<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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)
DELAWARE 25-1425889
- ------------------------------------------------ ------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5910 N. Central Expressway, Suite 1780, Dallas, Texas 75206
- ----------------------------------------------------- ------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's Telephone Number, Including Area Code 214-365-7450
------------------------
Indicate by check mark whether the registrant (1) had filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No .
--- ---
Number of shares of Common Stock outstanding as of 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.
<PAGE>
EXPLANATORY NOTE
This Amendment on Form 10-Q/A to the Quarterly Report of Avatex Corporation
hereby amends, in its entirety, the Corporation's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1999. This Amendment reflects the
restatement of our financial statements to report the operations of the
Corporation's real estate segment as a discontinued operation. Susequently to
the issuance and filing of our first quarter fiscal 2000 financial statements
with the Securities and Exchange Commission, we determined that we should
restate our first quarter fiscal 2000 financial statements and related
disclosures to reflect our real estate segment as a discontinued operation.
For comparative purposes, the statements of operations for all periods
presented have been restated to reflect income from real estate operations in
"Gain from discontinued operations, net of taxes". This restatement does not
change the Corporation's net loss or loss per share. The significant effects
of the restatement are presented in Note 8 to the consolidated financial
statements.
<PAGE>
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
(in thousands, except per share amounts) 1999 1998
(Restated-see Note 8)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING COSTS
Operating costs, including general and administrative costs $ 2,074 $ 1,980
Depreciation and amortization 11 11
- ------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS (2,085) (1,991)
Other expense (736) (1,687)
Interest and dividend income 469 591
Interest expense 185 206
- ------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN INCOME (LOSS)
OF AFFILIATES (2,537) (3,293)
Equity in income (loss) of affiliates (1,199) 257
- ------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,736) (3,036)
DISCONTINUED OPERATIONS
Gain from discontinued operations, net of tax 259 454
Gain on disposal of discontinued operations, net of tax 5,569 -
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS) 2,092 (2,582)
Preferred stock dividends 7,482 6,792
- ------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(5,390) $(9,374)
==========================================================================================
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.86) $ (0.73)
Discontinued operations 0.45 0.03
- ------------------------------------------------------------------------------------------
LOSS PER SHARE $ (0.41) $ (0.70)
==========================================================================================
Average number of common shares outstanding 13,005 13,379
- ------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 476 $(3,827)
==========================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
(in thousands of dollars) 1999 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 37,487 $ 27,159
Receivables - net 4,332 2,526
Net assets of discontinued operations held for sale - 5,552
Other current assets 576 1,348
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 42,395 36,585
INVESTMENT IN AFFILIATES 25,836 27,038
PROPERTY AND EQUIPMENT 175 214
Less accumulated depreciation and amortization 85 92
- --------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 90 122
OTHER ASSETS 22,517 25,812
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $90,838 $ 89,557
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,257 $ 1,435
Other accrued liabilities 3,676 1,930
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,933 3,365
LONG-TERM DEBT 9,169 9,001
OTHER LONG-TERM LIABILITIES 11,023 11,955
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK 250,652 243,169
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 204 1,820
Accumulated deficit (371,357) (365,967)
- --------------------------------------------------------------------------------------------------------
(183,018) (176,012)
Less: equity in cost of common stock of the Corporation
held by Phar-Mor, Inc. (1,921) (1,921)
- --------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (184,939) (177,933)
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 90,838 $ 89,557
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
(in thousands of dollars) 1999 1998
(Restated-see Note 8)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,092 $(2,582)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Equity in loss (income) of affiliates 1,199 (257)
Depreciation and amortization 11 11
Loss on investments 739 1,678
Other non-cash credits (202) (277)
Items related to discontinued operations (5,828) 251
Cash provided (used) by working capital items:
Receivables (1,205) 3,927
Other assets and restricted cash (401) (908)
Accounts payable and accrued liabilities (35) (3,227)
- ------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (3,630) (1,384)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (6,066)
Purchase of investments - (1,842)
Proceeds from investments 13,958 1,037
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,958 (6,871)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 4,281
Debt repayments - (127)
Dividends paid to minority interest - (7)
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 4,147
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 10,328 (4,108)
Cash and short-term investments, beginning of period 27,159 34,193
- ------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $37,487 $30,085
==========================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 all periods presented, have been restated to reflect the
income from real estate operations in "Gain (loss) from discontinued
operations, net of taxes". The balance sheet at March 31, 1999 reflects the
assets and liaibilities related to the real estate segment as "Net assets of
discontinued operations held for sale". This restatement does not change our
net loss or loss per share.
Our condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of operations and comprehensive income (loss) for the
three months ended June 30, 1999 and 1998, and the condensed consolidated
statements of cash flows for the three months ended June 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 months ended June 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 months ended June 30, 1999 and June 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 June 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 months ended June 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 427,407 at June 30,
1998 and, therefore, the net loss per share for the three months ended June 30,
1998 should have been $(0.70) per share instead of $(0.68) per share as we
originally reported.
4
<PAGE>
NOTE 2 - NET LOSS PER SHARE OF COMMON STOCK
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 three months ended
June 30,
--------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loss from continuing operations $ (3,736) $ (3,036)
Deduct dividends on preferred shares 7,482 6,792
- -----------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common stockholders
for BASIC earnings per share (11,218) (9,828)
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 $(11,218) $ (9,828)
- -----------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
for calculation of BASIC earnings per share 13,005 13,379
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 13,005 13,379
- -----------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common stockholders
Basic $ (0.86) $ (0.73)
Diluted $ (0.86) $ (0.73)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase approximately 3.9 million shares were outstanding at
both June 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 - REAL ESTATE INVESTMENT AND LONG-TERM DEBT
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 disposal of discontinued
operations on these transactions of approximately $6.2 million ($5.6 million
net of taxes). 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 three months ended June 30, 1999 were $2.8 million compared
to revenues for the three months ended June 30, 1998 of $2.6 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
5
<PAGE>
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 $9.0 million ($13.75 per share) on our convertible preferred stock and
$56.9 million ($13.19 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 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 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. 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
6
<PAGE>
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 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 three months
ended June 30,
1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 349 $ 360
Income taxes paid 8 67
Non-cash transactions:
Note received on sale of investments 600 -
Cumulative dividends in arrears accrued 6,682 6,105
-------------------------------------------------------------------------------------
The following supplemental information is provided for other assets and other long-term
liabilities (in thousands of dollars):
<CAPTION>
June 30, March 31,
1999 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Other assets:
Prepaid pension cost $ 11,265 $ 10,900
Securities available for sale 8,628 12,134
Other investments, at cost 1,288 1,438
Other 1,336 1,340
-------------------------------------------------------------------------------------
Total $ 22,517 $ 25,812
=====================================================================================
Other long-term liabilities:
Pension and postretirement benefits $ 4,913 $ 4,902
Environmental liabilities 1,335 1,357
Liabilities related to discontinued operations 2,611 3,486
Other 2,164 2,210
-------------------------------------------------------------------------------------
Total $ 11,023 $ 11,955
=====================================================================================
</TABLE>
7
<PAGE>
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 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
8
<PAGE>
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 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. The plaintiffs complied with the Court's order by filing a third
amended complaint, and the defendants have again filed a motion to dismiss
the complaint. The Court has scheduled a hearing on the motion in October
1999. 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
9
<PAGE>
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 in Statement of
Financial Accounting Standards ("SFAS") No. 131 which consists of owning
interests in other Corporations and partnerships. We review the results of
each or 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. Revenue
from services are for consulting services provided to companies in which we
are invested.
NOTE 8--RESTATEMENT
Subsequent to the issuance of our consolidated financial statements for
the three months ended June 30, 1999 and the filing of the June 30, 1999 Form
10-Q with the Securities and Exchange Commission (the "SEC"), we determined
that we should restate our first quarter fiscal 2000 financial statements and
related disclosures to reflect our real estate segment as a discontinued
operation. The restatement does not change our net loss or loss per share.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
For the three months ended June 30, 1999: As Previously Reported As Restated
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,848 $ 0
Income (loss) from continuing operations before
equity in income of affiliates, income tax provision
and minority interest 3,987 (2,537)
Income (loss) from continuing operations 2,092 (3,736)
Discontinued operations -- 5,828
Net income 2,092 2,092
Preferred stock dividends 7,482 7,482
Net loss applicable to common stockholders $ (5,390) $ (5,390)
Basic and diluted loss per share:
Loss from continuing operations $ (0.41) $ (0.86)
Discontinued operations -- $ 0.45
Loss per share $ (0.41) $ (0.41)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
In order to present comparative information for all periods in the
statements of operations, the results for the three months ended June 30,
1998 were also restated to reflect the real estate segment as a
discontinued operation.
<TABLE>
<CAPTION>
For the three months ended June 30, 1998: As Previously Reported As Restated
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,576 $ 0
Loss from continuing operations before equity in income of
affiliates, income tax provision and minority interest (2,751) (3,293)
Loss from continuing operations (2,582) (3,036)
Discontinued operations -- 454
Net loss (2,582) (2,582)
Preferred stock dividends 6,792 6,792
Net loss applicable to common stockholders $ (9,374) $ (9,374)
Basic and diluted loss per share:
Loss from continuing operations $ (0.70) $ (0.73)
Discontinued operations -- $ .03
Loss per share $ (0.70) $ (0.70)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 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.
Subsequent to the issuance and filing of our first quarter fiscal 2000
financial statements with the SEC, we determined that we should restate our
first quarter fiscal 2000 financial statements and related disclosures to
reflect our real estate segment as a discontinued operation. For comparative
purposes, the statements of operations for all periods presented have been
restated to reflect income from real estate operations in "Gain from
discontinued operations, net of taxes". This restatement does not change our
net loss or loss per share. The significant effects of the restatement are
presented in Note 8 to the consolidated financial statements and have been
reflected herein.
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 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
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.
11
<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 ($5,569 net of taxes).
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
12
<PAGE>
OPERATING COSTS
Operating costs including general and administrative and
depreciation and amortization increased $94 to $2,085 for the quarter ended
June 30, 1999 compared to $1,991 for the quarter ended June 30, 1998.
Increased expenses were primarily the result of higher costs associated with
the proposed Xetava merger, as discussed above, as well as severance costs
and other costs partially offset by lower compensation, legal and travel
costs than in the prior year. 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 extent of the savings depends on, among other factors, the
timing of the annual meeting to approve the merger.
OTHER EXPENSE
Other expense of $736 for the three months ended June 30, 1999
related to a reduction of $1,077 in the carrying value of our investment in
Imagyn Technologies, Inc. ("Imagyn") to its market value and a write-down of
$150 in the carrying value of an investment in a non-public company partially
offset by $491 in other income primarily from gains on the sale of securities
held for sale. Other expense of $1,687 for the three months ended June 30,
1998 related to a $1,915 reduction in the carrying value of our investment in
Imagyn to its market value and a write-down of $800 in the carrying value of
an investment in a non-public company partially offset by $1,028 in gains
principally from the recovery on investments which had been written-off in a
prior period.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased $122 to $469 for the three
months ended June 30, 1999 compared to $591 for the three months ended June
30, 1998. The decrease was due primarily to a decline in interest income.
While the average amount of funds invested increased by approximately $750 as
compared to the prior year due to the receipt of $11,400 in May 1999 in
connection with the sale of real estate properties, the average rate of
interest earned on the invested amounts decreased by approximately 0.6%.
Also contributing to the decrease was interest income earned in the prior
year on a note received as part of a settlement with National Steel
Corporation, which was paid in full in November 1998. Partially offsetting the
decrease in interest income was an increase in dividend income of $45.
INTEREST EXPENSE
Interest expense decreased $21 to $185 for the three months ended
June 30, 1999 compared to $206 for the three months ended June 30, 1998.
Interest expense decreased due primarily to the payoff of a note in fiscal
1999.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in loss was $1,199 for the quarter ended June 30, 1999
compared to equity in income of $257 for the quarter ended June 30, 1998.
The decrease in equity in income of affiliates was primarily the result of
lower earnings at Phar-Mor. Phar-Mor's decline in gross profit and increased
interest expense, partially offset by a decrease in operating expenses,
caused Phar-Mor's results to decrease when compared to the prior year.
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 $195 to $259 for the quarter
ended June 30, 1999 compared to $454 for the quarter ended June 30, 1998.
These amounts related only to the discontinued real estate segment. The
decrease was due mainly to lower operating income and higher interest
expense. Operating income decreased because we owned the properties for only
two months during the quarter until their sale in May 1999, as discussed
above, compared to revenues for the full quarter for the prior period. This
decrease was partially offset by operating income on a hotel opened in
October 1998 which had revenues of $1,159 for the current quarter. Interest
expense for the real estate operations increased due to $143 of interest
related to the property opened in October 1998 partially offset by only two
months of interest at the remaining properties until their sale in May 1999
as compared to three months of interest in the prior fiscal year.
The gain on disposal of discontinued operations for the three months
ended June 30, 1999 resulted from the gain on the sale of our interest in the
remaining three real estate properties, net of taxes.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends have increased to $7,482 for the three months
ended June 30, 1999 compared to $6,792 for the three months ended June 30,
1998. The increase was due to (i) an increase of $113 in the amortization of
discount on the Series A preferred stock and (ii) an increase of $577 in the
dividend on the Series A preferred stock attributable to the required
compounding of dividends on previously unpaid amounts.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had cash and short-term investments of
approximately $37,487. During the quarter, we loaned approximately $1.1 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 be paid to preferred stockholders as a result of the proposed merger as
well as interest payments on any notes issued in that transaction. 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.
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.
OTHER
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 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.
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",
14
<PAGE>
"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 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.
15
<PAGE>
PART II - OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
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 $9.0 million ($13.75 per share)
on the Convertible Preferred Stock and $56.9 million ($13.19 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
27 - Financial Data Schedule
(b) REPORTS ON 8-K
The following Current Reports on Form 8-K were filed by us
during the three months ended June 30, 1999:
We filed a Current Report on Form 8-K on May 19, 1999, which
announced our agreement to sell our real estate holdings.
We filed a Current Report on Form 8-K on June 24, 1999, which
announced the revised terms of a merger between us and Xetava
and the settlement of certain related lawsuits.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AVATEX CORPORATION
October 8, 1999 By: /s/ Grady E. Schleier
---------------------------------------------
Grady E. Schleier
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,487
<SECURITIES> 0
<RECEIVABLES> 4,347
<ALLOWANCES> 15
<INVENTORY> 0
<CURRENT-ASSETS> 42,395
<PP&E> 175
<DEPRECIATION> 85
<TOTAL-ASSETS> 90,838
<CURRENT-LIABILITIES> 4,933
<BONDS> 9,169
250,652
0
<COMMON> 69,032
<OTHER-SE> (253,971)
<TOTAL-LIABILITY-AND-EQUITY> 90,838
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> (3,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,736)
<DISCONTINUED> 5,828
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,092
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
