<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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5910 N. CENTRAL EXPRESSWAY,
SUITE 1780,
DALLAS, TEXAS 75206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
214-365-7450
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /.
Number of shares of Common Stock outstanding as of October 1, 1999:
13,806,487 shares 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.
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<PAGE>
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED SEPTEMBER 30,
------------------------
1999 1998
------- -------
<S> <C> <C>
OPERATING COSTS:
Operating costs, including general and administrative costs............................. $ 2,180 $ 1,959
Depreciation and amortization........................................................... 10 10
------- -------
TOTAL OPERATING COSTS..................................................................... (2,190) (1,969)
OTHER INCOME (EXPENSE).................................................................... 443 (703)
INTEREST AND DIVIDEND INCOME.............................................................. 615 569
INTEREST EXPENSE.......................................................................... 194 189
------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSS OF AFFILIATES....................... (1,326) (2,292)
Equity in loss of affiliates.............................................................. (1,691) (607)
------- -------
LOSS FROM CONTINUING OPERATIONS........................................................... (3,017) (2,899)
DISCONTINUED OPERATIONS:
Gain from discontinued operations, net of tax........................................... -- 115
Gain on disposal of discontinued operations, net of tax................................. 2,366 --
------- -------
NET LOSS.................................................................................. (651) (2,784)
Preferred stock dividends................................................................. 7,668 6,957
------- -------
LOSS APPLICABLE TO COMMON STOCKHOLDERS.................................................... $(8,319) $(9,741)
------- -------
------- -------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations......................................................... $ (0.82) $ (0.76)
Discontinued operations................................................................. 0.18 0.01
------- -------
LOSS PER SHARE............................................................................ $ (0.64) $ (0.75)
------- -------
------- -------
Average number of common shares outstanding............................................... 13,005 13,020
------- -------
COMPREHENSIVE LOSS........................................................................ $(1,470) $(5,557)
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING COSTS:
Operating costs, including general and administrative costs.............................. $ 4,254 $ 3,939
Depreciation and amortization............................................................ 21 21
-------- --------
TOTAL OPERATING COSTS...................................................................... (4,275) (3,960)
OTHER EXPENSE.............................................................................. (293) (2,390)
INTEREST AND DIVIDEND INCOME............................................................... 1,084 1,160
INTEREST EXPENSE........................................................................... 379 395
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSS OF AFFILIATES........................ (3,863) (5,585)
Equity in loss of affiliates............................................................... (2,890) (350)
-------- --------
LOSS FROM CONTINUING OPERATIONS............................................................ (6,753) (5,935)
DISCONTINUED OPERATIONS:
Gain from discontinued operations, net of tax............................................ 259 569
Gain on disposal of discontinued operations, net of tax.................................. 7,935 --
-------- --------
NET INCOME (LOSS).......................................................................... 1,441 (5,366)
Preferred stock dividends.................................................................. 15,150 13,749
-------- --------
LOSS APPLICABLE TO COMMON STOCKHOLDERS..................................................... $(13,709) $(19,115)
-------- --------
-------- --------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations.......................................................... $ (1.68) $ (1.49)
Discontinued operations.................................................................. 0.63 0.04
-------- --------
LOSS PER SHARE............................................................................. $ (1.05) $ (1.45)
-------- --------
-------- --------
Average number of common shares outstanding................................................ 13,005 13,198
-------- --------
COMPREHENSIVE LOSS......................................................................... $ (994) $ (9,384)
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments................................................... $ 39,587 $ 27,159
Receivables--net.................................................................. 1,865 2,526
Net assets of discontinued operations held for sale............................... -- 5,552
Other current assets.............................................................. 1,063 1,348
--------- ---------
TOTAL CURRENT ASSETS................................................................ 42,515 36,585
INVESTMENT IN AFFILIATES............................................................ 24,141 27,038
PROPERTY AND EQUIPMENT.............................................................. 174 214
Less accumulated depreciation and amortization.................................... 90 92
--------- ---------
NET PROPERTY AND EQUIPMENT.......................................................... 84 122
OTHER ASSETS........................................................................ 22,221 25,812
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TOTAL ASSETS........................................................................ $ 88,961 $ 89,557
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 1,571 $ 1,435
Other accrued liabilities......................................................... 2,834 1,930
--------- ---------
TOTAL CURRENT LIABILITIES........................................................... 4,405 3,365
LONG-TERM DEBT...................................................................... 9,346 9,001
OTHER LONG-TERM LIABILITIES......................................................... 10,968 11,955
COMMITMENTS AND CONTINGENCIES....................................................... -- --
REDEEMABLE PREFERRED STOCK.......................................................... 258,319 243,169
STOCKHOLDERS' DEFICIT:
Common stock $5.00 par value; authorized 50,000,000 shares;
issued: 13,806,487 shares...................................................... 69,032 69,032
Capital in excess of par value.................................................... 119,103 119,103
Accumulated other comprehensive income (loss)..................................... (615) 1,820
Accumulated deficit............................................................... (379,676) (365,967)
--------- ---------
(192,156) (176,012)
Less: equity in cost of common stock of the Corporation
held by Phar-Mor, Inc.......................................................... (1,921) (1,921)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT......................................................... (194,077) (177,933)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT......................................... $ 88,961 $ 89,557
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
SEPTEMBER 30,
------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................................... $ 1,441 $(5,366)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Equity in loss of affiliates.............................................................. 2,890 350
Depreciation and amortization............................................................. 21 21
Loss on investments....................................................................... 651 2,334
Other non-cash credits.................................................................... (398) (564)
Gain on disposal of discontinued operations............................................... (7,935)
Items related to discontinued operations.................................................. -- 474
Cash provided (used) by working capital items:
Receivables............................................................................ 3,770 4,292
Other assets........................................................................... (1,221) (990)
Accounts payable and accrued liabilities............................................... (834) (5,141)
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NET CASH USED BY OPERATING ACTIVITIES....................................................... (1,615) (4,590)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................................ (3) (9,079)
Purchase of investments................................................................... -- (2,309)
Proceeds from sale of investments......................................................... 14,046 1,590
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................................ 14,043 (9,798)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt.............................................. -- 8,779
Debt repayments........................................................................... -- (234)
Dividends paid to minority interest....................................................... -- (107)
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NET CASH PROVIDED BY FINANCING ACTIVITIES................................................... -- 8,438
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NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.................................. 12,428 (5,950)
Cash and short-term investments, beginning of period...................................... 27,159 34,193
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD.............................................. $39,587 $28,243
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
DESCRIPTION OF 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"), our 38% owned affiliate, we are 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 us 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.
We sold our real estate operations in May 1999, as discussed in Note 3, and
have presented our real estate segment as a discontinued operation in the
accompanying financial statements. For comparative purposes, the statements of
operations for prior year periods have been restated to reflect income from real
estate operations in "Gain from discontinued operations, net of taxes". The
restatement does not change our net loss or loss per share for the prior year
periods. The balance sheet at March 31, 1999 reflects the assets and liabilities
related to the real estate segment as "Net assets of discontinued operations
held for sale".
Our condensed consolidated balance sheet as of September 30, 1999, the
condensed consolidated statements of operations and comprehensive loss for the
three and six months ended September 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the six months ended September 30,
1999 and 1998, are unaudited. In our opinion, these statements have been
prepared on the same basis as the audited consolidated financial statements, and
include all adjustments necessary for the fair presentation of financial
position, results of operations and cash flows. Such adjustments were of a
normal recurring nature. The results of operations for the three and six months
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the entire year. The condensed consolidated balance sheet as of
March 31, 1999 was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
Additional information is contained in our Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission for the fiscal year ended March 31,
1999, and should be read in conjunction with this quarterly report.
COMPREHENSIVE INCOME (LOSS): The difference in comprehensive income (loss) and
net income (loss) is due to unrealized gains or losses on marketable securities
for the three and six months ended September 30, 1999 and September 30, 1998.
COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: During fiscal year
1999, Phar-Mor acquired 2,086,200 shares of our common stock through open market
transactions at a cost of approximately $5.0 million. We account for our
investment in Phar-Mor on an equity basis and treat Phar-Mor's investment in our
common stock similar to treasury stock, with a charge to the stockholders'
deficit of $1.9 million at March 31, 1999 and September 30, 1999. The charge was
equal to our 38.4% ownership in the cost of our common stock held by Phar-Mor.
Net loss per share for the three and six months ended September 30, 1998 was
originally calculated based on 13,806,375 shares outstanding. We determined that
the effect of Phar-Mor's investment in our common stock reduced the weighted
average number of shares outstanding for calculating earnings per share by
786,843 shares for the three months and 608,107 shares for the six months ended
September 30, 1998 and, therefore, the net loss per share for the three and six
months ended September 30, 1998 should have been $(0.75) and $(1.45) per share,
respectively, instead of $(0.71) and $(1.38) per share as we originally
reported.
5
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AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 2--NET LOSS PER SHARE OF COMMON STOCK
To calculate earnings per share from continuing operations, the dividends
on the preferred stock have been deducted from the loss from continuing
operations. The weighted average number of shares outstanding for basic earnings
per share was the same as for diluted earnings per share. Options to purchase
approximately 3.9 million shares were outstanding at both September 30, 1999 and
1998. These 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 3--DISCONTINUED OPERATIONS
On May 12, 1999, we announced that we had entered into an agreement to sell
our interests in our three remaining real estate developments. On May 27, 1999,
one property was sold to a third party and our 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, we received $11.4 million in cash and a
one-year, $0.6 million secured note. The note is secured by our former interests
in the two partnerships that were sold to our partners or their affiliates. We
recognized a gain on the disposal of discontinued operations on these
transactions of approximately $6.2 million ($5.6 million net of taxes). We also
recognized a gain on discontinued operations of $0.3 million which represents
the results of operations of the three properties until their sale on May 27,
1999. The debt related to these real estate properties ($25.7 million at
March 31, 1999) was either repaid, transferred to or assumed by another party in
connection with the sale. Revenues for the real estate segment for the period
from April 1, 1999 to their sale in May 1999 were $2.8 million compared to
revenues for the three and six months ended September 30, 1998 of $2.3 million
and $4.9 million, respectively.
We received, as part of the proceeds on the sale in August 1996 of a our
discontinued pharmacy benefit management operation, a right to an additional
minimum payment of $2.5 million that was due at any time subsequent to
August 2, 1997. This payment could increase to $5.0 million based on certain
criteria. In August 1999, we collected the $5.0 million payment and recognized a
gain on the disposal of discontinued operations of $2.5 million less certain
contingent incentive fees due to former employees of the discontinued operation
of approximately $0.1 million.
NOTE 4--CAPITAL STOCK
We have not declared or paid any dividends on our preferred stock since
October 15, 1996. The two issues of preferred stock are cumulative. Therefore,
the dividends that would have been paid have been shown in the condensed
consolidated statements of operations as if they had been declared, with a
corresponding charge to the accumulated deficit. The liability for the
cumulative unpaid dividends has been added to the carrying amount of the
redeemable preferred stock in the condensed consolidated balance sheets. The
cumulative dividends accrued but not paid were $9.8 million ($15.00 per share)
on our convertible preferred stock and $62.9 million ($14.59 per share) on our
Series A preferred stock.
On June 18, 1999, we announced that we had entered into an Amended and
Restated Agreement and Plan of Merger (the "Revised Merger Agreement") with our
wholly-owned subsidiary, Xetava Corporation. The Revised Merger Agreement amends
and restates the Agreement and Plan of Merger between us and Xetava dated
April 9, 1998. Under the Revised Merger Agreement, which was approved by our
Board of Directors, Xetava will merge with and into us, and our existing
preferred stockholders will receive new Class A common stock or, alternately, a
combination of cash, secured notes, warrants and other consideration. Our
existing common stockholders will receive new Class A common stock on a
one-for-one basis for their current common stock. Consummation of the proposed
merger is subject to, among other
6
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 4--CAPITAL STOCK--(CONTINUED)
things, (i) the approval of the merger by holders of a majority of our 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 common stock, the notes and the warrants described below, and (iii) the
dismissal of three Delaware lawsuits filed in connection with the April 1998
merger agreement. We anticipate a stockholder meeting to approve the merger will
take place in the fall of 1999.
Under the Revised Merger Agreement, each share of our existing convertible
preferred stock will be converted into 9.134 shares of our Class A common stock
or, at the election of the holder, into $3.7408 in cash, $8.34 principal amount
of three year, 6.75% notes to be issued by Avatex Funding, Inc., a new wholly-
owned subsidiary of ours, and warrants to purchase 0.67456 shares of our Class A
common stock at $2.25 per share. Each share of our existing Series A preferred
stock will be converted into 7.253 shares of our Class A common stock or, at the
election of the holder, into $2.9705 in cash, $6.623 principal amount of the
6.75% notes, and warrants to purchase 0.53567 shares of our Class A common stock
at $2.25 per share. In addition, the preferred stockholders 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 we may receive in certain litigation brought by us against McKesson HBOC,
Inc. ("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 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 their pro rata share of an
amount that is calculated based on the total number of shares of each series of
preferred stock outstanding immediately before the merger.
Avatex Funding will be a new subsidiary whose purpose will be to issue the
6.75% notes and to own 3,571,533 shares of common stock of Phar-Mor, which are
now owned by us. 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. We 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 all of the preferred stockholders elect to receive the cash, note
and warrant option in the proposed merger, we will be required to pay
approximately $15.3 million in cash and issue warrants to purchase approximately
2,750,000 shares of Class A common stock. Avatex Funding will be required to
issue approximately $34.0 million principal amount of the 6.75% notes. Under the
agreements discussed below, stockholders who represent approximately 50.0% of
the convertible preferred stock and 55.3% of the Series A preferred stock
outstanding have agreed to elect this cash, note and warrant option.
We have also entered into settlement, stockholder and voting agreements
with the preferred stockholder plaintiffs in the three Delaware lawsuits pending
against us, Xetava and certain of our directors. Under the Stipulation of
Settlement entered into by us 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 we will
pay up to $1.1 million of 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
7
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 4--CAPITAL STOCK--(CONTINUED)
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 our 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 our common stock in favor of the
merger. If the proposed purchase is consummated and assuming all preferred
stockholders elect to receive the cash, note and warrant option, Phar-Mor will
own 35.8% of our outstanding common stock. 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
1,099,160 shares. These reductions represent our 38.4% equity in our common
stock that Phar-Mor has agreed to purchase.
NOTE 5--SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION
The following supplemental cash flow information is provided for interest
and income taxes paid and for non-cash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER
30,
------------------
1999 1998
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<S> <C> <C>
Interest paid........................................................... $ 349 $ 734
Income taxes paid....................................................... 313 67
Non-cash transactions:
Note received on sale of investments.................................. 600 --
Cumulative dividends in arrears accrued............................... 13,520 12,349
------- -------
------- -------
</TABLE>
The following supplemental information is provided for other assets and
other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ---------
<S> <C> <C>
Other assets:
Prepaid pension cost............................................. $11,629 $10,900
Securities available for sale.................................... 7,809 12,134
Other investments, at cost....................................... 1,288 1,438
Other............................................................ 1,495 1,340
------- -------
Total......................................................... $22,221 $25,812
------- -------
------- -------
Other long-term liabilities:
Pension and postretirement benefits.............................. $ 4,911 $ 4,902
Environmental liabilities........................................ 1,305 1,357
Liabilities related to discontinued operations................... 2,611 3,486
Other............................................................ 2,141 2,210
------- -------
Total......................................................... $10,968 $11,955
------- -------
------- -------
</TABLE>
8
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 6--COMMITMENTS AND CONTINGENCIES
On April 14, 1998, we announced that we would merge with and into our
wholly-owned subsidiary, Xetava. Under the proposed merger, our existing common
and preferred stockholders would have received new common stock of Xetava. In
late April 1998, a preferred stockholder and a putative class of preferred
stockholders filed a total of three lawsuits in the Delaware Court of Chancery
against us, Xetava and seven of our 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 our merger with
and into Xetava and contended that the merger is subject to a separate class
vote by the holders of our preferred stock and that the exchange ratios for the
merger are unfair to the preferred stockholders. Plaintiffs sought a declaration
that the defendant directors breached their fiduciary duties, and sought
injunctive relief, damages and costs. In August 1998, the Delaware Supreme Court
ruled that the holders of our convertible preferred stock have the right to vote
separately as a class on our proposed merger into Xetava, as it was structured
and announced by us on April 14, 1998. Following these events, our management
considered various alternatives to the proposed merger and ultimately negotiated
and entered into agreements with certain large holders of our preferred stock
relating to the terms of a revised merger between us and Xetava and the
settlement of the preferred stockholders' litigation against us. See Note 4 for
a discussion of the new agreements.
We have retained responsibility for certain potential environmental
liabilities attributable to former operating units. As a result, we are subject
to federal, state and local environmental laws, rules and regulations, including
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended, and similar state superfund statutes. These statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties
regardless of fault. We and our subsidiaries have received various claims and
demands from governmental agencies relating to investigations and remedial
actions to address environmental clean-up costs and in some instances have been
designated as a potentially responsible party by the Environmental Protection
Agency.
Our reserves for environmental assessments, remediation activities,
penalties or fines that may be imposed for non-compliance with such laws or
regulations have not changed materially since March 31, 1999. The estimates of
these costs are based upon currently available facts, existing technology,
presently enacted laws and regulations and the professional judgment of
consultants and counsel.
The amounts of reserves for environmental liabilities are difficult to
estimate due to such factors as the unknown extent of the remedial actions that
may be required and, in the case of sites not owned by us, the unknown extent of
our probable liability in proportion to the probable liability of other parties.
Moreover, we may have environmental liabilities that cannot, in our judgment, be
estimated at this time and losses attributable to remediation costs may arise at
other sites. We recognize that additional work may need to be performed to
ascertain the ultimate liability for such sites, and further information could
ultimately change our current assessment. A change in the estimated liability
could have a material impact on our financial condition and results of
operations.
On March 1, 1994, we announced that we had proposed a merger in which
FoxMeyer Corporation ("FoxMeyer") would be merged with and into a wholly-owned
subsidiary of ours, making FoxMeyer a wholly-owned subsidiary. Shortly after the
announcement, class action lawsuits were filed against us, 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 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
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AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 6--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 we
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 we 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.
We and certain of our 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 our common and Series A and convertible
preferred stocks during the period July 19, 1995 through August 27, 1996. On May
1, 1997, plaintiffs in the lawsuit filed a consolidated amended class action
complaint, which alleges that we 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 our National Distribution Center and Delta
computer systems and the resulting impact on our existing and future business
and financial condition. On March 31, 1998, the court denied our motion to
dismiss the amended complaint in the lawsuit. We intend to continue to
vigorously defend ourselves in the lawsuit. We are unable at this time to
estimate the possible loss, if any, which may accrue from this lawsuit.
We and our 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. As
initially filed, the lawsuit purports to be brought on behalf of all holders of
our 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 our motion for summary judgment in the
lawsuit. On August 10, 1999, the court entered an Order Denying Class
Certification. In its Order, the court ruled that only some elements necessary
for class certification were met, and denied the plaintiff's motion to certify a
class of holders of our stock for purposes of the litigation. We intend to
continue to vigorously defend ourselves in the lawsuit. We are 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 our 17%-owned
subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"), filed lawsuits
against us, certain former officers and directors of Ben Franklin and certain of
our current and former officers and directors. We along with our officers and
directors have since been dropped as defendants in the lawsuits. In connection
with paying our own defense costs and those of our officers and directors, we
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 our request 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 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 October 1999, the District Court found that
the Bankruptcy Court's conclusions of law were correct, with the exception of
the trustee's failure to state a legally cognizable claim. In the third lawsuit,
pending in Illinois state court, the court dismissed the plaintiffs' amended
complaint without prejudice.
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AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 6--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
If liability is ever imposed in any of the lawsuits, we 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 of the FoxMeyer and FoxMeyer Drug Company
bankruptcy estates (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 us. In October 1997, in connection with the settlement of a separate
lawsuit brought by the Trustee against us, the Trustee released us from all
liability and provided the director-defendants in this lawsuit with covenants
not to execute. We have 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 our request 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 our behalf, against seven of our current directors and
three of our former directors who were members of our Board's Personnel and
Compensation Committee, under No. 602773198 in the Supreme Court of New York,
County of New York. The plaintiffs are holders of our Series A preferred stock,
and the lawsuit relates primarily to agreements and transactions between us and
our 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 our stockholders, (ii) the
compensation arrangements between us and Messrs. Butler and Estrin constitute
corporate waste, and (iii) the defendants caused our subsidiaries and affiliates
to improperly purchase our 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. In October 1999, the defendants
moved for summary judgment, and a hearing on the motion is set for November 30,
1999. We have been paying the defense costs of the defendants in accordance with
Delaware General Corporation Law, our charter and by-laws, and the terms and
conditions of Indemnification Agreements between us and certain of the
defendants.
There are various other pending claims and lawsuits arising out of the
normal conduct of the our businesses. In our opinion, the ultimate outcome of
these claims and lawsuits will not have a material effect on our consolidated
financial condition or results of operations.
NOTE 7--SEGMENT INFORMATION
We currently operate in only one segment as defined under Statement of
Financial Accounting Standards ("SFAS") No. 131, which consists of owning
interests in other corporations and partnerships. We review the results of each
of our investments, review new investment opportunities and allocate resources
to these current or new investments based on this review and our current
financial situation.
We have no foreign source revenues. Interest and dividend income and other
income are derived primarily from investments we have made.
11
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AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
Avatex Corporation is a holding company that, along with its 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.
On June 18, 1999, we announced that we had entered into a Revised Merger
Agreement with our wholly-owned subsidiary, Xetava. The Revised Merger Agreement
amends and restates the Agreement and Plan of Merger between us and Xetava dated
April 9, 1998. Under the Revised Merger Agreement, which was approved by our
Board of Directors, Xetava will merge with and into us, and our existing
preferred stockholders will receive our new Class A common stock or,
alternately, a combination of cash, secured notes, warrants and other
consideration. Our existing common stockholders will receive our new Class A
common stock 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 our 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 common stock, the
notes and the warrants described below, and (iii) the dismissal of three
Delaware lawsuits filed in connection with the April 1998 merger agreement. We
anticipate a stockholder meeting to approve the merger will take place in the
fall of 1999.
Under the Revised Merger Agreement, each share of our existing convertible
preferred stock will be converted into 9.134 shares of our new Class A common
stock or, at the election of the holder, into $3.7408 in cash, $8.34 principal
amount of three year, 6.75% notes to be issued by Avatex Funding, a new wholly-
owned subsidiary of ours, and warrants to purchase 0.67456 shares of our
Class A common stock at $2.25 per share. Each share of our existing Series A
preferred stock will be converted into 7.253 shares of our new Class A common
stock or, at the election of the holder, into $2.9705 in cash, $6.623 principal
amount of the 6.75% notes, and warrants to purchase 0.53567 shares of Class A
common stock at $2.25 per share. In addition, the preferred stockholders 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 we may receive in certain litigation brought by us 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 their pro rata share of an amount that is
calculated based on the total number of shares of each series of preferred stock
outstanding immediately before the merger.
Avatex Funding will be a new subsidiary whose purpose will be to issue the
6.75% notes and to own 3,571,533 shares of common stock of Phar-Mor, which are
now owned by us. 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. We 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 all of the preferred stockholders elect to receive the cash, note
and warrant option in the proposed merger, we 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. Avatex Funding will be required to
issue approximately $34,000 principal amount of the 6.75% notes. Under one of
the agreements discussed below, stockholders who represent approximately 50.0%
of the convertible preferred stock and 55.3% of the Series A preferred stock
outstanding have agreed to elect this cash, note and warrant option.
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<PAGE>
We have also entered into settlement, stockholder and voting agreements
with the preferred stockholder plaintiffs in the three Delaware lawsuits pending
against us, Xetava and certain of our directors. Under the Stipulation of
Settlement entered into by us 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 we will
pay up to $1,100 of 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 our 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 our common stock in favor of the merger.
On May 12, 1999, we announced that we had entered into an agreement to sell
our interests in our three remaining real estate developments. On May 27, 1999,
one property was sold to a third party and our 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, we received $11,400 in cash and a
one-year, $600 secured note. The note is secured by our former interests in the
two partnerships that were sold to our partners or their affiliates. We
recognized a gain on disposal of discontinued operations on these transactions
of approximately $6,181 ($5,558 net of taxes).
We received, as part of the proceeds on the sale of our discontinued
pharmacy benefit management operation in August 1996, a right to an additional
minimum payment of $2,500 that was due at any time subsequent to August 2, 1997.
This payment could increase to $5,000 based on certain criteria. In August 1999,
we collected the $5,000 payment and recognized a gain on the disposal of
discontinued operations of $2,500 less certain contingent incentive fees due to
former employees of the discontinued operation of $123.
RESULTS OF OPERATIONS
SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX AND THREE MONTHS
ENDED SEPTEMBER 30, 1998
OPERATING COSTS
Operating costs including general and administrative costs and depreciation
and amortization increased $221 to $2,190 for the quarter ended September 30,
1999 compared to $1,969 for the quarter ended September 30, 1998. For the six
months ended September 30, 1999, operating expenses increased $315 to $4,275
compared to $3,960 for the six months ended September 30, 1998. Increased
expenses were primarily the result of higher costs associated with the proposed
Xetava merger, as discussed above, as well as higher legal and other costs
partially offset by lower compensation costs than in the prior year. Legal costs
have increased as a result of more activity related to our ongoing lawsuits as
discussed in Note 6 to these financial statements. Also see, in our Form 10-K/A
for the year ended March 31, 1999, Note N to the consolidated financial
statements and Item 3 for a more detailed explanation of these cases.
Compensation costs have decreased as a result of the separation from us of two
of our officers at the end of June 1999. The consummation of the merger with
Xetava and the settlement with our preferred stockholders will result in
reductions in legal and consulting expenses associated with the merger and
accompanying lawsuits. The impact of those reductions depends on, among other
factors, the timing of the annual meeting and the approval of the merger.
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OTHER INCOME (EXPENSE)
Other income of $443 for the three months ended September 30, 1999 was the
result primarily of a $350 royalty payment from a property sold in a prior
fiscal year and gains on the sale of securities sold during the quarter. Other
expense of $703 for the three months ended September 30, 1998 related to a
reduction of $419 in the carrying value of our investment in Imagyn Medical
Technologies, Inc. ("Imagyn") to its market value and a write-down of $791 in
the carrying value of an investment in a non-public company partially offset by
$507 in other income primarily from a $500 royalty payment received from a
property sold in a prior fiscal year. Other expense of $293 for the six months
ended September 30, 1999 related to a $1,077 reduction in the carrying value of
our investment in Imagyn and a write-down in the carrying value of an investment
in a non-public company of $150 partially offset by $934 in income primarily
from $576 in gains on the sale of securities sold during the period and the
royalty payment received. Other expense of $2,390 for the six months ended
September 30, 1998 related to a $2,334 reduction in the carrying value of our
investment in Imagyn to its market value and a write-down of $1,591 in the
carrying value of an investment in a non-public company partially offset by
$1,535 in gains principally from recoveries on investments which had been
written-off in prior periods and the royalty payment received.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased $46 to $615 for the three months
ended September 30, 1999 compared to $569 for the three months ended September
30, 1998. Interest income increased $28 and dividend income increased $18.
Interest income on investments increased $130 primarily due to additional funds
available to invest from proceeds from the sale of the real estate properties
and the $5,000 payment discussed above as well as interest on new note
receivables made in the current fiscal year to companies in which we have made
equity investments. This income was partially offset by a $102 decrease in
interest income earned in the prior year on a receivable that was part of a
settlement with National Steel Corporation ("NSC"), which was paid in full in
November 1998. For the six months ended September 30, 1999, interest and
dividend income decreased $76 to $1,084 compared to $1,160 for the six months
ended September 30, 1998. Dividend income increased $64 as compared to the prior
year from additional amounts invested in the same preferred stock as held in the
prior year. Interest income decreased $140 when compared to the prior year
primarily as a result of a $237 decrease in interest income from the NSC
receivable partially offset by additional interest earned on other investments.
The average balance of these other investments had increased approximately
$5,000 when compared to the prior year due mainly to the additional funds
available to invest in the current year as discussed above. The increased amount
available to invest was partially offset by a decrease in the interest rate
earned during the six month period of about 0.4%.
INTEREST EXPENSE
Interest expense increased $5 to $194 for the three months ended
September 30, 1999 compared to $189 for the three months ended September 30,
1998. Interest expense increased primarily as a result of the impact of
compounding on the note payable to the Trustee. Interest expense decreased $16
to $379 for the six months ended September 30, 1999 compared to $395 for the six
months ended September 30, 1998. Interest expense decreased due primarily to the
payoff of a note in fiscal 1999.
EQUITY IN LOSS OF AFFILIATES
Equity in loss was $1,691 and $2,890 for the three and six months ended
September 30, 1999, respectively, compared to equity in loss of $607 and $350
for the three and six months ended September 30, 1998. The increase in equity in
loss of affiliates was primarily the result of lower earnings at Phar-Mor.
Phar-Mor's decline in gross profit accounted for most of the increase in the
loss over the prior year. Operating expenses were also up primarily due to work
on remodeling stores acquired from Pharmhouse.
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INCOME TAXES
We recorded no federal income tax provision for the current or prior year.
Any income tax expense or benefit related to the current or prior year's income
(loss) was offset by a corresponding change in the deferred tax asset valuation
allowance.
DISCONTINUED OPERATIONS
Gain on discontinued operations decreased $310 to $259 for the six months
ended September 30, 1999 compared to $569 for the six months ended
September 30, 1998. These amounts related only to the discontinued real estate
segment. The decrease is the result of owning the real estate properties for two
months during the current fiscal year compared to the whole period in the prior
year. Also, the $115 gain on discontinued operations for the three months ended
September 30, 1998 related entirely to the real estate segment. There were no
operations in the segment for the comparable period in the current fiscal year.
The gain on disposal of discontinued operations for the three months ended
September 30, 1999 resulted primarily from the $2,377 gain on the contingent
payment received from the sale of a discontinued operation as discussed in the
"Overview" section above partially offset by an $11 adjustment to the gain on
the real estate segment. For the six months ended September 30, 1999, the $7,935
gain includes the gain on the contingent payment of $2,377 and the gain on the
disposal of the real estate segment of $5,558, net of taxes.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends have increased to $7,668 and $15,150 for the
three and six months ended September 30, 1999, respectively, compared to $6,957
and $13,749 for the three and six months ended September 30, 1998. The increase
was due to (i) an increase of $117 and $230, respectively, in the amortization
of discount on the Series A preferred stock and (ii) an increase of $594 and
$1,171, respectively, in the dividend on the Series A preferred stock
attributable to the required compounding of dividends on previously unpaid
amounts.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and short-term investments of
approximately $39,587. During the six months, we loaned approximately $1.2
million to companies in which we had previously invested.
Our debt consists of a note payable to the FoxMeyer Chapter 7 Bankruptcy
Trustee. All the debt of real estate partnerships has been repaid, transferred
to or assumed by another party in connection with the sale. We have two issues
of redeemable preferred stock outstanding. Beginning with the quarterly payments
due January 15, 1997, we have not declared nor paid any cash dividends on our
Series A preferred stock or our convertible preferred stock. We 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 our proposed merger with Xetava. If the proposed merger is consummated as
proposed, our current redeemable preferred stock liability would be eliminated
and our preferred stockholders would receive new Class A common stock in
exchange for their preferred stock or, at their election, may receive a
combination of cash; three year, 6.75% notes; warrants to purchase common stock
of the merged company and other consideration. The issuance of the notes will
require Avatex Funding to pay interest semi-annually in cash with the principal
balance due in three years from the date of issuance. Since we will guarantee
the 6.75% notes and Avatex Funding will have no assets other than the Phar-Mor
common stock securing the notes, we may be required to make capital
contributions to Avatex Funding so it can satisfy its interest and principal
obligations on the notes. The potential cash outlay to the preferred
stockholders or their related entities, 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. This fiscal year we will also be required to fund any
cash to
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be paid to preferred stockholders as a result of the proposed merger. We expect
to receive cash from the collection of receivables, from interest and dividend
income earned on our investments and from service fees.
We continuously evaluate current and potential investments in connection
with an ongoing review of our investment strategies and, as opportunities arise,
will continue to invest in publicly and privately held companies which we
believe would be strategic fits. In addition, we may pursue the acquisition of
an operating company. There may also be restrictions imposed on our ability to
make certain types of investments and on other activities as a result of the
proposed merger with Xetava.
We will rely on cash on hand, any excess cash from investments and, if
necessary, the sale of our investments to meet future obligations. We are
involved in litigation which, if we were to lose, would have a material impact
on our financial condition, liquidity and results of operations. These financial
statements have been prepared on a going concern basis which contemplates the
realization of our assets and the settlement of our liabilities and commitments
in the normal course of business. See Note R to the consolidated financial
statements in our Form 10-K/A for the year ended March 31, 1999 for a discussion
of our ability to continue as a going concern and management's plans addressing
those issues.
OTHER
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Therefore, we will be required to adopt SFAS No. 133 for our fiscal year
beginning April 1, 2001. We have not yet determined the impact, if any, from the
adoption of SFAS No. 133.
There have been no material changes in the Quantitative and Qualitative
Disclosures about Market Risk since March 31, 1999, except that our investments
in available for sale securities other than redeemable preferred stock at
September 30, 1999 were $5.0 million compared to $9.5 million at March 31, 1999
and the interest rate on the variable rate note payable to the Trustee has
increased to 8.25% at September 30, 1999 from 7.75%.
This document contains "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 our 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 contain our current views with respect to future
events and are subject to certain risks and uncertainties which have been
described in our reports and statements filed with the Securities and Exchange
Commission, including this report. However, there can be no guarantee that these
assumptions will be achieved, and actual results could differ materially from
those anticipated.
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. Our internal systems, both
hardware and software, are Year 2000 compliant in all material respects. The
Year 2000 readiness of our vendors, and companies in which we have invested,
however may vary. We are currently trying to ascertain and monitor the Year 2000
readiness of these companies. If any of the companies in which we have made a
significant investment are not Year 2000 compliant, there may be a material
impact on the value of that investment and, correspondingly, on our results of
operations and financial condition. If certain vendors are not Year 2000
compliant, especially vendors that provide electricity, telephone services and
management services, we may suffer potentially significant disruptions to our
overall operations, depending upon the length and severity of the problems. At
this time, it is still uncertain to what extent we 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 our best current estimates, which were
derived from numerous assumptions about future events, including the continued
availability of certain
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resources, representations received from third parties and other factors. 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; 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 we undertake 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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PART II--OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
McKesson/Vendor Litigation. With respect to the Texas lawsuit we brought
against McKesson and certain pharmaceutical manufacturers, in October 1999, we
entered into a settlement agreement with another manufacturer defendant, under
which we will receive a confidential settlement payment.
FoxMeyer Corporation. With reference to the lawsuit the FoxMeyer
Corporation bankruptcy trustee brought against the five former directors of Fox
Meyer Corporation, the Delaware Bankruptcy Court entered an order establishing
procedures for a joint insolvency trial in the lawsuit and in certain other
lawsuits brought by the trustee against other persons and entities related to
the FoxMeyer Corporation bankruptcy cases.
Ben Franklin Retail Stores, Inc. With reference to the three lawsuits
relating to Ben Franklin Retail Stores, Inc., in October 1999, (a) the United
States District Court for the Northern District of Illinois entered an order in
the Ben Franklin bankruptcy trustee's lawsuit adopting the Bankruptcy Court's
factual findings and finding that the Bankruptcy Court's conclusions of law were
correct, with the exception of the trustee's failure to state a legally
cognizable claim, and (b) the Illinois state court entered an order dismissing
the plaintiffs' third amended complaint without prejudice.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
We did not declare, nor did we pay, the dividends due for the quarterly
periods since October 15, 1996 on either the Convertible Preferred Stock or the
Series A Preferred Stock. These two issues are cumulative. The cumulative
dividends accrued and unpaid were approximately $9.8 million ($15.00 per share)
on the Convertible Preferred Stock and $62.9 million ($14.59 per share) on the
Series A Preferred Stock. In addition, the annual sinking fund payments due
January 1998 and 1999 for 88,000 shares each of the Convertible Preferred Stock
were not made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------------
<S> <C>
27 -- Financial Data Schedule
</TABLE>
(b) Reports on 8-K
We did not file any Current Reports on Form 8-K during the three months
ended September 30, 1999.
18
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
AVATEX CORPORATION
By: /s/ GRADY E. SCHLEIER
----------------------------------
Grady E. Schleier
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
October 28, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of Avatex Corporation for the
six months ended September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 39,587
<SECURITIES> 0
<RECEIVABLES> 1,883
<ALLOWANCES> 18
<INVENTORY> 0
<CURRENT-ASSETS> 42,515
<PP&E> 174
<DEPRECIATION> 90
<TOTAL-ASSETS> 88,961
<CURRENT-LIABILITIES> 4,405
<BONDS> 9,346
258,319
0
<COMMON> 69,032
<OTHER-SE> (263,109)
<TOTAL-LIABILITY-AND-EQUITY> 88,961
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 379
<INCOME-PRETAX> (6,753)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,753)
<DISCONTINUED> 8,194
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,441
<EPS-BASIC> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
