixed Rate.................................. -- -- -- -- -- $ 2,651 $ 2,651 $ 2,651
Average interest rate....................... -- -- -- -- -- 12.4% 12.4%
Liabilities
Long-term debt (2), (4)
Fixed Rate.................................. $ 409 $ 256 $ 283 $ 313 $ 6,450 $ 4,727 $12,438 $12,438
Average interest rate....................... 9.7% 10.0% 10.0% 10.0% 10.2% 9.7% 10.0%
Variable Rate............................... $13,238 $9,001 -- -- -- -- $22,239 $21,499
Average interest rate....................... 6.7% 7.8% -- -- -- -- 7.1%
</TABLE>
- ------------------
(1) Maturities of redeemable preferred stock held for sale were based on the
first redemption date available to the Corporation. The Corporation also
holds investments in various other available for sale equity securities and
is subject to price risk arising from ownership of these investments. The
market value of these securities at March 31, 1999 was $9.5 million.
(2) Maturities were based on debt agreements with no redemption prior to actual
maturity being assumed. Variable rates were based on rates in effect on
March 31, 1999. Actual rates in the future could vary. The variable rate
loan maturing in 2000 is a construction loan which, along with the fixed
rate notes, were repaid, transferred to or assumed by another party in
connection with the sale of all the Corporation's real estate in May 1999.
See Note H to the consolidated financial statements.
(3) Fair value is based on the estimated current market value for redeemable
preferred stock issued by similar companies and on borrowing rates currently
available for debt instruments with similar terms and maturities.
(4) In connection with the variable rate loan maturing in 2000, the Corporation
has partially hedged the loan through an interest rate swap with a notional
value of $12.5 million that expires in December 1999. The swap effectively
converts the variable rate loan to a fixed rate loan. The Corporation pays a
fixed rate of 5% to the counterparty, a major bank. The counterparty pays
the Corporation at a variable rate based on LIBOR, which was 4.94% at March
31, 1999. The fair value of the swap was less than ten thousand dollars at
March 31, 1999. The Corporation's interest in the consolidated partnership
that was a party to the swap was sold in May 1999.
E-21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................... 23
Consolidated Statements of Operations--For the Three Years Ended March 31, 1999............................ 24
Consolidated Statements of Comprehensive Loss--For the Three Years Ended March 31, 1999.................... 25
Consolidated Balance Sheets--March 31, 1999 and 1998....................................................... 26
Consolidated Statements of Stockholders' Equity (Deficit)--For the Three Years Ended March 31, 1999........ 27
Consolidated Statements of Cash Flows--For the Three Years Ended March 31, 1999............................ 28
Notes to Consolidated Financial Statements--For the Three Years Ended March 31, 1999....................... 29
</TABLE>
E-22
<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, 1999 and 1998, 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, 1999 and 1998, 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 R 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 R. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 30, 1999
(except for Note S, which is
as of June 18, 1999)
E-23
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES................................................................... $ 10,509 $ 12,228 $ 12,463
OPERATING COSTS:
Operating costs, including general and administrative costs.............. 15,051 16,102 13,386
Depreciation and amortization............................................ 1,231 958 1,468
Unusual items............................................................ -- 4,746 --
--------- --------- ---------
OPERATING LOSS............................................................. (5,773) (9,578) (2,391)
OTHER INCOME (EXPENSE)..................................................... (1,475) (11,337) 19,228
INTEREST INCOME............................................................ 1,874 1,709 1,678
INTEREST EXPENSE........................................................... 2,417 5,233 6,416
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION,
EQUITY IN INCOME (LOSS) OF AFFILIATES, INCOME TAX PROVISION AND MINORITY
INTEREST................................................................. (7,791) (24,439) 12,099
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income................. -- 5,854 9,620
Loss on National Steel Corporation settlement............................ -- (59,038) --
Equity in income (loss) of affiliates 1,263 (3,336) (5,199)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION AND
MINORITY INTEREST........................................................ (6,528) (80,959) 16,520
Income tax provision....................................................... 8 40 29,870
--------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST................... (6,536) (80,999) (13,350)
Minority interest in results of operations of consolidated subsidiaries.... 51 220 (1,106)
--------- --------- ---------
NET LOSS FROM CONTINUING OPERATIONS........................................ (6,587) (81,219) (12,244)
Discontinued operations:
Loss from discontinued operations, net of tax............................ -- -- (21,057)
Gain (loss) on disposal of discontinued operations, net of tax........... -- 3,719 (246,055)
--------- --------- ---------
NET LOSS................................................................... (6,587) (77,500) (279,356)
Preferred stock dividends.................................................. 28,178 25,604 19,081
--------- --------- ---------
LOSS APPLICABLE TO COMMON STOCKHOLDERS..................................... $ (34,765) $(103,104) $(298,437)
--------- --------- ---------
--------- --------- ---------
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations.......................................... $ (2.65) $ (7.74) $ (2.10)
Discontinued operations.................................................. -- 0.27 (17,89)
--------- --------- ---------
LOSS PER SHARE............................................................. $ (2.65) $ (7.47) $ (19.99)
--------- --------- ---------
--------- --------- ---------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................................ 13,102 13,806 14,931
</TABLE>
See notes to consolidated financial statements.
E-24
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
NET LOSS....................................................................... $(6,587) $(77,500) $(279,356)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustment...................................... -- -- 17
Reclassification adjustment for losses included in net loss.................. -- -- 21
------- -------- ---------
Net foreign currency translation adjustment............................... -- -- 38
Unrealized gains (losses) on securities...................................... 685 1,168 (854)
Reclassification adjustment for (gains) losses included in net loss.......... (33) -- 871
------- -------- ---------
Net unrealized gains...................................................... 652 1,168 17
Minimum pension liability adjustment......................................... -- (6,187) (8,897)
Loss on plan termiantion from National Steel Corporation settlement included
in net loss............................................................... -- 79,718 --
------- -------- ---------
Net minimum pension liability adjustment.................................. -- 73,531 (8,897)
------- -------- ---------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)................................... 652 74,699 (8,842)
------- -------- ---------
COMPREHENSIVE LOSS............................................................. $(5,935) $ (2,801) $(288,198)
------- -------- ---------
------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
E-25
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments....................................................... $ 27,993 $ 34,193
Receivables, less allowance for possible losses of $41 in 1999 and
$27 in 1998........................................................................ 2,767 11,783
Other current assets.................................................................. 1,823 3,971
--------- ---------
Total current assets.................................................................... 32,583 49,947
Investment in affiliates................................................................ 27,038 25,343
Property and equipment.................................................................. 33,030 20,657
Less accumulated depreciation and amortization........................................ 2,756 1,630
--------- ---------
Net property and equipment.............................................................. 30,274 19,027
Other assets............................................................................ 27,325 24,986
--------- ---------
Total assets............................................................................ $ 117,220 $ 119,303
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................................................... $ 1,581 $ 2,665
Other accrued liabilities............................................................. 2,210 2,368
Salaries, wages and employee benefits................................................. 1,060 3,801
Long-term debt due within one year.................................................... 409 492
--------- ---------
Total current liabilities............................................................... 5,260 9,326
Long-term debt.......................................................................... 34,268 22,923
Other long-term liabilities............................................................. 12,046 13,402
Minority interest in consolidated subsidiaries.......................................... 410 558
Commitments and contingencies........................................................... -- --
Redeemable preferred stock.............................................................. 243,169 214,996
Stockholders' deficit
Common stock $5.00 par value; authorized 50,000,000 shares; issued 13,806,487 shares
in 1999 and 13,806,375 shares in 1998.............................................. 69,032 69,032
Capital in excess of par value........................................................ 119,103 119,100
Accumulated other comprehensive income................................................ 1,820 1,168
Accumulated deficit................................................................... (365,967) (331,202)
--------- ---------
(176,012) (141,902)
Less: equity in cost of common stock of the Corporation
held by Phar-Mor, Inc.............................................................. (1,921) --
--------- ---------
Total stockholders' deficit............................................................. (177,933) (141,902)
--------- ---------
Total liabilities and stockholders' deficit............................................. $ 117,220 $ 119,303
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
E-26
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL IN OTHER ACCUMULATED
COMMON EXCESS OF COMPREHENSIVE EARNINGS TREASURY
STOCK PAR VALUE INCOME (LOSS) (DEFICIT) STOCK
-------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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) --
Net loss.................................... (6,587)
Dividends in arrears on Convertible
Preferred and Series A Preferred......... (25,268)
Amortization of discount on Series A
Preferred................................ (2,910)
Net unrealized holding gain on securities... 652
Conversion of preferred stock............... 3
Equity in cost of common stock of the
Corporation held by Phar-Mor, Inc........ (1,921)
-------- -------- --------- --------- ---------
Balance at March 31, 1999..................... $ 69,032 $119,103 $ 1,820 $(365,967) $ (1,921)
-------- -------- --------- --------- ---------
-------- -------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
E-27
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (6,587) $(77,500) $(279,356)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries.... 51 220 (1,106)
Equity in loss (income) of affiliates...................................... (1,263) 3,336 5,199
Depreciation and amortization.............................................. 1,231 958 1,468
Net preferred income from National Steel Corporation....................... -- (5,854) (9,620)
Loss on National Steel Corporation settlement.............................. -- 59,038 --
Loss (gain) on disposal of discontinued operations......................... -- (3,719) 246,055
Loss (gain) on investments................................................. 1,755 11,368 (21,141)
Other non-cash charges (credits)........................................... (892) (25,952) 2,167
Deferred income tax provision.............................................. -- -- 29,836
Depreciation and amortization, provision for losses on accounts receivable
and other items related to discontinued operations...................... -- -- 86,333
Cash provided (used) by working capital items, net of acquisitions:
Receivables............................................................. 9,308 2,468 20,802
Inventories............................................................. -- -- 26,018
Other assets and restricted cash........................................ 52 32,883 (37,146)
Accounts payable and accrued liabilities................................ (5,728) (8,545) (14,687)
Other...................................................................... 13 20 110
-------- -------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................. (2,060) (11,279) 54,932
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations......... -- -- (24,366)
Purchase of property, plant and equipment.................................. (12,374) (5,593) (34,748)
Purchase of investments.................................................... (5,004) (15,315) (6,366)
Proceeds from the disposition of investments............................... 3,011 64,149 104,355
Acquisitions, net of cash acquired......................................... -- (7,399) --
Other...................................................................... (38) 2,192 250
-------- -------- ---------
NET CASH PROVIDED (USED) BYINVESTING ACTIVITIES.............................. (14,405) 38,034 39,125
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities............................... -- -- 447,492
Repayments under revolving credit facilities............................... -- -- (326,883)
Proceeds from the issuance of long-term debt............................... 11,055 18,613 14,520
Debt repayments............................................................ (489) (18,660) (212,486)
Debt issuance costs........................................................ (101) (388) (8,140)
Purchase of treasury stock................................................. -- -- (16,726)
Purchase of preferred stock................................................ -- -- (8,845)
Investment by minority interest............................................ -- 800 --
Dividends paid on redeemable preferred stock............................... -- -- (2,697)
Dividends paid to minority interest........................................ (200) (100) (1,786)
Exercise of stock options.................................................. -- -- 1,680
-------- -------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................. 10,265 265 (113,871)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS................... (6,200) 27,020 (19,814)
Cash and short-term investments, beginning of year......................... 34,193 7,173 26,987
-------- -------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR................................. $ 27,993 $ 34,193 $ 7,173
-------- -------- ---------
-------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
E-28
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that,
along with its subsidiaries, owns interests in hotels, an office building and
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. 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
financial instruments having a maturity of three months or less at the time of
purchase and are recorded at cost. These temporary cash investments may subject
the Corporation to a concentration of credit risk. To lessen this risk, the
Corporation placed substantially all of its temporary cash investments with
major financial institutions and diversified money market mutual funds. Use of
approximately $0.3 million of cash included in "Other current assets" at
March 31, 1999 and at March 31, 1998 was restricted in connection with certain
real estate loans (see Note H).
INVESTMENTS: The Corporation's investments in debt securities, and in
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 its acquisition date and is
reviewed periodically. Unrealized gains or losses result from the difference in
the fair market value and the cost of securities. For securities classified as
available for sale, unrealized gains or losses are shown as a component of the
stockholders' deficit. For trading securities, the unrealized gains or losses
are reported in the results of operations. The Corporation periodically reviews
its investments where 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. Gains
or losses on 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. Interest costs associated with significant capital
additions are capitalized. The Corporation capitalized $0.3 million of interest
in 1999. No interest was capitalized in 1998 or 1997. 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 shorter 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.
E-29
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS--(CONTINUED)
Property and equipment consisted of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Land................................................................. $ 5,631 $ 5,631
Buildings and building improvements.................................. 23,020 10,677
Leasehold improvements............................................... 62 61
Equipment and furniture.............................................. 4,317 697
Construction in progress............................................. -- 3,591
------- -------
$33,030 $20,657
------- -------
------- -------
</TABLE>
LONG-LIVED ASSETS: The Corporation reviews long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be used in the business is measured by a comparison
of the total future undiscounted cash flows generated by the asset to its
carrying value. If the carrying value of the asset is more than its undiscounted
expected future cash flows, an impairment exists which is measured by the
difference between the carrying value and the estimated fair value of the asset.
Assets to be disposed of are reported at the lower of their carrying value or
fair value less costs to sell.
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 deferred tax asset is reviewed periodically
to determine the amount 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): Comprehensive income (loss) is the change in
the 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.
NEWLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
2000. Therefore, the Corporation will be required to adopt SFAS No. 133 for its
fiscal year beginning April 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments that require every derivative to
be recorded on the balance sheet as an asset or liability measured at its fair
value. The statement also defines the accounting for the change in the fair
value of
E-30
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS--(CONTINUED)
derivatives depending on their intended use. The Corporation believes that the
adoption of SFAS No. 133 will not have a material impact on the financial
condition or results of operations of the Corporation.
EARNINGS (LOSS) PER SHARE: 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,
-----------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Loss from continuing operations................................ $ (6,587) $ (81,219) $(12,244)
Deduct dividends on preferred shares........................... 28,178 25,604 19,081
-------- --------- --------
Loss from continuing operations applicable to common
stockholders for BASIC earnings per share.................... (34,765) (106,823) (31,325)
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.................. $(34,765) $(106,823) $(31,325)
-------- --------- --------
Shares
Weighted average number of common shares outstanding for
calculation of BASIC earnings per share...................... 13,102 13,806 14,931
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.................... 13,102 13,806 14,931
-------- --------- --------
Loss from continuing operations
Basic........................................................ $ (2.65) $ (7.74) $ (2.10)
Diluted...................................................... $ (2.65) $ (7.74) $ (2.10)
-------- --------- --------
-------- --------- --------
</TABLE>
Options to purchase approximately 3.9 million, 3.9 million and 2.2 million
shares were outstanding at March 31, 1999, 1998 and 1997, 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. The loss from
discontinued operations was net of applicable income tax benefit of
$4.6 million in 1997.
E-31
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE B--ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
The unaudited balance sheet of FoxMeyer at June 30, 1996 was as follows (in
thousands of dollars):
Current assets.......................... $ 828,784
Property, plant and equipment........... 144,746
Goodwill and other intangibles.......... 209,699
Other assets............................ 72,924
----------
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
----------
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.
As a result of a bankruptcy filing on July 26, 1996, by Ben Franklin Retail
Stores, Inc. ("Ben Franklin"), the Corporation wrote off the book value of its
17.4% investment in Ben Franklin of approximately $2.0 million at June 30, 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. 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.
E-32
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE B--ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
Revenues for the year ended March 31, 1997 for these discontinued
operations were $1.5 million. The loss from discontinued operations was net of
tax benefits of $0.3 million for the year ended March 31, 1997.
Phar-Mor, Inc.
The Corporation accounts for its 38.4% investment in Phar-Mor's common
stock on an equity basis. Phar-Mor 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. The book value of Phar-Mor was $24.4 million at March 31, 1999 (with a
market value of $27.6 million based on its closing stock price at March 31,
1999, on the NASDAQ National Market). In addition, Phar-Mor owns 2,086,200
shares of the Corporation's common stock which were acquired through open market
purchases at a cost of approximately $5.0 million (see Note I). See Note S for a
discussion of additional purchases of the Corporation's common stock that
Phar-Mor may make.
In fiscal 1996, the Corporation acquired a 69.8% interest in Hamilton
Morgan LLC ("Hamilton Morgan"). Hamilton Morgan subsequently acquired an
approximate 30.9% common stock interest in Phar-Mor. On September 19, 1997, the
Corporation acquired from Hamilton Morgan, under an agreement among Hamilton
Morgan, the owner of the minority interest in Hamilton Morgan and certain other
parties, all of Phar-Mor's common stock held by Hamilton Morgan in exchange for
$6.1 million and other non-cash consideration. 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.
At March 31, 1997, the Corporation determined that there had been a decline
in the value of its investment in Phar-Mor that was other than temporary and
recorded a charge of $13.6 million (net of the minority interest in Hamilton
Morgan), including the write-off of goodwill related to the original 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.
Summarized unaudited financial information for Phar-Mor was as follows for
the three years ended March 27, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
MARCH 27, MARCH 28, MARCH 29,
CONDENSED STATEMENTS OF OPERATIONS 1999 1998 1997
- -------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................................... $1,132,317 $1,081,164 $1,084,325
Operating earnings............................................ 21,958 3,712 4,901
Net income (loss)............................................. 4,077 (9,092) (5,378)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 27, MARCH 28,
CONDENSED BALANCE SHEETS 1999 1998
- ---------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets.................................................. $ 272,714 $ 266,626
Property and equipment.......................................... 93,534 74,407
Other assets.................................................... 39,040 13,629
--------- ---------
Total assets.................................................... $ 405,288 $ 354,662
--------- ---------
Current liabilities............................................. $ 157,083 $ 116,892
Long-term obligations........................................... 163,482 155,714
Stockholders' equity............................................ 84,723 82,056
--------- ---------
Total liabilities and stockholders' equity...................... $ 405,288 $ 354,662
--------- ---------
--------- ---------
</TABLE>
E-33
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE B--ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
Chemlink Acquisition Company LLC
In March and December 1998, the Corporation invested a total of
$3.0 million to acquire a 41% interest in a Delaware limited liability company,
Chemlink Acquisition Company LLC ("CLAC"), which in turn acquired a 50% interest
in Chemlink Laboratories, LLC ("Chemlink"). The Corporation accounts for its
investment in CLAC, and CLAC accounts for its investment in Chemlink, using the
equity method of accounting. CLAC has no investments or business other than its
investment in Chemlink. Chemlink is an Atlanta based company that develops and
manufactures products that use a proprietary, and often patented, effervescent
formulation. These products include specialty cleaning, disinfecting and
sterilant products for the medical and dental professions and certain other
consumer and commercial products which are under development. The effervescent
formulation will supposedly allow easier packaging, less costly shipping and
potentially higher effectiveness of enzyme products than pre-mixed solutions.
The Corporation has a consulting contract with Chemlink. The acquisition of the
equity interest in Chemlink by CLAC was accounted for by the purchase method of
accounting. The $6.7 million difference between CLAC's purchase price and the
net book value of Chemlink's assets acquired less liabilities assumed was
allocated to patents controlled by Chemlink. The amount allocated to the patents
is being amortized to expense over their average remaining life. The
Corporation's equity investment in CLAC had a carrying value of $2.7 million at
March 31, 1999.
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. 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 $1.6 million in 1999, $1.4
million in 1998, and $4.0 million in 1997 in various real estate partnerships.
See Note S for a discussion of the sale of Development's interest in real
estate properties in May 1999.
During 1997, Development 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 that
fiscal year, revenues for the year ended March 31, 1998 would have been
approximately $1.2 million greater than reported. The pro forma impact on the
Corporation's loss from continuing operations for 1998, if the acquisition had
taken place at the beginning of that 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.
E-34
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE B--ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
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.
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,
------------------------------
1999 1998 1997
------ ------ --------
<S> <C> <C> <C>
Unrealized gains on securities...................................... $1,820 $1,168 $ --
Minimum pension liability........................................... -- -- (73,531)
------ ------ --------
Total accumulated other comprehensive income (loss)................. $1,820 $1,168 $(73,531)
------ ------ --------
------ ------ --------
</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). In the consolidated statement of comprehensive loss
for the year ended March 31, 1998, the reversal was shown in the caption "Loss
on plan termination from National Steel Corporation settlement included in net
loss."
As a result of the Corporation's income tax position (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, 1999.
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,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest paid.......................................................... $ 1,590 $ 3,179 $18,738
Income taxes paid...................................................... 36 40 34
Non-cash transactions:
Capital leases....................................................... 108 -- --
Note received as part of National Steel Corporation settlement....... -- 9,442 --
Notes received on sale of other investments.......................... -- 1,350 2,315
Payment of dividends in kind on Series A Preferred Stock............. -- -- 4,354
Cumulative dividends accrued but not paid............................ 25,268 23,101 10,806
------- ------- -------
------- ------- -------
</TABLE>
E-35
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE D--SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION--(CONTINUED)
The following supplemental information is provided for other long-term
assets and other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Other assets:
Prepaid pension cost................................................. $10,900 $ 9,440
Securities available for sale........................................ 12,134 7,212
Other investments, at cost........................................... 1,438 6,028
Other................................................................ 2,853 2,306
------- -------
Total........................................................... $27,325 $24,986
------- -------
Other long-term liabilities:
Pension and postretirement benefits.................................. $ 4,902 $ 5,290
Environmental liabilities............................................ 1,357 1,417
Liabilities related to discontinued operations....................... 3,486 4,334
Other................................................................ 2,301 2,361
------- -------
Total........................................................... $12,046 $13,402
------- -------
------- -------
</TABLE>
NOTE E--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 Bankruptcy 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
for former officers and employees (see Notes L and N).
In 1999, other expense consisted of a loss of $1.5 million related to a
$3.4 million reduction in the carrying value of certain of the Corporation's
investments, including a $1.8 million reduction in the carrying value of Imagyn
Medical Technologies, Inc. ("Imagyn"), partially offset by $1.9 million in gains
primarily from recoveries on investments which had been written-off in prior
years, a royalty payment from a property sold in the prior fiscal year and
dividends on investments. In 1998, other expense consisted of a loss of $12.9
million during the year from the adjustment in the carrying value of 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).
NOTE F--INVESTMENTS IN MARKETABLE SECURITIES
The Corporation's investments in debt securities, and in equity securities
that have a readily determinable market value, were classified as either
"available for sale" or "trading." The carrying value
E-36
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE F--INVESTMENTS IN MARKETABLE SECURITIES--(CONTINUED)
and gross unrealized gains and losses for available for sale securities were as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 1998
------- ------
<S> <C> <C>
Carrying value..................................................................... $12,134 $7,212
Unrealized gains................................................................... 2,045 1,168
Unrealized losses.................................................................. 225 --
------- ------
------- ------
</TABLE>
Available for sale securities are included in "Other assets." Trading
securities of $1.1 million and $2.9 million were included in "Other current
assets" at March 31, 1999 and 1998, respectively.
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,
---------------------------
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Available for sale securities:
Proceeds from sales..................................................... $1,413 $ -- $ 6
Realized gains.......................................................... 33 -- --
Realized losses......................................................... -- -- 871
Net unrealized gains.................................................... 652 1,168 17
Trading securities:
Net unrealized losses included in net income............................ (1,795) (11,856) (6,552)
------ ------- ------
------ ------- ------
</TABLE>
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").
In January 1994, the Corporation disposed of its remaining investment in the
common stock of NSC.
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.
E-37
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE G--INVESTMENT IN NATIONAL STEEL CORPORATION--(CONTINUED)
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 (with an estimated discounted
value of $9.4 million) in exchange for the redemption of the NSC Preferred Stock
owned by the Corporation and, in addition, NSC also released the Corporation
from the Weirton Liabilities as well as various environmental liabilities
related to NSC and Weirton sites (the "NSC Settlement"). The note received was
paid in installments over the next twelve months following the NSC Settlement.
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 assigned to NSC all of the Corporation's rights to assert pre-1987
environmental claims against insurers of both NSC and the Corporation, and the
Corporation released its share of any settlement proceeds related to such claims
as well as all amounts remaining in escrow from prior payments made by the
Corporation to NSC for environmental liabilities. 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,
------------------
1999 1998
------- -------
<S> <C> <C>
Trustee note...................................................................... $ 9,001 $ 8,322
Development notes with various maturities......................................... 25,676 15,093
------- -------
34,677 23,415
Long-term debt due within one year................................................ 409 492
------- -------
Long-term debt.................................................................... $34,268 $22,923
------- -------
------- -------
</TABLE>
In connection with the settlement of certain litigation with the FoxMeyer
Chapter 7 Bankruptcy 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 has been brought by the Trustee
against specified third parties. Interest accrues on the note 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 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 "Other current assets" 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
E-38
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE H--LONG-TERM DEBT--(CONTINUED)
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 a
term up to January 2000. Since the partnership has already secured permanent
loan financing to replace the construction loan upon final 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. These notes were
either repaid, transferred to or assumed by the other partners, or their
affiliates, in May 1999 as part of a sale of these properties (see Note S).
One of Development's limited partnerships entered into a interest rate swap
agreement as a hedge against the variable rate construction loan. The swap, for
a notional amount of $12.5 million, effectively converts the variable rate loan
to a fixed rate. The swap expires in December 1999. Under the agreement, the
partnership will pay a fixed interest rate of 5.0% to the counterparty. The
counterparty will pay the partnership interest at a variable rate based on the
monthly U.S. dollar LIBOR rate which was at 4.94% at March 31, 1999. Neither the
partnership or the counterparty, which is a major financial institution, are
required to collateralize their obligations under the swap. This swap was
transferred with the debt in the partnership as part of the sale of this
property (see Note S).
Maturity and approximate sinking fund requirements on all long-term debt of
the Corporation by fiscal year are as follows: $0.4 million in 2000;
$9.3 million in 2001; $0.3 million in 2002; $0.3 million in 2003: $6.5 million
in 2004 and $4.7 million thereafter. These debt requirements do not include the
$13.2 million construction loan which will be refinanced under the permanent
financing already secured. However, the maturity date and interest rate on the
permanent financing would be based on facts and circumstances at the date of the
refinancing. As a result of the sale of the real estate operations as discussed
in Note S, the maturity and sinking fund requirements are as follows:
2001--$9.0 million.
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, 1999, there were two series
of redeemable preferred stock outstanding.
At March 31, 1999 and 1998, the Corporation had 652,273 and 652,331 shares,
respectively, of cumulative convertible preferred stock outstanding 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 1,264,095 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 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, 1999 were $8.2 million or $12.50 per share. The
Corporation is also 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 for 88,000
shares each in January 1998 and 1999. In addition, the Corporation is prohibited
from redeeming any shares of this series of preferred stock as long as any
cumulative dividends remain unpaid on the other series of preferred stock
discussed below.
At both March 31, 1999 and 1998, 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
E-39
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE I--CAPITAL STOCK--(CONTINUED)
"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 its
liquidation preference plus unpaid dividends thereon. 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, 1999 was
$51.0 million or $11.83 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.
Dividends paid on or prior to October 15, 1996 on the Series A Preferred
Stock were paid in additional shares of the Series A Preferred Stock. The
difference in the Series A Preferred Stock's liquidation preference and the
recorded value when the original and additional shares were issued 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 would mature on November 30, 2003. If issued, the
Exchange Notes may be redeemed, at the option of the Corporation, in whole or in
part, at a redemption price equal to the principal amount plus any unpaid
interest thereon. The payments of principal and interest on the Exchange Notes
would be subordinated to all senior indebtedness of the Corporation.
The amount of cumulative unpaid dividends accrued is reflected in the
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.
After dividends on the convertible preferred stock and the Series A
Preferred Stock are in arrears for six full quarterly dividend periods, the
holders of the preferred stocks can elect four new directors until such
cumulative unpaid 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 in 1999 and added to the Board of Directors.
On April 14, 1998, the Corporation announced that it would merge with and
into its wholly-owned subsidiary, Xetava Corporation ("Xetava"). Under the
proposed merger, the Corporation's existing common and preferred stockholders
would have received new common stock of Xetava. In late April 1998, a preferred
stockholder of the Corporation and a putative class of preferred stockholders
filed a total of three lawsuits in the Delaware Court of Chancery (the "Delaware
Court") against the Corporation, Xetava and seven of the Corporation's
directors. In May 1998, the Delaware Court consolidated the lawsuits under the
caption In re Avatex Corporation Shareholders Litigation, C.A. No. 16334. The
lawsuits challenged the merger of the Corporation with and into Xetava and
contended that the merger is subject to a separate class vote by the holders of
the Corporation's preferred stock and that the exchange ratios for the merger
are unfair to the preferred stockholders. Plaintiffs sought a declaration that
the defendant directors have breached their fiduciary duties, injunctive relief
and damages and costs. In August 1998, the Delaware Supreme Court ruled that the
holders of the Corporation's convertible preferred stock have the right to vote
separately as a class on the proposed merger of the Corporation into Xetava, as
it was structured and announced by the
E-40
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE I--CAPITAL STOCK--(CONTINUED)
Corporation on April 14, 1998. As a result of these events, the Board of
Directors has reconsidered the appropriate course of action to take with respect
to the merger and has entered into an agreement with certain large holders of
its preferred stock on the terms of a revised merger between the Corporation and
Xetava and the settlement of the preferred stockholders' litigation against the
Corporation. See Note S for a discussion of the new agreements.
COMMON STOCK: At March 31, 1999 and 1998, the Corporation had 13,806,487
and 13,806,375 shares, respectively, of common stock issued. The Corporation has
also reserved 3,853,114 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 outstanding on the preferred stock, as discussed above, no
dividends may be paid on the common stock.
See Note S for a discussion of potential additional common stock and common
stock warrants that may be issued as a result of the merger and settlement with
preferred stockholders as discussed above.
As of March 31, 1999, Phar-Mor had acquired 2,086,200 shares of the
Corporation's common stock during the current fiscal year through open market
purchases at a cost of approximately $5.0 million. The Corporation accounts for
its investment in Phar-Mor on an equity basis (see Note B) and treats Phar-Mor's
investment in the Corporation's common stock similar to treasury stock, with a
charge to the stockholders' deficit of $1.9 million and a reduction in the
number of shares outstanding for calculating earnings per share of 801,101. The
charge to the stockholders' deficit and the reduction in shares for calculating
earnings per share is equal to the Corporation's 38.4% ownership in the cost and
number of shares of its common stock held by Phar-Mor. See Note S for a
discussion of additional purchases of the Corporation's common stock that
Phar-Mor may make.
On January 28, 1999, the New York Stock Exchange ("NYSE") informed the
Corporation that it no longer met the continued listing requirements of the NYSE
and that trading of its common, convertible preferred and Series A preferred
stocks would be suspended prior to the opening of the NYSE on Monday,
February 1, 1999. The Corporation's common and preferred stocks now trade on the
OTC Bulletin Board system.
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, 1999, options for 100,078 shares were still available for grant under
the Plan.
The Corporation has a Performance Incentive Plan which provides for
participants to receive (i) 17.5% of the Corporation's net income (before the
charge for the plan and after certain adjustments) and (ii) 17.5% of the net
proceeds from litigation, if any, related to the Corporation's lawsuit against
McKesson and various other defendants. Approximately $1.9 million in incentive
bonuses was earned under the net income portion of the plan for the year ended
March 31, 1998. No amounts were earned for the years ended March 31, 1999 or
March 31, 1997. The net income portion of the plan has not been extended beyond
March 31, 1999. The
E-41
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE J--EMPLOYEE COMPENSATION PLANS--(CONTINUED)
litigation portion of the plan does not expire nor can the percentage award or
the participants be changed unless the participant has voluntarily terminated
his employment or been terminated with cause.
The following table summarizes the information with respect to stock
options for the three years ended March 31, 1999. No options were granted during
1999. The exercise price of options granted in prior years was at least equal to
the published market price of the Corporation's common stock on the date of
grant.
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------
WEIGHTED
AVERAGE
EXERCISE
EXERCISABLE SHARES SHARES PRICE
------------------ --------- --------------
<S> <C> <C> <C>
March 31, 1996........................................... 1,329,669 3,165,297 $17.52
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
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
Granted.................................................. -- --
Exercised................................................ -- --
Canceled or forfeited.................................... -- --
---------- --------- ------
March 31, 1999........................................... 2,750,611 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, 1999, the Corporation's net 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>
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
As reported
Net loss from continuing operations................................ $(6,587) $(81,219) $ (12,244)
Net loss........................................................... (6,587) (77,500) (279,356)
Pro forma
Net loss from continuing operations................................ $(7,274) $(82,412) $ (12,006)
Net loss........................................................... (7,274) (78,693) (279,118)
------- -------- ---------
As reported for both basic and diluted earnings per share
Net loss per share from continuing operations...................... $ (2.65) $ (7.74) $ (2.10)
Net loss per share................................................. (2.65) (7.47) (19.99)
Pro forma for both basic and diluted earnings per share
Net loss per share from continuing operations...................... $ (2.71) $ (7.82) $ (2.08)
Net loss per share................................................. (2.71) (7.55) (19.97)
------- -------- ---------
------- -------- ---------
</TABLE>
E-42
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE J--EMPLOYEE COMPENSATION PLANS--(CONTINUED)
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, 1999 (no
grants were made during 1999):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield (%)........................................................ -- 0.0 0.0
Expected volatility (%)............................................................ -- 60.8 43.7
Risk-free interest rates (%)....................................................... -- 6.2 6.3
Expected option lives (years)...................................................... -- 4.0 4.5
-- ---- ----
-- ---- ----
</TABLE>
The weighted-average fair values of options granted during 1998 and 1997
were $0.58 and $1.57, respectively.
The following table summarizes information about significant option groups
outstanding and exercisable as of March 31, 1999 and related weighted-average
exercise price and weighted-average contractual life remaining:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
OPTIONS WITH EXERCISE PRICES ------------------ ------------------ REMAINING
RANGING FROM: SHARES PRICE SHARES PRICE LIFE
- ------------------------------------------------- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
$1.125 to $1.3125................................ 3,853,114 $1.16 2,750,611 $1.18 3.0
--------- ----- --------- ----- ---
--------- ----- --------- ----- ---
</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 employee is covered under a
defined benefit plan. 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, 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).
E-43
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE K--RETIREMENT PLANS--(CONTINUED)
Pension income for continuing operations under the Corporation's retirement
plans for the three years ended March 31, 1999, are presented in the table below
(in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net periodic pension cost (income) for defined benefit plans:
Service cost--benefits earned for the year.............................. $ 61 $ 78 $ 44
Interest cost on projected benefit obligation........................... 3,603 4,098 4,364
Expected return on plan assets.......................................... (4,795) (4,387) (5,681)
Net amortization and deferral........................................... (197) (57) (100)
------- ------- -------
Net periodic pension cost (income)...................................... (1,328) (268) (1,373)
Pension cost for defined contribution plans............................. 21 39 20
------- ------- -------
Total pension cost (income)............................................. $(1,307) $ (229) $(1,353)
------- ------- -------
------- ------- -------
</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
7.8% for the year ended March 31, 1999, 8.5% for the year ended March 31, 1998,
and 10.0% for the year ended March 31, 1997.
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) during 1998.
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, 1999 and 1998 utilizing a weighted
average discount rate of 7.0% in both 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation, beginning of year....................... $53,780 $56,231
Service cost.......................................................... 61 78
Interest cost......................................................... 3,603 4,098
Actuarial losses (gains).............................................. 98 2,816
Curtailment gain...................................................... -- (3,202)
Benefits paid......................................................... (5,116) (6,241)
------- -------
Projected benefit obligation, end of year............................. 52,426 53,780
------- -------
Change in plan assets:
Fair value of plan assets, beginning of year.......................... 64,179 53,911
Actual return on plan assets.......................................... 1,914 14,705
Benefits paid......................................................... (4,869) (4,437)
------- -------
Fair value of plan assets, end of year................................ 61,224 64,179
------- -------
Funded status........................................................... 8,798 10,399
Unrecognized transition asset........................................... (540) (724)
Unrecognized net actuarial loss (gain).................................. 1,725 (1,267)
------- -------
Net prepaid pension cost................................................ $ 9,983 $ 8,408
------- -------
------- -------
</TABLE>
The projected benefit obligation and accumulated benefit obligation of the
unfunded plans was $1.0 million as of March 31, 1999 and $1.0 million as of
March 31, 1998. The prepaid pension cost in the
E-44
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE K--RETIREMENT PLANS--(CONTINUED)
table above was shown net of accrued benefit liabilities of approximately
$0.9 million at March 31, 1999 and $1.0 million at March 31, 1998.
At March 31, 1999, the assets of the Corporation's defined benefit pension
plans were comprised of approximately 20% bonds, 62% stocks and 18% other.
Included in pension plans assets were approximately 1.4 million shares of the
Corporation's common stock with a market value of $1.4 million at March 31,
1999.
NOTE L--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation has a plan for retired employees that provides 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. The plan provides that
retirees pay for a portion of their coverage. The plan is not funded. The
Corporation pays all benefits on a current basis. No current employees are
covered under the plan.
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, 1999 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
---- ------ ------
<S> <C> <C> <C>
Service cost--benefits earned for the year..................... $ -- $ -- $ --
Interest cost.................................................. 157 1,501 1,565
Amortization of prior service cost and net gain................ (72) (464) (440)
---- ------ ------
Total postretirement benefit cost.............................. $ 85 $1,037 $1,125
---- ------ ------
---- ------ ------
</TABLE>
E-45
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE L--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED)
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, 1999 and 1998 utilizing a weighted average discount
rate of 7.0% for both 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 1998
------ -------
<S> <C> <C>
Accumulated postretirement benefit obligation, beginning of year......... $2,330 $19,871
Service cost........................................................... -- --
Interest cost.......................................................... 157 1,501
Plan participants' contributions....................................... 29 489
Benefits paid.......................................................... (175) (1,749)
Actuarial loss......................................................... 376 286
Settlement gain........................................................ -- (18,068)
------ -------
Accumulated postretirement benefit obligation, end of year............... 2,717 2,330
Unrecognized net gain.................................................... 830 1,278
------ -------
Amount of postretirement benefit obligation included in the consolidated
balance sheet.......................................................... $3,547 $ 3,608
------ -------
------ -------
</TABLE>
The 1998 reduction in plan liabilities reflects the plan settlements
discussed above.
Medical costs were assumed to increase at a rate of 8.5% during 1999 and
then to decline over a period of 8 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 9.8%
increase or a 8.3% decrease in the postretirement benefit obligation and a 19.1%
increase or a 16.2% decrease in postretirement benefit cost for the plan.
NOTE M--INCOME TAXES
The provision for income taxes consisted of the following for the three
years ended March 31, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
---------------------------
1999 1998 1997
---- ------ -------
<S> <C> <C> <C>
Federal
Current..................................................... $-- $ (40) $ --
Deferred.................................................... -- -- 24,557
State
Current..................................................... 8 80 34
Deferred.................................................... -- -- 5,279
---- ------ -------
Income tax provision.......................................... $ 8 $ 40 $29,870
---- ------ -------
---- ------ -------
</TABLE>
The Corporation recorded no federal income tax benefit in 1999 because of
the uncertainty of realizing its deferred tax assets. The Corporation adjusted
its valuation allowance to maintain a full valuation allowance against its net
deferred tax assets. State income taxes were related to Development
subsidiaries.
The Corporation recorded a benefit for federal income tax purposes in 1998
relating to a tax refund. Because of the uncertainty of realizing its deferred
tax assets, the Corporation adjusted its valuation allowance in 1998 to maintain
a full valuation allowance against its net deferred tax assets.
E-46
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE M--INCOME TAXES--(CONTINUED)
The Corporation recorded a federal income 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):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Statutory rate applied to pre-tax income (loss)............. $(2,285) $(28,336) $ 5,782
Change in deferred tax asset valuation allowance............ 3,112 (6,621) 26,702
Corporate dividend-received deduction....................... (44) (1,520) (1,976)
State income taxes (net of federal tax effect).............. 5 52 3,453
Weirton interest expense.................................... -- -- (1,063)
Capital losses.............................................. -- (296) (14,299)
NSC Settlement.............................................. -- 20,995 --
FoxMeyer bankruptcy settlement.............................. -- 11,652 --
Market adjustments to investments........................... 1,185 4,528 7,569
Equity in affiliates........................................ (548) 1,168 1,820
Other items................................................. (1,417) (1,582) 1,882
------- -------- --------
Total tax provision......................................... $ 8 $ 40 $ 29,870
------- -------- --------
------- -------- --------
</TABLE>
The Corporation's current and noncurrent deferred taxes, which net to a
zero balance as of March 31,1999 and 1998, 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,
------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Tax net operating losses.............................................. $83,056 $79,005
Other liabilities..................................................... 4,611 4,781
Tax credits........................................................... 7,451 7,595
------- -------
Total deferred tax assets............................................... 95,118 91,381
Deferred tax liabilities:
Retirement plans...................................................... (4,311) (3,733)
Other................................................................. (482) (435)
------- -------
Deferred tax liability.................................................. (4,793) (4,168)
Valuation allowance..................................................... (90,325) (87,213)
------- -------
Deferred tax asset, net................................................. $ -- $ --
------- -------
------- -------
</TABLE>
The net change in the valuation allowance for 1999 was an increase of
approximately $3.1 million.
At March 31, 1999, the Corporation had, for federal income tax purposes,
operating loss, capital loss, and investment credit carryforwards of
approximately $237.4 million, $30.4 million, and $0.5 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, 2013--$15.5 million, and 2014--$8.1 million. The capital loss
carryforwards available for
E-47
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE M--INCOME TAXES--(CONTINUED)
utilization in the Corporation's consolidated income tax return will expire in
2003. Investment credit carryforwards will expire during the years 2000 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 four years, utilization of
loss and tax credit carryforwards incurred prior to the latest ownership change
will be severely limited. The Corporation believes that, as a result of the
ownership change, the Corporation will be prevented from utilizing a significant
amount of its operating and capital loss and tax credit carryforwards incurred
prior to the current fiscal year.
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 $0.2 million in
1999, $0.1 million in 1998, and $1.1 million in 1997. Minimum rental payments
under operating leases with initial or remaining terms of one year or more at
March 31, 1999 total $0.5 million with payments due of $0.2 million in 2000,
$0.2 million in 2001 and $0.1 in million in 2002.
The real estate partnerships controlled by Development have liabilities
related to capital leases of $0.1 million. The assets associated with these
leases have a net book value of $0.1 million.
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 by the Trustee
against the Corporation was dismissed, (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 in 1998.
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.
E-48
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
At March 31, 1999, the Corporation had reserves of $1.5 million for
environmental assessments, remediation activities, penalties or fines at eight
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. 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 1998 consolidated statement of operations. Approximately
$3.2 million of the gain was associated with certain retirement plans discussed
in Note K.
On April 14, 1998, the Corporation announced that it would merge with and
into its wholly-owned subsidiary, Xetava. Under the proposed merger, the
Corporation's existing common and preferred stockholders would have received new
common stock of Xetava. In late April 1998, a preferred stockholder of the
Corporation and a putative class of preferred stockholders filed a total of
three lawsuits in the Delaware Court against the Corporation, Xetava and seven
of the Corporation's directors. In May 1998, the Delaware Court consolidated the
lawsuits under the caption In re Avatex Corporation Shareholders Litigation,
C.A. No. 16334. The lawsuits challenged the merger of the Corporation with and
into Xetava and contended that the merger is subject to a separate class vote by
the holders of the Corporation's preferred stock and that the exchange ratios
for the merger are unfair to the preferred stockholders. Plaintiffs sought a
declaration that the defendant directors have breached their fiduciary duties,
injunctive relief and damages and costs. In August 1998, the Delaware Supreme
Court ruled that the holders of the Corporation's convertible preferred stock
have the right to vote separately as a class on the proposed merger of the
Corporation into Xetava, as it was structured and announced by the Corporation
on April 14, 1998. As a result of these events, the Corporation has entered into
agreements with certain large holders of its preferred stock on the terms of a
E-49
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
revised merger between the Corporation and Xetava and the settlement of the
preferred stockholders' litigation against the Corporation. See Note S for a
discussion of the new agreements.
On March 1, 1994, the Corporation and FoxMeyer announced that the
Corporation had proposed a merger in which FoxMeyer would be merged with and
into a wholly-owned subsidiary of the Corporation, 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 in the Delaware Court. 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. The amended complaint alleged 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 alleged that the proxy statement issued in
connection with the merger failed to disclose certain matters relating to the
proposed merger. In fiscal 1999, the parties reached a tentative settlement of
the lawsuit in which the Corporation will pay the class the amount of
approximately $1.4 million, a portion of which will be paid by the directors'
insurance carrier. The settlement is subject to definitive documentation and
approval by the Delaware Court.
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 defendants in these lawsuits by reason of
the fact that they may have
E-50
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
been serving at the request of the Corporation as a director or officer of Ben
Franklin. On October 13, 1998, the United States Bankruptcy Court for the
Northern District of Illinois issued Memorandum Opinions that dismissed two of
the lawsuits against all but one of the defendants. On December 1, 1998, the
Court denied a motion to reconsider one of these opinions, and the plaintiffs
have filed objections to both opinions with the United States District Court for
the Northern District of Illinois. In the third lawsuit, pending in Illinois
state court, the court struck the plaintiffs' second amended complaint and
ordered a third amended complaint to be filed. If liability is ever imposed in
any of the lawsuits, the Corporation may, if appropriate, agree at a future date
to indemnify certain of the remaining defendants in the lawsuit in accordance
with Delaware law.
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.
On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed
a lawsuit, allegedly on behalf of the Corporation, against seven of the
Corporation's current directors and three of its former directors who were
members of its Personnel and Compensation Committee, under No. 602773198 in the
Supreme Court 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 Butler and Melvyn Estrin. The plaintiffs
allege that, in connection with such agreements and transactions, (i) the
defendants 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 common stock based on confidential non-public information. The
plaintiffs seek damages, injunctive relief and an accounting. In January 1999, a
stipulation was executed providing that the litigation, insofar as brought by
Stephen Mizel IRA, was voluntarily discontinued with prejudice. In April 1999,
the Court denied the remaining plaintiff's motion to amend its complaint to
allege additional claims. Discovery is proceeding in the lawsuit. The
Corporation has been paying the defense costs of the defendants in accordance
with Delaware General Corporation Law, the Corporation's charter and by-laws,
and the terms and conditions of Indemnification Agreements between the
Corporation and certain of the defendants.
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--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, 1999 or 1998, respectively.
E-51
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE O--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
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 $34.7 million and $23.4 million at
March 31, 1999 and 1998, respectively, while the estimated fair value was $33.9
million and $23.4 million, respectively, based upon interest rates available to
the Corporation for issuance of similar debt with similar terms and remaining
maturities. The fair market value of the interest rate swap with a notional
value of $12.5 million was immaterial.
Debt and equity securities classified as "available for sale" or "trading"
were carried at their estimated fair value (see Notes A and F).
The fair value of the Corporation's redeemable preferred stock, based on
quoted market prices at March 31, 1999 and 1998, was $14.5 million and
$69.3 million, respectively.
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 at March 31,
1998.
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, 1999 and
1998 was $1.4 million and $3.0 million, respectively.
The fair value estimates were based on pertinent information available to
management as of March 31, 1999 and 1998. 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.
NOTE P--SEGMENT INFORMATION
Under the definition of segments used in SFAS No. 131, the Corporation has
two reportable segments: the real estate segment and the investment segment. The
real estate segment included the operations of hotels and an office building.
The investment segment included equity investments in Phar-Mor as well as
investments in other public and private companies and partnerships. It also
includes all costs incurred by the corporate office. The accounting policies for
the segments are the same as those described in the summary of significant
accounting policies (Note A). The Corporation evaluates performance on income
before income
E-52
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE P--SEGMENT INFORMATION--(CONTINUED)
taxes and minority interest. There are no intersegment sales or transfers. The
following table includes segment information for the three years ended
March 31, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
REAL
ESTATE INVESTMENTS OTHER CONSOLIDATED
------- ----------- ------- ------------
<S> <C> <C> <C> <C>
1999
Revenues....................................................... $10,509 $ -- $ -- $ 10,509
Operating income (loss)........................................ 1,546 (7,319) -- (5,773)
Other income (expense)......................................... 85 (1,560) -- (1,475)
Interest income................................................ 61 1,813 -- 1,874
Interest expense............................................... 1,649 768 -- 2,417
Equity in income of affiliates................................. -- 1,263 -- 1,263
Income (loss) before income taxes and minority interest........ 43 (6,571) -- (6,528)
Depreciation and amortization.................................. 1,188 43 -- 1,231
Identifiable assets............................................ 33,441 83,779 -- 117,220
Capital expenditures........................................... 12,356 18 -- 12,374
------- ------- ------- --------
1998
Revenues....................................................... $12,228 $ -- $ -- $ 12,228
Operating income (loss)........................................ 1,855 (11,433) -- (9,578)
Other income (expense)......................................... 930 (12,267) -- (11,337)
Interest income................................................ 83 1,626 -- 1,709
Interest expense............................................... 2,185 3,048 -- 5,233
Equity in income (loss) of affiliates.......................... 159 (3,495) -- (3,336)
Income (loss) before income taxes and minority interest........ 842 (28,617) (53,184) (80,959)
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)
Other income................................................... 7,350 11,878 -- 19,228
Interest income................................................ 706 972 -- 1,678
Interest expense............................................... 2,270 4,146 -- 6,416
Equity in income (loss) of affiliates.......................... 459 (5,658) -- (5,199)
Income (loss) before income taxes and minority interest........ 8,853 (1,953) 9,620 16,520
Depreciation and amortization.................................. 934 534 -- 1,468
Identifiable assets............................................ 26,665 95,541 44,961 167,167
Capital expenditures........................................... 6,707 186 27,855 34,748
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
The "Other" column includes information for items not considered part of an
operating segment by management. These amounts include NSC assets and the income
or loss from those assets which were dedicated to meeting certain obligations to
NSC (see Note G). The column also includes capital expenditures for the first
three months of the 1997 fiscal year by FoxMeyer, a discontinued operation (see
Note B). There are no foreign operations in any segment.
E-53
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE Q--QUARTERLY DATA (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
continuing operations for the two years ended March 31, 1999 (in thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND THIRD FOURTH
-------- ------- -------- --------
<S> <C> <C> <C> <C>
1999:
Revenues.......................................................... $ 2,576 $ 2,353 $ 2,615 $ 2,965
Operating loss.................................................... (1,199) (1,535) (1,594) (1,445)
Net loss from continuing operations............................... (2,582) (2,784) (638) (583)
Loss per common share from continuing operations after preferred
stock dividends:
Basic and Diluted, as restated................................. (0.70) (0.75) (0.60) (0.61)
Basic and Diluted, as previously reported...................... (0.68) (0.71) (0.56)
-------- ------- -------- --------
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
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
As a result of the investment by Phar-Mor in the common stock of the
Corporation during fiscal 1999, the Corporation had increased its stockholders'
deficit by its equity in the $5.0 million cost of that investment (see Note I).
The Corporation did not reduce the number of shares outstanding in calculating
earnings per share for the financial statements on Form 10-Q for the quarters
ending June 30, 1998, September 30, 1998 or December 31, 1998. The Corporation
has determined that the effect of Phar-Mor's investment in the Corporation
reduces the Corporation's weighted average number of shares outstanding by
427,407 shares, 786,843 shares and 801,101 shares, respectively, for each of the
first three quarters of fiscal 1999. Basic and diluted loss per share would have
increased by $(0.02) per share for the three months ended June 30, 1998; $(0.04)
and $(0.07) per share for the three and six months ended September 30, 1998,
respectively; and $(0.04) and $(0.10) per share for the three and nine months
ended December 31, 1998, respectively.
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 the 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).
Per share amounts were computed independently for each quarter based on the
average number of shares outstanding during that quarter . As a result, the sum
of the quarterly per share amounts may not equal the per share amount for the
entire year.
E-54
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE R--GOING CONCERN
During the year ended March 31, 1998, the Corporation 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 these successes, management has
turned its full attention to the remaining issues.
The following specific actions are planned: (i) to overcome the operating
losses, management will 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 (see discussion below) and may seek to
identify and acquire an operating company; (ii) to address its common
stockholders' deficiency, the Corporation's Board of Directors has approved a
merger with Xetava which would eliminate the preferred stock obligation (see
Note S); and (iii) 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.
As part of this plan to overcome the remaining issues, the Corporation made
several investments in fiscal 1999. These include investments in RAS Holding
Corp. ("RAS"), Chemlink and HPD Holdings Corp. ("HPD"). Details concerning these
investments follow.
In April 1998, the Corporation invested in RAS by purchasing 10% Series B
convertible preferred stock ("Series B Stock"). In July 1998 and February 1999,
the Corporation made additional purchases of the Series B Stock after RAS met
certain performance goals. The Corporation's total investment was approximately
$1.4 million. The Corporation also received two-year warrants to purchase
additional Series B Stock for an additional investment of $0.9 million. On a
fully-diluted basis, assuming the exercise of all convertible preferred stock,
warrants and options outstanding, the Corporation would own approximately 12.9%
of the common stock of RAS. RAS, through its wholly-owned subsidiary Presby
Corp., has developed a surgical technique called the Surgical Reversal of
Presbyopia ("SRP"), which uses a patented medical device, the Scleral Expansion
Band ("SEB"), to treat presbyopia in the human eye. Presbyopia is, in general,
the loss of the ability of the human eye to focus on near objects due to aging.
RAS is in the process of marketing the SEBs in certain international markets
where the SEB has received regulatory approval. The Corporation has been advised
that in March 1999 RAS received conditional approval from the FDA to begin its
SRP clinical trials in the United States, but that the outcomes of the trials
and achieving commercial success of the technique are each highly uncertain. The
Corporation has a consulting contract with RAS and also licenses office space at
its Dallas, Texas office to RAS.
See Note B for a discussion of the Chemlink investment.
In April 1998, the Corporation invested $1.25 million in preferred and
common stock of HPD. The Corporation acquired 2.5% of the common stock of HPD.
HPD Laboratories ("HPD Labs"), a wholly-owned subsidiary of HPD, purchased the
assets associated with Block Drug Company's household product lines. The
Corporation has been advised that HPD Labs intends to continue and extend the
current product lines and expand into compatible lines.
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.
E-55
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE R--GOING CONCERN--(CONTINUED)
The financial statements do not reflect any adjustments that might ultimately
result from the resolution of these uncertainties.
NOTE S--SUBSEQUENT EVENT
On June 18, 1999, the Corporation announced that it had entered into an
Amended and Restated Agreement and Plan of Merger (the "Revised Merger
Agreement") with its wholly-owned subsidiary, Xetava. The Revised Merger
Agreement amends and restates the Agreement and Plan of Merger between the
Corporation and Xetava dated April 9, 1998. Under the Revised Merger Agreement,
which was approved by the Corporation's Board of Directors, Xetava will merge
with and into the Corporation, and the Corporation's existing preferred
stockholders will receive new Class A common stock of the Corporation or,
alternately, a combination of cash, secured notes, warrants and other
consideration. The Corporation's common stockholders will receive new Class A
common stock of the Corporation on a one-for-one basis for their current common
stock. Consummation of the proposed merger is subject to, among other things,
(i) the approval of the merger by holders of a majority of the Corporation's
common stock and by the holders of at least two-thirds of each series of
preferred stock, voting separately as a class, (ii) the effectiveness of a
registration statement filed with the Securities and Exchange Commission with
respect to the Class A shares, the notes and warrants described below, and
(iii) the dismissal of Delaware lawsuits filed in connection with the April 1998
merger agreement. The Corporation anticipates a stockholder meeting to approve
the merger will take place in the fall of 1999.
Under the Revised Merger Agreement, each share of existing convertible
preferred stock will be converted into 9.134 shares of Class A common stock of
the Corporation or, at the election of the holder, into $3.7408 in cash, $8.34
principal amount of a 6.75% note to be issued by Avatex Funding, Inc.
("Funding"), a new wholly-owned subsidiary of the Corporation, and warrants to
purchase 0.67456 shares of Class A common at $2.25 per share. Each share of
Series A Preferred Stock will be converted into 7.253 shares of Class A common
stock of the Corporation or, at the election of the holder, into $2.9705 in
cash, $6.623 principal amount of a 6.75% note, and warrants to purchase 0.53567
shares of Class A common at $2.25 per share. In addition, the shareholders of
the two series of preferred stock who elect the cash, note and warrant option
will receive a deferred contingent right to a portion of any net recovery, up to
$7.5 million, that the Corporation may receive in certain litigation brought by
the Corporation against McKesson and a number of large pharmaceutical
manufacturers. The amount will be equal to 20% of such net recovery, up to $7.5
million, with 84% of such recovery available to all the stockholders of the
Series A Preferred Stock and 16% available to all the stockholders of the
convertible preferred stock, with the per share amount to be received by each
preferred stockholder equal to its pro rata share of an amount that is
calculated based on the total number of shares of preferred stock outstanding
immediately before the merger.
Funding will be a new subsidiary whose purpose will be to issue the new
6.75% notes and to own 3,571,533 shares of common stock of Phar-Mor, which are
now owned by the Corporation. The shares of Phar-Mor will be pledged to secure
the notes. The principal of the notes will be due in three years from the date
of issuance, and the interest will be payable semi-annually in cash. The
Corporation will also guarantee the notes. The warrants to be issued in the
merger will expire 5 years and 3 months after closing of the proposed merger.
Assuming each of the preferred stockholders elects to receive the cash,
note and warrant option in the proposed merger, the Corporation will be required
to pay approximately $15.3 million in cash and issue warrants to purchase
2,750,000 shares of the Class A common stock. Funding will be required to issue
approximately $34.0 million principal amount of the 6.75% notes. Under one of
the agreements discussed below, stockholders who represent approximately 48.5%
of the convertible preferred and 50.1% of the Series A preferred stock
outstanding have agreed to elect this cash, note and warrant option.
E-56
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE S--SUBSEQUENT EVENT--(CONTINUED)
The Corporation has also entered into settlement, stockholder and voting
agreements with the preferred stockholder plaintiffs in the three Delaware
lawsuits pending against the Corporation, Xetava and certain of their directors.
Under the Stipulation of Settlement entered into by the Corporation and the
plaintiffs in the class action lawsuits on behalf of all holders of existing
preferred stock and for the plaintiff in the non-class action lawsuit, subject
to court approval and effective upon the closing of the merger, all three
Delaware lawsuits will be settled and the Corporation will pay up to $1.1
million in plaintiffs' attorneys' fees. Under a voting agreement with one of the
named plaintiffs in one of the class action lawsuits, such plaintiff and its
affiliates have agreed to vote in favor of the proposed merger and to waive any
appraisal rights in connection with the proposed merger. Such plaintiff will
also receive $0.3 million in exchange for a ten year standstill agreement, a
general release of liabilities (subject to certain specified exceptions) and
other consideration. Under a separate agreement with the plaintiff in the third
Delaware lawsuit and another party, these parties and their affiliates and
associated companies have agreed to vote in favor of the merger, to elect to
receive the cash, note and warrant option and to waive any appraisal rights in
connection with the proposed merger. These parties will also receive $0.6
million in exchange for a ten year standstill agreement, a general release of
liabilities and other consideration. In addition, these parties have entered
into a stock purchase agreement with Phar-Mor, under which, subject to the
consummation of the proposed merger, Phar-Mor has agreed to purchase 2,862,400
shares of the Corporation's common stock from these parties at $2.00 per share
with closing to occur at the same time as the Xetava merger. Phar-Mor has been
granted a proxy to vote these shares of the Corporation's common stock in favor
of the merger. Phar-Mor will control, if the proposed purchase is made, 35.8% of
the Corporation's common stock outstanding. The purchase will result in a charge
to the stockholders' deficit of approximately $2.2 million and will also reduce
the common stock outstanding for calculating earnings per share by approximately
1,099,000 shares. These reductions represent the Corporation's 38.4% equity in
its common stock that Phar-Mor has agreed to purchase.
On May 12, 1999, the Corporation announced that it had entered into an
agreement to sell its interests in its three remaining real estate developments.
On May 27, 1999, one property was sold to a third party and the Corporation's
interests in the partnerships that owned the other two properties were sold to
the other partners or their affiliates. The Corporation received $11.4 million
in cash and a one-year, $0.6 million secured note. The note is secured by the
Corporation's former interests in the two partnerships that were sold to its
partners or their affiliates. As a result of these transactions, the Corporation
will recognize a gain in fiscal 2000 of approximately $6.2 million
($5.6 million net of taxes).
E-57
<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 the Corporation consists of seven directors
elected by the holders of the Corporation's common stock and four directors
elected by the holders of the Corporation's two series of preferred stock. The
first seven directors identified below were elected by the holders of the
Corporation's common stock. The last four directors were elected by the written
consent of a majority of the holders of the Corporation's two series of
preferred stock in April 1998. At the time of their election to the Board, these
four directors were employed by Stonington Management Corp. ("Stonington").
Stonington is controlled by Mr. Paul Singer, who also controls Elliott and
Westgate International, L.P., which collectively are significant holders of the
Corporation's common and preferred stock. 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 62, 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 also serves as Co-Chairman of the Board and Co-Chief
Executive Officer of Phar-Mor; as managing partner of Centaur Partners, L.P., an
investment partnership with ownership interests in the Corporation; and 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 Carson, RAS, Caring, HPD and Cyclone,
Incorporated ("Cyclone"), and as a member of the Board of Managers of Chemlink.
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
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
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 and Ben Franklin each
filed for relief under the Bankruptcy Code in 1996.
Melvyn J. Estrin, age 56, 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 also serves as Co-Chairman of the Board and Co-Chief
Executive Officer of Phar-Mor; 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 Carson, RAS, Caring, and HPD, and as a member of
the Board of Managers of Chemlink. 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 and Ben Franklin each filed for relief under the
Bankruptcy Code in 1996.
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<PAGE>
Hyman H. Frankel, Ph.D., age 78, has served as a director of the
Corporation since February 1997. Dr. Frankel holds a Ph.D. 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 Co,
LLC 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
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 60, 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., from June 1991 to December 1996, and as Chairman of the Board of
Cyclone, a former business unit of USX Corporation, since 1994. Mr. Katz is also
a director of UNSI Corporation ("UNSI"). In 1994 and 1995, a subsidiary of the
Corporation, M & A Investments, Inc. ("M&A"), invested in UNSI and 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 58, 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 61, has served as a director of the Corporation
since February 1997. Mr. Pecarro is the Chief Financial Officer of Human Service
Group, Inc. and President of University Research Co, LLC, 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 59, has served as a director of the Corporation
since February 1997. Mr. Wineapple 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., Kellwood
Company, Chateau International, Moretz, Inc., Sara Lee Corporation, Wal-Mart
Stores, Inc., Mondani, Inc. and Fabrictex, Inc. From 1988 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 28, has served as a director of the Corporation since
April 1998. Mr. Gropper joined Stonington as an Analyst in 1995 and is currently
a Portfolio Manager, working on a variety of projects including bankruptcies,
restructurings, liquidations, activist positions and distressed high yield
situations. 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 42, has served as a director of the Corporation since
April 1998. Mr. Intrieri is a portfolio manager at a New York investment firm.
Prior thereto, Mr. Intrieri was a Portfolio Manager with
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<PAGE>
Stonington since 1995, where he analyzed investments and managed a portfolio of
stocks and high yield bonds in a variety of industries. 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 was previously a director of Australian Food and Fiber Limited,
Marvel Holdings, Inc. and Marvel (Parent) Holding, Inc.
Ralph DellaCamera, Jr., age 45, has served as a director of the Corporation
since June 1998. Mr. DellaCamera is currently President and Chief Executive
Officer of Brean, Murray & Co., Inc., a New York City based brokerage firm that
is a member of the New York Stock Exchange. Prior thereto, Mr. DellaCamera was
employed by Stonington, most recently as Head Trader and Senior Risk Manager
where he was responsible for managing investments in distressed securities,
equities, commodities and currencies. Mr. DellaCamera holds a Bachelor of
Science in Business Administration from the University of New Haven.
Brian Miller, age 33, 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 1999 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, which filed for
relief under Chapter 11 of the Bankruptcy Code in 1996.
Edward L. Massman, age 40, 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 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. Mr. Massman and the Corporation
have entered into a separation agreement under which he will be separated from
the Corporation effective June 28, 1999 (see EMPLOYMENT AND INDEMNIFICATION
AGREEMENTS below).
John G. Murray, age 44, 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 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 47, has served as Vice President and Treasurer since
November 1995. Effective as of June 28, 1999, Mr. Schleier will also be Chief
Financial Officer of the Corporation. He also served as Vice President and
Treasurer of FoxMeyer and FoxMeyer Drug 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
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<PAGE>
Officer and a director of American EnviroTech, Inc., a hazardous waste
management company, from February 1988 to September 1992.
Scott E. Peterson, age 47, 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 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. Mr. Peterson and the
Corporation have entered into a separation agreement under which his employment
with the Corporation will terminate effective June 30, 1999.
Robert H. Stone, age 39, 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. Mr. Stone was an attorney with the law
firm of Jones, Day, Reavis & Pogue from 1986 to November 1994.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (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
1999, the Corporation believes that its directors, executive officers and 10%
Owners complied with Section 16(a) filing requirements applicable to them during
fiscal 1999 and prior fiscal years, except that United Equities Commodities
Company, Momar Corporation and Moses Marx (collectively, "United"), which is a
10% Owner, increased its beneficial ownership of common stock, Series A
preferred stock and convertible preferred stock during fiscal 1999 and did not
furnish the Corporation a Form 4 with respect thereto.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the three fiscal years
ended March 31, 1999 received by the Corporation's Co-Chief Executive Officers
and the next three most highly compensated executive officers of the Corporation
for fiscal 1999:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
AWARDS
ANNUAL COMPENSATION (A) ---------- PAYOUTS
-------------------------------- SECURITIES -------
ALL OTHER UNDERLYING LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARS(#) ($) ($)(B)
- --------------------------------------- ------ ------- ------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbey J. Butler (C) ................... 1999 790,484 203,900 -- 410,000 0 130,445
Co-Chairman of the Board and Co-Chief 1998 370,833 750,000 -- 400,000 451,404 26,751
Executive Officer 1997 649,765 0 -- 994,640 0 17,773
Melvyn J. Estrin (C) .................. 1999 790,484 203,900 -- 410,000 0 112,269
Co-Chairman of the Board and Co-Chief 1998 370,833 750,000 -- 400,000 451,404 7,064
Executive Officer 1997 649,765 0 -- 994,640 0 7,274
</TABLE>
E-61
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
AWARDS
ANNUAL COMPENSATION (A) ---------- PAYOUTS
-------------------------------- SECURITIES -------
ALL OTHER UNDERLYING LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARS(#) ($) ($)(B)
- --------------------------------------- ------ ------- ------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward L. Massman (D) ................. 1999 300,000 100,000 -- 0 0 6,170
Former Senior Vice President and 1998 237,500 600,000 -- 400,000 341,973 7,410
Chief Financial Officer 1997 203,364 500,000 -- 52,000 0 4,184
Robert H. Stone (E) ................... 1999 200,000 0 -- 0 0 5,741
Vice President, General Counsel and 1998 158,333 300,000 -- 100,000 177,826 6,728
Secretary 1997 129,200 80,400 -- 21,834 0 2,360
Grady E. Schleier (F) ................. 1999 200,000 0 -- 0 0 5,643
Vice President, Chief Financial 1998 158,333 200,000 -- 100,000 177,826 6,784
Officer and Treasurer 1997 153,168 82,500 -- 20,000 0 3,199
</TABLE>
- ------------------
(A) The amounts listed under fiscal 1999 consist of compensation paid by the
Corporation during fiscal 1999 and compensation paid by Phar-Mor during its
most recent fiscal year ended June 27, 1998. No amounts are provided under
the column entitled "Other Annual Compensation" because the aggregate amount
of perquisites and personal benefits did not exceed the lesser of $50,000 or
10 percent of such executive officer's total salary and bonus for the fiscal
year.
(B) In fiscal 1999, All Other Compensation consisted of for Mr. Butler (i)
$7,094 for company-paid split-dollar life insurance, (ii) $1,656 for
company-paid term life insurance, (iii) $4,904 in company matching
contributions to its Employees' Savings and Profit Sharing Plan (the
"401(k) Plan"), (iv) $111,691 for Phar-Mor paid life insurance premiums, and
(v) $5,100 in Phar-Mor contributions to its non-qualified deferred
compensation plan; for Mr. Estrin (i) $6,435 for company-paid split-dollar
life insurance, (ii) $1,656 for company-paid term life insurance,
(iii) $99,078 for Phar-Mor-paid life insurance premiums, and (iv) $5,100 in
Phar-Mor contributions to its non-qualified deferred compensation plan; for
Mr. Massman (i) $4,928 in company matching contributions to the 401(k) Plan
and (ii) $1,242 for company-paid term life insurance; for Mr. Stone
(i) $4,913 in company matching contributions to the 401(k) Plan and
(ii) $828 for company-paid term life insurance; and for Mr. Schleier
(i) $4,856 in company matching contributions to the 401(k) Plan and
(ii) $787 for company-paid term life insurance. In fiscal 1998, All Other
Compensation consisted of for Mr. Butler (i) $17,897 for company-paid split-
dollar life insurance, (ii) $1,268 for company-paid term life insurance and
(iii) $7,586 in company matching contributions to the 401(k) Plan; for
Mr. Estrin (i) $5,796 for company-paid split-dollar life insurance and
(ii) $1,268 for company-paid term life insurance; for Mr. Massman
(i) $6,553 in company matching contributions to the 401(k) Plan and
(ii) $857 for company-paid term life insurance; for Mr. Stone (i) $6,163 in
company matching contributions to the 401(k) Plan and (ii) $565 for company-
paid term life insurance; and for Mr. Schleier (i) $6,192 in company
matching contributions to the 401(k) Plan and (ii) $592 for company-paid
term life insurance. In fiscal 1997, All Other Compensation consisted of for
Mr. Butler (i) $13,619 for company-paid split dollar life insurance and
(ii) $4,154 in company matching contributions to FoxMeyer's 401(k) plan; for
Mr. Estrin, (i) $3,120 for company-paid split-dollar life insurance and
(ii) $4,154 in company matching contributions by FoxMeyer to its
401(k) plan through November 1996; and for Messrs. Massman, Stone and
Schleier, matching contributions by FoxMeyer to its 401 (k) plan through
November 1996. The de minimis amounts of FoxMeyer paid term life insurance
during fiscal 1997 are not readily available to the Corporation and are not
included in the table.
(C) In fiscal 1999, Mr. Butler and Mr. Estrin each received $475,000 in salary
from the Corporation and $315,484 in salary and a $203,900 bonus from
Phar-Mor, and were each granted options to purchase 410,000 shares of
Phar-Mor common stock. In fiscal 1998, all compensation received by
Mr. Butler and
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
Mr. Estrin was paid by the Corporation, and they were each granted options
to purchase 400,000 shares of common stock. In fiscal 1997, Mr. Butler and
Mr. Estrin each received $350,000 from the Corporation, $231,314 from
FoxMeyer, and $68,451 from Ben Franklin, and all of the options to purchase
994,640 shares of common stock that were previously granted to each of
Mr. Butler and Mr. Estrin, including options to purchase 99,440 shares of
common stock that expired in fiscal 1997, were repriced and/or replaced by
the Corporation. In addition, 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.
In addition, Mr. Butler and Mr. Estrin have each received compensation for
serving as outside directors of the following companies in which the
Corporation owns an interest. In fiscal 1999, (i) Carson awarded Mr. Butler
20,625 shares and Mr. Estrin 10,125 shares of restricted stock and granted
each of them options to purchase 5,000 shares of common stock and
(ii) Caring granted Mr. Estrin options to purchase 20,000 shares of common
stock. In fiscal 1998, (i) Phar-Mor paid each of Mr. Butler and Mr. Estrin
$12,500 as his pro rata portion of annual director fees, plus per meeting
fees, and granted each of them options to purchase 10,000 shares of common
stock and credited each with 7,703 shares of common stock under its Phantom
Stock Plan, (ii) Imagyn paid each of Mr. Butler and Mr. Estrin $21,000 in
director fees and granted each of them options to purchase 7,500 shares of
common stock, (iii) Carson awarded each of Mr. Butler and Mr. Estrin 2,710
shares of restricted stock and options to purchase 5,000 shares of common
stock and (iv) Caring granted Mr. Estrin options to purchase 10,000 shares
of common stock. In fiscal 1997, (i) Phar-Mor paid each of Mr. Butler and
Mr. Estrin $25,000 in annual director fees, plus per meeting fees, and
granted each of them options to purchase 5,000 shares of common stock and
credited each with 4,050 shares of common stock under its Phantom Stock
Plan, (ii) Imagyn paid each of Mr. Butler and Mr. Estrin $11,000 and $10,000
in director fees, respectively, and granted each of them options to purchase
7,500 shares of common stock, and (iii) Carson granted each of Mr. Butler
and Mr. Estrin options to purchase 1,500 shares of common stock. In
addition, Mr. Butler served as an outside director of CST Entertainment,
Inc. ("CST") during fiscal 1997, 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.
(D) FoxMeyer Drug paid all compensation through November 1996, including
$100,000 pursuant to an August 8, 1996 incentive agreement. In fiscal 1997,
the Corporation paid $300,000 and assigned to Mr. Massman a 50% interest in
all amounts received by the Corporation from the proceeds of any sale of any
assets of, or its interests in, the 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. Mr. Massman will be
separated from the Corporation effective as of June 28, 1999.
(E) FoxMeyer Drug paid all compensation through November 1996, including a
$5,400 stay pay bonus.
(F) FoxMeyer Drug paid all compensation through November 1996, including a
$7,500 stay pay bonus.
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<PAGE>
OPTION/SAR GRANTS IN FISCAL YEAR 1999 TO EXECUTIVE OFFICERS
The Corporation did not grant any options during fiscal 1999 to any of its
executive officers.
AGGREGATE OPTIONS/SAR EXERCISES IN FISCAL 1999 BY EXECUTIVE OFFICERS
AND FISCAL YEAR-END OPTION/SAR VALUES
The executive officers named in the Summary Compensation Table did not
exercise any options during fiscal 1999. Because the market value of the
Corporation's common stock on March 31, 1999 was less than the exercise price of
all of the outstanding options held by the named executive officers, there were
no in-the-money unexercised options held at the end of fiscal 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS/SAR'S AT FY-END
(#)
-------------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- -------------
<S> <C> <C>
Abbey J. Butler........................................ 1,127,973 266,667
Melvyn J. Estrin....................................... 1,127,973 266,667
Edward L. Massman...................................... 185,333 266,667
Robert H. Stone........................................ 55,167 66,667
Grady E. Schleier...................................... 53,333 66,667
</TABLE>
LONG-TERM INCENTIVE PLANS--AWARDS
IN LAST FISCAL YEAR
The Corporation previously adopted a Performance Incentive Plan (the
"Incentive Plan") that provided for the distribution of amounts to participants
based on specified percentages of (a) Net Income (as defined in the Incentive
Plan) and (b) Litigation Income, which consists of net income generated in
connection with the Corporation's lawsuit against McKesson and various other
defendants. In fiscal 1998, the Corporation granted awards which total 17.5% of
any future Litigation Income to all participants, and the Incentive Plan
provides that neither the percentage of Litigation Income nor the percentage
award levels applicable to such participants can be changed in any manner
whatsoever, irrespective of when Litigation Income is accrued or received by the
Corporation, unless the participant has voluntarily terminated his or her
employment with the Corporation or is terminated by the Corporation for cause.
Thus, although the Incentive Plan has not been renewed with respect to Net
Income for the fiscal year beginning April 1, 1999, the Incentive Plan continues
to be effective with respect to Litigation Income.
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<PAGE>
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.
Each of the directors who served on the Board of Directors during fiscal
1998 is also a party to an indemnification agreement with the Corporation dated
as of October 23, 1997, the terms of which are substantially the same as the
indemnification agreements between the Corporation and its executive officers.
See EMPLOYMENT AND INDEMNIFICATION AGREEMENTS below.
One of the outside directors of the Corporation, Hyman H. Frankel, has also
served as a business consultant to the Corporation since February 1992.
Dr. Frankel and the Corporation are parties to a written agreement that is
terminable by either party on thirty days prior written notice. Under the
agreement, the Corporation paid Dr. Frankel a monthly consulting fee of $7,500
until March 31, 1999, after which it was reduced to $3,750.
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
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
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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 former Senior Vice President and Chief Financial
Officer of the Corporation, entered into a Separation Agreement with the
Corporation, effective as of June 28, 1999. Under the agreement, Mr. Massman
will be separated from the Corporation as of June 28, 1999. In full satisfaction
of the Corporation's obligations under Mr. Massman's prior employment agreement
with the Corporation, Mr. Massman will be paid $50,000 as a pro-rated portion of
his contractual bonus that would otherwise be payable in November 1999, and will
also be paid $150,000 for each of the next two years. In addition, for each of
the Corporation's fiscal years ending on March 31, 2000 and March 31, 2001 (or,
in certain limited circumstances, for the fiscal year ending on March 31, 2002),
the Corporation will pay Mr. Massman an amount equal to the total amount of
bonuses paid and/or accrued by the Corporation with respect to its General
Counsel and its Chief Financial Officer for the applicable fiscal year.
Mr. Massman will also generally retain his existing options to purchase the
Corporation's common stock, which will be exercisable until their expiration
dates in 2002, and his existing 2.86% interest in Litigation Income under the
Incentive Plan.
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, Chief Financial Officer and
Treasurer 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.
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 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.
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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 that 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 27, 1998, provided, however, that if the
performance objectives are exceeded, then 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 was 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, which options vest with respect
to 33.34% of the underlying shares on the date of grant (October 1, 1997), and
with respect to an additional 33.33% on each of the first and second
anniversaries of the date of grant. The term of the options is seven years and
unless Messrs. Butler and Estrin elect otherwise, to the fullest extent
permitted by law and under the plan, such options shall be treated and reported
as incentive stock options. Each of Messrs. Butler and Estrin were granted
incentive stock options to purchase 200,000 shares of common stock of Phar-Mor
at an exercise price of $9.625 per share on June 23, 1998 on terms similar to
the earlier grants.
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
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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.
Each of the agreements with Messrs. Butler and Estrin provides that, if it
is terminated without cause (as defined), 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 the "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 of the Board and is a shareholder 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.
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 consists of base
salary, annual performance incentive payments, long-term incentive awards, stock
option grants, and participation in the 401(k) Plan and other employee health
and welfare benefit plans. 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
attempts to recognize the unique financial history of the Corporation during the
past three years, as well as the extensive knowledge of the Corporation's
executive officers with respect to the events and circumstances which occurred
during that time. Absent the continued employment of and involvement by these
individuals, the Finance Committee believes that the Corporation would be
significantly hindered, if not entirely precluded, from moving forward
effectively on its most critical strategies and initiatives. In particular,
these individuals have extensive and critical knowledge and experience regarding
the facts and circumstances underlying (i) the McKesson Litigation, which is
being prosecuted in Texas state court and is also the subject of an injunction
action in Delaware, (ii) the consolidated class action shareholder lawsuits
pending against the Corporation in federal and state court in Dallas, which
relate to actions of the Corporation and FoxMeyer that occurred in 1995 and
1996, and (iii) the Trustee's lawsuits against certain third parties that
significantly harmed the FoxMeyer entities, of which 30% of the proceeds are
payable to the Corporation and are pledged as collateral by it to secure its $8
million obligation to the Trustee. In addition, a number of the executive
officers were instrumental in bringing certain investment opportunities to the
Corporation's attention. The Finance
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Committee believes that the involvement of these and other executive officers is
and will continue to be essential to the ongoing development of, and ultimate
realization of value from, these investments.
During fiscal 1999, each of the Corporation's officers and key employees
was paid a specified salary pursuant to the terms of his or her employment
agreement with the Corporation. All of these employment agreements were executed
and/or amended prior to fiscal 1999. Except with respect to a contractual bonus
paid to the Corporation's former Senior Vice President and Chief Financial
Officer and fiscal 1998 bonuses that were paid in May 1999, the Finance
Committee did not approve, and the Corporation did not pay, any bonus to any of
the Corporation's officers and key employees for fiscal 1999.
The Corporation's officers and key employees were also covered by an
Incentive Plan during fiscal 1999. The Incentive Plan, which was adopted and
approved by the Finance Committee beginning in fiscal 1997, provided for a fixed
percentage of the Corporation's Net Income and Litigation Income (as such terms
are defined in the Incentive Plan) to be paid to such officers and employees
based on a fixed allocation schedule. There was no Net Income or Litigation
Income under the Incentive Plan during fiscal 1999 and, accordingly, no amounts
were awarded or paid to any persons thereunder. With respect to fiscal 2000, the
Committee has recently determined that the Incentive Plan provisions regarding
Net Income will not be renewed, and that bonuses, if any, should be awarded and
paid on a discretionary basis. The Incentive Plan's provisions regarding
Litigation Income, however, provide that awards granted in prior fiscal years
may not be changed. Accordingly, to the extent that the Corporation receives any
net recovery from the McKesson Litigation in fiscal 2000 and future years, the
Corporation's executive officers and key employees will receive incentive
payments based on awards granted in fiscal 1998.
CO-CHIEF EXECUTIVE OFFICERS
The Finance Committee also makes compensation decisions regarding Abbey J.
Butler and Melvyn J. Estrin, the Co-Chief Executive Officers of the Corporation.
During fiscal 1999, in accordance with amendments to their respective employment
agreements entered into in fiscal 1998, the Corporation paid each of Messrs.
Butler and Estrin a annual salary of $475,000. With respect to other annual
compensation, Messrs. Butler and Estrin were treated substantially the same as
the Corporation's other executive officers, as the Finance Committee did not
approve, and the Corporation did not pay, any bonus to either Mr. Butler or
Mr. Estrin for fiscal 1999, whether under the Incentive Plan or otherwise.
Section 162(m) of the Internal Revenue Code (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
may exceed $1 million in any one year, the Code may limit the deductibility of
such compensation unless an exception to such limitation is available. In such
event, and because of the uncertainties surrounding the application and
interpretation of these limits, no assurance can be given that any such
compensation will be fully deductible. In addition, the Corporation and each of
Messrs. Butler and Estrin 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 or Estrin 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).
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.
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<PAGE>
PERFORMANCE GRAPH
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, 1994, and that all dividends were reinvested.
[LINE GRAPH]
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------------------------------
4/1/94 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Corporation................................. $100.00 $121.09 $113.28 $ 6.25 $ 12.89 $ 6.25
S&P 500 Index................................... 100.00 115.57 152.67 182.93 270.74 320.71
S&P SmallCap 600................................ 100.00 105.28 138.11 149.70 221.07 186.08
</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 14, 1999 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 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, 1999 (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
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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
NUMBER OF SHARES SHARES THAT MAY
OF COMMON STOCK PERCENTAGE OF BE ACQUIRED
BENEFICIALLY OUTSTANDING WITHIN SIXTY
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) SHARES(3) DAYS(2)
- -------------------------------------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
The Centaur Group(4)
c/o Centaur Partners IV
17 Battery Place, Suite 709
New York, New York 10004.................................... 1,504,055 8.6% 0
DIRECTORS AND NOMINEES FOR DIRECTOR (INCLUDING
THOSE WHO ARE ALSO EXECUTIVE OFFICERS)
Abbey J. Butler(5)............................................ 2,765,361 15.8% 1,261,306
Melvyn J. Estrin(5)........................................... 2,769,117 15.8% 1,261,306
Hyman H. Frankel.............................................. 16,000 * 16,000
Fred S. Katz.................................................. 16,000 * 16,000
William A. Lemer.............................................. 16,000 * 16,000
Charles C. Pecarro............................................ 16,000 * 16,000
John L. Wineapple............................................. 21,000 * 16,000
Ralph DellaCamera, Jr.(6)..................................... 0 0.0% 0
Daniel Gropper(6)............................................. 0 0.0% 0
Vincent Intrieri(6)........................................... 0 0.0% 0
Brian Miller(6)............................................... 0 0.0% 0
NAMED EXECUTIVE OFFICERS
Edward L. Massman............................................. 318,666 1.8% 318,666
Robert H. Stone............................................... 88,500 * 88,500
Grady E. Schleier............................................. 86,666 * 86,666
All Directors and Named Executive
Officers as a Group......................................... 4,609,255 26.3%
OTHER HOLDERS(7)
BEA Associates
153 East 53rd Street
New York, NY 10022.......................................... 712,000 4.1% 0
Elliott Associates, L.P.(6)(9)
712 Fifth Ave. 36th Floor
New York, NY 10019.......................................... 1,050,251 6.0% 216,351
National Intergroup, Inc. Retirement Program and Davenport,
Inc. Pension Plan........................................... 1,361,500 7.8% 0
Phar-Mor, Inc.(9)
20 Federal Plaza West
P O Box 400
Youngstown, Ohio 44501...................................... 2,086,200 11.9% 0
United Equities Commodities Company,
et al.(8)(9)
160 Broadway
New York, NY 10038.......................................... 2,424,624 13.8% 396,124
</TABLE>
(Footnotes continued on next page)
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(Footnotes continued from previous page)
- ------------------
* Indicates less than 1%.
(1) Except as provided in the Table, the business address of the directors and
executive officers, the National Intergroup, Inc. Retirement Program, and
the Davenport, Inc. Pension Plan is c/o Avatex Corporation, 5910 North
Central Expressway, Suite 1780, Dallas, Texas 75206.
(2) Includes shares of common stock underlying Convertible Preferred Stock and
options that are exercisable within 60 days of the Due Date.
(3) Percentages are based on a total of 17,515,406 shares of common stock, which
consists of (i) 13,806,487 shares outstanding as of June 14, 1999, (ii)
3,096,444 shares underlying options that are exercisable within 60 days of
the Due Date held by directors and named executive officers, and
(iii) 612,475 shares into which the convertible preferred stock held by the
entities listed in the Table is convertible.
(4) 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 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 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
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 common stock.
Estrin Equities disclaims beneficial ownership of the shares of common stock
owned by Mr. Butler individually, and Butler Equities disclaims beneficial
ownership of the shares of common stock owned by Estrin Equities and
Mr. Estrin individually.
(5) Includes beneficial ownership of common stock through The Centaur Group and,
for Mr. Estrin, 3,756 shares of common stock owned through FoxMeyer's 401(k)
plan.
(6) Elliott and Westgate International, L.P. stated in filings with the
Commission that Paul E. Singer and Braxton Associates, L.P., which is
controlled by Mr. Singer, are the general partners of Elliott and that
Hambledon, Inc. is the sole general partner of Westgate International, L.P.
Messrs. Gropper and Miller are employees of Stonington, and Messrs.
DellaCamera and Intrieri are former employees of Stonington. Stonington is
also controlled by Mr. Singer. The business address of Messrs. Gropper and
Miller is Elliott Associates, L.P., 712 Fifth Ave., 36th Floor, New York, NY
10019, the business address of Mr. DellaCamera is Brean Murray & Co. Inc.,
570 Lexington Avenue, New York, NY 10002, and the address of Mr. Intrieri is
235 East 95th Street, Apt. 17B-C, New York, NY 10128.
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(7) The information provided for "Other Holders" is based on Schedule 13D and
Schedule 13G reports filed with the Commission and other written information
provided to the Corporation.
(8) United stated in filings with the Commission that Moses Marx, as a result of
his position with and ownership interest in United Equities Commodities
Company and Momar Corporation, could be deemed to have voting and/or
investment power with respect to shares of the Corporation beneficially
owned by them.
(9) The Corporation has been advised that Elliott, Mr. Marx and their respective
affiliates and associated companies have entered into a Stock Purchase
Agreement, dated June 18, 1999, with Phar-Mor. Subject to the consummation
of the proposed merger of Xetava into the Corporation, Phar-Mor has agreed
to purchase the 2,862,400 shares of the Corporation's common stock owned by
Elliott, Mr. Marx and their respective affiliates and associated companies
for $2.00 per share, with the closing to occur simultaneously with the
closing of the proposed merger. The remaining shares of the Corporation's
common stock that are beneficially owned by Elliott, Mr. Marx and their
respective affiliates and associated companies are based on their ownership
of the Corporation's convertible preferred stock. Pursuant to a
Stockholders' Agreement executed in connection with the proposed merger, the
holders of these shares will elect to receive cash, notes, warrants and
other consideration, rather than new common stock, under the proposed
merger.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With respect to Hyman H. Frankel, Ph.D., who is a director of the
Corporation, see "COMPENSATION OF DIRECTORS" above. With respect to Fred S.
Katz, who is a director of the Corporation, see "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" above.
In April 1998, 13 persons and entities (the "Purchasers") committed to
purchase a total of $3 million of Series B preferred stock of RAS. The
securities were purchased in three separate closings that occurred in April
1998, July 1998 and February 1999. The Purchasers also received warrants to
purchase additional shares of Series B convertible preferred stock for an
aggregate exercise price of $2 million. The Purchasers included the Corporation;
Cabot Noble, Inc. ("Cabot Noble"), which is a wholly-owned subsidiary of
Phar-Mor; all of the Corporation's executive officers and its Director of
Accounting (and/or their designees); one non-officer director of the
Corporation, Charles Pecarro; and two additional parties related to, or referred
to by, Abbey Butler or Melvyn 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. Mr. Butler and Mr. Estrin are directors of RAS, and Mr. Butler
and Mr. Schleier are directors of a RAS subsidiary, Presby Corp.
In April 1999, RAS distributed to its stockholders, including the
Purchasers, shares of common stock in two RAS subsidiaries, PC Lens Corp. and
Medical Internet Technologies, Inc. These stockholders also purchased additional
shares of common stock of these entities based on the number of shares they were
entitled to purchase had they exercised their warrants to purchase RAS preferred
stock. The purchase price for these shares was their $.001 par value per share.
In addition, the Corporation is a party to a consulting agreement with RAS,
under which the Corporation provides certain financial, accounting and other
management consulting services to RAS, and also licenses to RAS a portion of the
office space leased by the Corporation in Dallas, Texas.
In April 1998, the Corporation and Cabot Noble each purchased
$1.25 million of preferred stock of HPD in connection with the acquisition by a
HPD subsidiary of certain assets of Block Drug Company, Inc. used in or related
to the manufacture, sale or distribution of its 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 Mr. Butler and Mr. Estrin are
limited partners of HPD Partners, LP and directors of HPD.
E-73
<PAGE>
In March and December 1998, certain persons and entities purchased a total
of $7.2 million of membership interests in CLAC, which in turn purchased a total
of 50% of the membership interests in Chemlink. These persons and entities
included the Corporation; Phar-Mor; four of the Corporation's officers,
Mr. Butler, Mr. Estrin, Mr. Massman and Mr. Schleier (and/or their designees);
one non-officer director of the Corporation, Mr. Pecarro; and five additional
parties related to, or referred to by, Mr. Butler or Mr. Estrin. Of the total
amount invested in CLAC, the Corporation's share was approximately 41.1%, Phar-
Mor's share was approximately 35.8%, the officers/designees' share was
approximately 14.4%, the non-officer director's share was approximately 0.7%,
and the related parties' share was approximately 8.0%. The largest share
invested by a Corporation officer or director (or his designee) was
approximately 6.1% of the total amount invested. In May 1999, each of the
members of CLAC, along with the other members of Chemlink (or their respective
stockholders), loaned a total of $250,000 to Chemlink on a pro rata basis based
on their ultimate ownership interests in Chemlink, in the form of one year
interest bearing notes. Mr. Butler and Mr. Estrin are members of the Board of
Managers of Chemlink. In addition, the Corporation is a party to a consulting
agreement with Chemlink, under which the Corporation provides certain financial,
accounting and other management consulting services to Chemlink.
In May 1999, the Corporation purchased a $1 million secured promissory note
from Caring. The Corporation has been advised that certain other stockholders of
Caring are exercising their rights under Caring's Stockholders Agreement to
purchase notes on the same terms and conditions as the note purchased by the
Corporation. The Corporation, six of its officers, and seven additional parties
related to or referred by Mr. Butler, Mr. Estrin or Mr. Massman currently own
Series B preferred stock of Caring, and Mr. Butler and Mr. Estrin are directors
of Caring. In addition, the Corporation licenses to Caring a portion of the
office space leased by the Corporation in Dallas, Texas along with certain
personal property located therein. In June 1999, Mr. Massman became the Chief
Executive Officer of Caring.
The Corporation, through a number of wholly-owned subsidiaries (the
"Subsidiaries"), engages in the buying, holding, operating and disposing of real
estate, notes secured by real estate and other similar investments. These
activities are conducted through limited partnerships (the "Partnerships") in
which one or more of the Subsidiaries is a general and/or limited partner. The
other partner in each of the Partnerships is an affiliate of The Bernstein
Companies ("Bernstein Co"), a real estate development firm based in Washington,
D.C. Mr. 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 Bernstein Co.
In March 1999, the Corporation and the Subsidiaries entered into a letter
agreement (the "Letter Agreement") with Bernstein Co, under which (i) a hotel
and related property located in northwest Washington, D.C. (the "Property")
owned by one of the Partnerships would be sold and (ii) upon the sale of the
Property, Bernstein Co. would purchase the Subsidiaries' interests in the other
two Partnerships, which own a hotel located in the Scott Circle area of
Washington, D.C. and a hotel and an adjoining office building located in
Annapolis, Maryland. As contemplated by the Letter Agreement, in May 1999, the
Property was sold to a third party and the Subsidiaries sold their interests in
the Partnerships and the stock of one of the Subsidiaries to affiliates of
Bernstein Co. As a result of these transactions, the Corporation and the
remaining Subsidiaries received a total of $12 million, of which $11.4 million
was in cash and $600,000 is evidenced by a one year promissory note and a
guaranty executed by Bernstein Co. and certain of its affiliates, the payment of
which is secured by the partnership interests that were sold by the Subsidiaries
to affiliates of Bernstein Co. As of May 31, 1999, the only remaining Bernstein
Co.-related investment by the Corporation was a $200,000 investment made in 1995
in one non-real estate joint venture.
E-74
<PAGE>
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 77 of all financial
statements filed as part of this report.
(2) Financial Statement Schedules
Reference is made to the listing on page 77 of all financial
statement schedules filed as part of this report.
(3) Exhibits
Reference is made to the Exhibit Index beginning on page 86 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, 1999, the Corporation filed
the following Current Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K on February 1,
1999 which announced that the New York Stock Exchange had halted
trading in the common and preferred stocks of the Corporation. The
Corporation filed the following Current Reports on Form 8-K after
March 31, 1999 but prior to the date of filing this Annual Report
on Form 10-K:
The Corporation filed a Current Report on Form 8-K on May 19, 1999,
which announced the terms of the sale of its current real estate
holdings.
The Corporation filed a Current Report on Form 8-K on June 24,
1999, which announced the revised terms of a merger between the
Corporation and Xetava and the settlement of certain related
lawsuits.
E-75
<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/ GRADY E. SCHLEIER
-----------------------------------
Grady E. Schleier
Vice President and Chief Financial
June 29, 1999 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 Co-Chairman of the Board June 29, 1999
- -------------------------------------------- and Co-Chief Executive Officer
Abbey J. Butler
/s/ MELVYN J. ESTRIN Co-Chairman of the Board June 29, 1999
- -------------------------------------------- and Co-Chief Executive Officer
Melvyn J. Estrin
/s/ GRADY E. SCHLEIER Vice President and Chief Financial Officer June 29, 1999
- -------------------------------------------- (Principal Financial Officer)
Grady E. Schleier
/s/ SCOTT E. PETERSON Vice President--Finance and Controller June 29, 1999
- -------------------------------------------- (Principal Accounting Officer)
Scott E. Peterson
ADDITIONAL DIRECTORS:
/s/ HYMAN H. FRANKEL Director June 29, 1999
- --------------------------------------------
Hyman H. Frankel
/s/ FRED S. KATZ Director June 29, 1999
- --------------------------------------------
Fred S. Katz
/s/ WILLIAM A. LEMER Director June 29, 1999
- --------------------------------------------
William A. Lemer
/s/ CHARLES C. PECARRO Director June 29, 1999
- --------------------------------------------
Charles C. Pecarro
/s/ JOHN L. WINEAPPLE Director June 29, 1999
- --------------------------------------------
John L. Wineapple
Director June 29, 1999
- --------------------------------------------
Daniel Gropper
Director June 29, 1999
- --------------------------------------------
Vincent Intrieri
/s/ RALPH DELLACAMERA, JR. Director June 29, 1999
- --------------------------------------------
Ralph DellaCamera, Jr.
Director June 29, 1999
- --------------------------------------------
Brian Miller
</TABLE>
E-76
<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...................................................... 23
Consolidated Statements of Operations--For the Three Years Ended March 31, 1999... 24
Consolidated Statements of Comprehensive Loss--For the Three Years Ended March 31,
1999............................................................................ 25
Consolidated Balance Sheets--March 31, 1999 and 1998.............................. 26
Consolidated Statements of Stockholders' Equity (Deficit)--For the Three Years
Ended March 31, 1999............................................................ 27
Consolidated Statements of Cash Flows--For the Three Years Ended March 31, 1999... 28
Notes to Consolidated Financial Statements--For the Three Years Ended March 31,
1999............................................................................ 29
</TABLE>
The following financial statement schedules of Avatex Corporation and
subsidiaries are included in Item 14(d):
<TABLE>
<CAPTION>
PAGE NO.
IN
FORM 10-K
---------
<S> <C>
Schedule I--Condensed Financial Information of Registrant......................... 78
Schedule II--Valuation and Qualifying Accounts.................................... 83
Schedule III--Real Estate and Accumulated Depreciation............................ 84
Independent Auditors' Consent..................................................... 85
</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 July 3, 1999
will be filed as an amendment to the Corporation's Form 10-K within 90 days of
Phar-Mor Inc.'s fiscal year end.
E-77
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
Operating costs
Administrative and general expenses.......................................... $ 7,810 $ 7,317 $ 5,792
Depreciation and amortization................................................ 43 41 8
Unusual items................................................................ -- 26,096 --
------- -------- ---------
Operating loss................................................................. (7,853) (33,454) (5,800)
Other income (expense)......................................................... (9) (12,310) 24,740
Interest income................................................................ 1,785 1,598 788
Interest expense............................................................... 768 2,108 3,173
------- -------- ---------
Income (loss) from continuing operations before National Steel Corporation,
equity in income (loss) of subsidiaries and affiliates and income tax
provision (benefit).......................................................... (6,845) (46,274) 16,555
National Steel Corporation
National Steel Corporation net preferred dividend income..................... -- 5,854 9,620
Loss on National Steel Corporation settlement................................ -- (59,038) --
Equity in income (loss) of subsidiaries and affiliates......................... 258 18,199 (8,556)
------- -------- ---------
Income (loss) from continuing operations before income tax provision
(benefit).................................................................... (6,587) (81,259) 17,619
Income tax provision (benefit)................................................. -- (40) 29,863
------- -------- ---------
Net loss from continuing operations............................................ (6,587) (81,219) (12,244)
Discontinued operations
Equity in loss from discontinued operations.................................. -- -- (21,057)
Equity in gain on disposal of discontinued operations........................ -- 3,719 8,417
Loss on disposal of discontinued operations.................................. -- -- (254,472)
------- -------- ---------
Net loss....................................................................... (6,587) (77,500) (279,356)
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)
------- -------- ---------
Net foreign currency translation adjustment............................... -- -- 38
------- -------- ---------
Unrealized gains (losses) on securities...................................... (210) 19 --
Reclassification adjustment for gains included in net loss................... (33) -- --
Equity in unrealized gains on securities..................................... 895 1,149 17
------- -------- ---------
Net unrealized gains...................................................... 652 1,168 17
------- -------- ---------
Minimum pension liability adjustment......................................... -- (6,187) (8,897)
Loss on plan termination from National Steel
Corporation settlement included in net loss............................... -- 79,718 --
------- -------- ---------
Net minimum pension liability adjustment.................................. -- 73,531 (8,897)
------- -------- ---------
Total other comprehensive income (loss)................................. 652 74,699 (8,842)
------- -------- ---------
Comprehensive loss............................................................. $(5,935) $ (2,801) $(288,198)
------- -------- ---------
------- -------- ---------
</TABLE>
See notes to condensed financial statements.
E-78
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments.......................................................... $ 26,284 $ 32,926
Receivables, less allowance for possible losses of $15 in 1999 and $11 in 1998........... 2,526 9,701
Other current assets..................................................................... 1,320 3,532
-------- --------
Total current assets....................................................................... 30,130 46,159
Investment in subsidiaries and affiliates.................................................. 70,182 68,597
Property and equipment..................................................................... 214 196
Less accumulated depreciation and amortization........................................... 92 49
-------- --------
Net property and equipment................................................................. 122 147
Other assets............................................................................... 14,588 12,016
-------- --------
Total assets............................................................................... $115,022 $126,919
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable......................................................................... $ 1,434 $ 1,273
Other accrued liabilities................................................................ 1,236 4,055
-------- --------
Total current liabilities.................................................................. 2,670 5,328
Intercompany payables...................................................................... 29,528 30,426
Long-term debt............................................................................. 9,001 8,322
Other long-term liabilities................................................................ 8,587 9,749
Redeemable preferred stock................................................................. 243,169 214,996
Stockholders' deficit
Common stock $5.00 par value; authorized 50,000,000 shares; issued: 13,806,487 shares in
1999 and 13,806,375 shares in 1998.................................................... 69,032 69,032
Capital in excess of par value........................................................... 119,103 119,100
Accumulated other comprehensive income................................................... 1,820 1,168
Accumulated deficit...................................................................... (365,967) (331,202)
-------- --------
(176,012) (141,902)
Less: equity in cost of common stock of the Corporation held by Phar-Mor, Inc......... (1,921) --
-------- --------
Total stockholders' deficit................................................................ (177,933) (141,902)
-------- --------
Total liabilities and stockholders' deficit................................................ $115,022 $126,919
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
E-79
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1999 1998 1997
------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(6,587) $ (77,500) $ (279,356)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Net preferred income from National Steel Corporation....................... -- (5,854) (9,620)
Loss on National Steel Corporation settlement.............................. -- 59,038 --
Equity in loss (income) of subsidiaries and affiliates..................... (258) (21,918) 21,196
Deferred income tax provision.............................................. -- -- 29,863
Other non-cash charges (credits)........................................... (571) (5,284) 2,018
Loss (gain) on investments................................................. 249 12,313 (26,435)
Loss on disposal of discontinued operations................................ -- -- 254,472
Cash provided (used) by working capital items:
Receivables and other current assets.................................... 7,593 35,368 (32,139)
Accounts payable and accrued liabilities................................ (4,119) (6,762) (5,827)
Net intercompany activity with subsidiaries................................ (898) 2,772 51,547
Other...................................................................... 45 39 19
------- --------- ----------
Net cash provided (used) by operating activities............................. (4,546) (7,788) 5,738
------- --------- ----------
Cash flows from investing activities:
Purchase of affiliates and investments..................................... (5,004) (12,571) --
Sale of affiliates and investments......................................... 2,926 59,675 37,442
Purchase of property and equipment......................................... (18) (10) (186)
------- --------- ----------
Net cash provided (used) by investing activities............................. (2,096) 47,094 37,256
------- --------- ----------
Cash flows from financing activities:
Repayments on revolving credit facilities.................................. -- -- (15,000)
Proceeds from the issuance of long-term debt............................... -- 8,000 --
Repayment of long-term debt................................................ -- (14,900) (5,100)
Debt issuance costs........................................................ -- -- (178)
Purchase of treasury stock................................................. -- -- (16,726)
Purchase of preferred stock................................................ -- -- (8,845)
Dividends paid on redeemable preferred stock............................... -- -- (2,697)
Exercise of stock options.................................................. -- -- 1,680
------- --------- ----------
Net cash used by financing activities........................................ -- (6,900) (46,866)
------- --------- ----------
Net increase (decrease) in cash and short-term investments................... (6,642) 32,406 (3,872)
Cash and short-term investments, beginning of year......................... 32,926 520 4,392
------- --------- ----------
Cash and short-term investments, end of year................................. $26,284 $ 32,926 $ 520
------- --------- ----------
------- --------- ----------
</TABLE>
See notes to condensed financial statements.
E-80
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
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 R to the consolidated
financial statements. See Note S to the consolidated financial statements for a
discussion of (i) a proposed merger which would eliminate the preferred stock
liability and (ii) the sale by subsidiaries of the Corporation's current real
estate holdings.
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 net deferred tax asset as the Parent Company believes
it may not be able to realize its deferred tax asset (see Note M to the
consolidated financial statements).
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: In 1998, unusual items consisted of a $33.3 million charge
from the settlement of certain litigation with FoxMeyer Corporation's
("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 (see Note N to the consolidated
financial statements).
Other income (expense): In 1999, other expense consisted of a loss of a
$1.8 million from a reduction in the carrying value of the Parent Company's
investment in Imagyn Technologies, Inc. ("Imagyn"). The reduction was almost
completely offset by $1.8 million in gains, primarily from recoveries on
investments which had been written off in prior years, a royalty payment from a
property sold in the prior year and dividends on investments. In 1998, other
expense consisted of a loss of $12.9 million from the adjustment during the year
in the carrying value of 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.
of $2.0 million and $7.3 million in other losses (including a $6.2 million
trading loss on Imagyn).
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 the Parent
Company plus any accrued interest thereon.
E-81
<PAGE>
NOTE C--TAX SHARING PAYMENTS
The Corporation does not have tax sharing agreements with any of its
subsidiaries except for FoxMeyer. Under that tax sharing agreement, no tax
sharing payments were received during the three years ended March 31, 1999.
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,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Interest paid................................................................... $ 62 $ 1,215 $ 2,050
Income tax refund............................................................... -- (40) --
Non-cash transactions:
Note received as part of National Steel Corporation Settlement................ -- 9,442 --
Payment of dividends-in-kind on Series A Preferred Stock...................... -- -- 4,354
Cumulative dividends accrued but not paid..................................... 25,268 23,101 10,806
Dividend received from FoxMeyer............................................... -- -- 105,888
</TABLE>
E-82
<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
BALANCE AT CHARGED TO TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- -------------------------------------------------- ---------- ---------- --------- ----------- ----------
YEAR ENDED MARCH 31, 1999
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on notes and
accounts receivable............................. $ 27 $ 15 $-- $ 1 $ 41
<CAPTION>
YEAR ENDED MARCH 31, 1998
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on notes and
accounts receivable............................. $ 539 $ 9 $-- $ 521(2) $ 27
<CAPTION>
YEAR ENDED MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
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) --
</TABLE>
- ------------------
Notes:
(1) Principally relates to discontinued operations.
(2) Principally the collection and write-off of receivables retained on the sale
of discontinued operations.
E-83
<PAGE>
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AVATEX CORPORATION AND SUBSIDIARIES
MARCH 31, 1999
(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
--------------------- ----------------------- -------------------------------
BUILDINGS BUILDINGS
ENCUM- AND CARRYING 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.............. $ 5,146 $1,079 $3,402 $ 1,098 $ -- $1,079 $ 4,500 $ 5,579
Hotel Washington D.C........ 7,292 4,000 2,310 2,948 -- 4,000 5,258 9,258
Hotel Washington D.C........ 13,238 552 1,001 11,936 325 552 13,262 13,814
------- ------ ------ -------- ---- ------ -------- -------
Total....................... $25,676 $5,631 $6,713 $ 15,982 $325 $5,631 $ 23,020 $28,651
------- ------ ------ -------- ---- ------ -------- -------
------- ------ ------ -------- ---- ------ -------- -------
</TABLE>
<TABLE>
<CAPTION>
COL A COL F COL G COL H COL I
- ------------------------------------------------ ---------- ------------ ------------- -------------
LIFE ON WHICH
ACCUMULATED DATE OF DEPRECIATION
DESCRIPTION DEPRECIATION CONSTRUCTION DATE ACQUIRED IS COMPUTED
- ------------------------------------------------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Office building and $ 789 Hotel--1971 November 1993 5-39 years
hotel Annapolis MD............................ Office--1989
Hotel Washington D.C............................ 934 1961 October 1994 5-20 years
Hotel Washington D.C............................ 146 1955 May 1996* 5-40 years
-------
Total........................................... $ 1,869
-------
-------
</TABLE>
NOTES: The cost of land and buildings and improvements for federal income tax
purposes is approximately $24.7 million.
* Started operations in October 1998.
Reconciliation of real estate and accumulated depreciation for each of the
last three fiscal years ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
-------------------------- -------------------------- --------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
REAL ESTATE DEPRECIATION REAL ESTATE DEPRECIATION REAL ESTATE DEPRECIATION
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.... $19,899 $ 1,217 $18,667 $ 727 $18,172 $ 1,023
Acquisitions during period:
Acquisitions other than
through foreclosure........ -- -- 7,676 -- 2,900 --
Improvements................. 8,752 -- 5,450 -- 4,052 --
Contribution of joint venture
assets..................... -- -- -- -- 4,000 --
Depreciation.................... -- 652 -- 613 -- 397
------- ------- ------- ------- ------- -------
28,651 1,869 31,793 1,340 29,124 1,420
Deductions during period:
Cost of real estate sold..... -- -- 11,894 123 10,457 693
------- ------- ------- ------- ------- -------
Balance at end of period.......... $28,651 $ 1,869 $19,899 $ 1,217 $18,667 $ 727
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
E-84
<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, 1999, except for Note S, which is as of June 18,
1999, 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, 1999.
DELOITTE & TOUCHE LLP
Dallas, Texas
June 28, 1999
E-85
<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 -- Second Amendment dated June 21, 1999 to the 1993 Stock Option and Performance Award Plan of the
Corporation.*
10-E -- 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-F -- 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-G -- 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.)
10-H -- 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-I -- 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.)
</TABLE>
E-86
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C>
10-J -- Employment Agreement, dated as of 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-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 -- Amendment to Employment Agreement between the Corporation and Abbey J. Butler, effective as of
February 1, 1998. (Filed as Exhibit 10-N to the Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by reference.)
10-N -- Amendment to Employment Agreement between the Corporation and Melvyn J. Estrin, effective as of
February 1, 1998. (Filed as Exhibit 10-O to the Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by reference.)
10-O -- Employment Agreement between the Corporation and John G. Murray, effective as of February 1, 1998.
(Filed as Exhibit 10-Q to the Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein by reference.)
10-P -- Amendment to Employment Agreement between the Corporation and Grady E. Schleier, effective as of
February 1, 1998. (Filed as Exhibit 10-S to the Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by reference.)
10-Q -- Amendment to Employment Agreement between the Corporation and Robert H. Stone, effective as of
February 1, 1998. (Filed as Exhibit 10-T to the Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by reference.)
10-R -- Amendment No. 2 to the Performance Incentive Plan of the Corporation, effective as of June 23, 1997.
(Filed as Exhibit 10-U to the Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31. 1998 and incorporated herein by reference.)
10-S -- Form of Indemnification Agreement between the Corporation and certain of its officers and directors.*
10-T -- Amended and Restated Agreement and Plan of Merger, dated as of June 18, 1999, by and between the
Corporation and Xetava Corporation. (Filed as Exhibit 2 to the Corporation's Current Report on
Form 8-K filed June 24, 1999 and incorporated herein by reference.)
10-U -- Stockholders' Agreement dated June 18, 1999, by and among the Corporation, Elliott Associates, L.P.,
Martley International, Inc., Moses Marx, Momar Corporation, and United Equities Commodities Company.
(Filed as Exhibit 10-A to the Corporation's Current Report on Form 8-K filed June 24, 1999 and
incorporated herein by reference.)
10-V -- Voting Agreement, dated June 18, 1999, by and among the Corporation, Mark S. Zucker, Anvil Investment
Partners, L.P. and Anvil Investors, Inc. (Filed as Exhibit 10-B to the Corporation's Current Report
on Form 8-K filed June 24, 1999 and incorporated herein by reference.)
10-W -- Separation Agreement between the Corporation and Edward L. Massman effective as of June 28, 1999.*
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
E-87
<PAGE>
ANNEX F
EXCERPTED FROM PHAR-MOR, INC.'S ANNUAL REPORT ON FORM 10-K
FOR ITS FISCAL YEAR ENDED JUNE 27, 1998.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Phar-Mor, Inc.:
We have audited the accompanying consolidated balance sheets of Phar-Mor, Inc.
and subsidiaries (the "Company") as of June 27, 1998 and June 28, 1997
(Successor Phar-Mor balance sheets), and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
fifty-two weeks ended June 27, 1998, the fifty-two weeks ended June 28, 1997,
the forty-three weeks ended June 29, 1996 (Successor Phar-Mor operations) and
the nine weeks ended September 2, 1995 (Predecessor Phar-Mor operations). Our
audits also included financial statement Schedule II, Valuation and Qualifying
Accounts. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
Except as discussed in the following paragraph, 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.
As discussed in Note 1 to the financial statements, in August 1992, the Board of
Directors of the Company disclosed that a fraud and embezzlement of the
Company's assets, which had been concealed for a period of years by
falsification of the accounting records, had been discovered. As a result, and
as discussed in Notes 1 and 6, reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment were
not available; accordingly, we were not able to complete our auditing procedures
for depreciation and amortization related to property and equipment for the nine
weeks ended September 2, 1995. As discussed in Note 6, during the fifty-three
weeks ended July 2, 1994, the Company recorded a $53,211,000 write down of its
property and equipment based upon an independent appraisal. It was not possible
to determine whether the aggregate amount of property and equipment at July 2,
1994 was greater than the original acquisition cost of such assets less
accumulated depreciation and amortization.
In our opinion, except for the effect of any adjustments that might have been
determined to be necessary had reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment been
available, the Predecessor Phar-Mor financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Predecessor Phar-Mor for the nine weeks ended September 2, 1995, in
conformity with generally accepted accounting principles.
In our opinion, the Successor Phar-Mor financial statements referred to above
present fairly, in all material respects, the financial position of Phar-Mor,
Inc. and subsidiaries as of June 27, 1998 and June 28, 1997 and the results of
their operations and their cash flows for the fifty-two weeks ended June 27,
1998 and June 28, 1997 and the forty-three weeks ended June 29, 1996, in
conformity with general accepted accounting principles.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, on August 29, 1995, the
Bankruptcy Court entered an order confirming the Plan of Reorganization which
became effective on September 11, 1995. Accordingly, the accompanying financial
statements have been prepared in conformity with AICPA Statement of Position
90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy
Code," for the Successor Phar-Mor as a new entity with assets, liabilities and a
capital structure having carrying values not comparable with prior periods as
described in Note 1.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
August 14, 1998
(September 10, 1998 as to Notes 3
and 8)
F-2
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 44,655 $ 79,847
Marketable securities................................................................... 9,065 --
Accounts receivable--net................................................................ 20,927 21,614
Merchandise inventories................................................................. 176,069 169,103
Prepaid expenses........................................................................ 2,214 5,228
Deferred tax asset...................................................................... 489 515
-------- --------
Total current assets................................................................. 253,419 276,307
Property and equipment--net............................................................... 75,512 72,835
Deferred tax asset........................................................................ 9,281 9,255
Investments............................................................................... 4,275 --
Investment in Avatex...................................................................... 3,525 --
Other assets.............................................................................. 3,443 4,208
-------- --------
Total assets......................................................................... $349,455 $362,605
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 67,091 $ 61,808
Accrued expenses........................................................................ 36,069 36,019
Reserve for costs of rightsizing program................................................ 967 1,866
Current portion of self insurance reserves.............................................. 2,280 2,649
Current portion of long-term debt....................................................... 3,276 2,624
Current portion of capital lease obligations............................................ 7,051 6,531
-------- --------
Total current liabilities............................................................ 116,734 111,497
Long-term debt............................................................................ 103,859 107,554
Capital lease obligations................................................................. 27,134 32,659
Long-term self insurance reserves......................................................... 7,680 8,098
Unfavorable lease liability--net.......................................................... 11,074 12,493
-------- --------
Total liabilities.................................................................... 266,481 272,301
-------- --------
Commitments and contingencies
Minority interests...................................................................... 535 535
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, authorized shares, 10,000,000, none outstanding........ -- --
Common stock, $.01 par value, authorized shares, 40,000,000; issued and outstanding
shares, 12,235,865 at June 27, 1998, and 12,159,199 at June 28, 1997................. 122 122
Additional paid-in capital.............................................................. 89,976 89,402
Stock options outstanding............................................................... 1,401 --
Unrealized loss on investment in Avatex................................................. (475) --
Retained (deficit)/earnings............................................................. (8,585) 245
-------- --------
Total stockholders' equity........................................................... 82,439 89,769
-------- --------
Total liabilities and stockholders' equity........................................... $349,455 $362,605
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------- ------------
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE WEEKS
WEEKS ENDED WEEKS ENDED WEEKS ENDED ENDED
JUNE 27, JUNE 27, JUNE 29, SEPTEMBER 2,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales............................................... $ 1,100,851 $ 1,074,828 $ 874,284 $ 181,968
Less:
Cost of goods sold, including occupancy and
distribution costs................................ 887,657 873,095 722,214 147,124
Selling, general and administrative expenses........ 173,982 168,218 128,312 27,057
Chapter 11 professional fee accrual adjustment...... -- -- (1,530) --
Executive severance................................. 6,787 -- -- --
Loss on disposal of equipment....................... 4,615 -- -- --
Terminated business combination expenses............ -- 3,076 -- --
Depreciation and amortization....................... 22,047 20,982 14,891 3,732
----------- ----------- ----------- ------------
Income from operations before interest expense,
investment loss, interest income, reorganization
items, fresh-start revaluation, taxes and
extraordinary item................................ 5,763 9,457 10,397 4,055
Interest expense (excludes contractual interest not
accrued on prepetition debt of $3,897 in the nine
weeks ended September 2, 1995).................... 16,639 17,175 14,343 5,689
Investment loss..................................... 1,105 -- -- --
Interest income..................................... 3,151 5,437 8,614 --
(Loss) income before reorganization items, fresh-
start revaluation, income taxes and extraordinary
item.............................................. (8,830) (2,281) 4,668 (1,634)
Reorganization items................................ -- -- -- 16,798
Fresh-start revaluation............................. -- -- -- (8,043)
----------- ----------- ----------- ------------
(Loss) income before income taxes and extraordinary
item.............................................. (8,830) (2,281) 4,668 (10,389)
Income tax provision................................ -- -- 2,142 --
----------- ----------- ----------- ------------
(Loss) income before extraordinary item............. (8,830) (2,281) 2,526 (10,389)
Extraordinary item--gain on debt discharge.......... -- -- -- 775,073
----------- ----------- ----------- ------------
Net (loss) income................................. $ (8,830) $ (2,281) $ 2,526 $ 764,684
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Basic and diluted (loss) income per common share:
(Loss) income before extraordinary item........... $ (.72) $ (.19) $ .21 $ (.19)
Extraordinary item.................................. -- -- -- 14.33
----------- ----------- ----------- ------------
Net (loss) income................................... $ (.72) $ (.19) $ .21 $ 14.14
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average number of common shares
outstanding....................................... 12,197,371 12,157,419 12,156,614 54,066,463
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- TOTAL
PAR ADDITIONAL STOCK UNREALIZED RETAINED STOCKHOLDERS'
VALUE PAID-IN OPTIONS LOSS ON (DEFICIT) (DEFICIENCY)
SHARES AMOUNT CAPITAL OUTSTANDING INVESTMENTS EARNINGS EQUITY
------- ------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1995............... 54,066 $ 5,407 $ 487,477 -- -- $(1,257,568) $(764,684)
Net income............................ -- -- -- -- -- 764,684 764,684
Cancellation of the former common
equity under the Plan of
Reorganization...................... (54,066) (5,407) (487,477) -- -- 492,884 --
Issuance of the new equity interests
in connection with emergence from
Chapter 11 Cases.................... 12,156 122 89,378 -- -- -- 89,500
------- ------- ---------- ------- ----- ----------- ---------
BALANCE AT SEPTEMBER 2, 1995.......... 12,156 122 89,378 -- -- -- 89,500
Net income............................ -- -- -- -- -- 2,526 2,526
Shares issued......................... 1 -- 7 -- -- -- 7
------- ------- ---------- ------- ----- ----------- ---------
BALANCE AT JUNE 29, 1996.............. 12,157 122 89,385 -- -- 2,526 92,033
Net loss.............................. -- -- -- -- -- (2,281) (2,281)
Shares issued......................... 2 -- 17 -- -- -- 17
------- ------- ---------- ------- ----- ----------- ---------
BALANCE AT JUNE 28, 1997.............. 12,159 122 89,402 -- -- 245 89,769
Net loss.............................. -- -- -- -- -- (8,830) (8,830)
Stock options outstanding............. -- -- -- $ 1,401 -- -- 1,401
Unrealized loss on investments........ -- -- -- -- $(475) -- (475)
Shares issued......................... 77 -- 574 -- -- -- 574
------- ------- ---------- ------- ----- ----------- ---------
BALANCE AT JUNE 27, 1998.............. 12,236 $ 122 $ 89,976 $ 1,401 $(475) $ (8,585) $ 82,439
------- ------- ---------- ------- ----- ----------- ---------
------- ------- ---------- ------- ----- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------- ------------
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE WEEKS
WEEKS ENDED WEEKS ENDED WEEKS ENDED ENDED
JUNE 27, JUNE 28, JUNE 29, SEPTEMBER 2,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................................ $ (8,830) $ (2,281) $ 2,526 $ 764,684
Adjustment to reconcile net (loss) income to net cash
provided by operating activities:
Items not requiring the outlay of cash:
Extraordinary gain on debt discharged................ -- -- -- (775,073)
Fresh-start revaluation.............................. -- -- -- (8,043)
Noncash charges included in reorganization items..... -- -- -- 16,500
Depreciation......................................... 14,030 12,182 8,802 2,388
Loss on disposal of equipment........................ 4,615 -- -- --
Stock option expense................................. 1,401 -- -- --
Amortization of video rental tapes................... 7,970 8,800 6,055 1,333
Amortization of deferred financing costs and
goodwill........................................... 467 408 363 73
Deferred income taxes................................ -- -- 2,142 --
Deferred rent and unfavorable lease liabilities...... (1,419) 1,412 606 (89)
Changes in assets and liabilities:
Accounts receivable.................................. 687 (780) 6,905 11,997
Marketable securities................................ (9,065) -- -- --
Merchandise inventories.............................. (6,769) (16,258) 15,534 (6,922)
Prepaid expenses..................................... 3,014 (44) 1,356 2,441
Deferred income taxes................................ -- -- 2,088 --
Other assets......................................... 298 (707) (681) 449
Accounts payable..................................... 5,283 8,047 (4,370) (8,865)
Accrued expenses..................................... 58 2,610 (1,999) 1,133
Accrued bankruptcy professional fees................. -- (181) (19,476) 4,442
Reserve for costs of rightsizing program............. (899) (1,585) (2,921) 550
Self insurance reserves.............................. (787) (180) (916) 1,131
--------- --------- --------- ----------
Net cash provided by operating activities.................. 10,054 11,443 16,014 8,129
--------- --------- --------- ----------
INVESTING ACTIVITIES
Additions to rental videotapes........................... (8,167) (8,694) (7,316) (1,874)
Additions to property and equipment...................... (19,213) (18,467) (6,368) (649)
Investment in Avatex..................................... (4,000) -- -- --
Investment in equity securities.......................... (4,275) -- -- --
Purchase of partnership interests........................ -- -- (145) --
--------- --------- --------- ----------
Net cash used for investing activities..................... (35,655) (27,161) (13,829) (2,523)
--------- --------- --------- ----------
FINANCING ACTIVITIES
Principal payments on term debt.......................... (3,043) (2,698) (1,467) --
Principal payments on capital lease obligations.......... (7,122) (6,019) (4,390) --
Issuance of common stock................................. 574 17 7 --
--------- --------- --------- ----------
Net cash used for financing activities................... (9,591) (8,700) (5,850) --
--------- --------- --------- ----------
REORGANIZATION ACTIVITIES
Cash distribution pursuant to the plan of
reorganization......................................... -- -- -- (105,381)
Payment of reclamation claims............................ -- -- -- (23,961)
Decrease in all other liabilities subject to settlement
under reorganization proceedings....................... -- -- -- (2,076)
Proceeds from the sale of new common stock............... -- -- -- 9,500
Debtor-in-possession financing costs..................... -- -- -- (15)
--------- --------- --------- ----------
Net cash used for reorganization activities................ -- -- -- (121,933)
--------- --------- --------- ----------
(Decrease) increase in cash and cash equivalents........... (35,192) (24,418) (3,665) (116,327)
Cash and cash equivalents, beginning of period............. 79,847 104,265 107,930 224,257
--------- --------- --------- ----------
Cash and cash equivalents, end of period................... $ 44,655 $ 79,847 $ 104,265 $ 107,930
--------- --------- --------- ----------
--------- --------- --------- ----------
SUPPLEMENTAL INFORMATION
Interest paid............................................ $ 16,155 $ 16,762 $ 9,067 $ 4,592
Income tax refunds....................................... 48 86 2,669 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. REORGANIZATION AND BASIS OF PRESENTATION
In early August 1992 Phar-Mor, Inc. and its subsidiaries (collectively, the
"Company") publicly disclosed that it had discovered a scheme by certain of its
senior executives to falsify financial results. The officers believed to be
involved were promptly dismissed and are no longer employed by the Company. A
new management team, hired by the Board of Directors, assumed day-to-day
management of the Company. Upon discovery of the fraud, it became apparent that
the Company's explosive growth during the preceding several years had been
fueled in part by a systematic scheme to falsify the Company's financial results
and to conceal the Company's true financial condition. The fraud, which was
perpetrated by the manipulation of information and override of the system of
internal controls by certain of its senior executives, as well as a lack of
systems and surrounding controls, masked very substantial losses, created in
part by low margins, slow moving merchandise categories, high rentals for the
newer and larger stores and operational inefficiencies. By the time the Company
concluded its investigation into the size of the fraud, it determined that
cumulative earnings had been overstated by approximately $500,000. In response
to the fraud, new management developed and executed a business plan that
resulted in closing retail store locations and distribution centers, improved
gross margins, reduced operating costs and invested in systems designed to
strengthen internal controls and improve management reporting. Additional
charges to cumulative earnings of approximately $500,000 resulted from changes
in accounting policies and restructuring costs which were recorded as of
September 26, 1992 (See Note 6).
On August 17, 1992, the Company filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). From that time
until September 11, 1995, the Company operated its business as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Northern District of Ohio (the "Bankruptcy Court").
On September 11, 1995, (the "Effective Date") the Company emerged from
reorganization proceedings under Chapter 11 pursuant to the confirmation order
entered on August 29, 1995 by the Bankruptcy Court confirming the Third Amended
Joint Plan of Reorganization dated May 25, 1995 (the "Joint Plan").
Consequently, the Company applied the reorganization and fresh-start reporting
adjustments to the consolidated balance sheet as of September 2, 1995, the
closest fiscal month end to the Effective Date.
The consolidated financial statements of the Company during the bankruptcy
proceedings (the "Predecessor Company financial statements") are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"). Pursuant to guidance provided by SOP 90-7, the
Company adopted fresh-start reporting as of September 2, 1995. Under fresh-start
reporting, a new reporting entity is deemed to be created and the recorded
amounts of assets and liabilities are adjusted to reflect their estimated fair
values at the Effective Date (see Note 2). Consolidated financial statements for
periods ended prior to September 2, 1995, have been designated as those of the
Predecessor Company. Black lines have been drawn to separate the Successor
Company consolidated financial statements from the Predecessor Company
consolidated financial statements to signify that they are different reporting
entities which have not been prepared on a comparable basis.
The Joint Plan provided for, among other things, settlement of all
liabilities subject to settlement under reorganization proceedings in exchange
for cash, new debt, 12,156,250 shares of common stock and 1,250,000 common stock
warrants and an interest in a Limited Liability Company ("LLC") which was
established as part of the Joint Plan (see Notes 9 and 12). The Company's cause
of action against its former auditor and certain other causes of action were
assigned to such LLC. The Predecessor Company's creditors and former
shareholders were beneficiaries of the LLC.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
1. REORGANIZATION AND BASIS OF PRESENTATION--(CONTINUED)
The net cash disbursements upon the effectiveness of the Joint Plan were
comprised as follows:
<TABLE>
<S> <C>
Payment to the holders of claims under the prepetition credit agreement and
prepetition senior secured notes................................................ $103,708
Payment to fund litigation of LLC causes of action................................ 400
Payment of origination costs for revolving credit facility for the Successor
Company......................................................................... 1,273
--------
105,381
Receipt of net proceeds from the sale of new common stock......................... (9,500)
--------
$ 95,881
--------
--------
</TABLE>
The value of cash, notes and securities required to be distributed under
the Joint Plan was less than the value of the allowed claims on and interests in
the Predecessor Company; accordingly, the Predecessor Company recorded an
extraordinary gain of $775,073 related to the discharge of prepetition
liabilities in the period ended September 2, 1995. Payments and distributions
associated with the prepetition claims and obligations were made or provided for
in the consolidated balance sheet as of September 2, 1995 (see Note 2). The
consolidated financial statements at September 2, 1995, give effect to the
issuance of all common stock, senior notes and tax notes in accordance with the
Joint Plan.
The extraordinary gain recorded by the Predecessor Company was determined
as follows:
<TABLE>
<S> <C>
Liabilities subject to settlement under reorganization proceedings
at the Effective Date......................................................... $1,126,414
Less:
Cash distribution pursuant to the Joint Plan.................................. (105,381)
Issuance of new debt.......................................................... (108,523)
New capital lease obligations................................................. (49,599)
Assumption of prepetition liabilities......................................... (7,838)
Value of new common stock issued to prepetition creditors..................... (80,000)
----------
Extraordinary item--gain on debt discharge...................................... $ 775,073
----------
----------
</TABLE>
2. FRESH-START REPORTING
As indicated in Note 1, the Company adopted fresh-start reporting as of
September 2, 1995. The Successor Company fresh-start reorganization equity value
of $89,500 was determined with the assistance of the financial advisors employed
by the Company. The financial advisors reviewed financial data of the Company,
including financial projections through the fiscal year 1999. The reorganization
value of the Company, net of current liabilities, which was determined to be in
a range of $260,000 to $330,000, was based primarily on the following methods of
valuation: discounted cash flow analysis using projected five year financial
information and a discount rate of 9.8%; market valuation of certain publicly
traded companies whose operating businesses were believed to be similar to that
of the Company; and review of certain acquisitions of companies whose operating
businesses were viewed to be similar to that of the Company. In addition to
these methods of analysis, certain general economic and industry information
relevant to the business of the Company was considered.
Based on the analysis outlined above, the financial advisors determined the
equity value of the Company to be between $90,000 and $160,000. This equity
value represented the reorganization value of $260,000 to $330,000 less $170,000
of debt assumed to be issued under the Joint Plan. The fresh-start
reorganization equity value of $89,500 correlates to the $90,000 referred to
above, less $1,000 in expenses reimbursed to
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
2. FRESH-START REPORTING--(CONTINUED)
certain shareholders plus $500 reflecting the purchase of common stock by
present and former members of management as further described in the Joint Plan.
The five year cash flow projections were based on estimates and assumptions
about circumstances and events that had not yet taken place. Such estimates and
assumptions were inherently subject to significant economic and competitive
uncertainties beyond the control of the Company including, but not limited to,
those with respect to the future course of the Company's business activity. Any
difference between the Company's projected and actual results following its
emergence from Chapter 11 has not and will not alter the determination of the
fresh-start reorganization equity value because such value is not contingent
upon the Company achieving the projected results.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
2. FRESH-START REPORTING--(CONTINUED)
The Predecessor Company balance sheet as of September 2, 1995, and
adjustments thereto to give effect to the discharge of prepetition debt and
fresh-start reporting, are as follows:
<TABLE>
<CAPTION>
PREDECESSOR ADOPTION OF COMPANY
COMPANY RESTRUCTURING FRESH-START SUCCESSOR
PRE-CONFIRMATION (SEE NOTE 1) REPORTING REORGANIZED
---------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 203,811 $ (95,881) -- $ 107,930
Account receivable--net.............................. 27,702 -- -- 27,702
Due from related parties............................. -- -- -- --
Merchandise inventories.............................. 167,177 -- -- 167,177
Prepaid expenses..................................... 6,540 -- -- 6,540
Deferred tax asset................................... -- -- $ 1,814 1,814
------------ ----------- --------- ---------
Total current assets.............................. 405,230 (95,881) 1,814 311,163
Property and equipment--net............................ 69,770 -- (4,592) 65,178
Deferred tax asset..................................... 180 -- 12,006 12,186
Other assets........................................... 2,992 3 (1,315) 1,680
------------ ----------- --------- ---------
Total assets...................................... $ 478,172 $ (95,878) $ 7,913 $ 390,207
------------ ----------- --------- ---------
------------ ----------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable..................................... $ 56,483 $ 1,623 -- $ 58,106
Accrued expenses..................................... 27,619 6,255 -- 33,874
Accrued bankruptcy professional fees................. 19,657 -- -- 19,657
Reserve for costs of rightsizing program............. 7,301 -- -- 7,301
Current portion of self insurance reserves........... 5,030 -- -- 5,030
Current portion of long-term debt.................... -- 1,541 -- 1,541
Current portion of capital lease obligations......... -- 5,534 -- 5,534
------------ ----------- --------- ---------
Total current liabilities......................... 116,090 14,953 -- 131,043
Liabilities subject to settlement under reorganization
proceedings.......................................... 1,126,414 (1,126,414) -- --
Long-Term debt......................................... -- 106,982 -- 106,982
Capital lease obligations.............................. -- 44,065 -- 44,065
Long-term self insurance reserves...................... 8,142 -- -- 8,142
Unfavorable lease liability--net....................... -- -- $ 10,475 10,475
Deferred rent.......................................... 10,642 (37) (10,605) --
------------ ----------- --------- ---------
Total liabilities................................. 1,261,288 (960,451) (130) 300,707
------------ ----------- --------- ---------
Stockholders' equity (deficiency):
Common stock......................................... 5,407 (5,285) -- 122
Additional paid-in capital........................... 487,477 (398,099) -- 89,378
Retained earnings (deficit).......................... (1,276,000) 1,267,957 8,043 --
------------ ----------- --------- ---------
Total stockholders' equity (deficiency)........... (783,116) 864,573 8,043 89,500
------------ ----------- --------- ---------
Total liabilities and stockholders' equity
(deficiency)......................................... $ 478,172 $ (95,878) $ 7,913 $ 390,207
------------ ----------- --------- ---------
------------ ----------- --------- ---------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
2. FRESH-START REPORTING--(CONTINUED)
The significant fresh-start reporting adjustments are summarized as
follows:
(1) Revaluation of fixed assets and leasehold interests based, in
part, upon the estimated fair market values of properties and leases. This
revaluation resulted in recording unfavorable lease liabilities for certain
locations. See Notes 3 and 6.
(2) Write-off of lease acquisition costs.
(3) Valuation and recording of a deferred tax asset representing the
estimated net realizable value of net operating loss carryforwards.
(4) Adjustments to the fair market value of other noncurrent assets in
excess of reorganization value in accordance with fresh-start reporting.
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<TABLE>
<S> <C>
a. Fiscal Periods Presented--The accompanying consolidated balance sheets were prepared as of June 27, 1998 and
June 28, 1997. The accompanying consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows were prepared for the fifty-two weeks ended June 27, 1998, the fifty-two weeks
ended June 28, 1997, the forty-three weeks ended June 29, 1996, and the nine weeks ended September 2, 1995.
The Company's year ends on the Saturday closest to June 30.
b. Business--The Company operates a chain of "deep discount" drugstores primarily located in the midwest and
along the east coast of the continental United States in which it sells merchandise in various categories.
c. Principles of Consolidation--The consolidated financial statements include the accounts of Phar-Mor, Inc., its
wholly-owned subsidiaries and its majority-owned partnerships. All intercompany accounts and transactions have
been eliminated.
d. Cash and Cash Equivalents--The Company considers all short-term investments with an original maturity of three
months or less to be cash equivalents.
e. Marketable Securities--Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," marketable securities are carried at fair
market value as trading securities. The cost of the securities sold is determined using the specific
identification method. Marketable securities consist primarily of equity instruments of corporations and real
estate investment trusts. For the fifty-two weeks ended June 27, 1998, unrealized losses of $1,363 are
included in Investment loss in the Consolidated Statement of Operations.
f. Merchandise Inventories--Merchandise inventories are valued at the lower of first-in, first-out ("FIFO") cost
or market.
g. Video Rental Tapes--Videotapes held for rental which are included in inventories, are recorded at cost and are
amortized over their estimated economic life with no provision for salvage value. With respect to "hit" titles
for which four or more copies per store are purchased, the fourth and any succeeding copies are amortized over
nine months on a straight-line basis. All other video cassette purchases up to three copies per store are
amortized over thirty-six months on a straight-line basis.
h. Investments--Investments consist of equity interests in unconsolidated affiliates that do not have readily
determinable market values. The Company uses the equity method of accounting for investments in which it has
20% or more interest in voting common stock and the cost method of accounting for investments in which it has
less than a 20% interest in voting common stock or investments in preferred stock (see Note 11).
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<S> <C>
i. Investment in Avatex--During the fifty-two weeks ended June 27, 1998, the Company invested $4,000 to purchase
approximately 11.9% of Avatex Corporation, formerly known as FoxMeyer Health Corporation ("Avatex"), an
affiliate of one of the Company's former largest suppliers and the largest stockholder of the Company (see
Note 11). Under the provisions of SFAS No. 115, this investment is carried at market value as
available-for-sale securities. Unrealized losses on these securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized. As of September 10, 1998, the qouted
market price of Avatex Corporation common stock was $1.0625 per share as compared to $2.1875 per share at
June 27, 1998, representing an additional unrealized loss of $1,812 on the Company's original $4,000
investment.
j. Deferred Debt Expense--Deferred debt expense is included in other assets and is amortized on a straight-line
basis over the term of the related debt.
k. Goodwill--Goodwill is included in other assets and is amortized on a straight-line basis over 40 years.
l. Pre-Opening Costs--Expenses incurred for new stores prior to their opening are expensed as incurred.
m. Property and Equipment--The Company's policy is to record property and equipment (including leasehold
improvements) at cost. Depreciation is recorded on the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the estimated useful lives of the improvements or the
lives of the leases, whichever is shorter. The Company capitalizes the costs of software and software upgrades
purchased for use in its operations. The Company expenses the internal costs of software developed or modified
for use in its operations. Maintenance and repairs are expensed as incurred. Replacements and betterments are
capitalized and depreciated over the remaining estimated useful life of the asset.
Because of the fraud and embezzlement referred to in Note 1 above, which resulted in unreliable and
insufficient evidential matter to support the acquisition cost of property and equipment, as of July 2, 1994,
the Company revalued property and equipment based upon an independent appraisal. Consequently, Predecessor
Company property and equipment and related depreciation and amortization at and for periods subsequent to
July 2, 1994 are based upon such assets valued at the lower of the appraised value or net book value at
July 2, 1994 as adjusted for additions and disposals since that date (see Note 6).
Property and equipment was revalued at September 2, 1995 in connection with the adoption of fresh-start
reporting (see Note 2).
n. Leased Property Under Capital Leases--The Company accounts for capital leases, which transfer substantially
all of the benefits and risks incident to the ownership of property to the Company, as the acquisition of an
asset and the incurrence of an obligation. Under this method of accounting the cost of the leased asset is
amortized principally using the straight-line method over its estimated useful life, and the obligation,
including interest thereon, is liquidated over the life of the lease.
o. Operating Leases and Deferred Rent--Operating leases are accounted for on the straight-line method over the
lease term. Deferred rent represents the difference between rents paid and the amounts expensed for operating
leases.
p. Unfavorable Lease Liability--The unfavorable lease liability was recorded as part of fresh-start reporting
(see Note 2) and represents the excess of the present value of the liability related to lease commitments over
the present value of market rate rents as of the date of the Reorganization for such locations. This liability
will be amortized as a reduction of rent expense over the remaining lease terms.
q. Self insurance reserves--The Company is generally self-insured for losses and liabilities related primarily to
workers' compensation and comprehensive general and product liability. Losses are accrued based
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<S> <C>
upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry and based on Company experience.
r. Revenue Recognition--Sales are recognized on merchandise inventories sold upon receipt by the customer and are
recorded net of returns.
s. Reclassifications--Certain amounts in prior year financial statements have been reclassified to conform with
the current year presentation.
t. Estimates--The preparation of 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 disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results could differ from those
estimates.
u. New Accounting Pronouncements--In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive
income and its components, some of which have been historically excluded from the Statement of Operations and
recorded directly to the equity section of an entity's statement of financial position. SFAS No. 130 also
requires that the cumulative balance of these items of other comprehensive income are reported separately from
retained earnings and additional paid-in capital in the equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December 15, 1997. Management anticipates that
the adoption of SFAS No. 130 will have an impact on the disclosures in the consolidated financial statements
but will not have a material impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way public companies report selected information
about operating segments in both quarterly and annual financial statements to their shareholders. It also
established standards for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This statement is
not required to be applied to interim financial statements in the initial year of its application. Management
does not believe that SFAS No. 131 will have an impact on the disclosures in the consolidated financial
statements or a material impact on its financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other postretirement
benefit plans by standardizing the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer
considered useful. It does not change the measurement or recognition of these plans. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. Management has not yet determined the impact that SFAS
No. 132 will have on the disclosures in its consolidated financial statements, but does not believe adoption
will have a material impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets of liabilities in the statement of
financial position and measure those instruments at fair value, with the potential effect on operations
dependent upon certain conditions being met. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe that the adoption of SFAS No. 133 will have a
material impact on its financial position or results of operations.
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Accounts receivable--vendors.............................................. $ 11,712 $ 13,162
Third-party prescriptions................................................. 9,205 8,489
Vendor coupons............................................................ 1,238 1,202
Other..................................................................... 174 1,464
--------- ---------
22,329 24,317
Less allowance for doubtful accounts...................................... 1,402 2,703
--------- ---------
$ 20,927 $ 21,614
--------- ---------
--------- ---------
</TABLE>
5. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Store inventories......................................................... $ 146,969 $ 140,158
Warehouse inventories..................................................... 34,659 37,361
Video rental tapes--net................................................... 6,065 6,442
--------- ---------
187,693 183,961
Less reserves for markdowns, shrinkage and vendor rebates................. 11,624 14,858
--------- ---------
$ 176,069 $ 169,103
--------- ---------
--------- ---------
</TABLE>
The video rental tape inventory is net of accumulated amortization of
$13,340 and $12,797 at June 27, 1998 and June 28, 1997, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Furniture, fixtures and equipment......................................... $ 40,083 $ 28,394
Building improvements to leased property.................................. 33,622 27,641
Land...................................................................... 166 166
Capital leases:
Buildings............................................................... 11,076 11,076
Furniture, fixtures and equipment....................................... 21,860 27,380
--------- ---------
106,807 94,657
Less accumulated depreciation and amortization............................ 30,923 21,308
Less allowance for disposal of property and equipment..................... 372 514
--------- ---------
$ 75,512 $ 72,835
--------- ---------
--------- ---------
</TABLE>
Due to the lack of reliable accounting records referred to in Note 1 and
because the adverse business conditions which had been concealed by the fraud
and embezzlement dictated an assessment as to whether the carrying amount of
property and equipment had been overstated, an independent appraisal was
undertaken in 1994. The appraisal included the physical inspection of property
and equipment at the Company's corporate headquarters, warehouse and selected
retail store locations. The appraised value of certain property and equipment
was less than the net book value of the assets. Accordingly, the Company
recorded a charge
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
6. PROPERTY AND EQUIPMENT--(CONTINUED)
of $53,211 to write down property and equipment as of July 2, 1994. The
following is a reconciliation of the net book value of property and equipment
and the effects of the write down:
<TABLE>
<CAPTION>
JULY 2, 1994
--------------------------------------
LOWER OF
HISTORICAL APPRAISED
NET BOOK OR NET
VALUE WRITE DOWN BOOK VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Furniture, fixtures and equipment................................ $ 54,935 $(31,150) $ 23,785
Building improvements to leased property......................... 36,582 (22,061) 14,521
Capital leases:
Buildings...................................................... 11,201 -- 11,201
Furniture, fixtures and equipment.............................. 40,850 -- 40,850
-------- -------- --------
$143,568 $(53,211) $ 90,357
-------- -------- --------
-------- -------- --------
</TABLE>
The historical net book value amounts are net of accumulated depreciation
and amortization for each caption. Accumulated depreciation and amortization is
$0 for each caption for the lower of appraised or net book value amounts.
Also, as a result of the fraudulent reporting described in Note 1, the
following types of errors extended to property and equipment:
(1) Journalization of fictitious income via systematic capitalization
of non-existent additions to store property and equipment accounts.
(2) Repair and maintenance and short-term equipment rental items which
were improperly capitalized.
(3) Landlord reimbursements received in prior years for leasehold
improvements, which reimbursements were not credited as a reduction to the
related asset account, and in some cases, could not be traced to the
accounting records at all.
Adjustments were made in the September 26, 1992 balance sheet for the above
known errors. September 26, 1992 was the end of the Company's first fiscal
quarter of fiscal year 1993, the date closest to the dates on which the Company
conducted a physical inventory at its stores and distribution centers following
the disclosure of the fraud and the earliest date a consolidated balance sheet
could be prepared by new management.
While it is not possible to say with certainty that it was a conscious part
of the fraudulent reporting scheme, the conditions which prevented new
management from reconstructing the property and equipment records were: 1)
incomplete and unreconcilable detailed fixed asset registers or equivalent
records (i.e., there was inadequate detail maintained regarding the composition
of fixed assets below the general ledger account level); and 2) inadequate
documentation to support the acquisition cost of those assets (e.g., lack of
invoices, contracts or the like).
Despite the expenditure of substantial resources to locate sufficient
underlying documentation to reconstruct those records, the Company ultimately
concluded that it was not possible to determine that the recorded amounts were
reflective of the original acquisition cost.
Accordingly, any adjustment that might have been determined to be necessary
to adjust to original acquisition cost if reliable records could have been
reconstructed would be limited to: 1) the recorded cost of property and
equipment; 2) accumulated depreciation thereon; and 3) the related periodic
depreciation expense. Note that any adjustment to cost or accumulated
depreciation as of September 26, 1992 would have
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
6. PROPERTY AND EQUIPMENT--(CONTINUED)
affected those balance sheet line-items and retained deficit, but would not have
affected subsequent statements of operations beyond the impact on depreciation
expense.
7. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Goodwill.................................................................. $ 1,667 $ 1,712
Deferred debt expense..................................................... 79 401
Pharmacy files............................................................ 496 641
Cash surrender value of officers life insurance........................... -- 659
Utility and other deposits................................................ 664 86
Other..................................................................... 537 709
------- -------
$ 3,443 $ 4,208
------- -------
------- -------
</TABLE>
Goodwill, deferred debt expense and pharmacy files are net of accumulated
amortization of $123, $989 and $425, respectively, at June 27, 1998 and $78,
$667 and $180, respectively, at June 28, 1997. The deferred debt expense
consists of debt origination costs associated with the credit facility (See
Note 8).
8. REVOLVING CREDIT FACILITIES
On September 11, 1995, the Company entered into a Loan and Security
Agreement (the "Facility") with BankAmerica Business Credit, Inc. ("BABC"), as
agent, and other financial institutions (collectively, the "Lenders"), that
established a credit facility in the maximum amount of $100,000.
Borrowings under the Facility could have been used for working capital
needs and general corporate purposes. Up to $50,000 of the Facility at any time
could have been used for standby and documentary letters of credit. The Facility
included restrictions on, among other things, additional debt, capital
expenditures, investments, restricted payments and other distributions, mergers
and acquisitions, and contained covenants requiring the Company to meet a
specified quarterly minimum EBITDA Coverage Ratio (the sum of earnings before
interest, taxes, depreciation and amortization, as defined, divided by interest
expense), calculated on a rolling four quarter basis, and a monthly minimum net
worth test.
Credit availability under the Facility at any time was the lesser of the
Aggregate Availability (as defined in the Facility) or $100,000. Availability
under the Facility, after subtracting amounts used for outstanding letters of
credit, was $91,704 and $88,003 at June 27, 1998 and June 28, 1997,
respectively. The Facility establishes a first priority lien and security
interest in the current assets of the Company, including, among other items,
cash, accounts receivable and inventory.
Advances made under the Facility would have borne interest at the
BankAmerica reference rate plus 1/2% or London Interbank Offered Rate ("LIBOR")
plus the applicable margin. The applicable margin ranged between 1.50% and 2.00%
and was determined by a formula based on a ratio of (a) the Company's earnings
before interest, taxes, depreciation and amortization to (b) interest. Under the
terms of the Facility, the Company was required to pay a commitment fee of
0.28125% per annum on the unused portion of the Facility, letter of credit fees
and certain other fees.
There have been no borrowings under the Facility. At June 27, 1998 and
June 28, 1997 there were letters of credit in the amount of $5,709 and $4,924,
respectively, outstanding under the Facility.
The Company entered into an Amended and Restated Revolving Credit Facility
(the "Amended Revolving Credit Facility") effective September 10, 1998 with
BABC, as agent, and other financial institutions that established a credit
facility in the maximum amount of $100,000.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
8. REVOLVING CREDIT FACILITIES--(CONTINUED)
Borrowings under the Amended Revolving Credit Facility may be used for
working capital needs and general corporate purposes. Up to $50,000 of the
facility at any time may be used for standby and documentary letters of credit.
The Facility includes restrictions on, among other things, additional debt,
investments, dividends and other distributions, mergers and acquisitions. The
facility contains no financial covenants.
Credit availability under the Amended Revolving Credit Facility at any time
is the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000. The Amended Revolving Credit Facility establishes a first priority
lien and security interest in the current assets of the Company, including,
among other items, cash, accounts receivable and inventory.
Advances made under the Amended Revolving Credit Facility bear interest at
the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms of
the Amended Revolving Credit Facility, the Company is required to pay a
commitment fee of between 0.25% and 0.35% per annum on the unused portion of the
facility, letter of credit fees and certain other fees.
The Amended Revolving Credit Facility expires on September 10, 2001.
9. LONG-TERM DEBT
The composition of the debt obligations included on the consolidated
balance sheet as of June 27, 1998 and June 28, 1997 is as follows:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Senior unsecured notes, interest rate of 11.72%, due September 2002.... $ 91,462 $ 91,462
Equipment notes, interest rate of 7%, due in installments through
October 2003......................................................... 5,484 7,166
Tax notes, interest rates at 5.89% to 8%, due through September 2001... 5,257 6,342
Real estate mortgage notes and bonds payable at rates ranging from 3%
to 9.98% and the prime rate plus 1%.................................. 4,932 5,208
--------- ---------
Total debt............................................................. 107,135 110,178
Less current portion................................................... 3,276 2,624
--------- ---------
Total long-term debt................................................... $ 103,859 $ 107,554
--------- ---------
--------- ---------
</TABLE>
The Company must offer to purchase the senior unsecured notes at a price
equal to 101% of the principal amount upon the occurrence of a change in
control. The new senior notes contain restrictions on, among other things,
incurrence of debt, payment of dividends and repurchases of common stock.
The Company has mortgage notes and bonds payable collateralized by real
estate with an aggregate net book value of $4,222 at June 27, 1998.
Future maturities of long-term debt subsequent to June 27, 1998 are
summarized as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 3,276
2000.............................................................. 1,502
2001.............................................................. 1,120
2002.............................................................. 3,079
2003.............................................................. 92,591
Thereafter........................................................ 5,567
----------
$ 107,135
----------
----------
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
10. LEASES
The Company leases its retail store properties, certain warehouse
facilities and certain equipment under capital and operating leases. Generally,
leases are net leases that require the payment of executory expenses such as
real estate taxes, insurance, maintenance and other operating costs, in addition
to minimum rentals. The initial terms of the leases range from three to
twenty-five years and generally provide for renewal options.
Minimum annual rentals for all capital and operating leases having initial
noncancelable lease terms in excess of one year at June 27, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999............................................................ $ 9,398 $ 35,080
2000............................................................ 8,822 35,313
2001............................................................ 5,887 34,802
2002............................................................ 5,240 34,253
2003............................................................ 3,423 31,513
Thereafter...................................................... 10,610 124,321
-------- ---------
Total minimum lease payments.................................... 43,380 $ 295,282
---------
---------
Less amounts representing interest.............................. 9,195
--------
Present value of minimum lease payments......................... 34,185
Less current portion............................................ 7,051
--------
Long-term capital lease obligations............................. $ 27,134
--------
--------
</TABLE>
The operating leases on substantially all store properties, provide for
additional rentals when sales exceed specified levels and contain escalation
clauses. Rent expense for the fifty-two weeks ended June 27, 1998, the fifty-two
weeks ended June 28, 1997, the forty-three weeks ended June 29, 1996, and the
nine weeks ended September 2, 1995 was $31,921, $32,557, $26,278, and $5,660,
respectively, including $123, $145, $103, and $36 of additional rentals.
11. TRANSACTIONS WITH RELATED PARTIES
Successor Company
From September 11, 1995, to September 19, 1997, Hamilton Morgan LLC
("Hamilton Morgan") beneficially owned approximately 39.9% of the Company's
common stock. During this period, (a) Avatex owned 69.8% of Hamilton Morgan, and
Abbey J. Butler and Melvyn J. Estrin, Avatex's Co-Chairmen of the Board and
Co-Chief Executive Officers, served as directors of the Company, and (b) Robert
Haft owned 31.2% of Hamilton Morgan and served as Hamilton Morgan's President
and the Company's Chairman of the Board and Chief Executive Officer. On
September 19, 1997, under the terms of an agreement between Hamilton Morgan,
Robert Haft and Avatex (the "Hamilton Morgan Agreement"), Avatex acquired the
3,750,000 shares of the Company's common stock previously owned by Hamilton
Morgan in exchange for (i) the redemption of Avatex's membership interest in
Hamilton Morgan, (ii) the satisfaction of a certain promissory note from
Hamilton Morgan to Avatex and (iii) the transfer of certain other assets from
Avatex to Hamilton Morgan. Avatex now beneficially owns approximately 39.1% of
the Company's common stock.
In conjunction with the Hamilton Morgan Agreement, the Company entered into
a Severance Agreement with Robert Haft whereby he resigned his position as
Chairman of the Board of Directors and Chief Executive Officer and received a
lump sum cash payment of $4,417. Under the terms of the Severance Agreement, the
Company will continue to provide benefits to him through September 19, 2000. He
is indemnified and entitled to tax reimbursement in respect to any payments that
constitute excess parachute
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
11. TRANSACTIONS WITH RELATED PARTIES--(CONTINUED)
payments under Federal Income Tax laws. The Company is obligated to provide a
letter of credit in the amount of approximately $2,900 to secure its contractual
obligations under the Severance Agreement.
A subsidiary of Avatex, FoxMeyer Drug Company, supplied the Company with
pharmaceuticals and health and beauty care products under a long term contract
until November 1996, when substantially all of FoxMeyer Drug Company's assets
were acquired by McKesson Corporation. For the fifty-two weeks ended June 28,
1997, and the forty-three weeks ended June 29, 1996, the Company purchased
$71,298 and $179,841, respectively, of products from FoxMeyer Drug Company under
the contract.
In March 1998, 13 persons and entities purchased (or committed to purchase)
a total of $2,200 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 Company;
Avatex; two of the Company's executive officers, Abbey J. Butler and Melvyn J.
Estrin (and/or their designees); one Avatex officer, Edward L. Massman; one
non-officer director of Avatex; and five additional parties related to, or
referred to by, Abbey J. Butler or Melvyn J. Estrin. Of the total amount
invested, the Company's share was approximately 35.8%, Avatex's share was
approximately 35.8%, the Avatex officers/designees' share (including Messrs.
Butler and Estrin) was approximately 14.8%, the Avatex non-officer director's
share was approximately 1.1%, and the related parties' share was approximately
12.5%. The largest share invested by a Company officer or director (or his
designee) was approximately 6.8% of the total amount invested. Messrs. Butler,
Estrin and Shulman serve on the Board of Managers of Chemlink Laboratories, LLC.
The Company accounts for this investment using the equity method of accounting.
In April 1998, 13 persons and entities purchased (or committed to purchase)
a total of $3,000 of Series B Preferred Stock and warrants to purchase Series B
Preferred Stock of RAS Holding Corp. These persons and entities included the
Company; Avatex; two of the Company's executive officers, Melvyn J. Estrin and
Abbey J. Butler; all of Avatex's executive officers and its Director of
Accounting (and/or their designees); one non-officer director of Avatex; and two
additional parties related to, or referred to by, Abbey J. Butler or Melvyn J.
Estrin. Mr. Butler is also a director of RAS Holding Corp. Of the total amount
invested, Avatex's share was approximately 46.7%, the Company's share was 25%,
the Avatex officers/designees' share was 19.8%, the Avatex 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 Company (or his
designee) was 5% of the total amount invested. The Company accounts for this
investment using the cost method of accounting.
In April 1998, the Company and Avatex each purchased $1,250 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 Company and Avatex 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 and directors of HPD
Laboratories, Inc., a wholly owned subsidiary of HPD. The Company accounts for
this investment using the cost method of accounting.
During Fiscal Year 1998, the Company paid $10 to University Research
Corporation and $10 to Human Service Group, Inc. for secretarial services
provided to Mr. Estrin. Human Service Group, Inc. and University Research
Corporation are corporations wholly owned by Mr. Estrin.
The Company purchased $314 of product from AM Cosmetics, Inc. Mr. Butler
and Mr. Estrin were directors of AM Cosmetics, Inc. until September, 1998.
The Company purchased $241 of product from Carson Products, a subsidiary of
Carson, Inc. Mr. Butler and Mr. Estrin are directors of Carson, Inc. A
subsidiary of Avatex purchased a total of 372,000 shares of Carson class A
common stock in December 1997 and January 1998.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
11. TRANSACTIONS WITH RELATED PARTIES--(CONTINUED)
The Company paid CB Equities Corporation $52 for office and equipment
support for Mr. Butler. Mr. Butler is President of CB Equities Corporation.
Predecessor Company
Operating Leases--The Company leased various property and equipment from
related parties. Rental payments for the nine weeks ended September 2, 1995 were
$2,280.
12. COMMON STOCK, WARRANTS AND OPTIONS
Common Stock
A total of 12,156,250 common shares were issued and outstanding as of the
Effective Date. Pursuant to the Joint Plan, 10,000,000 common shares were issued
to prepetition creditors. Further, pursuant to the Joint Plan, 1,250,000 common
shares were issued by the Company to Hamilton Morgan, 50,000 common shares were
issued to Alvarez & Marsal, Inc., and 12,500 common shares were issued to
certain members of existing management in exchange for cash consideration at
$8.00 per share net of $1,000 in expenses incurred by Hamilton Morgan.
Additionally, 843,750 shares were distributed to Avatex as settlement for a
prepetition reclamation claim.
Warrants
Pursuant to the Joint Plan, warrants to purchase an aggregate of 1,250,000
common shares were issued as of the Effective Date to certain prepetition
unsecured creditors. Each warrant entitles the holder thereof to acquire one
common share at a price of $13.50, subject to certain adjustments, as defined in
the Joint Plan. The warrants are exercisable at any time until the close of
business on September 10, 2002. As of June 27, 1998, no warrants have been
exercised.
Stock Options
The Company has an incentive stock option plan for officers and key
employees which allows for the issuance of a maximum of 3,500,000 options. As of
June 27, 1998, options for 1,343,834 common shares were reserved for future
grant, and options for 2,079,500 shares were outstanding and are exercisable
upon vesting. Under the terms of the option plan, all options have a seven-year
term from date of grant. Generally, the options granted vest with respect to 20%
or 33 1/3% of the underlying shares on the grant date, and will vest in
additional increments of 20% or 33 1/3% of the underlying shares on each of the
subsequent anniversaries of the grant date until 100% vested. To the extent then
vested, the options are generally exercisable within one year following the
death or disability of the holder of the option, and within six months of any
termination event, except where a termination is for cause, in which case the
option will then terminate. To the extent then not vested, the options generally
will terminate upon the holders death, disability or termination of employment.
The employment agreements of certain executive officers provide for accelerated
vesting of options upon specified termination events.
The firm of Alvarez & Marsal, Inc. were granted fully vested stock options
for 416,667 shares of common stock on the Effective Date. The options are
exercisable at $8.00 per share and expire on September 11, 2002.
The Company has a stock option plan for directors. Before October 1, 1997,
each director received an annual grant of an option to purchase 5,000 shares of
Common Stock. Commencing with the grant on October 1, 1997, each director now
receives an annual grant of an option to purchase 10,000 shares of Common Stock
The options vest immediately, expire five years after the grant date and are
exercisable at an
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
12. COMMON STOCK, WARRANTS AND OPTIONS--(CONTINUED)
exercise price equal to the market price on the grant date. A maximum of 500,000
common shares may be granted under the stock option plan for directors.
As of June 27, 1998, options for 120,000 shares were outstanding.
Each director may also elect to receive common stock, in lieu of all or
portions of the director's annual retainer at a price equal to the market price
as of October 1 of the year of the election.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation. Accordingly, $1,401 in compensation cost for the
Company's stock option plans has been recognized in the accompanying
consolidated financial statements. Had compensation cost for the Company's plans
been determined based on the fair value at the grant date instead of the
intrinsic value method described above for the awards granted in 1996, 1997, and
1998 the Company's net (loss) income and net (loss) income per share would have
been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FORTY-THREE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income
As reported..................................................... $ (8,830) $(2,281) $ 2,526
Pro forma....................................................... $ (11,654) $(2,541) $ 2,364
Basic and diluted earnings per share
As reported..................................................... $ (0.72) $ (0.19) $ 0.21
Pro forma....................................................... $ (0.96) $ (0.21) $ 0.19
</TABLE>
The fair value of each option has been estimated on the date of grant using
the Black-Scholes options pricing model with the following assumptions for the
periods presented: expected volatility of 30%; no dividend yield; expected life
of 7 years; and a risk-free interest rate of 6.5%.
All of the Company's Stock Option Plans are administered by the
Compensation Committee of the Company's Board of Directors.
As of June 27, 1998, 1,452,579 options were exercisable at a weighted
average exercise price per share of $7.70.
The following table summarizes stock option activity under the plans:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
OPTIONS EXERCISE OPTION PRICE CONTRACTUAL
OUTSTANDING PRICE PER SHARE PER SHARE LIFE (YEARS)
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 2, 1995.......................... 1,225,917 $8.00 $8.00 7.00
Granted............................................... 248,800 $7.53 $7.06--$8.00
Forfeited............................................. (116,100) $8.00 $8.00
---------
Balance at June 29, 1996.............................. 1,358,617 $7.91 $7.06--$8.00 6.22
Granted............................................... 100,000 $5.66 $5.44--$6.17
Forfeited............................................. (137,800) $7.82 $7.06--$8.00
---------
Balance at June 28, 1997.............................. 1,320,817 $7.75 $5.44--$8.00 5.30
Granted............................................... 1,840,000 $7.83 $5.44--$9.63
Forfeited............................................. (467,984) $7.00 $5.44--$8.00
Exercised............................................. (76,666) $7.50 $6.50--$8.00
---------
Balance at June 27, 1998.............................. 2,616,167 $7.92 $5.44--$9.63 5.71
---------
---------
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
12. COMMON STOCK, WARRANTS AND OPTIONS--(CONTINUED)
On February 17, 1998, the Company granted options to purchase 375,000
shares at $5.4375 and options to purchase 400,000 shares at $6.84375. These
options were issued below the market price of $9.6875 on this date. All of the
remaining options were granted at the market price on the date of the grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company sponsors an Employee Stock Purchase Plan ("ESPP") under which
it is authorized to issue up to 500,000 shares of common stock to all employees
with a minimum of three months of service. The ESPP allows eligible employees to
contribute through payroll deductions up to 10% of their annual salary toward
stock purchases. Stock purchases will be made quarterly at 90% of the closing
price at the last day of any calendar quarter.
13. INCOME TAXES
Deferred taxes at June 27, 1998 and June 28, 1997, reflect the net tax
effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Deferred tax assets are recognized to the extent that realization of
such benefits is more likely than not. Changes in tax rates or laws will result
in adjustments to the recorded deferred tax assets or liabilities in the period
that the change is enacted.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
---------------- ----------------
<S> <C> <C>
Deferred Tax Assets:
Operating and restructuring reserves.............................................. $ 5,495 $ 7,448
Net operating losses.............................................................. 114,293 116,399
Depreciation and amortization..................................................... 28,411 27,078
Lease escalation accruals......................................................... 4,470 5,030
Jobs tax credit................................................................... 4,432 4,432
Other items....................................................................... 3,730 767
---------- ----------
160,831 161,154
Valuation allowance............................................................... (151,061) (151,384)
---------- ----------
Net deferred tax assets........................................................... $ 9,770 $ 9,770
---------- ----------
---------- ----------
Composition of amounts in Consolidated Balance Sheet:
Deferred tax assets--current...................................................... $ 489 $ 515
Deferred tax liabilities--current................................................. -- --
---------- ----------
Net deferred tax assets--current.................................................. $ 489 $ 515
---------- ----------
---------- ----------
Deferred tax assets--noncurrent................................................... $ 9,281 $ 9,255
Deferred tax liabilities--noncurrent.............................................. -- --
---------- ----------
Net deferred tax assets--noncurrent............................................... $ 9,281 $ 9,255
---------- ----------
---------- ----------
</TABLE>
Deferred tax assets, arising both from future deductible temporary
differences and net operating losses ("NOLs"), have been reduced by a valuation
allowance to an amount more likely than not to be realized through the future
reversal of existing taxable temporary differences. Any future reversal of the
valuation allowance existing at the Effective Date to increase the net deferred
tax asset will be added to additional paid-in capital.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
13. INCOME TAXES--(CONTINUED)
There is no current income tax provision. A reconciliation of the total tax
provision with the amount computed by applying the statutory federal income tax
rate to (loss) income before taxes is as follows:
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 28, JUNE 29, SEPTEMBER 2,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Statutory tax rate..................................... (35.0)% (35.0)% 35.0% 35.0%
State income taxes, net of federal benefit............. -- -- 5.1 --
Nontaxable forgiveness of indebtedness................. -- -- -- (29.1)
Depreciation........................................... -- -- -- (0.4)
Restructuring reserves................................. -- -- -- (5.3)
Change in valuation allowance.......................... 35.0 35.0 -- 0.3
Other, net............................................. -- -- 5.8 (0.5)
----- ----- ----- ------
Effective tax rate..................................... 0.0% 0.0% 45.9% 0.0%
----- ----- ----- ------
----- ----- ----- ------
</TABLE>
The Company has approximately $279,000 of tax basis NOLs available to
offset future taxable income. Approximately $263,000 of this amount ("Section
382 NOLs") is subject to restrictions enacted in the Internal Revenue Code of
1986, as amended, dealing specifically with stock ownership changes and debt
cancellations that occurred in connection with the Company's emergence from
bankruptcy. Additional restrictions imposed by Internal Revenue Code Section
382(I)(6), and the regulations thereunder, could further limit the Company's
ability to use its Section 382 NOLs to offset future income to an amount
approximating $5,100 annually. The remaining $16,000 of NOLs were incurred
subsequent to September 2, 1995, and may be used to offset future taxable income
without restriction. These NOLs will expire beginning in 2008.
The Company also has $4,432 of federal targeted jobs tax credit carryovers,
which will expire beginning in 2001.
The Internal Revenue Service has completed its field examination of the
Company's federal income tax returns for all years to and including June 1992.
14. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
The Company provides pension benefits under noncontributory defined benefit
pension plans to its union employees who have met the applicable age and service
requirements specified in the plans.
Benefits are earned on the basis of credited service and average
compensation over a period of years. Vesting occurs after five years of service
as specified under the plans. The Company makes contributions to the plans as
necessary to satisfy the minimum funding requirement of ERISA.
The Company provided pension benefits under noncontributory defined benefit
pension plans to its non-union employees who have met the applicable age and
service requirements specified in the plans. During fiscal 1996 the Company's
Board of Directors voted to freeze the benefits accruing under its defined
benefit plan that covers non-union personnel effective June 29, 1996 and to
increase the Company's matching contribution to the defined contribution plan
for those employees. The Company terminated its defined benefit plan that covers
non-union personnel on April 30, 1998. Lump sum cash payments were made to the
majority of plan participants prior to June 27, 1998. Annuities will be
purchased for the remaining participants during the fifty-three weeks ended
July 3, 1999.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
14. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The following table sets forth the funded status of the Company's defined
benefit pension plans and the amounts recognized in the Company's consolidated
balance sheets:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$4,011 and $9,076.......................................... $ 4,013 $ 9,498
Additional amounts related to future salary increases......... 1,162 764
------- -------
Projected benefit obligation.................................... 5,175 10,262
Plan assets, at fair value...................................... 3,589 8,829
------- -------
Projected benefit obligation in excess of plan assets........... 1,586 1,433
Unrecognized net (loss)/gain.................................... (309) 1,335
Unrecognized prior service costs................................ (1) (1)
Unrecognized transition asset................................... 1 5
------- -------
Accrued pension costs........................................... $ 1,277 $ 2,772
------- -------
------- -------
</TABLE>
The significant assumptions used in determining the pension obligations
are:
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
Discount rate................................................... 6.5% 6.3%
Expected long-term rate of return on assets..................... 8.5 8.5
Rate of increase in future compensation levels.................. 4.0 4.0
</TABLE>
Assets of the plans consist primarily of investments in stock and bond
pooled funds.
The net pension expense consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------- ------------
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE WEEKS
WEEKS ENDED WEEKS ENDED WEEKS ENDED ENDED
JUNE 27, JUNE 28, JUNE 29, SEPTEMBER 2,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Service costs.......................................... $ 170 $ 85 $ 875 $179
Interest cost on projected benefit obligation.......... 668 622 698 104
Actual net return on assets............................ (1,783) (1,584) (1,746) (97)
Net amortization (deferral)............................ 1,010 933 1,186 2
------- ------- ------- ----
Net periodic pension cost.............................. 65 56 1,013 188
Settlement effect from lump sum cashouts............... (1,446) -- -- --
------- ------- ------- ----
Net pension (income) expense........................... $(1,381) $ 56 $ 1,013 $188
------- ------- ------- ----
------- ------- ------- ----
</TABLE>
Defined Contribution Plans
The Company has defined contribution employee savings plans covering
employees who meet the eligibility requirements as described in the plans. The
Company contributes to these plans an amount equal to 25% of an employee's
contribution up to a maximum of 4% of the employee's compensation. The Company
increased its contribution to the nonunion employee savings plan beginning in
fiscal 1997 to 100% of the employees contribution up to 2% of the employees pay
and 20% of the employees contribution in excess of 2% up to 4% of employees pay.
Employee savings plan expenses for the fifty-two weeks ended June 27, 1998, the
fifty-two weeks ended June 28, 1997, the forty-three weeks ended June 29, 1996,
and the nine weeks ended September 2, 1995 were $1,009, $980, $281, and $65,
respectively.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
14. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Health and Welfare Plans
The Company also contributes to a multiemployer union sponsored health and
welfare plan covering truck drivers and warehouse personnel. Total expenses for
the fifty-two weeks ended June 27, 1998, the fifty-two weeks ended June 28,
1997, the forty-three weeks ended June 29, 1996, and the nine weeks ended
September 2, 1995, were $1,858, $1,303, $896, and $196, respectively.
The Company has no postretirement health and welfare or benefits programs.
15. PREDECESSOR COMPANY INTEREST EXPENSE
Interest expense for the Predecessor Company, for which disclosure is
required by SOP 90-7, consists of the following:
<TABLE>
<CAPTION>
NINE WEEKS ENDED
SEPTEMBER 2, 1995
-----------------
<S> <C>
Prepetition credit facility interest................... $ 3,164
Senior notes........................................... 1,695
Adequate protection term loans and capitalized
equipment leases..................................... 776
Amortization of deferred debt expense.................. 44
Other.................................................. 10
-------
$ 5,689
-------
-------
</TABLE>
Generally, as a result of the bankruptcy, the contractual terms of
prepetition debt obligations are suspended. Only creditors who are secured by
collateral, the value of which exceeds their prepetition claims, are entitled to
accrue interest on those claims after a bankruptcy filing. Subsequent to the
bankruptcy filing, the Company continued to accrue interest on the revolving
credit loan and senior notes at the contractual rates. During October 1992, the
Company entered into agreements with lenders to make adequate protection
payments at rates less than those specified as interest in the respective
agreements. The difference between these amounts is reflected in liabilities
subject to settlement under reorganization proceedings. With respect to the
remainder of the secured debt and capitalized lease obligations, the Company
accrued only the adequate protection payments it anticipated would be required.
The difference between the interest which would have accrued at the contractual
rates and the adequate protection payments related to the remaining secured debt
and capitalized lease obligations was $2,846 for the nine weeks ended
September 2, 1995. The Company did not accrue or pay interest on the unsecured
debt subsequent to the bankruptcy filing. The unaccrued interest on the
unsecured debt was $1,051 for the nine weeks ended September 2, 1995.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
16. REORGANIZATION ITEMS AND RELATED RESERVES
Reorganization items consist of the following:
<TABLE>
<CAPTION>
NINE WEEKS ENDED
SEPTEMBER 2, 1995
-----------------
<S> <C>
Chapter 11 professional fees........................... $ 9,373
Amortization of prepetition exclusivity income......... (283)
Interest income........................................ (2,171)
Amortization of post-petition credit facility
origination fees..................................... 29
Insurance claim recovery............................... (6,650)
Costs of downsizing.................................... 16,500
-------
$16,798
-------
-------
</TABLE>
Costs of Downsizing
In September 1992, the Company made a decision to downsize the chain, and
in October 1992 commenced a store closing program. The program involved the
closing of 143 of the Company's stores that management considered not viable. In
conjunction with the program to downsize the chain, the Company also
consolidated its distribution centers into one location in Youngstown, Ohio and
reduced corporate overhead. The Company identified for closure an additional 25
stores in fiscal 1994 and 41 stores in fiscal 1995. In August 1995 management
identified 50 stores which were scheduled to be reduced in size (rightsized) and
provided for the cost of rightsizing and provided a markdown reserve for the
inventories which would be liquidated in the affected stores. In 1997, the
rightsizing program was replaced with the "Warehouse District" concept. The
"Warehouse District" concept involves liquidating slow-moving merchandise and
utilizes the excess space to expand the existing grocery offering and adds
frozen and refrigerated food.
The consolidated statements of operations reflect reorganization expenses
related to the downsizings as follows:
<TABLE>
<CAPTION>
NINE WEEKS ENDED
SEPTEMBER 2, 1995
-----------------
<S> <C>
Downsizing reserve..................................... $ 2,500
Inventory markdown reserve............................. 14,000
-------
$16,500
-------
-------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
16. REORGANIZATION ITEMS AND RELATED RESERVES--(CONTINUED)
The activity in the reserve for costs of downsizing is as follows:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------- ------------
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, JUNE 28, JUNE 29, SEPTEMBER 2,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of period.............................. $ 1,866 $ 3,451 $ 7,301 $ 6,564
Additions to reserve...................................... -- -- -- 2,500
Charges associated with closed stores..................... -- (462) (1,772) (1,690)
Store rightsizing costs................................... (899) (895) (640) --
Corporate and distribution center costs................... -- (228) (1,438) (73)
------- ------- ------- --------
$ 967 $ 1,866 $ 3,451 $ 7,301
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
The remainder of the reserve for the costs of downsizing at June 27, 1998
is considered by management to be a reasonable estimate of the costs to be
incurred related to the downsizings. To the extent additional stores or
distribution centers are identified for closure at a later date or the estimates
for write-downs or reserves for the current downsizing program require
adjustment, such adjustments will be recognized in future periods.
17. FINANCIAL INSTRUMENTS
The Company has financial instruments which include marketable securities,
investments and long-term debt. The carrying values of all instruments at
June 27, 1998 approximated their fair market value.
The fair values of the instruments were based upon quoted market prices of
the same or similar instruments or on the rate available to the Company for
instruments of the same maturities.
18. NONCASH INVESTING AND FINANCING ACTIVITIES
On September 29, 1995 the Company and one of its subsidiaries purchased all
of the partnership interests in the partnership that owns the building in which
the Company's headquarters is located for $145. Also, the partnership has a 50%
interest in another partnership which owns a commercial building. In conjunction
with the acquisition, assets and liabilities were assumed in the forty-three
weeks ended June 29, 1996, as follows:
<TABLE>
<S> <C>
FAIR VALUE OF ASSETS ACQUIRED:
Accounts receivable.................................................................................. 37
Land, buildings and leasehold interests.............................................................. 4,735
Goodwill and other assets............................................................................ 1,958
LIABILITIES AND MINORITY INTEREST ASSUMED:
Accounts payable..................................................................................... 25
Accrued expenses..................................................................................... 205
Mortgage notes and bonds payable..................................................................... 5,820
Minority interest.................................................................................... 535
</TABLE>
For the fifty-two weeks ended June 27, 1998, the Company entered into a
capital lease which increased property and equipment and capital lease
obligations $2,178.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
FISCAL 1998 SEPTEMBER 27, 1997 DECEMBER 27, 1997 MARCH 28, 1998 JUNE 27, 1998
- ------------------------------------------- ------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales...................................... $ 256,332 $ 292,212 $ 277,319 $ 275,988
Gross profit............................... $ 48,130 $ 57,992 $ 53,623 $ 53,449
Net (loss) income.......................... $ (7,571) $ 2,778 $ (4,712) $ 675
Net (loss) income per basic share.......... $ (0.62) $ 0.23 $ (0.39) $ 0.06
Weighted average number of basic shares
outstanding.............................. 12,159,199 12,165,353 12,229,071 12,235,865
Net (loss) income per diluted share........ $ (0.62) $ 0.23 $ (0.39) $ 0.05
Weighted average number of diluted shares
outstanding.............................. 12,159,199 12,212,527 12,229,071 12,790,933
</TABLE>
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
FISCAL 1997 SEPTEMBER 28, 1996 DECEMBER 28, 1996 MARCH 29, 1997 JUNE 28, 1997
- ------------------------------------------- ------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales...................................... $ 264,551 $ 290,933 $ 264,043 $ 255,301
Gross profit............................... $ 45,460 $ 54,990 $ 50,451 $ 50,832
Net (loss) income.......................... $ (2,195) $ (548) $ 49 $ 413
Net (loss) income per basic share.......... $ (0.18) $ (0.05) $ -- $ 0.03
Weighted average number of basic shares
outstanding.............................. 12,157,054 12,157,054 12,157,054 12,158,515
Net (loss) income per diluted share........ $ (0.18) $ (0.05) $ -- $ 0.03
Weighted average number of diluted shares
outstanding.............................. 12,157,054 12,157,054 12,157,054 12,158,515
</TABLE>
20. (LOSS) INCOME PER SHARE
During 1997, the Company adopted SFAS No. 128 "Earnings per Share." This
standard requires the Company to present basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding during the period. The diluted earnings per
share calculation assumes the conversion of dilutive stock options and warrants
into common shares.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
20. (LOSS) INCOME PER SHARE--(CONTINUED)
Previously reported earnings per share information have been restated as a
result of the adoption. The earnings per share calculations for all periods are
as follows:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------------- ------------------
FIFTY-TWO FIFTY-TWO FORTY-THREE NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 SEPTEMBER 2, 1995
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
BASIC (LOSS) INCOME PER SHARE
Net (loss) income available for common
shares...................................... $ (8,830) $ (2,281) $ 2,526 $ 764,684
Basic weighted average common shares
outstanding................................. 12,197,371 12,157,419 12,156,614 54,066,463
Basic earnings per share...................... $ (.72) $ (.19) $ .21 $ 14.14
DILUTED (LOSS) INCOME PER SHARE
Net (loss) income available for common
shares...................................... $ (8,830) $ (2,281) $ 2,526 $ 764,684
Diluted weighted average common shares........ 12,197,371 12,157,419 12,162,095 54,066,463
Diluted earnings per share.................... $ (.72) $ (.19) $ .21 $ 14.14
</TABLE>
There were 2,616,167; 1,320,817 and 1,358,617 options for the fifty-two
weeks ended June 27, 1998, the fifty-two weeks ended June 28, 1997 and the
forty-three weeks ended June 29, 1996, respectively, and 1,250,000 warrants for
the fifty-two weeks ended June 27, 1998, the fifty-two weeks ended June 28, 1997
and the forty-three weeks ended June 29, 1996 excluded from the calculation of
diluted (loss) income per share as they would have had an anti-dilutive effect
on (loss) income per share.
21. LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings, claims and litigation
will not have a material impact on the Company's consolidated financial
position.
22. TERMINATED BUSINESS COMBINATION
The Company entered into an Agreement and Plan of Reorganization dated
September 7, 1996 (as amended as of October 9, 1996) with ShopKo Stores, Inc.
("ShopKo") and Cabot Noble, Inc. ("Cabot Noble").
On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a
Termination Agreement mutually terminating the Agreement Plan of Reorganization
effective as of April 1, 1997.
The Company has expensed all fees and costs it has incurred and is
obligated to pay in connection with the Proposed Transaction.
F-29
<PAGE>
SCHEDULE II
PHAR-MOR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSE CHARGE-OFFS PERIOD
- -------------------------------------------------------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
9 weeks ended September 2, 1995............................. $ 4,917 $ 350 $ (645) $ 4,622
43 weeks ended June 29, 1996................................ 4,622 3,106 (3,537) 4,191
52 weeks ended June 28, 1997................................ 4,191 1,382 (2,870) 2,703
52 weeks ended June 27, 1998................................ 2,703 (186) (1,115) 1,402
INVENTORY SHRINK RESERVE
9 weeks ended September 2, 1995............................. $ 5,495 $ 3,100 $ (836) $ 7,759
43 weeks ended June 29, 1996................................ 7,759 16,385 (17,675) 6,469
52 weeks ended June 28, 1997................................ 6,469 13,122 (13,968) 5,623
52 weeks ended June 27, 1998................................ 5,623 6,310 (8,009) 3,924
INVENTORY MARKDOWN RESERVE
9 weeks ended September 2, 1995............................. -- $ 14,000 -- $ 14,000
43 weeks ended June 29, 1996................................ $ 14,000 -- $ (8,639) 5,361
52 weeks ended June 28, 1997................................ 5,361 -- (4,616) 745
52 weeks ended June 27, 1998................................ 745 -- (745) --
</TABLE>
F-30
<PAGE>
EXCERPTED FROM PHAR-MOR, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR ITS FISCAL QUARTER ENDED MARCH 27, 1999
F-31
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27, 1999 JUNE 27, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 17,020 $ 44,655
Marketable securities............................................................ 3,469 9,065
Accounts receivable--net......................................................... 23,129 20,927
Merchandise inventories.......................................................... 226,676 176,069
Prepaid expenses and other current assets........................................ 2,420 2,703
-------- ---------
Total current assets.......................................................... $272,714 $ 253,419
-------- ---------
-------- ---------
PROPERTY AND EQUIPMENT--NET........................................................ $ 93,534 $ 75,512
GOODWILL........................................................................... 16,500 1,667
DEFERRED TAX ASSET................................................................. 8,143 9,281
INVESTMENTS........................................................................ 7,301 4,275
INVESTMENT IN AVATEX............................................................... 1,694 3,525
OTHER ASSETS....................................................................... 5,402 1,776
-------- ---------
Total assets.................................................................. $405,288 $ 349,455
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $106,796 $ 67,091
Accrued expenses and other current liabilities................................... 40,160 39,316
Current portion of long-term debt and capital lease obligations.................. 10,127 10,327
-------- ---------
Total current liabilities..................................................... $157,083 $ 116,734
-------- ---------
-------- ---------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS....................................... $123,900 $ 130,993
REVOLVING CREDIT FACILITY.......................................................... 20,050 --
LONG-TERM SELF INSURANCE RESERVES.................................................. 7,348 7,680
DEFERRED RENT AND UNFAVORABLE LEASE LIABILITY--NET................................. 11,649 11,074
-------- ---------
Total liabilities............................................................. $320,030 $ 266,481
-------- ---------
-------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS............................................................... $ 535 $ 535
-------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock.................................................................. $ -- $ --
Common stock..................................................................... 122 122
Additional paid-in capital....................................................... 90,007 89,976
Stock options outstanding........................................................ 1,951 1,401
Unrealized loss on investment in Avatex, net of related tax effect of $1,131 and
$0, respectively.............................................................. (2,174) (475)
Retained deficit................................................................. (5,183) (8,585)
-------- ---------
Total stockholders' equity.................................................... 84,723 82,439
-------- ---------
Total liabilities and stockholders' equity.................................... $405,288 $ 349,455
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-32
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
-------------------- --------------------
<S> <C> <C>
Sales............................................................... $ 290,928 $ 277,319
Less:
Cost of goods sold, including occupancy and distribution
costs.......................................................... 235,910 223,696
Selling, general and administrative expenses...................... 44,482 44,236
Chief Executive Officer severance expenses........................ -- 720
Loss on disposal of equipment..................................... -- 4,615
Depreciation and amortization..................................... 5,992 5,463
------------ ------------
Income (loss) from operations before interest expense, interest
income, investment income and income taxes........................ 4,544 (1,411)
Interest expense.................................................... (3,877) (4,194)
Interest income..................................................... 797 839
Investment income................................................... 483 54
------------ ------------
Income (loss) before income taxes................................... 1,947 (4,712)
Income taxes........................................................ 780 --
Net Income (loss)................................................... $ 1,167 $ (4,712)
------------ ------------
------------ ------------
Basic income (loss) per common share................................ $ .10 $ (.39)
------------ ------------
------------ ------------
Diluted income (loss) per common share.............................. $ .09 $ (.39)
------------ ------------
------------ ------------
Weighted average number of basic common shares
outstanding....................................................... 12,240,865 12,229,071
Weighted average number of diluted common shares
outstanding....................................................... 12,317,051 12,229,071
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-33
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED THIRTY-NINE WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
----------------------- -----------------------
<S> <C> <C>
Sales.......................................................... $ 857,329 $ 825,863
Less:
Cost of goods sold, including occupancy and distribution
costs..................................................... 692,792 666,118
Selling, general and administrative expenses................. 130,681 131,834
Chief Executive Officer severance expenses................... 6,387
Loss on disposal of equipment................................ 4,615
Depreciation and amortization................................ 17,270 16,518
----------- -----------
Income from operations before interest expense, interest
income, investment (loss) Income and income taxes............ 16,586 391
Interest expense............................................... (11,761) (12,562)
Interest income................................................ 1,568 2,612
Investment (loss) income....................................... (721) 54
----------- -----------
Income (loss) before income taxes.............................. 5,672 (9,505)
Income taxes................................................... 2,270 --
----------- -----------
Net income (loss).............................................. $ 3,402 $ (9,505)
----------- -----------
----------- -----------
Basic income (loss) per common share........................... $ .28 $ (.78)
----------- -----------
----------- -----------
Diluted income (loss) per common share......................... $ .28 $ (.78)
----------- -----------
----------- -----------
Weighted average number of basic common shares outstanding..... 12,240,517 12,184,541
Weighted average number of diluted common shares outstanding... 12,306,320 12,184,541
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-34
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
-------------------- --------------------
<S> <C> <C>
Net income (loss)................................................... $ 1,167 $ (4,712)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex arising during
period......................................................... (1) --
-------- --------
Comprehensive income (loss)......................................... $ 1,166 $ (4,712)
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-35
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED THIRTY-NINE WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
----------------------- -----------------------
<S> <C> <C>
Net income (loss).............................................. $ 3,402 $ (9,505)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex arising
during period net of tax benefit of $1,131................ (1,699) --
--------- ---------
Comprehensive income (loss).................................... $ 1,703 $ (9,505)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED THIRTY-NINE WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
----------------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ 3,402 $ (9,505)
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Items not requiring the outlay of cash:
Depreciation............................................ 11,813 10,470
Amortization of video rental tapes...................... 5,374 6,048
Loss on disposal of equipment........................... -- 4,615
Stock option expense.................................... 549 1,218
Amortization of deferred financing costs and goodwill... 183 315
Deferred income taxes................................... 2,270 --
Deferred rent........................................... (483) (438)
Gain on equity method investment........................ (735) --
Changes in assets and liabilities:........................
Accounts receivable..................................... (586) (4,429)
Marketable securities................................... 5,596 (11,546)
Merchandise inventories................................. (15,271) (14,832)
Prepaid expenses........................................ 586 511
Other assets............................................ (21) (516)
Accounts payable........................................ (5,711) 9,428
Accrued expenses and other current liabilities.......... (9,960) (4,245)
--------- ---------
Net cash used for operating activities....................... (2,994) (12,906)
--------- ---------
INVESTING ACTIVITIES
Additions to rental videotapes............................... (6,000) (6,377)
Additions to property and equipment.......................... (18,631) (14,539)
Proceeds on sale of property and equipment................... 110 --
Investment in Avatex......................................... (1,000) --
Investment in Pharmhouse Corp., net of $3,292 cash
acquired.................................................. (4,608) --
Investment in equity securities.............................. (2,291) --
Net cash used for investing activities....................... (32,420) (20,916)
FINANCING ACTIVITIES
Borrowings under revolving credit facility................... 20,050 --
Principal payments on long-term debt......................... (28,959) (1,694)
Principal payments on capital lease obligations.............. (5,280) (5,399)
Bank overdrafts.............................................. 21,687 --
Additions to long-term debt.................................. 250 --
Issuance of common stock..................................... 31 574
Net cash provided by (used for) financing activities......... 7,779 (6,519)
--------- ---------
Decrease in cash and cash equivalents........................ (27,635) (40,341)
Cash and cash equivalents, beginning of period............... 44,655 79,847
--------- ---------
Cash and cash equivalents, end of period..................... $ 17,020 $ 39,506
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. They do not include all
information and footnotes which would be required by generally accepted
accounting principles for complete financial statements. In the opinion of
management of Phar-Mor, Inc. (the "Company") and its subsidiaries, these interim
financial statements contain all adjustments considered necessary for a fair
presentation of financial position, results of operations, comprehensive income
(loss) and cash flows for the periods presented. Reference should be made to the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 for
additional disclosures, including a summary of the Company's accounting
policies, which have not changed, except as discussed in Note 3. Operating
results for the thirty-nine weeks ended March 27, 1999 are not necessarily
indicative of the results that may be expected for the fifty-three weeks ending
July 3, 1999.
2. CHIEF EXECUTIVE OFFICER RESIGNATION
On September 19, 1997, Robert Haft and Avatex Corporation ("Avatex")
finalized an agreement regarding Hamilton Morgan LLC ("Hamilton Morgan"), (the
"Hamilton Morgan Agreement"). In exchange for 3,750,000 shares of the Company's
stock and the return of a voting proxy on other Company shares, Hamilton Morgan
redeemed the 69.8% Avatex interest in Hamilton Morgan, repaid certain
indebtedness and received other consideration. Avatex beneficially owns 39.1% of
the Company's outstanding common stock. In conjunction with the Hamilton Morgan
Agreement, the Company entered into a Severance Agreement with Robert Haft
whereby he resigned his positions as Chairman of the Company's Board of
Directors and as the Company's Chief Executive Officer and received a lump sum
cash payment of $4,417. Under the terms of the Severance Agreement, the Company
will continue to provide benefits to him through September 19, 2000. He is
indemnified and entitled to tax reimbursement in respect to any payments that
constitute excess parachute payments under Federal Income Tax laws. The Company
has provided a letter of credit in the amount of approximately $2,900 to secure
its contractual obligations under the Severance Agreement.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting comprehensive income and its
components, some of which have been historically excluded from the Consolidated
Statement of Operations and recorded directly to the equity section of an
entities statement of financial position. SFAS No. 130 also requires that the
cumulative balance of these items of other comprehensive income are reported
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997. The Company adopted SFAS
No. 130 in 1998 and has elected to include the required items of other
comprehensive income in its Condensed Consolidated Statements of Comprehensive
Income (Loss).
4. LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings, claims and litigation
will not have a material impact of the Company's consolidated financial position
or results of operations.
F-38
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)--(CONTINUED)
5. INVESTMENT IN AVATEX
During the thirty-nine weeks ended March 27, 1999, the Company invested
$1,000 to purchase approximately 3.4% of Avatex common stock, bringing its total
investment in Avatex to approximately 15.1% of Avatex's total outstanding common
stock. This investment is carried at market value as available-for-sale
securities. Unrealized losses on these securities are excluded from net income
but are included as a comprehensive income (loss) in the Condensed Consolidated
Statements of Comprehensive Income (Loss). As of March 27, 1999, the quoted
market price of Avatex common stock was $.812 per share as compared to $2.1875
per share at June 27, 1998. To the extent that the Company determines in the
future that an other than temporary decline in the common stock value has
occurred, the write-down of the investment will be included in the Consolidated
Statement of Operations.
6. BUSINESS COMBINATION
On March 15, 1999, Phar-Mor, Inc. ("Phar-Mor") completed the merger of its
wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into
Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger
dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger
Agreement"). As a result of the merger Pharmhouse became a wholly owned
subsidiary of Phar-Mor. In addition, subject to the terms of the Merger
Agreement, each share of the common stock of Pharmhouse was converted into the
right to receive $2.88 per share in cash (the "Merger").
Phar-Mor and PAC financed the payment of the purchase price and all other
fees and expenses associated with the Merger through cash from operations and
from borrowings under the Company's revolving credit facility.
The Merger was accounted for under the purchase method of accounting. The
results of operations of Pharmhouse from March 16, 1999 through March 27, 1999
have been included in the Condensed Consolidated Statements of Operations for
both the thirteen and thirty-nine weeks ended March 27, 1999. The total purchase
price payable in connection with the Merger was approximately $34.2 million,
consisting of $7.5 million in cash and the assumption of $26.7 million in debt.
Goodwill is being amortized using the straight-line method over a period of 25
years. The fair value of the assets acquired and liabilities assumed was as
follows:
<TABLE>
<S> <C>
Identifiable assets acquired........................... $ 54,962
Liabilities assumed.................................... (61,954)
Goodwill............................................... 14,866
--------
Cash paid.............................................. $ 7,874
--------
--------
</TABLE>
The following supplemental pro forma information is presented as though the
companies combined at the beginning of the respective periods:
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
MARCH 27, 1999 MARCH 28, 1998
-------------- --------------
<S> <C> <C>
Sales....................................... $ 988,012 $ 972,605
---------- ----------
---------- ----------
Net loss.................................... (3,074) (13,549)
---------- ----------
Basic and diluted loss per common share..... $(.25) $(1.11)
</TABLE>
F-39
<PAGE>
ANNEX G
262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further provided that
no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Section Section 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation
G-1
<PAGE>
or the sale of all or substantially all of the assets of the corporation. If the
certificate of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this section,
shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
G-2
<PAGE>
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
G-3
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
G-4
