<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
AVATEX CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 25-1425889
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5910 NORTH CENTRAL EXPRESSWAY, SUITE 1780, DALLAS, TEXAS 75206
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-365-7450
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, par value $5 per share
$5 Cumulative Convertible Preferred Stock
$4.20 Cumulative Exchangeable Series A Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
---
On June 23, 1999, the aggregate value of voting stock held by non-affiliates of
the registrant was approximately $7,343,000.
On June 23, 1999, there were 13,806,487 shares of the registrant's common stock
outstanding before deducting 801,101 shares which represent the Corporation's
38.4% equity interest in common stock of the Corporation owned by Phar-Mor, Inc.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
PART I
ITEM 1. BUSINESS
Avatex Corporation is a holding company that, along with its subsidiaries, owns
interests in other corporations and partnerships. Through Phar-Mor, Inc.
("Phar-Mor"), its 38% owned affiliate, the Corporation is involved in operating
a chain of discount retail drugstores.
The Corporation was incorporated in Delaware on September 27, 1982, to effect a
corporate restructuring of National Steel Corporation ("NSC") and its
subsidiaries in which NSC assets pertaining to the steel industry were separated
from its non-steel assets. On September 13, 1983, NSC was merged into a
subsidiary of the Corporation and the stockholders of NSC became stockholders of
the Corporation. The Corporation sold substantially all of its investment in NSC
and related metals operations by fiscal 1991 and invested in distribution
businesses, principally FoxMeyer Corporation ("FoxMeyer"). On August 27, 1996,
the Corporation's subsidiary, FoxMeyer, filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. On November 8, 1996, the Bankruptcy Court approved the
sale of the principal assets of FoxMeyer and FoxMeyer Drug Company ("FoxMeyer
Drug") to McKesson Corporation ("McKesson"). On March 18, 1997, the Chapter 11
cases were converted into Chapter 7 liquidation cases. In September 1995 and
September 1997, the Corporation directly and indirectly acquired certain equity
investments in Phar-Mor and currently owns approximately 38.4% of Phar-Mor's
outstanding common stock.
On June 18, 1999, the Corporation announced that it had reached an agreement
with the holders of a majority of its two series of preferred stock on the
terms of a revised merger between the Corporation and Xetava Corporation
("Xetava"), a wholly-owned subsidiary of the Corporation, and the settlement
of three lawsuits brought by certain holders of the Corporation's preferred
stock against the Corporation and Xetava relating to a prior merger
transaction announced in April 1998. See disclosures in Items 3, 7 and 8
concerning the proposed merger and its impact on the Corporation.
DESCRIPTION OF BUSINESS
Cautionary Statement under the Private Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the assumptions, beliefs and opinions of the Corporation's
management. When used in this document, the words "anticipate," "believe,"
"continue," "estimate," "expect," "intend," "may," "should," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Corporation with respect to future events and
are subject to certain risks and uncertainties, including, but not limited to,
the risk that the Corporation may be unable to implement its strategies to
reduce the possibility it may not continue as a going concern. In industries in
which the Corporation operates or invests, it also faces risks associated with
currently unforeseen competitive pressures; the ability of the Corporation's and
investees' management to develop, implement and market their products and
services; and other such risks. These other risks include decreased consumer
spending, customer concentration issues, millennium compliance issues and the
effects of general economic conditions. In addition, the Corporation's business,
operations and financial condition are subject to the risks, uncertainties and
assumptions which are described in the Corporation's reports and statements
filed from time to time with the Securities and Exchange Commission, including
this report. Should one or more of those risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein. The forward-looking statements made in
this document speak only to the date on which such statements are made, and the
Corporation undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events.
The Corporation's fiscal year ends on March 31; therefore, references to
fiscal 1999, fiscal 1998, etc. herein refer to the Corporation's fiscal year
ending on March 31 of that year.
REAL ESTATE
The Corporation made certain investments in real estate through limited
partnerships. These limited partnerships were controlled by wholly-owned
subsidiaries of the Corporation which held 50% partnership interests in these
limited partnerships. The limited partnerships were engaged in the buying,
holding, operating and disposing of real
1
<PAGE>
estate. At March 31, 1999, the Corporation owned interests in three real
estate developments consisting of hotels and an office building. On May 12,
1999, the Corporation announced it had reached an agreement to sell its
interests in these three real estate developments. At the closing of the sale
on May 27, 1999, the Corporation received $11.4 million in cash and a
one-year, secured note in the amount of $0.6 million. See "Item 7. Overview"
and Note S to the consolidated financial statements. The real estate
developments were as follows:
A 38,510 square foot office building and 150 room hotel located in Annapolis,
Maryland. Both properties were purchased in November 1993 and refurbished. The
office building was approximately 84% occupied and the hotel was approximately
63% occupied during fiscal 1999.
A 194 room hotel located in Washington, D.C. in the Watergate area. A
partnership in which the Corporation is a general partner assumed operating
control of the hotel in November 1995 and had refurbished the property.
The fiscal 1999 occupancy rate was approximately 78%.
A 103,000 square foot office building with adjoining townhouse located in the
Scott Circle area of Washington, D.C. was purchased in May 1996. The townhouse
was sold in January 1998. The office building was renovated into a 156 room
hotel which opened in October 1998. The occupancy rate since opening has been
approximately 65%.
EQUITY INVESTMENT IN PHAR-MOR, INC.
The Corporation owns approximately 38.4% of Phar-Mor's outstanding common stock.
Phar-Mor operates a chain of 138 discount retail drugstores in 24 states, under
the names "Phar-Mor", "Pharmhouse" and "The Rx Place", devoted to the sale of
prescription and over-the-counter drugs, health and beauty care products, and
other general merchandise and grocery items. Approximately 40% of Phar-Mor
stores are located in Pennsylvania, Ohio and West Virginia; 20% are located in
Virginia, North Carolina and South Carolina; and 14% are located in New York and
New Jersey.
During fiscal 1999, Phar-Mor acquired 2,086,200 shares of the Corporation's
common stock (15.1% of the currently issued shares of common stock) at a cost
of approximately $5.0 million. The Corporation has been advised by Phar-Mor
that it will acquire, from certain preferred stockholders of the Corporation,
an additional 2,862,400 shares of the Corporation's common stock (20.7% of
the currently issued shares) at $2.00 per share upon consummation of the
proposed Avatex and Xetava merger. See "Item 7. Overview" and Note S to the
consolidated financial statements.
OTHER
The Corporation holds an approximate 11.4% common stock interest in Carson, Inc.
("Carson"), a global manufacturer of cosmetics.
At March 31, 1999, the Corporation had an approximate 3.2% common stock interest
in JW Genesis Financial Corp., a full service securities broker and investment
banking firm providing securities transaction processing and other related
services. The Corporation sold a substantial portion of its interest during
April and May 1999 at prevailing market prices.
The Corporation has an approximate 5.0% common stock interest in Imagyn Medical
Technologies, Inc. ("Imagyn"), a developer, manufacturer and distributor for the
urology, minimally invasive and general surgery, and gynecology markets. In May
1999, Imagyn consented to the entry of an order of relief in a Chapter 11
bankruptcy proceeding and indicated that the currently outstanding common stock
would probably be canceled and the common stockholders would likely receive no
distributions as a result of any reorganization plan.
The Corporation holds the equivalent of an approximate 12.9% fully-diluted
interest in RAS Holding Corp. ("RAS"), assuming conversion of all the
outstanding RAS preferred stock and the exercise of all the outstanding RAS
options and warrants. RAS is a privately-held corporation involved in the
development and distribution of medical optical devices.
2
<PAGE>
The Corporation holds the equivalent of an approximate 6.3% interest in
Caring Technologies, Inc. ("Caring"), which is a privately held corporation
that develops, manufactures and markets miniature continuous-wear vital signs
monitors that combine proprietary sensor and wireless data transmission
technologies. In addition, in May 1999, the Corporation made a one year, secured
loan for $1.0 million to Caring and also received five-year warrants to
purchase 1.0 million shares of common stock at $1.30 per share.
The Corporation, through a limited liability company, holds the equivalent of an
approximate 20.5% interest in Chemlink Laboratories LLC ("Chemlink"), which is
principally engaged in the development, manufacture and distribution of
effervescent tablet formulations for use in cleaning, disinfectant and
sterilization applications as well as in various household products.
The Corporation has an approximate 12.3% indirect ownership interest in AM
Cosmetics, Inc. ("AM"), a leading privately held manufacturer of low cost
cosmetics. Subsequent to the fiscal year end, AM undertook a reorganization plan
which has reduced the Corporation's ownership interest to approximately 3.9%.
The Corporation owns $1.25 million of preferred stock of HPD Holdings Corp.
("HPD"), which is a privately held corporation whose subsidiary manufactures,
sells and distributes household product lines. The Corporation also owns 2.5% of
the common stock of HPD.
The interests in Chemlink, HPD and RAS noted above are the Corporation's
direct interest and do not give effect to Phar-Mor's investments in these
same companies. Phar-Mor has an approximate 6.9% interest in RAS on a
fully-diluted basis, a 17.9% interest in Chemlink, and also owns $1.25
million of preferred stock and 2.5% of the common stock of HPD.
The Corporation owned 17.4% of Ben Franklin Retail Stores, Inc. ("Ben Franklin")
which filed for protection under the Bankruptcy Code in July 1996 and
subsequently liquidated its assets under Chapter 7 of the Bankruptcy Code. The
Corporation wrote off its investment in Ben Franklin in fiscal 1997 as a result
of the bankruptcy filing.
ENVIRONMENTAL REGULATION
The Corporation, like many other enterprises, is subject to federal, state and
local laws and regulations governing environmental matters. Such laws and
regulations primarily affect the Corporation's previously sold or discontinued
operations where the Corporation retained all or part of any environmental
liabilities on conditions existing at the date of sale.
It is anticipated that compliance with statutory requirements related to
environmental quality will continue to necessitate cash outlays by the
Corporation for certain of its former operations. The amounts of these
liabilities are difficult to estimate due to such factors as the unknown
extent of the remedial actions that may be required and, in the case of sites
not owned by the Corporation, the unknown extent of the Corporation's
probable liability in proportion to the probable liability of other parties.
Moreover, the Corporation may have environmental liabilities that the
Corporation cannot, in its judgment, estimate at this time and that losses
attributable to remediation costs may arise at other sites. Management
recognizes that additional work may need to be performed to ascertain the
ultimate liability for such sites, and that further information may
ultimately change management's current assessment. See Note N to the
consolidated financial statements of the Corporation and "Item 3. Legal
Proceedings" contained herein for a discussion of outstanding environmental
actions involving the Corporation.
EMPLOYEES
The number of persons employed by the Corporation and its consolidated
subsidiaries was 13 at March 31, 1999. This number does not include 151
employees of the consolidated real estate limited partnerships who were
employed at March 31, 1999 by their respective management companies.
3
<PAGE>
ITEM 2. PROPERTIES
The Corporation's executive office, located at 5910 North Central Expressway,
Suite 1780, Dallas, Texas, contains approximately 8,997 square feet of space
under a lease agreement that expires in December 2001. The Corporation licenses
approximately 57% of such office space to other entities in which the
Corporation has invested.
The following additional information is provided for the real estate
properties discussed in Item 1 under the caption "Real Estate". As stated in
Item 1, the Corporation sold its interests in these properties on May 27, 1999.
The Corporation had an investment in a hotel and office building located in
Annapolis, Maryland that had a book value of $4.9 million and was encumbered
by a $5.1 million loan. The occupancy rate for the hotel for fiscal 1995
through fiscal 1999 was 43%, 65%, 64%, 66% and 63%, respectively. The
occupancy rate at year end for the office building for fiscal 1995 through
fiscal 1999 was 95%, 100%, 100%, 91% and 84%, respectively. The loan was
assumed by the other partner in the development when the Corporation's
interest in the property was sold to that partner in May 1999. The office
building had two tenants which occupied more than 10% of the 38,510 net
rentable square feet. Fleet Business School occupied approximately 29% and
NationsBank approximately 16% of the lease space. The average rental per
square foot at the office building was $22.46 at March 31, 1999. The following
table sets forth the lease expirations at the office building for all current
tenants:
<TABLE>
<CAPTION>
Fiscal Year Number of Tenants Lease in Square Feet Annual Rental % of Annual Rental
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 4 21,119 $ 493,359 72.9%
2002 1 2,900 63,800 9.4%
2003 4 6,114 119,744 17.7%
===================================================================================================================
</TABLE>
The Corporation had an investment in a hotel located in the Watergate area of
Washington, D.C. that had a book value of $8.4 million and was encumbered by
two loans totaling $7.3 million. The occupancy rate for the hotel since its
acquisition in fiscal 1995 was 66%, 62%, 79% and 78%, respectively, for
fiscal 1996 through fiscal 1999. The loans were repaid when the property was
sold in May 1999.
The Corporation had an investment in another hotel located in the Scott
Circle area of Washington, D.C. that had a book value of $16.9 million and
was encumbered by a construction loan of $13.2 million. The occupancy rate
since the opening of the hotel in October 1998 was approximately 65%. The
partnership that owns the property redeemed the Corporation's partnership
interest in May 1999, and the lenders agreed to release the Corporation's
subsidiary from liability on the construction loan.
ITEM 3. LEGAL PROCEEDINGS
MCKESSON\VENDOR LITIGATION
On January 10, 1997, the Corporation filed a ten count lawsuit against McKesson
and certain major pharmaceutical manufacturers styled FoxMeyer Health
Corporation v. McKesson Corporation, et al., Cause No. 9700311, in the 95th
Judicial District Court of Dallas County, Texas (the "McKesson Litigation"). In
November 1998, the Corporation filed an amended petition, in which it withdrew
three of the counts asserted in its original petition. As so amended, the
Corporation alleges in the McKesson Litigation, among other things, that
McKesson and the pharmaceutical manufacturers conspired to drive the
Corporation's pharmaceutical distribution subsidiary, FoxMeyer Drug, out of
business, and that McKesson obtained confidential financial and competitive
information and used the information to cause damage to the Corporation. The
Corporation seeks to recover in excess of $400
4
<PAGE>
million in compensatory damages, plus punitive damages. In February 1997,
certain defendants removed the lawsuit to the United States Bankruptcy Court
for the Northern District of Texas, Dallas Division, and moved to transfer
the McKesson Litigation to the United States Bankruptcy Court for the
District of Delaware as a proceeding related to the Chapter 11 case of
FoxMeyer Drug. On August 27, 1997, the Dallas Bankruptcy Court entered an
order denying the defendants' motion to transfer and, on November 17, 1998,
the Court granted the Corporation's motion to remand the McKesson Litigation
back to Texas state court. As a result of a decision by the Delaware
Bankruptcy Court (described below), the Dallas Bankruptcy Court also
dismissed counts one, two and three of the Texas lawsuit to the extent that
the claims were brought by the Corporation. On May 18, 1999, the United
States District Court for the Northern District of Texas, Dallas Division,
affirmed the Dallas Bankruptcy Court's decision to remand the McKesson
Litigation back to Texas state court and denied as moot its decision not to
transfer the McKesson Litigation to the Delaware Bankruptcy Court. The
District Court has not yet ruled on the Corporation's cross-appeal of the
Dallas Bankruptcy Court's order dismissing counts one, two and three. On June
16, 1999, certain of the defendants filed a notice of appeal of the portion
of the District Court's decision that denied as moot the appeal of the Dallas
Bankruptcy Court's decision not to transfer the McKesson Litigation to the
Delaware Bankruptcy Court.
In addition, on December 3, 1998, McKesson filed a counterclaim against the
Corporation and a third party complaint against Bart A. Brown, Jr., the
Chapter 7 Trustee (the "Trustee") of FoxMeyer and FoxMeyer Drug, and three of
the Corporation's current or former officers, Abbey Butler, Melvyn Estrin and
Edward Massman, alleging claims of fraudulent misrepresentation, negligent
misrepresentation, breach of letter agreement and inducing breach of
contract. The Corporation and the third party officer defendants believe that
the counterclaim and the third party claims are without merit and will
vigorously defend themselves against such claims.
On February 26, 1997, the Official Unsecured Creditors' Committee of the
FoxMeyer and FoxMeyer Drug bankruptcy estates (the "Committee") filed a
lawsuit against the Corporation in the Delaware Bankruptcy Court under
Adversary No. 97-20. In the Delaware lawsuit, the Committee sought a
declaration that the claims asserted by the Corporation in the McKesson
Litigation are property of the FoxMeyer and FoxMeyer Drug estates and an
injunction barring the Corporation from continuing to prosecute the McKesson
Litigation. The Trustee has succeeded to the interests of the Committee, and
McKesson and the other Texas defendants subsequently intervened in the
Committee's lawsuit. McKesson filed its own complaint and asserted that (a)
as of the commencement of the Chapter 11 cases in August 1996, the claims
asserted in the McKesson Litigation were property of the FoxMeyer and
FoxMeyer Drug estates, and (b) as of November 1996, when McKesson purchased
substantially all of the assets of FoxMeyer Drug, the claims were transferred
to McKesson. On August 24, 1998, the Delaware Bankruptcy Court denied the
Texas defendants' first motion for summary judgment and ruled that the
parties should return to Texas and move the McKesson Litigation forward as
much as possible. On November 12 and 16, 1998, the Delaware Bankruptcy Court
granted in part and denied in part the Texas defendants' second motion for
summary judgment and ruled that the Corporation is judicially estopped from
pursuing counts one, two and three of the Texas lawsuit (for fraud, negligent
misrepresentation and conspiracy). The Delaware Bankruptcy Court also
indicated that, if discovery shows that there is "substantial overlap"
between the factual allegations underlying counts one, two and three and
those underlying the remaining counts (for breach of confidential
relationship, tortious interference with contract, interference with business
and business disparagement), those counts may be barred as well. The
Corporation has filed a motion to revise the November 12 and 16, 1998 order,
and the Texas defendants have filed a renewed motion for summary judgment
with respect to the remaining four counts, to which the Corporation has
objected. The parties are awaiting a ruling on these motions, both of which
were heard on April 14, 1999. In addition, the Corporation has recently
entered into a settlement agreement with one of the manufacturer defendants
in the McKesson Litigation, under which the Corporation received a
confidential settlement payment.
1994 MERGER LITIGATION
On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation
had proposed a merger in which FoxMeyer would be merged with and into a
wholly-owned subsidiary of the Corporation, making FoxMeyer a wholly-owned
subsidiary of the Corporation. Shortly after the announcement, class action
lawsuits were filed against the Corporation, FoxMeyer and certain of FoxMeyer's
officers and directors in the Delaware Court of Chancery. Following a number of
procedural matters, and the execution (and subsequent withdrawal) of a
5
<PAGE>
Memorandum of Understanding dated June 30, 1994 under which the litigation would
be dismissed, the litigation was consolidated and an amended complaint was filed
on February 13, 1996. The amended complaint alleged that the defendants breached
their fiduciary duties to FoxMeyer's shareholders by agreeing to the merger at
an unfair price and at a time designed so that the Corporation could take
advantage of, among other things, an alleged substantial growth in the business
of FoxMeyer. The complaint also alleged that the proxy statement issued in
connection with the merger failed to disclose certain matters relating to the
proposed merger. In fiscal 1999, the parties reached a tentative settlement of
the lawsuit in which the Corporation will pay the class the amount of
$1,450,000, a portion of which will be paid by the directors' insurance carrier.
The settlement is subject to definitive documentation and approval by the
Delaware Court of Chancery.
1996 SHAREHOLDER LITIGATION
The Corporation and certain of its current and former officers and directors
have been named in a series of purported class action lawsuits that were
filed and subsequently consolidated under Zuckerman, et al. v. FoxMeyer
Health Corporation, et al., in the United States District Court for the
Northern District of Texas, Dallas Division, Case No. 396-CV-2258-T. The
lawsuit purports to be brought on behalf of purchasers of the Corporation's
common and its Series A and convertible preferred stocks during the period
July 19, 1995 through August 27, 1996. On May 1, 1997, plaintiffs in the
lawsuit filed a consolidated amended class action complaint, which alleges
that the Corporation and the defendant officers and directors made
misrepresentations of material facts in public statements or omitted material
facts from public statements, including the failure to disclose purportedly
negative information concerning its National Distribution Center and Delta
computer systems and the resulting impact on the Corporation's existing and
future business and financial condition. On March 31, 1998, the Court denied
the Corporation's motion to dismiss the amended complaint in the lawsuit.
Discovery is proceeding in the lawsuit, and the parties are awaiting a ruling
on the plaintiffs' class certification motion. The Corporation intends to
continue to vigorously defend itself in the lawsuit.
The Corporation and its Co-Chairmen and Co-Chief Executive Officers have also
been named as defendants in Grossman v. FoxMeyer Health Corp., et al., Cause
No. 96-10866-J, in the 191st Judicial Court of Dallas County, Texas. The
lawsuit purports to be brought on behalf of all holders of the Corporation's
common stock during the period October 30, 1995 through July 1, 1996, and
seeks unspecified money damages. Plaintiff asserts claims of common law fraud
and negligent misrepresentation, based on allegations that she was induced
not to sell her shares by supposed misrepresentations and omissions that are
substantially the same as those alleged in the Zuckerman action described
above. On September 28, 1997, the Court denied the Corporation's motion for
summary judgment in the lawsuit. Discovery is proceeding in the lawsuit, and
the Corporation intends to continue to vigorously defend itself in the
lawsuit.
PREFERRED STOCKHOLDER LITIGATION
In April 1998, three lawsuits were filed by certain of the Corporation's
preferred stockholders relating to the proposed merger of the Corporation
into Xetava. First on April 23, 1998, Elliott Associates, L.P. ("Elliott")
filed a lawsuit against the Corporation, Xetava and seven of the
Corporation's directors in the Delaware Court of Chancery. In this lawsuit,
Elliott sought to enjoin the proposed merger by alleging that (i) the
proposed merger required the consent of the holders of the Corporation's
preferred stock, (ii) the individual defendants' actions in approving the
merger breached their fiduciary duties of care and loyalty, and (iii) the
individual defendants further breached the fiduciary duties by structuring
the merger in a manner calculated to entrench themselves in office. Second,
on April 23, 1998, Harbor Finance Partners, Ltd. and Anvil Investment
Partners, L.P. (collectively, "Harbor") filed a purported class action
lawsuit, allegedly on behalf of the holders of the Corporation's two series
of preferred stock, against the Corporation and the same seven individual
defendants in the Delaware Court of Chancery. In this lawsuit, Harbor alleged
the same allegations contained in the first two counts of the Elliott
lawsuit, and further alleged that (i) the defendants breached the implied
covenant of good faith in the "organic corporate documents" applicable to the
preferred stock and (ii) the defendants' actions constituted an anticipatory
breach of such documents. Third, on April 29, 1998, Robert Strougo filed a
lawsuit against the Corporation and the seven individual defendants in the
Delaware Court of Chancery, which was substantially identical to the Harbor
lawsuit. In August 1998, the Delaware Supreme Court ruled in these lawsuits
that the holders of the Corporation's convertible preferred stock have the
right to vote separately as a class on the proposed merger of the Corporation
into Xetava, as it was structured and announced by the Corporation on April
14, 1998. On June 18, 1999 the Corporation announced an agreement with the
plaintiffs to settle and dismiss the lawsuits in connection with the revised
proposed merger of Xetava into the Corporation. The settlement of the
lawsuits is subject to various conditions, including the approval of the
Delaware Court of Chancery and the closing of the proposed merger
transaction, which in turn is subject to various conditions, including the
approval of the transaction by the Corporation's common and two series of
preferred stockholders, voting separately as a class. See Note S to the
consolidated financial statements.
DERIVATIVE LITIGATION
On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed a
lawsuit, allegedly on behalf of the Corporation, against seven of the
Corporation's current directors and three of its former directors who were
members of its Personnel and Compensation Committee, under No. 602773198 in
the Supreme Court of New York, County of New York. The plaintiffs were
originally two holders of the Corporation's Series A preferred stock, and the
lawsuit
6
<PAGE>
relates primarily to agreements and transactions between the Corporation and
its Co-Chairmen and Co-Chief Executive Officers, Abbey Butler and Melvyn
Estrin. The plaintiffs allege that, in connection with such agreements and
transactions, (i) the defendants breached their fiduciary duty to the
Corporation's stockholders, (ii) the compensation arrangements between the
Corporation and Messrs. Butler and Estrin constitute corporate waste, and
(iii) the defendants caused the Corporation's subsidiaries and affiliates to
improperly purchase the Corporation's common stock based on confidential
non-public information. The plaintiffs seek damages, injunctive relief and an
accounting. In January 1999, a stipulation was executed providing that the
litigation, insofar as brought by Stephen Mizel IRA, was voluntarily
discontinued with prejudice. In April 1999, the Court denied the remaining
plaintiff's motion to amend its complaint to allege additional claims.
Discovery is proceeding in the lawsuit. The Corporation has been paying the
defense costs of the defendants in accordance with Delaware General
Corporation Law, the Corporation's charter and by-laws, and the terms and
conditions of Indemnification Agreements between the Corporation and certain
of the defendants.
NATIONAL ALUMINUM CORPORATION
During the fiscal year ended March 31, 1990, the Corporation disposed of the
operating assets of its subsidiary, National Aluminum Corporation ("NAC"). In
connection with the disposition of such assets, the Corporation retained
responsibility for certain environmental matters, as described in paragraphs (a)
through (g) below:
(a) DIAZ. In June 1988, NAC received notification that it was considered to be
one of several hundred potentially responsible parties ("PRPs") for the clean-up
of a site known as the Diaz Refinery located in Diaz, Arkansas. In September
1989, a complaint was filed against NAC and others in the Chancery Court of
Jackson County, Arkansas, styled Grantors to the Diaz Refinery PRP Committee
Site Trust, et al. v. Rheem Manufacturing Company, et al., in which a PRP
steering committee sought a declaratory judgment relating to cleanup liability
and cost recovery at the site. In January 1990, NAC was dismissed as a defendant
and realigned as a plaintiff, and thereby joined the PRP steering committee that
is participating in site remediation activities. Assuming final approval of the
cleanup by the State of Arkansas, NAC does not anticipate any additional
material costs at the site.
(b) FISHER-CALO. In October 1990, the Environmental Protection Agency (the
"EPA") sent a Special Notice Letter to approximately 350 PRPs, including NAC,
demanding payment of the EPA's past costs and requesting voluntary participation
in performing or financing the remedial design/remedial action at the
Fisher-Calo Chemical and Solvent Recovery Site located in Kingsbury, Indiana. In
August 1991, approximately 52 PRPs, including NAC, executed a Consent Decree to
perform the remedial design/remedial action. Under the Consent Decree and Cost
Sharing Agreement among the PRPs, NAC paid its allocated share of approximately
$890,000 of the estimated $25 to $35 million total cost of the cleanup.
Excluding any potential cost overruns, funding of the contribution action
against the non-participating PRPs and annual administrative fees of
approximately $4,000, NAC does not anticipate any additional material costs at
the site.
(c) GRANVILLE SOLVENTS. In May 1995, a complaint was filed against NAC and
others in the United States District Court for the Southern District of Ohio
styled AT&T Global v. Union Tank Car Co., in which a PRP group seeks to recover
costs incurred relating to the Granville Solvents site located in Granville,
Ohio. In August 1995, NAC was dismissed as a defendant following its payment of
approximately $18,000 for its allocated share of past costs and agreement to
join the PRP group and participate in funding the remedial work at the site. NAC
also signed an Administrative Order on Consent with the EPA. The total cost of
the remedial work at the site is estimated to be approximately $8.5 million, and
NAC's allocated share is likely to be approximately 1.0% of the total cost and
the related litigation assessments for cost recovery actions against
non-participating PRPs.
(d) GREEN RIVER. In January 1992, the EPA notified NAC that it was considered to
be one of a number of PRPs with respect to the disposal of allegedly hazardous
substances at the Green River Disposal Site located in Davies County, Kentucky.
With respect to costs associated with the investigation and remediation of the
site, including but not limited to the remedial investigation/feasibility study
("RI/FS") and the remedial action, NAC has paid a total of approximately
$267,000 of the total estimated costs, and expects to pay in the future a small
amount each year for operating and maintenance costs. In 1997, NAC and a number
of other parties received a demand from the EPA to
7
<PAGE>
recover certain of its costs incurred at the site, estimated at $1.2 million.
NAC is supporting efforts of the PRPs that previously paid the costs to
investigate and remediate the site to have the EPA's costs paid by
non-participating PRPs. In any event, NAC believes that its share of such
costs is unlikely to exceed $60,000 based on a volumetric allocation. In
addition, at the direction of the EPA, the PRPs have agreed to undertake
limited groundwater monitoring in an attempt to establish that groundwater
remediation is unnecessary. Should groundwater remediation be necessary, NAC
would allegedly be responsible for its volumetric share of the costs, which
costs cannot be estimated at this time.
(e) HASTINGS/AMERIMARK. In April 1992, the United States District Court for the
Western District of Michigan ruled in favor of Amerimark Building Products, the
successor to Hastings Building Products, Inc., that NAC was liable for 50% of
all future costs of removal or remedial action related to the mask wash
contamination of soil and groundwater in the vicinity of a former NAC plant
located in Hastings, Michigan. Thereafter, the court entered an amended ruling
that NAC was liable for 75% of response costs incurred to date and any further
response costs related to mask wash contamination that are not inconsistent with
the national contingency plan. NAC has paid approximately $530,000 of response
costs incurred to date at the site, and expects to pay at least $300,000
depending on the status of the water treatment plan at the site, plus ongoing
operating and maintenance costs.
(f) NORTHEAST GRAVEL. NAC is one of 25 PRPs participating in a RI/FS at the
Northeast Gravel Site located in Plainfield, Michigan. Based on its 0.19%
allocated share among the PRP group, NAC had paid its $955 share of the $300,000
total cost of the RI/FS at the site. The PRP group has completed the remedy at
the site and expects to receive the final settlement agreement in the near
future. NAC does not anticipate any additional material costs at the site.
(g) ORGANIC CHEMICAL. In March 1991, NAC received notification that its former
Hastings Aluminum Products division was considered to be one of a number of PRPs
for wastes present at the Organic Chemical Site located near Grandville,
Michigan. In the notice, the EPA requested NAC's voluntary participation in
certain remedial actions and, in January 1992, the EPA issued an Administrative
Order requiring NAC and approximately 150 other PRPs to perform remediation of
operating unit one at the site. A group of PRPs, including NAC, is performing
the first remediation at the operating unit one and, in March 1999, executed a
Consent Decree with respect to remediation of operating unit two. NAC
anticipates that its remaining costs at the site will consist of (i) NAC's 2.0%
allocated percentage of at least $500,000 in ongoing pump and treatment costs at
operating unit one to be paid over a number of years, (ii) approximately $66,000
of costs attributable to NAC's share of operating unit two remediation costs,
(iii) NAC's 2.0% allocated percentage of future EPA oversight costs permitted
under the Consent Decree, which NAC estimates are likely to be de minimus, and
(iv) NAC's share of assessments attributable to cost recovery action brought
against non-participating PRPs.
BULL MOOSE TUBE COMPANY
In August 1988, the Corporation sold all of the outstanding stock of Bull Moose
Tube Company to Caparo, Inc. (collectively, "Caparo"). Caparo has indicated that
it will seek indemnification from the Corporation for the costs of removing
dioxin contaminated soil at a facility located in Gerald, Missouri, at which
plant roads were allegedly sprayed with dioxin contaminated oil in 1973 and
1977. The contamination has been remediated under an EPA plan. The EPA may seek
recovery of removal and transportation (but not incineration) costs from Caparo,
which may then seek recovery of such costs, along with defense costs, from the
Corporation. In 1997, Caparo provided the Corporation with certain initial cost
information totaling approximately $305,000. The information is an estimate
only, and the Corporation believes that it has certain defenses available to it
under the original stock purchase agreement.
FOXMEYER CORPORATION
In April 1998, the Trustee filed a lawsuit against the five former directors of
FoxMeyer, alleging that the defendants breached their fiduciary duties in
connection with the June 19, 1996 dividend of certain assets to the Corporation.
The defendants have denied liability in the lawsuit and, in connection with the
October 1997 settlement of a separate lawsuit brought by the Trustee against the
Corporation relating to the dividend, the defendants received covenants not to
execute from the Trustee. The Corporation is paying the initial defense costs of
the defendants in the lawsuit
8
<PAGE>
by reason of the fact that they may have been serving at the request of the
Corporation as a director or officer of FoxMeyer.
BEN FRANKLIN RETAIL STORES, INC.
In 1997, the bankruptcy trustee and certain creditors of the Corporation's
17%-owned subsidiary, Ben Franklin, filed lawsuits against certain former
officers and directors of Ben Franklin, the Corporation and certain current and
former officers and directors of the Corporation. The Corporation and its
officers and directors have since been dropped as defendants in the lawsuits. In
connection with paying its own defense costs and those of its officers and
directors, the Corporation also initially paid a portion of the defense costs of
certain individuals who are named as defendants in these lawsuits by reason of
the fact that they may have been serving at the request of the Corporation as a
director or officer of Ben Franklin. On October 13, 1998, the United States
Bankruptcy Court for the Northern District of Illinois issued Memorandum
Opinions that dismissed two of the lawsuits against all of the defendants except
David Brainard. On December 1, 1998, the Bankruptcy Court denied a motion to
reconsider one of these opinions, and the plaintiffs have filed objections to
both opinions with the United States District Court for the Northern District of
Illinois. In the third lawsuit, pending in Illinois state court, the court
struck the plaintiffs' second amended complaint and ordered a third amended
complaint to be filed. If liability is ever imposed in any of the lawsuits, the
Corporation may, if appropriate, agree at a future date to indemnify certain of
the remaining defendants in the lawsuit in accordance with Delaware law.
OTHER
The Corporation also is a party to various other lawsuits arising in the
ordinary course of business. The Corporation, however, does not believe that the
outcome of these lawsuits, individually or in the aggregate, will have a
material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
<PAGE>
PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the OTC Bulletin Board system.
Prior to February 1, 1999, the Corporation's common and and its two series of
preferred stocks traded on the New York Stock Exchange ("NYSE"). At May 31,
1999, the Corporation had 5,688 common stock holders of record. Information
concerning the high and low market prices of the Corporation's common and
preferred stocks and dividends declared on such stocks for each quarter in
the last two fiscal years are shown below. Prior to February 1, 1999, the
prices presented are the high and low sale prices as reported on the NYSE
Composite Tape. After January 31, 1999, the prices presented are bid prices
which represent prices quoted by broker-dealers on th OTC Bulletin Board
system and do not necessarily reflect prices from actual transactions.
STOCK PRICES FOR FISCAL 1999 AND 1998
<TABLE>
<CAPTION>
Dividends Declared Per
Market Price Range Share
-----------------------------------------------------------------------------
Fiscal 1999 Fiscal 1998
---------------------------------------------------- Fiscal Fiscal
High Low High Low 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock (Symbol: AVAX)
1st Quarter $ 2 11/16 $ 1 13/16 $1 1/2 $ 0 3/4 $0 $0
2nd Quarter 2 1/16 0 7/8 2 1/8 0 15/16 0 0
3rd Quarter 1 3/16 0 5/8 2 1/8 1 1/4 0 0
4th Quarter 1 3/8 0 1/2 2 5/16 1 3/16 0 0
- ---------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock (Symbol: AVAXP)
1st Quarter 21 14 1/2 10 3/8 9 3/4 0* 0*
2nd Quarter 16 12 13 1/4 10 0* 0*
3rd Quarter 12 1/2 5 16 1/2 12 1/16 0* 0*
4th Quarter 6 2 15 1/2 13 15/16 0* 0*
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock Series A (Symbol: AVAXO)
1st Quarter 16 7/8 11 3/4 8 1/2 6 7/8 0* 0*
2nd Quarter 13 3/8 8 11 7 15/16 0* 0*
3rd Quarter 8 3 5/16 13 1/2 9 1/2 0* 0*
4th Quarter 4 1/2 2 3/4 15 12 7/16 0* 0*
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Dividends were not declared. Both series of preferred stock provide
for cumulative dividends which have been accrued as if declared. For
the Convertible Preferred Stock, cumulative unpaid dividends due at
March 31, 1999 were $12.50 per share. For the Preferred Stock Series
A, cumulative unpaid dividends due at March 31, 1999 were
approximately $11.83 per share.
Information with respect to restrictions on the payment of dividends on the
common stock, the unpaid cumulative dividends on the preferred stock and the
proposed merger with Xetava are incorporated herein by reference to Note I to
the consolidated financial statements contained herein in Item 8.
On January 28, 1999, the NYSE informed the Corporation that it no longer met the
continued listing requirements of the NYSE and that trading of its common
(symbol AAV), convertible preferred (symbol AAVPr) and Series A preferred
(symbol AAVA) stocks would be suspended prior to the opening of the NYSE on
Monday, February 1, 1999. The Corporation's common and preferred stocks now
trade on the OTC Bulletin Board system under the symbols set forth in the table.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements contained herein:
AVATEX CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY AND RELATED DATA
<TABLE>
<CAPTION>
For the years ended March 31,
(In millions of dollars, except per share amounts) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues $ 10.5 $ 12.2 $ 12.5 $ 10.4 $ 4.2
Operating costs 16.3 21.8 14.9 17.5 14.3
Operating loss (5.8) (9.6) (2.4) (7.1) (10.1)
Other income (expense) (1.5) (11.3) 19.2 21.8 47.4
Financing costs, net 0.5 3.5 4.7 3.6 1.5
National Steel Corporation - (53.2) 9.6 3.3 5.4
Equity in income (loss) of affiliates 1.3 (3.3) (5.2) (4.2) 0.8
Income tax provision - 0.1 29.9 3.0 0.3
Minority interest in results of operations of
consolidated subsidiaries 0.1 0.2 (1.1) 2.1 2.3
Income (loss) from continuing operations (6.6) (81.2) (12.3) 5.1 39.4
Discontinued operations - 3.7 (267.1) (68.8) 2.2
Net income (loss) $ (6.6) $(77.5) $(279.4) $ (63.7) $ 41.6
- -----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
Basic Earnings per share:
Continuing operations $(2.65) $(7.74) $ (2.10) $ (0.97) $ 1.38
Discontinued operations - 0.27 (17.89) (4.16) 0.15
Earnings (loss) per share $(2.65) $(7.47) $(19.99) $ (5.13) $ 1.53
Diluted Earnings per share:
Continuing operations $(2.65) $(7.74) $ (2.10) $ (0.97) $ 1.37
Discontinued operations - 0.27 (17.89) (4.16) 0.15
Earnings (loss) per share $(2.65) $(7.47) $(19.99) $ (5.13) $ 1.52
Cash dividends per share - - - - -
Average number of common shares outstanding (in thousands):
Basic 13,102 13,806 14,931 16,521 14,711
Diluted 13,102 13,806 14,931 16,521 14,821
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Working capital $ 27.3 $ 40.6 $ 46.4 $ 276.4 $ 444.5
Total assets 117.2 119.3 167.2 1,577.1 1,777.0
Capital expenditures 12.4 5.6 34.7 40.8 59.1
Long-term debt 34.3 22.9 27.5 403.8 422.8
Redeemable preferred stock 243.2 215.0 189.4 187.3 175.0
Stockholders' equity (deficit) (177.9) (141.9) (113.5) 202.5 304.2
- -----------------------------------------------------------------------------------------------------------------------------
KEY FINANCIAL RATIOS
Current ratio 6.19:1 5.36:1 4.80:1 1.38:1 1.57:1
Long-term debt as a percent of total capitalization 34.4% 23.9% 26.6% 50.9% 46.9%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The comparability of the information presented above is affected by
acquisitions, dispositions, and other transactions which are described in the
accompanying footnotes to the consolidated financial statements which should be
read in conjunction with this five-year financial summary. Securities and
Exchange Commission regulations require that capitalization ratios also be shown
with the redeemable preferred stock included in debt. On
11
<PAGE>
this basis, long-term debt as a percentage of total capitalization would be
278.8%, 247.8%, 209.8%, 74.5%, and 66.3%, respectively, for each of the five
years ended March 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
The Corporation is a holding company that, along with its subsidiaries, owns
interests in hotels, an office building and other corporations and
partnerships. Through Phar-Mor, its 38% owned affiliate, the Corporation is
involved in operating a chain of discount retail drugstores.
On June 18, 1999, the Corporation announced that it had entered into an
Amended and Restated Agreement and Plan of Merger (the "Revised Merger
Agreement") with its wholly-owned subsidiary, Xetava. The Revised Merger
Agreement amends and restates the Agreement and Plan of Merger between the
Corporation and Xetava dated April 9, 1998. Under the Revised Merger
Agreement, which was approved by the Corporation's Board of Directors, Xetava
will merge with and into the Corporation, and the Corporation's existing
preferred stockholders will receive new Class A common stock of the
Corporation or, alternately, a combination of cash, secured notes, warrants
and other consideration. The Corporation's common stockholders will receive
new Class A common stock of the Corporation on a one-for-one basis for their
current common stock. Consummation of the proposed merger is subject to,
among other things, (i) the approval of the merger by holders of a majority
of the Corporation's common stock and by the holders of at least two-thirds
of each series of preferred stock, voting separately as a class, (ii) the
effectiveness of a registration statement filed with the Securities and
Exchange Commission with respect to the Class A shares, the notes and
warrants described below, and (iii) the dismissal of Delaware lawsuits filed
in connection with the April 1998 merger agreement. The Corporation
anticipates a stockholder meeting to approve the merger will take place in
the fall of 1999.
Under the Revised Merger Agreement, each share of existing convertible preferred
stock will be converted into 9.134 shares of Class A common stock of the
Corporation or, at the election of the holder, into $3.7408 in cash, $8.34
principal amount of a 6.75% note to be issued by Avatex Funding, Inc.
("Funding"), a new wholly-owned subsidiary of the Corporation, and warrants to
purchase 0.67456 shares of Class A common at $2.25 per share. Each share of
Series A preferred stock will be converted into 7.253 shares of Class A common
stock of the Corporation or, at the election of the holder, into $2.9705 in
cash, $6.623 principal amount of a 6.75% note, and warrants to purchase 0.53567
shares of Class A common at $2.25 per share. In addition, the shareholders of
the two series of preferred stock who elect the cash, note and warrant option
will receive a deferred contingent right to a portion of any net recovery, up to
$7,500, that the Corporation may receive in certain litigation brought by the
Corporation against McKesson and a number of large pharmaceutical manufacturers.
The amount will be equal to 20% of such net recovery, up to $7,500, with 84% of
such recovery available to all the Series A preferred stockholders and 16%
available to all the convertible preferred stockholders, with the per share
amount to be received by each preferred stockholder equal to its pro rata share
of an amount that is calculated based on the total number of shares of preferred
stock outstanding immediately before the merger.
Funding will be a new subsidiary whose purpose will be to issue the new 6.75%
notes and to own 3,571,533 shares of common stock of Phar-Mor, which are now
owned by the Corporation. The shares of Phar-Mor will be pledged to secure the
notes. The principal of the notes will be due in three years from the date of
issuance, and the interest will be payable semi-annually in cash. The
Corporation will also guarantee the notes. The warrants to be issued in the
merger will expire 5 years and 3 months after closing of the proposed merger.
Assuming each of the preferred stockholders elects to receive the cash, note
and warrant option in the proposed merger, the Corporation will be required
to pay approximately $15,250 in cash and issue warrants to purchase
approximately 2,750,000 shares of the Class A common stock. 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 48.5% of the convertible preferred and 50.1% of the Series A
preferred stock outstanding have agreed to elect this cash, note and warrant
option.
12
<PAGE>
The Corporation has also entered into settlement, stockholder and voting
agreements with the preferred stockholder plaintiffs in the three Delaware
lawsuits pending against the Corporation, Xetava and certain of their
directors. Under the Stipulation of Settlement entered into by the
Corporation and the plaintiffs in the class action lawsuits on behalf of all
holders of existing preferred stock and for the plaintiff in the non-class
action lawsuit, subject to court approval and effective upon the closing of the
merger, all three Delaware lawsuits will be settled and the Corporation will
pay up to $1,100 in plaintiffs' attorneys' fees. Under a voting agreement
with one of the named plaintiffs in one of the class action lawsuits, such
plaintiff and its affiliates have agreed to vote in favor of the proposed
merger and to waive any appraisal rights in connection with the proposed
merger. Such plaintiff will also receive $300 in exchange for a ten year
standstill agreement, a general release of liabilities (subject to certain
specified exceptions) and other consideration. Under a separate agreement
with the plaintiff in the third Delaware lawsuit and another party, these
parties and their affiliates and associated companies have agreed to vote in
favor of the merger, to elect to receive the cash, note and warrant option
and to waive any appraisal rights in connection with the proposed merger.
These parties will also receive $600 in exchange for a ten year standstill
agreement, a general release of liabilities and other consideration. In
addition, these parties have entered into a stock purchase agreement with
Phar-Mor, under which, subject to the consummation of the proposed merger,
Phar-Mor has agreed to purchase 2,862,400 shares of the Corporation's common
stock from these parties at $2.00 per share with closing to occur at the same
time as the Xetava merger. Phar-Mor has been granted a proxy to vote these
shares of the Corporation's common stock in favor of the merger.
During the fiscal year ended March 31, 1999, the Corporation made private equity
investments in three entities. A brief description of these investments follows.
In April 1998, the Corporation invested in RAS by purchasing 10% Series B
convertible preferred stock ("Series B Stock"). In July 1998 and February
1999, the Corporation made additional purchases of the Series B Stock after
RAS met certain performance goals. The Corporation's total investment was
approximately $1,400. The Corporation also received two-year warrants to
purchase additional Series B Stock for an additional investment of $934. On a
fully-diluted basis, assuming the exercise of all convertible preferred
stock, warrants and options outstanding, the Corporation would own
approximately 12.9% of the common stock of RAS. RAS, through its wholly-owned
subsidiary Presby Corp., has developed a surgical technique called the
Surgical Reversal of Presbyopia ("SRP"), which uses a patented medical
device, the Scleral Expansion Band ("SEB"), to treat presbyopia in the human
eye. Presbyopia is, in general, the loss of the ability of the human eye to
focus on near objects due to aging. RAS is in the process of marketing the
SEBs in certain international markets where the SEB has received regulatory
approval. The Corporation has been advised that in March 1999 RAS received
conditional approval from the FDA to begin its SRP clinical trials in the
United States, but that the outcomes of the trials and achieving commercial
success of the technique are each highly uncertain. The Corporation has a
consulting contract with RAS and also licenses office space at its Dallas,
Texas office to RAS.
In March and December 1998, the Corporation invested a total of $3.0 million
to acquire a 41% interest in a Delaware limited liability company, Chemlink
Acquisition Company LLC ("CLAC"), which in turn acquired a 50% interest in
Chemlink. Chemlink is a privately held Atlanta based company that develops
and manufactures products that use a proprietary, and often patented,
effervescent formulation. These products include specialty cleaning,
disinfecting and sterilant products for the medical and dental professions
and certain other consumer and commercial products which are under
development. The effervescent formulation will supposedly allow easier
packaging, less costly shipping and potentially higher effectiveness of
enzyme products than pre-mixed solutions. The Corporation has been advised
that Chemlink believes that it will be able to enter into several new
distribution and/or marketing agreements during the Corporation's next fiscal
year but that Chemlink has not yet achieved commercial success with its
product lines and such success remains uncertain. The Corporation has a
consulting contract with Chemlink.
In April 1998, the Corporation invested $1,250 in preferred and common stock
of HPD. The Corporation acquired 2.5% of the common stock of HPD. HPD
Laboratories ("HPD Labs"), a wholly owned subsidiary of HPD, purchased the
assets associated with Block Drug Company's household product lines. The
Corporation has been advised that HPD Labs intends to continue and extend the
current product lines and expand into compatible lines.
On May 12, 1999, the Corporation announced that it had entered into an agreement
to sell its interests in its three remaining real estate developments. On May
27, 1999, one property was sold to a third party and the Corporation's interests
in the partnerships that owned the other two properties were sold to the other
partners or their affiliates.
13
<PAGE>
As a result of these sales, the Corporation received $11,400 in cash and a
one-year, $600 secured note. The note is secured by the Corporation's former
interests in the two partnerships that were sold to its partners or their
affiliates. As a result of these transaction, the Corporation will recognize
a gain in fiscal 2000 of approximately $6,175 ($5,565 net of taxes).
On January 28, 1999, the NYSE informed the Corporation that it no longer met the
continued listing requirements of the NYSE and that trading of its common
(symbol AAV), convertible preferred (symbol AAVPr) and Series A preferred
(symbol AAVA) stocks would be suspended prior to the opening of the NYSE on
Monday, February 1, 1999. The Corporation's common and preferred stocks started
trading on the OTC Bulletin Board system effective February 1, 1999 under the
following symbols: AVAX for the common stock, AVAXP for the convertible
preferred stock and AVAXO for the Series A preferred stock.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999 COMPARED
TO YEAR ENDED MARCH 31, 1998
OPERATING LOSS
Revenues from real estate operations decreased $1,719 to $10,509 for the year
ended March 31, 1999 compared to $12,228 for the year ended March 31, 1998.
The decrease was primarily the result of the loss of revenues due to the
disposal of the Arlington, Virginia property in fiscal 1998 ($3,884)
partially offset by revenues from a new Washington, D.C. hotel opened in
October 1998 ($1,930). The remainder of the change represents increased
revenues at properties that were open in both years. As discussed above, the
sale of the remaining real estate properties in May 1999 will result in a
significant decrease in revenues in fiscal year 2000.
For the year ended March 31, 1999, operating costs, including depreciation
and amortization, decreased $778 to $16,282 compared to $17,060 for the year
ended March 31, 1998. The decrease was due to a reduction in real estate
operating costs of $1,410 partially offset by an increase in corporate
overhead costs of $632. Real estate costs decreased primarily as a result of
the Arlington, Virginia property disposed of in fiscal 1998 partially offset
by increased expenses for the Washington, D.C. hotel opened in October 1998.
Increased corporate expenses were primarily the result of the costs
associated with the proposed merger with Xetava as well as increased legal,
insurance and certain other operating costs, partially offset by lower
expenses for compensation, pensions, consultants and travel. The sale of the
Corporation's interests in real estate properties in May 1999 will result in
only two months of operating expenses during fiscal 2000 related to real
estate operations. The sale of these properties will have only a minimal
impact on corporate expenses in the next fiscal year. The consummation of the
merger with Xetava and the settlement with preferred stockholders may result
in reductions in legal and consulting expenses associated with the merger and
accompanying lawsuits. The extent of the savings depends on the timing of the
settlement and the costs associated with the final negotiations in fiscal
2000. In fiscal 1999, these expenses were approximately $2,170.
Unusual items for the year ended March 31, 1998 consisted of $33,292 in charges
incurred in connection with the settlement reached in litigation with the
Trustee, as discussed in Note N to the consolidated financial statements. This
charge was partially offset by $1,715 in income from the settlement of
litigation, principally from payments received from insurance carriers related
to the settlement of environmental liability claims, and $26,831 in gains in
connection with the settlement of certain pension and other postretirement
benefit obligations for former officers and employees.
OTHER EXPENSE
Other expense of $1,475 for the year ended March 31, 1999 related to a $3,386
reduction in the carrying value of certain of the Corporation's investments,
including a $1,795 reduction in the carrying value of Imagyn, partially offset
by $1,911 in gains primarily from recoveries on investments which had been
written-off in prior years, a royalty payment from a property sold in the prior
fiscal year and dividends on investments. In the year ended
14
<PAGE>
March 31, 1998, other expense of $11,337 related primarily to the $12,938
reduction in the carrying value of the Corporation's investment in Imagyn to
its market value, partially offset by $1,601 in gains principally from the
sale of other assets.
INTEREST INCOME (EXPENSE)
Interest income increased $165 to $1,874 for the year ended March 31, 1999
compared to $1,709 for the year ended March 31, 1998. The average amount of
funds invested increased compared to the prior year due to cash received in
November 1997 from the NSC settlement and the sale of US HealthData Interchange,
Inc. ("USHDI") and interest earned on the note received as part of the NSC
settlement (see Notes B and G to the consolidated financial statements).
Interest expense decreased $2,816 to $2,417 for the year ended March 31, 1999
compared to $5,233 for the year ended March 31, 1998. $536 of the decrease
related to real estate operations. This decrease was primarily due to the
absence of debt on the property disposed of in fiscal 1998 partially offset
by interest incurred in the current fiscal year in connection with the
property opened in October 1998. The $1,649 expense incurred in fiscal 1999
related to these real estate properties will be substantially reduced in
fiscal 2000 as a result of the sale of the Corporation's real estate
investments discussed above. Interest expense related to corporate activities
declined $2,280 due primarily to the termination or settlement of certain
employee deferred compensation plans and other benefit plans of subsidiaries
of the Corporation, which obligations had originally been recorded at a
discount, and the repayment of a secured debt facility during fiscal 1998.
This decline in interest expense for corporate activities was partially
offset by additional interest expense related to the note payable to the
Trustee.
NATIONAL STEEL CORPORATION RESULTS
The decrease in net preferred dividend income as compared to the prior year and
the "Loss on National Steel Corporation settlement" are due to the November 1997
redemption by NSC of the NSC preferred stock and the settlement of all related
liabilities (see Note G to the consolidated financial statements).
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income was $1,263 for the year ended March 31, 1999 compared to an
equity in loss of $3,336 for the year ended March 31, 1998. The increase was
primarily due to an improvement in Phar-Mor's operating results for the current
year compared to the prior year. For the most part, the improved results related
to severance expense paid to Phar-Mor's former chief executive officer and a
write-down of fixed assets both of which occurred in the prior fiscal year.
INCOME TAXES
The Corporation recorded no federal income tax provision for the current or
prior year. Any income tax benefit related to the current or prior year's
loss was offset by a corresponding change in the deferred tax asset valuation
allowance. The tax expense for the current and prior years represents state
income taxes related to real estate operations. The fiscal 1998 amount also
reflects a $40 refund of federal income taxes.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
For the year ended March 31, 1999, the minority interest decreased $169 to
$51 compared to $220 in the prior year. The decrease related primarily to
reduced earnings on real estate still owned. The minority interest was
eliminated in May 1999 with the sale of the real estate properties.
DISCONTINUED OPERATIONS
The gain on discontinued operations for the year ended March 31, 1998 resulted
from the sale of USHDI in November 1997.
PREFERRED STOCK DIVIDENDS
15
<PAGE>
Preferred stock dividends have increased to $28,178 for the year ended March 31,
1999 compared to $25,604 for the year ended March 31, 1998. The increase was due
to an increase of $407 in the amortization of discount on the Series A preferred
stock, and an increase of $2,167 in the dividend on the Series A preferred stock
attributable to the required compounding of dividends on previously unpaid
amounts. If the proposed merger with Xetava is consummated in fiscal year
2000, the Corporation will no longer be obligated to pay such preferred stock
dividends.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED
TO YEAR ENDED MARCH 31, 1997
OPERATING LOSS
Revenues from real estate operations decreased $235 to $12,228 for the year
ended March 31, 1998, compared to $12,463 for the year ended March 31, 1997. The
decrease was the result of the disposal of several properties in fiscal 1997
($4,934) partially offset by increased revenues at the remaining properties
($815) and the purchase of an additional interest in a property in June 1997
($3,884).
Total operating costs including depreciation and amortization increased $2,206
to $17,060 for the year ended March 31, 1998 compared to $14,854 for the year
ended March 31, 1997. Real estate operating costs increased $518. Such increase
is primarily attributable to an increase in operating costs at existing
properties ($680), as well as incremental costs for the property purchased in
fiscal 1998 ($3,519), somewhat offset by a decline in operating costs associated
with properties sold in fiscal 1997 ($3,681). An increase in corporate operating
costs of $1,688 related primarily to increased compensation, pension, legal and
insurance costs during the current fiscal year as compared to the prior year.
Unusual items for the year ended March 31, 1998 consisted of $33,292 in charges
incurred in connection with the settlement reached in litigation with the
Trustee. This charge was partially offset by $1,715 in income from the
settlement of litigation, principally from payments received from insurance
carriers related to the settlement of environmental liability claims, and
$26,831 in gains in connection with the settlement of certain pension and other
postretirement benefit obligations for former officers and employees.
OTHER INCOME (EXPENSE)
Other income (expense) was an expense of $11,337 for the year ended March 31,
1998, compared to income of $19,228 for the year ended March 31, 1997. In fiscal
1998, the loss was primarily related to a $12,938 charge for the year from the
Corporation's adjustment in the carrying value of its investment in Imagyn to
its market value partially offset by $1,601 in gains principally from the sale
of other assets. In fiscal 1997, the Corporation recognized gains of $34,019
from the sale of FoxMeyer Canada Inc. ("FoxMeyer Canada") and $7,350 from the
sale of real estate properties and the early collection of a real estate note
receivable. The gains were partially offset by the write-down of the
Corporation's investment in Phar-Mor of $13,394, the write-off of the
Corporation's investment in Ben Franklin of $2,043 and $6,704 in other losses
primarily from marketable securities (including $4,830 in losses related to
Imagyn).
NET FINANCING COSTS
Net financing costs decreased $1,214 to $3,524 for the year ended March 31,
1998, compared to $4,738 for the year ended March 31, 1997. Interest income was
approximately the same for both periods. A decrease in interest income earned
from real estate operations was offset by increased income from excess cash
invested by the Corporation primarily from proceeds from the NSC settlement and
the USHDI sale and from funds previously held in escrow that were used in the
settlement with the Trustee. Interest expense decreased $1,183. Such decrease
was attributable to repayments of the secured and revolving debt of the
Corporation from proceeds of asset sales and the
16
<PAGE>
NSC settlement, somewhat offset by interest expense on the note payable
incurred in connection with the settlement with the Trustee.
NATIONAL STEEL CORPORATION RESULTS
The net preferred income for NSC was $5,854 for the year ended March 31, 1998,
compared to $9,620 for the prior period. The decrease was primarily due to the
redemption of the preferred stock in November 1997 as part of the NSC settlement
compared to a full year of net preferred income in the prior year. The $59,038
loss in connection with the NSC settlement is explained in Note G to the
consolidated financial statements.
EQUITY IN LOSS OF AFFILIATES
The equity in loss of affiliates decreased $1,863 to a loss of $3,336 for the
year ended March 31, 1998, compared to a loss of $5,199 for the year ended March
31, 1997. The decrease in the equity loss of affiliates resulted principally
from the sale in the prior year of the Corporation's equity investment in
FoxMeyer Canada, which had been incurring losses, and a decrease in the equity
loss of Phar-Mor. While Phar-Mor had a greater net loss in fiscal 1998 than in
fiscal 1997, primarily as a result of severance costs to its former chief
executive officer and the write-down of fixed assets, the fiscal 1997 amount
also included a write-down of the Corporation's investment in Phar-Mor.
INCOME TAXES
The Corporation recorded an income tax provision for fiscal year 1998 for state
taxes incurred by its real estate subsidiaries, net of a federal income tax
refund received. The Corporation recorded an income tax provision of $29,870 for
the year ended March 31, 1997. The provision for fiscal 1997 was primarily due
to an increase in the deferred tax asset valuation allowance resulting from the
loss of FoxMeyer's anticipated taxable income in future years due to FoxMeyer's
bankruptcy filing.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The minority interest in net income of consolidated subsidiaries was $220 for
the year ended March 31, 1998, compared to a minority interest in net loss of
$1,106 for the year ended March 31, 1997. The minority interest related to real
estate partnerships and the Corporation's investment in Hamilton Morgan LLC. The
increase in the minority interest resulted from the purchase of the minority
interest in Hamilton Morgan LLC in the 1998 fiscal year, eliminating the impact
of the Phar-Mor losses subsequent to the purchase. The increase was partially
offset by a decrease in the minority interest in real estate partnerships in the
1998 fiscal year, primarily as a result of earnings recognized in the 1997
fiscal year from properties sold during fiscal 1997.
DISCONTINUED OPERATIONS
The loss from discontinued operations for fiscal 1997 was $21,057. The loss
represented FoxMeyer's operating loss of $17,467 to June 30, 1996, the effective
date for treating FoxMeyer as a discontinued operation, and USHDI's loss from
operations of $3,590 through March 31, 1997, the effective date for treating
USHDI as a discontinued operation.
The gain on disposal of discontinued operations for the year ended March 31,
1998 represented the gain on the sale of USHDI. The loss on disposal of
discontinued operations for the year ended March 31, 1997, represented estimated
losses related to discontinuing the operations of FoxMeyer ($254,472) and USHDI
($4,932) partially offset by a gain on the sale of the Corporation's pharmacy
benefit management operations ($13,349).
PREFERRED STOCK DIVIDENDS
Preferred stock dividends increased to $25,604 for the year ended March 31,
1998, compared to $19,081 for the
17
<PAGE>
year ended March 31, 1997. The increase for the year was primarily due to the
Series A preferred stock's 1998 fiscal year charge to equity based on the
cash dividend that would have been paid if declared being substantially
higher than the 1997 fiscal year charge based on the market value of the
additional preferred stock issued as a pay-in-kind dividend.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Corporation had cash and short-term investments of
approximately $27,993. During the fiscal year, the Corporation committed
approximately $5,004 to new investments and $1,650 to real estate development.
As of March 31, 1999, the debt of the Corporation consisted of the note
payable to the Trustee and the debt of consolidated real estate partnerships,
which debt was without recourse to the parent company, Avatex Corporation.
The debt related to real estate operations was either repaid, transferred to
or assumed by another party in connection with the sale of all the
Corporation's real estate in May 1999. See Note H to the consolidated
financial statements.
The Corporation has two series of redeemable preferred stock outstanding.
Beginning with the quarterly payments due January 15, 1997, the Corporation
has not declared nor paid any cash dividends on its Series A preferred stock
or its convertible preferred stock. The Corporation also did not make the
annual sinking fund payments on the convertible preferred stock due January
1998 and January 1999. See the "Overview" section above for a discussion of a
proposed merger of the Corporation with its Xetava subsidiary. If the
proposed merger is consummated as proposed, the preferred stockholders would
receive New Class A common stock in exchange for their preferred stock or, at
their election, the preferred stockholders may receive a combination of cash,
a 6.75% note, warrants to purchase common stock of the merged company and
other consideration. The issuance of the notes will require Funding to pay
interest semi-annually in cash with the principal balance due in three years
from the date of issuance. Since the Corporation will guarantee the 6.75%
notes and Funding will have no assets other than the Phar-Mor common stock
securing the notes, the Corporation may be required to make capital
contributions to Funding so it can satisfy its interest and principal payment
obligations on the notes. The potential cash outlay, if the merger is
consummated as currently contemplated and all preferred stockholders elect
the package of cash, notes and warrants, will be approximately $17,250 at the
time of the merger and $1,148 semi-annually for interest on the notes.
For corporate operations, cash requirements include the funding of monthly
operating activities, the payment of benefit obligations, and the funding of
environmental liabilities of previously owned businesses, the amounts and timing
of which are uncertain. The next fiscal year will require funding any cash to be
paid to preferred stockholders as a result of the proposed merger as well as
interest payments on any notes issued in that transaction. The Corporation
received $11,400 in cash from the sale of real estate in May 1999, and expects
to receive cash from collection of receivables and interest income it earns on
its investments.
The Corporation continuously evaluates current and potential investments in
connection with an ongoing review of its investment strategies and, as
opportunities arise, may continue to invest in publicly and privately held
companies which the Corporation believes would be a strategic fit. The
Corporation, from time to time, may decide to liquidate those investments
which no longer fit its investment criteria. The Corporation may also pursue
the acquisition of an operating company. In addition, there may be
restrictions imposed on the Corporation's ability to make certain types of
investments and on other activities as a result of the proposed merger with
Xetava.
The Corporation will rely on cash on hand and, if necessary, the sale of
investments to meet its future obligations. For a discussion of current
litigation which, if the Corporation were to lose, would have a material
impact on the Corporation's financial condition, liquidity and results of
operations, see Note N to the consolidated financial statements and "Item 3.
Legal Proceedings".
The Corporation's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from the
resolution of the uncertainties discussed in Note R to the consolidated
financial statements.
18
<PAGE>
OTHER
The Corporation has approximately $1,471 in reserves in connection with
environmental claims relating to businesses that were disposed of or
discontinued (see Note N to the consolidated financial statements and "Item 3.
Legal Proceedings"). During fiscal 1999, the Corporation paid approximately $357
with respect to environmental claims and related legal fees.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after June 15, 2000. Therefore, the Corporation will be required to
adopt SFAS No. 133 for its fiscal year beginning April 1, 2001. The Corporation
believes there will be no material impact on the financial results or condition
of the Corporation due to the adoption of SFAS No. 133.
What is commonly referred to as the "Year 2000" issue relates, in part, to many
hardware and software systems that use only two digits to represent the year
being unable to recognize dates beyond 1999. The Corporation's internal systems,
both hardware and software, are Year 2000 compliant in all material respects.
The Year 2000 readiness of the Corporation's vendors, and companies in which the
Corporation has invested, however may vary. The Corporation is currently trying
to ascertain and monitor the Year 2000 readiness of these companies. If any of
the companies in which the Corporation has made a significant investment are not
Year 2000 compliant, there may be a material impact on the value of that
investment and, correspondingly, on the Corporation's results of operations and
financial condition. If certain vendors are not Year 2000 compliant, especially
vendors that provide electricity, telephone services and management services,
the Corporation may suffer potentially significant disruptions to its overall
operations, depending upon the length and severity of the problems. At this
time, it is still uncertain to what extent the Corporation may be affected by
such matters at these other entities.
The foregoing Year 2000 discussion and the information contained therein are
provided as a "Year 2000 Readiness Disclosure" and contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on management's best current estimates, which
were derived from numerous assumptions about future events, including the
continued availability of certain resources, representations received from third
parties and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors which might cause such material differences
include, but are not limited to, the ability to identify and remediate all
relevant systems; adequate resolution of Year 2000 issues by government
agencies, businesses and other third parties who are outsourcing service
providers, suppliers and vendors of the Corporation; the adequacy of Year 2000
remediation by investees; and the adequacy and ability to implement contingency
plans. The forward-looking statements made in the foregoing Year 2000 discussion
speak only to the date on which such statements are made, and the Corporation
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
19
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On Balance Sheet Financial Instruments (in thousands except interest rates):
<TABLE>
<CAPTION>
Expected maturity date
----------------------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value (3)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities available for sale (1)
- -------------------------------------------------------------------------------------------------------------------
Fixed Rate - - - - - $2,651 $2,651 $ 2,651
- -------------------------------------------------------------------------------------------------------------------
Average interest rate - - - - - 12.4% 12.4%
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt (2), (4)
- -------------------------------------------------------------------------------------------------------------------
Fixed Rate $ 409 $ 256 $ 283 $ 313 $6,450 $4,727 $12,438 $12,438
- -------------------------------------------------------------------------------------------------------------------
Average interest rate 9.7% 10.0% 10.0% 10.0% 10.2% 9.7% 10.0%
- -------------------------------------------------------------------------------------------------------------------
Variable Rate $13,238 $9,001 - - - - $22,239 $21,499
- -------------------------------------------------------------------------------------------------------------------
Average interest rate 6.7% 7.8% - - - - 7.1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Maturities of redeemable preferred stock held for sale were based on the
first redemption date available to the Corporation. The Corporation also
holds investments in various other available for sale equity securities and
is subject to price risk arising from ownership of these investments. The
market value of these securities at March 31, 1999 was $9.5 million.
(2) Maturities were based on debt agreements with no redemption prior to actual
maturity being assumed. Variable rates were based on rates in effect on
March 31, 1999. Actual rates in the future could vary. The variable rate
loan maturing in 2000 is a construction loan which, along with the fixed
rate notes, were repaid, transferred to or assumed by another party in
connection with the sale of all the Corporation's real estate in May 1999.
See Note H to the consolidated financial statements.
(3) Fair value is based on the estimated current market value for redeemable
preferred stock issued by similar companies and on borrowing rates
currently available for debt instruments with similar terms and maturities.
(4) In connection with the variable rate loan maturing in 2000, the Corporation
has partially hedged the loan through an interest rate swap with a notional
value of $12.5 million that expires in December 1999. The swap effectively
converts the variable rate loan to a fixed rate loan. The Corporation pays
a fixed rate of 5% to the counterparty, a major bank. The counterparty pays
the Corporation at a variable rate based on LIBOR, which was 4.94% at March
31, 1999. The fair value of the swap was less than ten thousand dollars at
March 31, 1999. The Corporation's interest in the consolidated partnership
that was a party to the swap was sold in May 1999.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements
Page
<S> <C>
Independent Auditors' Report 22
Consolidated Statements of Operations - For the Three Years Ended March 31, 1999 23
Consolidated Statements of Comprehensive Loss - For the Three Years Ended March 31, 1999 24
Consolidated Balance Sheets - March 31, 1999 and 1998 25
Consolidated Statements of Stockholders' Equity (Deficit) - For the Three Years Ended March 31, 1999 26
Consolidated Statements of Cash Flows - For the Three Years Ended March 31, 1999 27
Notes to Consolidated Financial Statements - For the Three Years Ended March 31, 1999 28
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Avatex Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Avatex
Corporation and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
(deficit) and cash flows for each of the three years in the period then ended.
Our audits also included the financial statement schedules listed in the Index
at Item 14. These financial statements and financial statement schedules are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Avatex Corporation and
subsidiaries at March 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
financial statements taken as whole, present fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. As discussed in Note R to the
financial statements, the Corporation's recurring losses from operations,
pending litigation and stockholders' deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also discussed in Note R. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Dallas, Texas
April 30, 1999
(except for Note S,
which is as of June 18, 1999)
22
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 10,509 $ 12,228 $ 12,463
OPERATING COSTS
Operating costs, including general and administrative costs 15,051 16,102 13,386
Depreciation and amortization 1,231 958 1,468
Unusual items - 4,746 -
- ----------------------------------------------------------------------------------------------------------------
OPERATING LOSS (5,773) (9,578) (2,391)
OTHER INCOME (EXPENSE) (1,475) (11,337) 19,228
INTEREST INCOME 1,874 1,709 1,678
INTEREST EXPENSE 2,417 5,233 6,416
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL
CORPORATION, EQUITY IN INCOME (LOSS) OF AFFILIATES, INCOME
TAX PROVISION AND MINORITY INTEREST (7,791) (24,439) 12,099
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income - 5,854 9,620
Loss on National Steel Corporation settlement - (59,038) -
Equity in income (loss) of affiliates 1,263 (3,336) (5,199)
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTEREST (6,528) (80,959) 16,520
Income tax provision 8 40 29,870
- ----------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (6,536) (80,999) (13,350)
Minority interest in results of operations of consolidated subsidiaries 51 220 (1,106)
- ----------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (6,587) (81,219) (12,244)
Discontinued operations
Loss from discontinued operations, net of tax - - (21,057)
Gain (loss) on disposal of discontinued operations, net of tax - 3,719 (246,055)
- ----------------------------------------------------------------------------------------------------------------
NET LOSS (6,587) (77,500) (279,356)
Preferred stock dividends 28,178 25,604 19,081
- ----------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (34,765) $(103,104) $(298,437)
================================================================================================================
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (2.65) $ (7.74) $ (2.10)
Discontinued operations - 0.27 (17.89)
- ----------------------------------------------------------------------------------------------------------------
LOSS PER SHARE $ (2.65) $ (7.47) $ (19.99)
================================================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,102 13,806 14,931
================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET LOSS $ (6,587) $ (77,500) $(279,356)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustment - - 17
Reclassification adjustment for losses included in net loss - - 21
- -----------------------------------------------------------------------------------------------------------------------------------
Net foreign currency translation adjustment - - 38
Unrealized gains (losses) on securities 685 1,168 (854)
Reclassification adjustment for (gains) losses included in net loss (33) - 871
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 652 1,168 17
Minimum pension liability adjustment - (6,187) (8,897)
Loss on plan termination from National Steel
Corporation settlement included in net loss - 79,718 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net minimum pension liability adjustment - 73,531 (8,897)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 652 74,699 (8,842)
- -----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (5,935) $ (2,801) $(288,198)
===================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
(in thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 27,993 $ 34,193
Receivables, less allowance for possible losses of $41
in 1999 and $27 in 1998 2,767 11,783
Other current assets 1,823 3,971
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 32,583 49,947
INVESTMENT IN AFFILIATES 27,038 25,343
PROPERTY AND EQUIPMENT 33,030 20,657
Less accumulated depreciation and amortization 2,756 1,630
- ----------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 30,274 19,027
OTHER ASSETS 27,325 24,986
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 117,220 $ 119,303
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,581 $ 2,665
Other accrued liabilities 2,210 2,368
Salaries, wages and employee benefits 1,060 3,801
Long-term debt due within one year 409 492
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,260 9,326
LONG-TERM DEBT 34,268 22,923
OTHER LONG-TERM LIABILITIES 12,046 13,402
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 410 558
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK 243,169 214,996
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized 50,000,000 shares;
issued 13,806,487 shares in 1999 and 13,806,375 shares in 1998 69,032 69,032
Capital in excess of par value 119,103 119,100
Accumulated other comprehensive income 1,820 1,168
Accumulated deficit (365,967) (331,202)
- ----------------------------------------------------------------------------------------------------------
(176,012) (141,902)
Less: equity in cost of common stock of the Corporation held by
Phar-Mor, Inc. (1,921) -
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (177,933) (141,902)
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 117,220 $ 119,303
==========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Capital in other
excess of comprehensive Accumulated
Common par income earnings Treasury
(in thousands of dollars) stock value (loss) (deficit) stock
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 $120,940 $209,613 $ (64,689) $ 70,469 $(133,870)
Net loss (279,356)
Dividends declared - Convertible Preferred -
$5.00 per share (1,771)
Dividends declared - Series A Preferred -
paid in additional stock (4,354)
Dividends in arrears on Convertible Preferred
and Series A Preferred (10,806)
Amortization of discount on Series A Preferred (2,150)
Purchase and cancellation of preferred stock 6,355
Purchase of treasury stock (16,726)
Cancellation of treasury stock (51,910) (96,807) 148,717
Net unrealized holding gain on securities 17
Recognition of additional minimum
pension liability (8,897)
Stock options exercised (69) (130) 1,879
Foreign currency translation adjustment 38
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 69,030 119,092 (73,531) (228,098) -
Net loss (77,500)
Dividends in arrears on Convertible Preferred
and Series A Preferred (23,101)
Amortization of discount on Series A Preferred (2,503)
Conversion of preferred stock 2 8
Net unrealized holding gain on securities 1,168
Reduction in additional minimum
pension liability 73,531
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 69,032 119,100 1,168 (331,202) -
Net loss (6,587)
Dividends in arrears on Convertible Preferred
and Series A Preferred (25,268)
Amortization of discount on Series A Preferred (2,910)
Net unrealized holding gain on securities 652
Conversion of preferred stock 3
Equity in cost of common stock of the Corporation
held by Phar-Mor, Inc. (1,921)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $ 69,032 $119,103 $ 1,820 $(365,967) $ (1,921)
===================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,587) $ (77,500) $(279,356)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 51 220 (1,106)
Equity in loss (income) of affiliates (1,263) 3,336 5,199
Depreciation and amortization 1,231 958 1,468
Net preferred income from National Steel Corporation - (5,854) (9,620)
Loss on National Steel Corporation settlement - 59,038 -
Loss (gain) on disposal of discontinued operations - (3,719) 246,055
Loss (gain) on investments 1,755 11,368 (21,141)
Other non-cash charges (credits) (892) (25,952) 2,167
Deferred income tax provision - - 29,836
Depreciation and amortization, provision for losses on accounts
receivable and other items related to discontinued operations - - 86,333
Cash provided (used) by working capital items, net of acquisitions:
Receivables 9,308 2,468 20,802
Inventories - - 26,018
Other assets and restricted cash 52 32,883 (37,146)
Accounts payable and accrued liabilities (5,728) (8,545) (14,687)
Other 13 20 110
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,060) (11,279) 54,932
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations - - (24,366)
Purchase of property, plant and equipment (12,374) (5,593) (34,748)
Purchase of investments (5,004) (15,315) (6,366)
Proceeds from the disposition of investments 3,011 64,149 104,355
Acquisitions, net of cash acquired - (7,399) -
Other (38) 2,192 250
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (14,405) 38,034 39,125
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities - - 447,492
Repayments under revolving credit facilities - - (326,883)
Proceeds from the issuance of long-term debt 11,055 18,613 14,520
Debt repayments (489) (18,660) (212,486)
Debt issuance costs (101) (388) (8,140)
Purchase of treasury stock - - (16,726)
Purchase of preferred stock - - (8,845)
Investment by minority interest - 800 -
Dividends paid on redeemable preferred stock - - (2,697)
Dividends paid to minority interest (200) (100) (1,786)
Exercise of stock options - - 1,680
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 10,265 265 (113,871)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (6,200) 27,020 (19,814)
Cash and short-term investments, beginning of year 34,193 7,173 26,987
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 27,993 $ 34,193 $ 7,173
================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that, along
with its subsidiaries, owns interests in hotels, an office building and other
corporations and partnerships. Through Phar-Mor, Inc. ("Phar-Mor"), its 38%
owned affiliate, the Corporation is involved in operating a chain of discount
retail drugstores.
BASIS OF PRESENTATION: The preparation of the consolidated financial statements,
in conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities, at the
dates of the financial statements and the reported amounts of revenues and
expenses during such reporting periods. Actual results could differ from these
estimates.
The consolidated financial statements include the accounts of all majority-owned
subsidiaries and partnerships in which the Corporation has a controlling
interest. Investments in other companies and partnerships in which the
Corporation has significant influence but does not have a controlling interest
are accounted for on the equity basis. All significant intercompany balances and
transactions have been eliminated.
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested in
financial instruments having a maturity of three months or less at the time of
purchase and are recorded at cost. These temporary cash investments may subject
the Corporation to a concentration of credit risk. To lessen this risk, the
Corporation placed substantially all of its temporary cash investments with
major financial institutions and diversified money market mutual funds. Use of
approximately $0.3 million of cash included in "Other current assets" at March
31, 1999 and at March 31, 1998 was restricted in connection with certain real
estate loans (see Note H).
INVESTMENTS: The Corporation's investments in debt securities, and in equity
securities that have a readily determinable fair value, are classified as either
"available for sale" or "trading" and are carried at fair value. The
classification of the security is determined at its acquisition date and is
reviewed periodically. Unrealized gains or losses result from the difference in
the fair market value and the cost of securities. For securities classified as
available for sale, unrealized gains or losses are shown as a component of the
stockholders' deficit. For trading securities, the unrealized gains or losses
are reported in the results of operations. The Corporation periodically reviews
its investments where fair value is less than cost to determine if the decline
in value is other than temporary. If the decline in value is judged to be other
than temporary, the cost basis of the security is written down to fair value.
The amount of any write-down would be included in the results of operations as a
realized loss. Realized gains and losses resulting from the sale of securities
are determined using the average cost method. See Note F.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Gains or
losses on properties retired or disposed of are included in results of
operations. The cost of maintenance and repairs is charged against results of
operations as incurred. Interest costs associated with significant capital
additions are capitalized. The Corporation capitalized $0.3 million of interest
in 1999. No interest was capitalized in 1998 or 1997. Depreciation of property
and equipment is provided using the straight-line method at rates designed to
distribute the cost of properties over their estimated service lives of 5 to 40
years for buildings and building improvements and 3 to 10 years for equipment
and furniture. Amortization of leasehold improvements is included in
depreciation and amortization and is based on the shorter of the minimum term of
the lease or the asset's estimated useful life. Depreciation for income tax
purposes is computed using both the straight-line and accelerated methods.
28
<PAGE>
<TABLE>
<CAPTION>
Property and equipment consisted of the following (in thousands of dollars):
March 31,
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 5,631 $ 5,631
Buildings and building improvements 23,020 10,677
Leasehold improvements 62 61
Equipment and furniture 4,317 697
Construction in progress - 3,591
------------------------------------------------------------------------------------------------
$33,030 $20,657
================================================================================================
</TABLE>
LONG-LIVED ASSETS: The Corporation reviews long-lived assets and identifiable
intangibles for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be used in the business is measured by a comparison of the total future
undiscounted cash flows generated by the asset to its carrying value. If the
carrying value of the asset is more than its undiscounted expected future cash
flows, an impairment exists which is measured by the difference between the
carrying value and the estimated fair value of the asset. Assets to be disposed
of are reported at the lower of their carrying value or fair value less costs to
sell.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: Minority interest in results of
operations of consolidated subsidiaries represents the minority shareholders' or
partners' proportionate share of the net income (loss) of various consolidated
subsidiaries (see Note B). The minority interest in the consolidated balance
sheets reflects the proportionate interest in the equity of consolidated
subsidiaries.
REVENUE RECOGNITION: Revenues, consisting of receipts from hotels and related
operations as well as lease income from office rentals, are recorded when
earned. No one customer accounted for over 10% of revenues. All real estate
operations are located in the Washington D.C. and surrounding area.
INCOME TAXES: Deferred tax assets and liabilities are established for temporary
differences between financial statement carrying amounts and the taxable basis
of assets and liabilities using rates currently in effect. A valuation allowance
is established for any portion of the deferred tax asset for which realization
is not likely. The deferred tax asset is reviewed periodically to determine the
amount considered realizable.
STOCK-BASED COMPENSATION: As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", the
Corporation continued to apply the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees" and adopted only the disclosure requirements of SFAS No.
123. Accordingly, no compensation costs were recognized in connection with the
Corporation's stock option plans (see Note J).
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) is the change in the
equity of a business enterprise during a period from transactions and other
events from nonowner sources. Changes in balances of items that are reported
directly in a separate component of stockholders' equity (foreign currency
translation adjustments, unrealized gains and losses and minimum pension
liability adjustments) are added or subtracted from net income (loss) to arrive
at comprehensive income (loss). See Note C.
NEWLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
2000. Therefore, the Corporation will be required to adopt SFAS No. 133 for its
fiscal year beginning April 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments that require every derivative to
be recorded on the balance sheet as an asset or liability measured at its fair
value. The statement also defines the accounting for the change in the fair
value of derivatives depending on their intended use. The Corporation believes
that the adoption of SFAS No. 133 will not have a material impact on the
financial condition
29
<PAGE>
or results of operations of the Corporation.
EARNINGS (LOSS) PER SHARE: The amounts used in the calculation of earnings per
share from continuing operations were as follows (amounts in thousands, except
per share amounts):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss from continuing operations $ (6,587) $ (81,219) $ (12,244)
Deduct dividends on preferred shares 28,178 25,604 19,081
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders for BASIC earnings per share (34,765) (106,823) (31,325)
Effect of dilutive securities:
Dividends on convertible preferred shares, unless anti-dilutive - - -
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders for DILUTED earnings per share $ (34,765) $(106,823) $ (31,325)
- --------------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
for calculation of BASIC earnings per share 13,102 13,806 14,931
Conversion of preferred stock, unless anti-dilutive - - -
Outstanding options, unless anti-dilutive - - -
- --------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
for calculation of DILUTED earnings per share 13,102 13,806 14,931
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
Basic $ (2.65) $ (7.74) $ (2.10)
Diluted $ (2.65) $ (7.74) $ (2.10)
==========================================================================================================================
</TABLE>
Options to purchase approximately 3.9 million, 3.9 million and 2.2 million
shares were outstanding at March 31, 1999, 1998 and 1997, respectively (see
Note J). The options were not included in the computation of diluted earnings
per share because the effect of including the options in the calculation
would be anti-dilutive. Conversion of the convertible preferred stock
outstanding was also not included in the calculation of diluted earnings per
share as it would also have been anti-dilutive.
NOTE B - ACQUISITIONS AND DISPOSITIONS
FOXMEYER CORPORATION
In 1997, the Board of Directors of the Corporation approved a plan to divest its
drug distribution subsidiary, FoxMeyer Drug Company ("FoxMeyer Drug"), the
primary operating unit of the Corporation. The subsidiary and its parent,
FoxMeyer Corporation ("FoxMeyer"), were treated as a discontinued operation as
of the measurement date of June 30, 1996. The Corporation recognized a loss from
discontinued operations of FoxMeyer of $17.5 million, net of taxes, for the
three months ended June 30, 1996. In addition, the Corporation recognized a loss
of $254.5 million from the write-off of its investment in FoxMeyer. Revenues
included in results of discontinued operations were $1.4 billion for the three
months ended June 30, 1996. The loss from discontinued operations was net of
applicable income tax benefit of $4.6 million in 1997.
The unaudited balance sheet of FoxMeyer at June 30, 1996 was as follows (in
thousands of dollars):
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current assets $ 828,784 Current liabilities $ 679,912
Property, plant and equipment 144,746 Long-term debt 318,954
Goodwill and other intangibles 209,699 Other long-term liabilities 4,605
Other assets 72,924 Stockholder's equity 252,682
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 1,256,153 Total liabilities and stockholder's equity $ 1,256,153
==================================================================================================================
</TABLE>
Commencing in mid-July 1996, a group of FoxMeyer Drug's most significant vendors
began reducing their credit lines. Despite positive cash flow projections, the
liquidity offered by a new credit facility and FoxMeyer Drug's history of timely
debt payments, the group of vendors eliminated approximately $100 million of
liquidity from FoxMeyer Drug's operations over a forty-five day period by
shortening repayment terms or requiring prepayment for inventory purchases. In
addition, during July and August 1996, FoxMeyer Drug made certain prepayments to
its suppliers for shipments of critical orders where, after receiving payment,
the vendors refused to release the product. In August 1996, FoxMeyer Drug met
with certain key vendors requesting a reinstatement of credit lines to previous
levels, however, an agreement could not be reached. As a result of these events,
FoxMeyer and most of its subsidiaries filed for protection under Chapter 11 of
the Bankruptcy Code on August 27, 1996. On November 8, 1996, the U.S. Bankruptcy
Court for the District of Delaware approved a sale of the principal assets of
FoxMeyer and FoxMeyer Drug to McKesson Corporation ("McKesson"). On March 18,
1997, the Chapter 11 cases were converted into Chapter 7 liquidation cases.
In connection with McKesson's purchase of FoxMeyer's and FoxMeyer Drug's assets,
McKesson paid approximately $23 million in cash to debtors, paid off
approximately $500 million in secured debt and assumed an additional $75 million
in other liabilities. The Corporation received no proceeds from the sale of
FoxMeyer's and FoxMeyer Drug's assets to McKesson.
BEN FRANKLIN RETAIL STORES, INC.
As a result of a bankruptcy filing on July 26, 1996, by Ben Franklin Retail
Stores, Inc. ("Ben Franklin"), the Corporation wrote off the book value of its
17.4% investment in Ben Franklin of approximately $2.0 million at June 30, 1996.
Ben Franklin's assets were subsequently liquidated under Chapter 7 of the
Bankruptcy Code.
OTHER DISCONTINUED OPERATIONS
In July 1995, the Corporation adopted a plan to dispose of certain of FoxMeyer's
managed care and information service operations. On August 2, 1996, the
remaining operation was sold for $30.5 million with an additional minimum
payment of $2.5 million due and payable at any time subsequent to August 2,
1997. The additional payment may increase to a maximum of $5.0 million based on
certain criteria. The August 1996 transaction resulted in a gain on disposal of
discontinued operations of approximately $13.3 million.
In April 1997, the Corporation adopted a plan to dispose of US HealthData
Interchange, Inc. ("USHDI"), its medical claims processing operation. As a
result, a $3.6 million loss from discontinued operations was recognized to the
measurement date of March 31, 1997. The Corporation also recorded a $4.9 million
loss on disposal of discontinued operations. The $4.9 million loss was based on
management's best estimate of the amounts of future operating losses and
proceeds to be realized on the sale or other disposition of this operation. On
November 19, 1997, the Corporation sold substantially all of the assets of USHDI
for $4.0 million in cash, subject to certain adjustments. The Corporation
recognized a $3.7 million gain on discontinued operations as a result of the
sale.
Revenues for the year ended March 31, 1997 for these discontinued operations
were $1.5 million. The loss from discontinued operations was net of tax benefits
of $0.3 million for the year ended March 31, 1997.
PHAR-MOR, INC.
The Corporation accounts for its 38.4% investment in Phar-Mor's common stock on
an equity basis. Phar-Mor
31
<PAGE>
operates a chain of discount retail drugstores devoted to the sale of
prescription and over-the-counter drugs, health and beauty care products, and
other general merchandise and grocery items. The book value of Phar-Mor was
$24.4 million at March 31, 1999 (with a market value of $27.6 million based
on its closing stock price at March 31, 1999, on the NASDAQ National Market).
In addition, Phar-Mor owns 2,086,200 shares of the Corporation's common stock
which were acquired through open market purchases at a cost of approximately
$5.0 million (see Note I). See Note S for a discussion of additional
purchases of the Corporation's common stock that Phar-Mor may make.
In fiscal 1996, the Corporation acquired a 69.8% interest in Hamilton Morgan LLC
("Hamilton Morgan"). Hamilton Morgan subsequently acquired an approximate 30.9%
common stock interest in Phar-Mor. On September 19, 1997, the Corporation
acquired from Hamilton Morgan, under an agreement among Hamilton Morgan, the
owner of the minority interest in Hamilton Morgan and certain other parties, all
of Phar-Mor's common stock held by Hamilton Morgan in exchange for $6.1 million
and other non-cash consideration. The transaction was treated as a purchase of
the minority interest in Hamilton Morgan. The acquisition price was
approximately equal to the book value of the minority interest acquired.
At March 31, 1997, the Corporation determined that there had been a decline in
the value of its investment in Phar-Mor that was other than temporary and
recorded a charge of $13.6 million (net of the minority interest in Hamilton
Morgan), including the write-off of goodwill related to the original acquisition
of Hamilton Morgan. The reduction in value was based on management's best
estimate of the fair value of its investment in Phar-Mor at March 31, 1997.
Summarized unaudited financial information for Phar-Mor was as follows for the
three years ended March 27, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
March 27, March 28, March 29,
Condensed Statements of Operations 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,132,317 $ 1,081,164 $ 1,084,325
Operating earnings 21,958 3,712 4,901
Net income (loss) 4,077 (9,092) (5,378)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
March 27, March 28,
Condensed Balance Sheets 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 272,714 $ 266,626
Property and equipment 93,534 74,407
Other assets 39,040 13,629
--------------------------------------------------------------------------------
Total assets $ 405,288 $ 354,662
--------------------------------------------------------------------------------
Current liabilities $ 157,083 $ 116,892
Long-term obligations 163,482 155,714
Stockholders' equity 84,723 82,056
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 405,288 $ 354,662
================================================================================
</TABLE>
CHEMLINK ACQUISITION COMPANY LLC
In March and December 1998, the Corporation invested a total of $3.0 million to
acquire a 41% interest in a Delaware limited liability company, Chemlink
Acquisition Company LLC ("CLAC") which in turn acquired a 50% interest in
Chemlink Laboratories, LLC ("Chemlink"). The Corporation accounts for its
investment in CLAC, and CLAC accounts for its investment in Chemlink, using the
equity method of accounting. CLAC has no investments
32
<PAGE>
or business other than its investment in Chemlink. Chemlink is an Atlanta
based company that develops and manufactures products that use a proprietary,
and often patented, effervescent formulation. These products include
specialty cleaning, disinfecting and sterilant products for the medical and
dental professions and certain other consumer and commercial products which
are under development. The effervescent formulation will supposedly allow
easier packaging, less costly shipping and potentially higher effectiveness
of enzyme products than pre-mixed solutions. The Corporation has a consulting
contract with Chemlink. The acquisition of the equity interest in Chemlink by
CLAC was accounted for by the purchase method of accounting. The $6.7 million
difference between CLAC's purchase price and the net book value of Chemlink's
assets acquired less liabilities assumed was allocated to patents controlled
by Chemlink. The amount allocated to the patents is being amortized to
expense over their average remaining life. The Corporation's equity
investment in CLAC had a carrying value of $2.7 million at March 31, 1999.
DEVELOPMENT
Certain subsidiaries of the Corporation (collectively, "Development") are
controlling partners in various real estate limited partnerships engaged in the
buying, holding, operating and disposing of real estate and real estate loans.
These partnerships are consolidated in the accompanying financial statements.
Development controls these partnerships pursuant to rights granted by the
partnership agreements which specify that the partnership's business shall be
managed, and its business controlled, exclusively by Development. Additionally,
Development was a general partner or a limited partner in other real estate
partnerships, in which it had significant influence but did not have a
controlling interest, that were generally accounted for using the equity method.
Development's partnerships are generally obligated to return Development's
initial investment together with a preferred rate of return on the undistributed
investment before other partners may receive distributions. Such preferred
returns were accounted for as liquidating dividends. Development invested,
before dividends and return of capital, approximately $1.6 million in 1999, $1.4
million in 1998, and $4.0 million in 1997 in various real estate partnerships.
See Note S for a discussion of the sale of Development's interest in real estate
properties in May 1999.
During 1997, Development sold its ownership interest in certain real estate
limited partnerships for $9.9 million. The transactions resulted in a gain of
approximately $6.0 million which was included in "Other income (expense)" in the
consolidated statements of operations.
On June 5, 1997, one of the consolidated partnerships acquired the remaining
65.5% of certain improved real property not already owned by the partnership for
approximately $7.4 million, net of cash acquired in the acquisition. The
partnership accounted for the acquisition using the purchase method of
accounting. If the property had been acquired at the beginning of that fiscal
year, revenues for the year ended March 31, 1998 would have been approximately
$1.2 million greater than reported. The pro forma impact on the Corporation's
loss from continuing operations for 1998, if the acquisition had taken place at
the beginning of that fiscal year, was not material. On March 31, 1998, the
Corporation sold its 50% interest in the partnership for $1.8 million, including
$0.4 million in cash and a $1.4 million short-term note receivable, resulting in
a gain of $0.7 million which was included in "Other income (expense)" in the
consolidated statements of operations.
FOXMEYER CANADA INC.
On October 7, 1996, the Corporation sold all of its interest in FoxMeyer Canada
Inc. ("FoxMeyer Canada"). The net proceeds from the sale were $37.4 million. In
connection with the sale, the Corporation recognized a gain of approximately
$34.0 million which was included in "Other income (expense)" in the consolidated
statements of operations. FoxMeyer Canada was a 39% owned affiliate of the
Corporation at the time of its sale and was accounted for on the equity basis.
33
<PAGE>
NOTE C - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND SUPPLEMENTAL
COMPREHENSIVE INCOME (LOSS) INFORMATION
Accumulated other comprehensive income (loss) in the consolidated statements of
stockholders' equity (deficit) included the following components (in thousands
of dollars):
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities $ 1,820 $ 1,168 $ -
Minimum pension liability - - (73,531)
-------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $ 1,820 $ 1,168 $ (73,531)
=======================================================================================================
</TABLE>
Amounts charged to the minimum pension liability in prior periods were
reversed upon the termination of the Corporation's liability with respect to
the Weirton pension plan as a result of the settlement with National Steel
Corporation (see Note G). In the consolidated statement of comprehensive loss
for the year ended March 31, 1998, the reversal was shown in the caption
"Loss on plan termination from National Steel Corporation settlement included
in net loss".
As a result of the Corporation's income tax position (see Note M), income tax
provisions (benefits) were not allocated to any of the components of other
comprehensive income (loss) for the three years ended March 31, 1999.
NOTE D - SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION
The following supplemental cash flow information is provided for interest and
income taxes paid and for non-cash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 1,590 $3,179 $ 18,738
Income taxes paid 36 40 34
Non-cash transactions:
Capital leases 108 - -
Note received as part of National Steel Corporation settlement - 9,442 -
Notes received on sale of other investments - 1,350 2,315
Payment of dividends in kind on Series A Preferred Stock - - 4,354
Cumulative dividends accrued but not paid 25,268 23,101 10,806
================================================================================================================
</TABLE>
The following supplemental information is provided for other long-term assets
and other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other assets:
Prepaid pension cost $ 10,900 $ 9,440
Securities available for sale 12,134 7,212
Other investments, at cost 1,438 6,028
Other 2,853 2,306
- ----------------------------------------------------------------------------------------------------------------
Total $ 27,325 $ 24,986
================================================================================================================
Other long-term liabilities:
Pension and postretirement benefits $ 4,902 $ 5,290
Environmental liabilities 1,357 1,417
Liabilities related to discontinued operations 3,486 4,334
Other 2,301 2,361
- ----------------------------------------------------------------------------------------------------------------
Total $ 12,046 $ 13,402
================================================================================================================
</TABLE>
34
<PAGE>
NOTE E - UNUSUAL ITEMS AND OTHER INCOME (EXPENSE)
In 1998, unusual items consisted of a $33.3 million charge from the settlement
of certain litigation with the FoxMeyer Bankruptcy Trustee (see Note N), a gain
of $1.7 million from the settlement of litigation, principally from payments
received from insurance carriers related to the settlement of environmental
liabilities (see Note N), and a gain of $26.9 million for the settlement or
termination of certain pension and other postretirement benefits for former
officers and employees (see Notes L and N).
In 1999, other expense consisted of a loss of $1.5 million related to a $3.4
million reduction in the carrying value of certain of the Corporation's
investments, including a $1.8 million reduction in the carrying value of Imagyn
Medical Technologies, Inc. ("Imagyn"), partially offset by $1.9 million in gains
primarily from recoveries on investments which had been written-off in prior
years, a royalty payment from a property sold in the prior fiscal year and
dividends on investments. In 1998, other expense consisted of a loss of $12.9
million during the year from the adjustment in the carrying value of Imagyn to
its market value, partially offset by $1.6 million in gains primarily from the
sale of other investments. In 1997, other income consisted of a gain of $34.0
million on the sale of FoxMeyer Canada and $7.3 million from the sale of real
estate properties and the early collection of a real estate note receivable. The
gains were partially offset by the write-down of the Corporation's investment in
Phar-Mor of $13.4 million, the write-off of the investment in Ben Franklin of
$2.0 million and $6.7 million in other losses primarily from marketable
securities (including $4.8 million in losses related to Imagyn).
NOTE F - INVESTMENTS IN MARKETABLE SECURITIES
The Corporation's investments in debt securities, and in equity securities that
have a readily determinable market value, were classified as either "available
for sale" or "trading". The carrying value and gross unrealized gains and losses
for available for sale securities were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value $ 12,134 $ 7,212
Unrealized gains 2,045 1,168
Unrealized losses 225 -
=============================================================================================
</TABLE>
Available for sale securities are included in "Other assets". Trading securities
of $1.1 million and $2.9 million were included in "Other current assets" at
March 31, 1999 and 1998, respectively.
The gross proceeds and realized gains and losses from the sale of available for
sale securities and the change in unrealized gains (losses) on available for
sale and trading securities were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale securities:
Proceeds from sales $ 1,413 $ - $ 6
Realized gains 33 - -
Realized losses - - 871
Net unrealized gains 652 1,168 17
Trading securities:
Net unrealized losses included in net income (1,795) (11,856) (6,552)
=============================================================================================
</TABLE>
35
<PAGE>
NOTE G - INVESTMENT IN NATIONAL STEEL CORPORATION
In January 1984, the Corporation, through its then wholly-owned subsidiary
National Steel Corporation ("NSC"), sold substantially all of the assets of the
Weirton Steel Division ("Weirton") to Weirton Steel Corporation. In connection
with the sale, NSC retained certain liabilities arising out of the operation of
Weirton prior to May 1, 1983, including certain environmental liabilities, a
note payable to the NSC pension trust (the "NSC Note") and employee benefits for
Weirton employees, which consisted principally of pension benefits for active
employees based on service prior to May 1, 1983, and pension, life and health
insurance benefits for retired employees (the "Weirton Liabilities"). As a
result of transactions which occurred in August 1984 and June 1990, the
Corporation sold all but 13% of its common stock investment in NSC to NKK
Corporation. As part of the 1984 transaction, the Corporation agreed to provide
NSC sufficient funds for payment of, and to indemnify NSC against, all Weirton
Liabilities and for certain environmental liabilities related to the former
operations of NSC. As part of the 1990 transaction, the Corporation received
newly issued NSC redeemable Series B preferred stock (the "NSC Preferred Stock")
and $146.6 million in cash. The cash was transferred to NSC in exchange for NSC
releasing the Corporation from an equivalent amount of its indemnification
liability with respect to the Weirton Liabilities (the "Released Liabilities").
In January 1994, the Corporation disposed of its remaining investment in the
common stock of NSC.
In addition, under the terms of the 1990 transaction agreement, the Corporation
committed that all NSC Preferred Stock dividends and redemption amounts were to
be used to satisfy the Weirton Liabilities, excluding the Released Liabilities
(the "Remaining Liabilities"), before any funds were available to the
Corporation for general corporate purposes. As a result, the Corporation
reflected its dividend income from the NSC Preferred Stock, interest accretion
and pension charges on the Remaining Liabilities and premium amortization of the
NSC Preferred Stock as a single net amount in its consolidated statements of
operations.
On November 25, 1997, NSC, certain of its affiliates and the Corporation entered
into an agreement whereby the Corporation received $59.0 million in cash and a
non-interest bearing $10.0 million note (with an estimated discounted value of
$9.4 million) in exchange for the redemption of the NSC Preferred Stock owned by
the Corporation and, in addition, NSC also released the Corporation from the
Weirton Liabilities as well as various environmental liabilities related to NSC
and Weirton sites (the "NSC Settlement"). The note received was paid in
installments over the next twelve months following the NSC Settlement. At March
31, 1998, the note receivable had a book value of $7.2 million and was included
in "Receivables" in the consolidated balance sheet. In addition, the Corporation
assigned to NSC all of the Corporation's rights to assert pre-1987 environmental
claims against insurers of both NSC and the Corporation, and the Corporation
released its share of any settlement proceeds related to such claims as well as
all amounts remaining in escrow from prior payments made by the Corporation to
NSC for environmental liabilities. As a result of the NSC Settlement, the
Corporation recognized a $59.0 million loss. However, in connection with the
Corporation's contractual obligation to NSC relating to the Weirton Retirement
Program, the Corporation had previously recorded a $79.7 million charge as of
November 1997 to the accumulated deficit to recognize the minimum pension
liability adjustment associated with the pension obligation. As a result of the
NSC Settlement, the Corporation reversed the charge. The reversal of the minimum
pension liability, net of the loss on the NSC Settlement, resulted in an
improvement in the Corporation's accumulated deficit of $20.7 million.
36
<PAGE>
NOTE H - LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C>
Trustee note $ 9,001 $ 8,322
Development notes with various maturities 25,676 15,093
---------------------------------------------------------------------------------------------
34,677 23,415
Long-term debt due within one year 409 492
---------------------------------------------------------------------------------------------
Long-term debt $ 34,268 $ 22,923
=============================================================================================
</TABLE>
In connection with the settlement of certain litigation with the FoxMeyer
Chapter 7 Bankruptcy Trustee (the "Trustee") (see Note N), on October 9, 1997,
the Corporation executed an $8.0 million three year note payable to the Trustee.
The note is secured by 1,132,500 shares of Phar-Mor common stock and a 30%
interest, up to the greater of $10.0 million or the amount owed under the note,
in the net proceeds from certain litigation that has been brought by the Trustee
against specified third parties. Interest accrues on the note at the prime rate
and is compounded annually. The accrued interest and the principal balance of
the note are due at maturity on October 8, 2000; however, proceeds from any sale
of the Phar-Mor stock held as collateral, or the successful resolution of the
litigation brought by the Trustee against third parties, must first be used to
satisfy the note.
The limited partnerships controlled by Development, and included in the
consolidated financial statements, have incurred certain indebtedness in
connection with the acquisition of real estate (the "Development Notes"). The
Development Notes generally require (i) monthly payments of principal and
interest and (ii) that a percentage of revenues be escrowed which may later be
used to reimburse the partnership for capital expenditures or maintenance of the
property. The escrowed funds are included in "Other current assets" in the
consolidated balance sheets. The indebtedness is typically non-recourse and
secured by the underlying assets; however, certain Development Notes may also be
guaranteed by entities related to the minority partners, or Development
subsidiaries. The Development Notes, with maturities ranging from 2000 to 2022,
bear interest at fixed rates of from 9.25% to 10.19% except for a construction
loan which bears interest at 1.75% over LIBOR with a term up to January 2000.
Since the partnership has already secured permanent loan financing to replace
the construction loan upon final completion of the project, this loan was
treated as long-term. One of the Development Notes has a balloon payment of $6.3
million in 2004. The Development Notes also limit the amount of dividends or
other distributions to the partners. These notes were either repaid, transferred
to or assumed by the other partners, or their affiliates, in May 1999 as part of
a sale of these properties (see Note S).
One of Development's limited partnerships entered into a interest rate swap
agreement as a hedge against the variable rate construction loan. The swap, for
a notional amount of $12.5 million, effectively converts the variable rate loan
to a fixed rate. The swap expires in December 1999. Under the agreement, the
partnership will pay a fixed interest rate of 5.0% to the counterparty. The
counterparty will pay the partnership interest at a variable rate based on the
monthly U.S. dollar LIBOR rate which was at 4.94% at March 31, 1999. Neither the
partnership or the counterparty, which is a major financial institution, are
required to collateralize their obligations under the swap. This swap was
transferred with the debt in the partnership as part of the sale of this
property (see Note S).
Maturity and approximate sinking fund requirements on all long-term debt of the
Corporation by fiscal year are as follows: $0.4 million in 2000; $9.3 million in
2001; $0.3 million in 2002; $0.3 million in 2003: $6.5 million in 2004 and $4.7
million thereafter. These debt requirements do not include the $13.2 million
construction loan which will be refinanced under the permanent financing already
secured. However, the maturity date and interest rate on the permanent financing
would be based on facts and circumstances at the date of the refinancing. As a
result of the sale of the real estate operations as discussed in Note S, the
maturity and sinking fund requirements are as follows: 2001 - $9.0 million.
NOTE I - CAPITAL STOCK
COMMON STOCK SHARE REPURCHASE: Under various share repurchase programs approved
by the Corporation's Board of Directors, 2,966,800 shares of common stock were
purchased by the Corporation during the period from July 1996 to September 1996
when the last repurchase program was suspended. The Corporation canceled these
and all other previously acquired treasury shares in September 1996 with a
corresponding reduction in common stock and capital in excess of par value of
$148.7 million.
37
<PAGE>
REDEEMABLE PREFERRED STOCK: The Corporation is authorized to issue 10,000,000
shares of preferred stock. At March 31, 1999, there were two series of
redeemable preferred stock outstanding.
At March 31, 1999 and 1998, the Corporation had 652,273 and 652,331 shares,
respectively, of cumulative convertible preferred stock outstanding at a stated
price of $50.00 per share. Each share of this preferred stock is entitled to a
cumulative annual dividend of $5.00 and is convertible into common stock of the
Corporation at a conversion price of $25.80 per share. The Corporation has
reserved 1,264,095 shares of its common stock for issuance upon the conversion
of this preferred stock. The shares are redeemable at a price of $50.00 per
share. The Corporation did not declare, nor did it pay, any of the dividends due
since October 15, 1996. Cumulative dividends unpaid for the convertible
preferred stock at March 31, 1999 were $8.2 million or $12.50 per share. The
Corporation is also required to make sinking fund payments in each year to 2002
in an amount sufficient to redeem 88,000 shares annually and 220,000 shares in
2003. The Corporation did not make the required sinking fund payment for 88,000
shares each in January 1998 and 1999. In addition, the Corporation is prohibited
from redeeming any shares of this series of preferred stock as long as any
cumulative dividends remain unpaid on the other series of preferred stock
discussed below.
At both March 31, 1999 and 1998, the Corporation had 4,312,351 shares of $4.20
Cumulative Exchangeable Series A Preferred Stock, par value $5 per share, with a
liquidation preference of $40 (the "Series A Preferred Stock") outstanding. The
Series A Preferred Stock is redeemable at $40 per share on November 30, 2003.
The Series A Preferred Stock may be redeemed at the option of the Corporation,
in whole or in part, at its liquidation preference plus unpaid dividends
thereon. Dividends due since October 15, 1996 have not been declared or paid.
The amount of cumulative dividends unpaid for the Series A Preferred Stock at
March 31, 1999 was $51.0 million or $11.83 per share. The amount of the
cumulative dividend accrued each quarter, if any dividends remain unpaid,
increases as if additional shares of the Series A Preferred Stock had been
issued in lieu of the cash dividend and such additional shares were outstanding
on each succeeding dividend date until such unpaid dividends have been declared
and paid in cash.
Dividends paid on or prior to October 15, 1996 on the Series A Preferred Stock
were paid in additional shares of the Series A Preferred Stock. The difference
in the Series A Preferred Stock's liquidation preference and the recorded value
when the original and additional shares were issued is being amortized on an
effective yield basis as additional preferred stock dividends and charged to
retained earnings over the remaining life of the Series A Preferred Stock.
In addition, if all cumulative unpaid dividends have been paid, the Series A
Preferred Stock is exchangeable, at the option of the Corporation, in whole but
not in part, and on any dividend payment date, for the Corporation's 10.5%
Subordinated Notes due 2003 (the "Exchange Notes") with a principal amount equal
to the aggregate liquidation value of the outstanding Series A Preferred Stock.
The Exchange Notes would mature on November 30, 2003. If issued, the Exchange
Notes may be redeemed, at the option of the Corporation, in whole or in part, at
a redemption price equal to the principal amount plus any unpaid interest
thereon. The payments of principal and interest on the Exchange Notes would be
subordinated to all senior indebtedness of the Corporation.
The amount of cumulative unpaid dividends accrued is reflected in the
consolidated statements of operations as if they had been declared with a
corresponding charge to retained earnings. The liability for the cumulative
unpaid dividends has been added to the carrying value of the redeemable
preferred stock in the consolidated balance sheets.
After dividends on the convertible preferred stock and the Series A Preferred
Stock are in arrears for six full quarterly dividend periods, the holders of the
preferred stocks can elect four new directors until such cumulative unpaid
dividends have been paid in full. The voting rights and the term of office of
these directors shall cease at such time as all dividends in arrears have been
paid in full, or at such time as such dividends have been declared and an amount
sufficient to pay the full amount of such dividends has been irrevocably set
aside for payment. Four directors representing the preferred stockholders were
elected in 1999 and added to the Board of Directors.
On April 14, 1998, the Corporation announced that it would merge with and into
its wholly-owned subsidiary,
38
<PAGE>
Xetava Corporation ("Xetava"). Under the proposed merger, the Corporation's
existing common and preferred stockholders would have received new common
stock of Xetava. In late April 1998, a preferred stockholder of the
Corporation and a putative class of preferred stockholders filed a total of
three lawsuits in the Delaware Court of Chancery (the "Delaware Court")
against the Corporation, Xetava and seven of the Corporation's directors. In
May 1998, the Delaware Court consolidated the lawsuits under the caption In
re Avatex Corporation Shareholders Litigation, C.A. No. 16334. The lawsuits
challenged the merger of the Corporation with and into Xetava and contended
that the merger is subject to a separate class vote by the holders of the
Corporation's preferred stock and that the exchange ratios for the merger are
unfair to the preferred stockholders. Plaintiffs sought a declaration that
the defendant directors have breached their fiduciary duties, injunctive
relief and damages and costs. In August 1998, the Delaware Supreme Court
ruled that the holders of the Corporation's convertible preferred stock have
the right to vote separately as a class on the proposed merger of the
Corporation into Xetava, as it was structured and announced by the
Corporation on April 14, 1998. As a result of these events, the Board of
Directors has reconsidered the appropriate course of action to take with
respect to the merger and has entered into an agreement with certain large
holders of its preferred stock on the terms of a revised merger between the
Corporation and Xetava and the settlement of the preferred stockholders'
litigation against the Corporation. See Note S for a discussion of the new
agreements.
COMMON STOCK: At March 31, 1999 and 1998, the Corporation had issued
13,806,487 and 13,806,375 shares, respectively, of common stock. The
Corporation has also reserved 3,853,114 shares of its common stock for
issuance under its stock option and performance award plans (see Note J). As
long as there are cumulative unpaid dividends outstanding on the preferred
stock, as discussed above, no dividends may be paid on the common stock.
See Note S for a discussion of potential additional common stock and common
stock warrants that may be issued as a result of the merger and settlement with
preferred stockholders as discussed above.
As of March 31, 1999, Phar-Mor had acquired 2,086,200 shares of the
Corporation's common stock during the current fiscal year through open market
purchases at a cost of approximately $5.0 million. The Corporation accounts
for its investment in Phar-Mor on an equity basis (see Note B) and treats
Phar-Mor's investment in the Corporation's common stock similar to treasury
stock, with a charge to the stockholders' deficit of $1.9 million and a
reduction in the number of shares outstanding for calculating earnings per
share of 801,101. The charge to the stockholders' deficit and the reduction
in shares for calculating earnings per share is equal to the Corporation's
38.4% ownership in the cost and number of shares of its common stock held by
Phar-Mor. See Note S for a discussion of additional purchases of the
Corporation's common stock that Phar-Mor may make.
On January 28, 1999, the New York Stock Exchange ("NYSE") informed the
Corporation that it no longer met the continued listing requirements of the NYSE
and that trading of its common, convertible preferred and Series A preferred
stocks would be suspended prior to the opening of the NYSE on Monday, February
1, 1999. The Corporation's common and preferred stocks now trade on the OTC
Bulletin Board system.
NOTE J- EMPLOYEE COMPENSATION PLANS
The Corporation maintains the 1993 Restated Stock Option and Performance Award
Plan (the "Plan"). The Plan provides for the granting of incentive options and
non-qualified options to purchase shares of the common stock of the Corporation
to certain officers and key employees of the Corporation and its subsidiaries
and for the granting of non-qualified stock options to the outside directors on
an automatic basis. The Plan also permits the granting of performance shares,
restricted shares and performance units to participants (other than outside
directors). Under the Plan, the Finance and Personnel Committee of the Board of
Directors of the Corporation determines the price at which options are to be
granted, the period over which options are exercisable, the duration of
performance or restriction periods and performance targets over which
performance shares shall be earned. Options for an aggregate of 4,000,000 shares
of the Corporation's common stock may be granted under the Plan. At March 31,
1999, options for 100,078 shares were still available for grant under the Plan.
The Corporation has a Performance Incentive Plan which provides for participants
to receive (i) 17.5% of the
39
<PAGE>
Corporation's net income (before the charge for the plan and after certain
adjustments) and (ii) 17.5% of the net proceeds from litigation, if any,
related to the Corporation's lawsuit against McKesson and various other
defendants. Approximately $1.9 million in incentive bonuses was earned under
the net income portion of the plan for the year ended March 31, 1998. No
amounts were earned for the years ended March 31, 1999 or March 31, 1997. The
net income portion of the plan has not been extended beyond March 31, 1999.
The litigation portion of the plan does not expire nor can the percentage
award or the participants be changed unless the participant has voluntarily
terminated his employment or been terminated with cause.
The following table summarizes the information with respect to stock options for
the three years ended March 31, 1999. No options were granted during 1999. The
exercise price of options granted in prior years was at least equal to the
published market price of the Corporation's common stock on the date of grant.
<TABLE>
<CAPTION>
Outstanding
------------------------------------
Weighted
Average
Exercisable Shares Shares Exercise Price
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1996 1,329,669 3,165,297 $17.52
Granted 4,932,786 7.13
Exercised 105,586 15.91
Canceled or forfeited 5,753,591 14.90
---------------------------------------------------------------------------------------------------
March 31, 1997 40,792 2,238,906 1.45
Granted 1,655,000 1.13
Exercised - -
Canceled or forfeited 40,792 15.11
---------------------------------------------------------------------------------------------------
March 31, 1998 1,452,909 3,853,114 1.16
Granted - -
Exercised - -
Canceled or forfeited - -
---------------------------------------------------------------------------------------------------
March 31, 1999 2,750,611 3,853,114 1.16
===================================================================================================
</TABLE>
The Corporation accounts for stock-based compensation using the intrinsic value
method of APB 25 (see Note A). Accordingly, no compensation expense was
recognized. If the Corporation had used the fair value of options at the grant
dates, as defined by SFAS No. 123, to recognize compensation cost for the three
years ended March 31, 1999, the Corporation's net loss and loss per common share
would have been as follows on a pro forma basis (in thousands of dollars, except
per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported
Net loss from continuing operations $(6,587) $ (81,219) $ (12,244)
Net loss (6,587) (77,500) (279,356)
Pro forma
Net loss from continuing operations $(7,274) $ (82,412) $ (12,006)
Net loss (7,274) (78,693) (279,118)
----------------------------------------------------------------------------------------------------------
As reported for both basic and diluted earnings per share
Net loss per share from continuing operations $ (2.65) $ (7.74) $ (2.10)
Net loss per share (2.65) (7.47) (19.99)
Pro forma for both basic and diluted earnings per share
Net loss per share from continuing operations $ (2.71) $ (7.82) $ (2.08)
Net loss per share (2.71) (7.55) (19.97)
==========================================================================================================
</TABLE>
The fair value of each option grant was estimated on the date of grant by using
the Black-Scholes option-pricing
40
<PAGE>
model. The following weighted average assumptions were used for grants during
the three years ended March 31, 1999 (no grants were made during 1999):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield (%) - 0.0 0.0
Expected volatility (%) - 60.8 43.7
Risk-free interest rates (%) - 6.2 6.3
Expected option lives (years) - 4.0 4.5
=================================================================================================
</TABLE>
The weighted-average fair values of options granted during 1998 and 1997 were
$0.58 and $1.57, respectively.
The following table summarizes information about significant option groups
outstanding and exercisable as of March 31, 1999 and related weighted-average
exercise price and weighted-average contractual life remaining:
<TABLE>
<CAPTION>
Options with Exercise Prices Outstanding Exercisable Remaining
Ranging from: Shares Price Shares Price Life
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.125 to $1.3125 3,853,114 $ 1.16 2,750,611 $ 1.18 3.0
======================================================================================================
</TABLE>
NOTE K - RETIREMENT PLANS
The Corporation and its subsidiaries have retirement plans consisting of both
defined benefit and defined contribution plans. Pension benefits under the
defined benefit plans are generally based upon years of service or a combination
of remuneration and years of service. No current employee is covered under a
defined benefit plan. The Corporation's funding policy for defined benefit plans
is to make payments to the pension trusts in accordance with the funding
requirements of federal laws and regulations. The outside directors of the
Corporation are covered under a non-qualified and unfunded defined benefit plan.
The Corporation has maintained an employees' savings plan under Section 401(k)
of the Internal Revenue Code for all employees since April 1997. Under the plan,
employees generally may elect to exclude up to 15% of their compensation from
amounts subject to income tax as a salary deferral contribution. The Corporation
makes a matching contribution to each employee, which immediately vests, in an
amount equal to 50% of the first 6% of the employee's contribution. For 1997, a
subsidiary of the Corporation, FoxMeyer, maintained an employees' savings and
profit sharing plan under Section 401(k) which covered substantially all the
Corporation's employees prior to the acquisition of FoxMeyer's assets by
McKesson in November 1996 (see Note B).
Pension income for continuing operations under the Corporation's retirement
plans for the three years ended March 31, 1999, are presented in the table below
(in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic pension cost (income) for defined benefit plans:
Service cost - benefits earned for the year $ 61 $ 78 $ 44
Interest cost on projected benefit obligation 3,603 4,098 4,364
Expected return on plan assets (4,795) (4,387) (5,681)
Net amortization and deferral (197) (57) (100)
--------------------------------------------------------------------------------------------------------------
Net periodic pension cost (income) (1,328) (268) (1,373)
Pension cost for defined contribution plans 21 39 20
--------------------------------------------------------------------------------------------------------------
Total pension cost (income) $(1,307) $ (229) $(1,353)
==============================================================================================================
</TABLE>
The net periodic pension income for defined benefit plans was determined by
assuming a weighted average expected long-term rate of return on plan assets of
7.8% for the year ended March 31, 1999, 8.5% for the year
41
<PAGE>
ended March 31, 1998, and 10.0% for the year ended March 31, 1997.
As a result of agreements with certain former officers and employees who elected
lump sum payments in lieu of continuing payments from certain unfunded plans,
two plans were terminated and a third plan was partially settled (see Note N)
during 1998.
The following table sets forth the funded status of the Corporation's defined
benefit pension plans and amounts recognized in the Corporation's consolidated
balance sheets at March 31, 1999 and 1998 utilizing a weighted average discount
rate of 7.0% in both 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 53,780 $ 56,231
Service cost 61 78
Interest cost 3,603 4,098
Actuarial losses (gains) 98 2,816
Curtailment gain - (3,202)
Benefits paid (5,116) (6,241)
--------------------------------------------------------------------------------------
Projected benefit obligation, end of year 52,426 53,780
--------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year 64,179 53,911
Actual return on plan assets 1,914 14,705
Benefits paid (4,869) (4,437)
--------------------------------------------------------------------------------------
Fair value of plan assets, end of year 61,224 64,179
--------------------------------------------------------------------------------------
Funded status 8,798 10,399
Unrecognized transition asset (540) (724)
Unrecognized net actuarial loss (gain) 1,725 (1,267)
--------------------------------------------------------------------------------------
Net prepaid pension cost $ 9,983 $ 8,408
======================================================================================
</TABLE>
The projected benefit obligation and accumulated benefit obligation of the
unfunded plans was $1.0 million as of March 31, 1999 and $1.0 million as of
March 31, 1998. The prepaid pension cost in the table above was shown net of
accrued benefit liabilities of approximately $0.9 million at March 31, 1999 and
$1.0 million at March 31, 1998.
At March 31, 1999, the assets of the Corporation's defined benefit pension plans
were comprised of approximately 20% bonds, 62% stocks and 18% other. Included in
pension plans assets were approximately 1.4 million shares of the Corporation's
common stock with a market value of $1.4 million at March 31, 1999.
NOTE L - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation has a plan for retired employees that provides for
postretirement health care and life insurance benefits. Health benefits include
major medical insurance with deductible and coinsurance provisions. Life
insurance benefits are usually for a flat benefit. The plan provides that
retirees pay for a portion of their coverage. The plan is not funded. The
Corporation pays all benefits on a current basis. No current employees are
covered under the plan.
In March 1998, one inactive subsidiary of the Corporation, which had no ongoing
operations since 1990, exercised its right to terminate coverage of its retiree
healthcare and life insurance plans, as provided in the plan documents. In
addition, another subsidiary of the Corporation, which had no ongoing operations
since 1983 and no resources to pay its liabilities, was dissolved in March 1998.
As a consequence, this subsidiary's retiree healthcare and life insurance plans
were effectively discontinued. Most retirees covered by these plans elected to
participate in a transition assistance payment plan and executed releases in
favor of the applicable subsidiary and its affiliates. A
42
<PAGE>
gain of approximately $21.3 million, net of such payments and certain
remaining claim reserves, was included in "Unusual items" in the consolidated
statements of operations as a result of the termination or discontinuance of
these plans.
The net periodic postretirement benefit cost for continuing operations for the
three years ended March 31, 1999 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned for the year $ - $ - $ -
Interest cost 157 1,501 1,565
Amortization of prior service cost and net gain (72) (464) (440)
-----------------------------------------------------------------------------------------------------
Total postretirement benefit cost $ 85 $ 1,037 $ 1,125
=====================================================================================================
</TABLE>
The following table sets forth the funded status of the postretirement health
care and life insurance plans and amounts recognized in the consolidated balance
sheets at March 31, 1999 and 1998 utilizing a weighted average discount rate of
7.0% for both 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation, beginning of year $ 2,330 $ 19,871
Service cost - -
Interest cost 157 1,501
Plan participants' contributions 29 489
Benefits paid (175) (1,749)
Actuarial loss 376 286
Settlement gain - (18,068)
----------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation, end of year 2,717 2,330
Unrecognized net gain 830 1,278
----------------------------------------------------------------------------------------------------
Amount of postretirement benefit obligation included in the
consolidated balance sheet $ 3,547 $ 3,608
====================================================================================================
</TABLE>
The 1998 reduction in plan liabilities reflects the plan settlements discussed
above.
Medical costs were assumed to increase at a rate of 8.5% during 1999 and then to
decline over a period of 8 years to a rate of 5%. To demonstrate the volatility
of the valuation results based on this assumption, the impact of a 1% increase
or a 1% decrease in the cost of health care would result in a 9.8% increase or a
8.3% decrease in the postretirement benefit obligation and a 19.1% increase or a
16.2% decrease in postretirement benefit cost for the plan.
NOTE M - INCOME TAXES
The provision for income taxes consisted of the following for the three years
ended March 31, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ - $ (40) $ -
Deferred - - 24,557
State
Current 8 80 34
Deferred - - 5,279
---------------------------------------------------------------
Income tax provision $ 8 $ 40 $29,870
===============================================================
</TABLE>
43
<PAGE>
The Corporation recorded no federal income tax benefit in 1999 because of the
uncertainty of realizing its deferred tax assets. The Corporation adjusted
its valuation allowance to maintain a full valuation allowance against its
net deferred tax assets. State income taxes were related to Development
subsidiaries.
The Corporation recorded a benefit for federal income tax purposes in 1998
relating to a tax refund. Because of the uncertainty of realizing its deferred
tax assets, the Corporation adjusted its valuation allowance in 1998 to maintain
a full valuation allowance against its net deferred tax assets.
The Corporation recorded a federal income tax provision of $24.6 million in
1997. The federal income tax provision was primarily attributable to the
establishment of a full valuation allowance against its net deferred tax assets
in recognition of the impact of the FoxMeyer bankruptcy filing (see Note B).
The reasons for the difference between the total tax provision and the amount
computed by applying the statutory federal income tax rate to income (loss) from
continuing operations before income taxes and minority interest were as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to pre-tax income (loss) $(2,285) $(28,336) $ 5,782
Change in deferred tax asset valuation allowance 3,112 (6,621) 26,702
Corporate dividend-received deduction (44) (1,520) (1,976)
State income taxes (net of federal tax effect) 5 52 3,453
Weirton interest expense - - (1,063)
Capital losses - (296) (14,299)
NSC Settlement - 20,995 -
FoxMeyer bankruptcy settlement - 11,652 -
Market adjustments to investments 1,185 4,528 7,569
Equity in affiliates (548) 1,168 1,820
Other items (1,417) (1,582) 1,882
- -----------------------------------------------------------------------------------------------
Total tax provision $ 8 $ 40 $ 29,870
===============================================================================================
</TABLE>
The Corporation's current and noncurrent deferred taxes, which net to a zero
balance as of March 31, 1999 and 1998, consisted of the following temporary
differences and net operating losses at the statutory rate, tax credits, and
valuation allowance (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1999 1998
------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax net operating losses $ 83,056 $ 79,005
Other liabilities 4,611 4,781
Tax credits 7,451 7,595
------------------------------------------------------------
Total deferred tax assets 95,118 91,381
44
<PAGE>
Deferred tax liabilities:
Retirement plans (4,311) (3,733)
Other (482) (435)
------------------------------------------------------------
Deferred tax liability (4,793) (4,168)
Valuation allowance (90,325) (87,213)
------------------------------------------------------------
Deferred tax asset, net $ - $ -
============================================================
</TABLE>
The net change in the valuation allowance for 1999 was an increase of
approximately $3.1 million.
At March 31, 1999, the Corporation had, for federal income tax purposes,
operating loss, capital loss, and investment credit carryforwards of
approximately $237.4 million, $30.4 million, and $0.5 million, respectively,
subject to the limits discussed below. Operating loss carryforwards available
for utilization in the Corporation's consolidated income tax return expire as
follows: 2003 - $15.8 million, 2004 - $58.3 million, 2006 - $94.0 million, 2008
- - $0.5 million, 2009 - $1.0 million, 2011 - $31.6 million, 2012 - $12.6 million,
2013 - $15.5 million, and 2014 - $8.1 million. The capital loss carryforwards
available for utilization in the Corporation's consolidated income tax return
will expire in 2003. Investment credit carryforwards will expire during the
years 2000 through 2002. The Corporation also has alternative minimum tax credit
carryforwards of $7.0 million, which are available to offset the future regular
income tax liability of the Corporation. Alternative minimum tax credit
carryforwards do not expire.
The losses and tax credits referred to in the preceding paragraph have not been
examined by the U.S. Internal Revenue Service and, therefore, may be subject to
adjustment. The availability of such loss and tax credit carryforwards to reduce
the Corporation's future consolidated federal income tax liability are subject
to various limitations under the Internal Revenue Code of 1986, as amended (the
"Code"), including limitations upon the utilization of loss and tax credit
carryforwards in the event of an ownership change (as defined in the Code) of
the Corporation. The Corporation believes that an ownership change occurred in
1995 and that another ownership change occurred between January and April 1998.
Consequently, except in connection with the disposition of certain assets
occurring in the next four years, utilization of loss and tax credit
carryforwards incurred prior to the latest ownership change will be severely
limited. The Corporation believes that, as a result of the ownership change, the
Corporation will be prevented from utilizing a significant amount of its
operating and capital loss and tax credit carryforwards incurred prior to the
current fiscal year.
NOTE N - COMMITMENTS AND CONTINGENCIES
The Corporation leases various types of properties, primarily corporate office
space and equipment, through noncancelable operating leases. Rental expense for
continuing operations under operating leases totaled $0.2 million in 1999, $0.1
million in 1998, and $1.1 million in 1997. Minimum rental payments under
operating leases with initial or remaining terms of one year or more at March
31, 1999 total $0.5 million with payments due of $0.2 million in 2000, $0.2
million in 2001 and $0.1 in million in 2002.
The real estate partnerships controlled by Development have liabilities related
to capital leases of $0.1 million. The assets associated with these leases have
a net book value of $0.1 million.
On October 9, 1997, the United States Bankruptcy Court for the District of
Delaware approved a settlement (the "FoxMeyer Settlement") of certain litigation
between the Corporation and the Chapter 7 Trustee of FoxMeyer and certain of its
subsidiaries (see Note B). The litigation concerned the validity of the transfer
of certain property from FoxMeyer to the Corporation as a dividend on June 19,
1996. Under the FoxMeyer Settlement, (i) the pending litigation by the Trustee
against the Corporation was dismissed, (ii) the Corporation paid the Trustee
approximately $25.8 million from a previously established escrow account, and
(iii) the Corporation executed a three year, $8.0 million promissory note
payable to the Trustee (see Note H). As a result of the FoxMeyer Settlement, the
Corporation recognized a $33.3 million charge which is included in "Unusual
items" in the consolidated statements of operations in 1998.
45
<PAGE>
The Corporation has retained responsibility for certain potential environmental
liabilities attributable to former operating units. As a result of the NSC
Settlement, the Corporation has been released from responsibility for claims
resulting from its prior ownership of NSC or Weirton (see Note G). The
Corporation is still subject to federal, state and local environmental laws,
rules and regulations, including the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, and similar state superfund
statutes related to sites of other former operating units. These statutes
generally impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties regardless of fault. The Corporation and its subsidiaries received
various claims and demands from governmental agencies relating to investigations
and remedial actions to address environmental clean-up costs and in some
instances have been designated as a potentially responsible party by the
Environmental Protection Agency.
At March 31, 1999, the Corporation had reserves of $1.5 million for
environmental assessments, remediation activities, penalties or fines at eight
sites that may be imposed for non-compliance with such laws or regulations.
Reserves are established when it is probable that liability for such costs will
be incurred and the amount can be reasonably estimated. The Corporation's
estimates of these costs are based upon currently available facts, existing
technology, presently enacted laws and regulations and the professional judgment
of consultants and counsel. Where the available information is sufficient to
estimate the amount of the liability, that estimate has been used. Where the
information is only sufficient to establish a range of probable liability and no
point within the range is more likely than the other, the lower end of the range
was used.
The amounts of reserves for environmental liabilities are difficult to estimate
due to such factors as the unknown extent of the remedial actions that may be
required and, in the case of sites not formerly owned by the Corporation, the
unknown extent of the Corporation's probable liability in proportion to the
probable liability of other parties. Moreover, the Corporation may have
environmental liabilities that the Corporation cannot, in its judgment, estimate
at this time and losses attributable to remediation costs may arise at other
sites. Management recognizes that additional work may need to be performed to
ascertain the ultimate liability for such sites, and further information could
ultimately change management's current assessment. A change in the estimated
liability could have a material impact on the financial condition and results of
operations of the Corporation.
In connection with litigation claims by the Corporation and certain other
plaintiffs against various insurance carriers for coverage of certain
environmental liabilities, the Corporation received a $1.6 million cash
settlement in 1998 for certain of these claims which was included in the
consolidated statements of operations in "Unusual items". In connection with the
NSC Settlement in November 1997, the Corporation assigned to NSC its right to
assert pre-1987 environmental claims against the insurance carriers and released
to NSC its share of any settlement proceeds related to such claims.
In November 1997, the Corporation entered into lump sum payment agreements with
certain former officers and employees who were receiving supplemental pension
and other payments from the Corporation or its subsidiaries. As a result of the
agreements, the Corporation paid approximately $2.1 million to these individuals
for the termination of the Corporation's payment obligations and recognized a
gain of approximately $5.6 million which was included in "Unusual items" in the
1998 consolidated statement of operations. Approximately $3.2 million of the
gain was associated with certain retirement plans discussed in Note K.
On April 14, 1998, the Corporation announced that it would merge with and into
its wholly-owned subsidiary, Xetava. Under the proposed merger, the
Corporation's existing common and preferred stockholders would have received new
common stock of Xetava. In late April 1998, a preferred stockholder of the
Corporation and a putative class of preferred stockholders filed a total of
three lawsuits in the Delaware Court against the Corporation, Xetava and seven
of the Corporation's directors. In May 1998, the Delaware Court consolidated the
lawsuits under the caption In re Avatex Corporation Shareholders Litigation,
C.A. No. 16334. The lawsuits challenged the merger of the Corporation with and
into Xetava and contended that the merger is subject to a separate class vote by
the holders of the Corporation's preferred stock and that the exchange ratios
for the merger are unfair to the preferred stockholders. Plaintiffs sought a
declaration that the defendant directors have breached their fiduciary duties,
injunctive relief and damages and costs. In August 1998, the Delaware Supreme
Court ruled that the holders of the Corporation's convertible preferred stock
have the right to vote separately as a class on the proposed merger of the
46
<PAGE>
Corporation into Xetava, as it was structured and announced by the Corporation
on April 14, 1998. As a result of these events, the Corporation has entered into
agreements with certain large holders of its preferred stock on the terms of a
revised merger between the Corporation and Xetava and the settlement of the
preferred stockholders' litigation against the Corporation. See Note S for a
discussion of the new agreements.
On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation
had proposed a merger in which FoxMeyer would be merged with and into a
wholly-owned subsidiary of the Corporation, making FoxMeyer a wholly-owned
subsidiary of the Corporation. Shortly after the announcement, class action
lawsuits were filed against the Corporation, FoxMeyer and certain of FoxMeyer's
officers and directors in the Delaware Court. Following a number of procedural
matters, and the execution (and subsequent withdrawal) of a Memorandum of
Understanding dated June 30, 1994 under which the litigation would be dismissed,
the litigation was consolidated and an amended complaint was filed on February
13, 1996. The amended complaint alleged that the defendants breached their
fiduciary duties to FoxMeyer's shareholders by agreeing to the merger at an
unfair price and at a time designed so that the Corporation could take advantage
of, among other things, an alleged substantial growth in the business of
FoxMeyer. The complaint also alleged that the proxy statement issued in
connection with the merger failed to disclose certain matters relating to the
proposed merger. In fiscal 1999, the parties reached a tentative settlement of
the lawsuit in which the Corporation will pay the class the amount of
approximately $1.4 million, a portion of which will be paid by the directors'
insurance carrier. The settlement is subject to definitive documentation and
approval by the Delaware Court.
The Corporation and certain of its current and former officers and directors
have been named in a series of purported class action lawsuits that were filed
and subsequently consolidated under Zuckerman, et al. v. FoxMeyer Health
Corporation, et al., in the United States District Court for the Northern
District of Texas, Dallas Division, Case No. 396-CV-2258-T. The lawsuit purports
to be brought on behalf of purchasers of the Corporation's common and its Series
A and convertible preferred stocks during the period July 19, 1995 through
August 27, 1996. On May 1, 1997, plaintiffs in the lawsuit filed a consolidated
amended class action complaint, which alleges that the Corporation and the
defendant officers and directors made misrepresentations of material facts in
public statements or omitted material facts from public statements, including
the failure to disclose purportedly negative information concerning its National
Distribution Center and Delta computer systems and the resulting impact on the
Corporation's existing and future business and financial condition. On March 31,
1998, the court denied the Corporation's motion to dismiss the amended complaint
in the lawsuit. The Corporation intends to continue to vigorously defend itself
in the lawsuit. The Corporation is unable at this time to estimate the possible
loss, if any, which may accrue from this lawsuit.
The Corporation and its Co-Chairmen and Co-Chief Executive Officers have also
been named as defendants in Grossman v. FoxMeyer Health Corp., et al., Cause No.
96-10866-J, in the 191st Judicial Court of Dallas County, Texas. The lawsuit
purports to be brought on behalf of all holders of the Corporation's common
stock during the period October 30, 1995 through July 1, 1996, and seeks
unspecified money damages. Plaintiff asserts claims of common law fraud and
negligent misrepresentation, based on allegations that she was induced not to
sell her shares by supposed misrepresentations and omissions that are
substantially the same as those alleged in the ZUCKERMAN action described above.
On September 28, 1997, the court denied the Corporation's motion for summary
judgment in the lawsuit. The Corporation intends to continue to vigorously
defend itself in the lawsuit. The Corporation is unable at this time to estimate
the possible loss, if any, which may accrue from this lawsuit.
In 1997, the bankruptcy trustee and certain creditors of the Corporation's
17%-owned subsidiary, Ben Franklin, filed lawsuits against certain former
officers and directors of Ben Franklin, the Corporation and certain current and
former officers and directors of the Corporation. The Corporation and its
officers and directors have since been dropped as defendants in the lawsuits. In
connection with paying its own defense costs and those of its officers and
directors, the Corporation also initially paid a portion of the defense costs of
certain individuals who are named as defendants in these lawsuits by reason of
the fact that they may have been serving at the request of the Corporation as a
director or officer of Ben Franklin. On October 13, 1998, the United States
Bankruptcy Court for the Northern District of Illinois issued Memorandum
Opinions that dismissed two of the lawsuits against all but one of the
defendants. On December 1, 1998, the Court denied a motion to reconsider one of
these opinions, and the plaintiffs have filed objections to both opinions with
the United States District Court for the Northern District of Illinois. In
47
<PAGE>
the third lawsuit, pending in Illinois state court, the court struck the
plaintiffs' second amended complaint and ordered a third amended complaint to
be filed. If liability is ever imposed in any of the lawsuits, the
Corporation may, if appropriate, agree at a future date to indemnify certain
of the remaining defendants in the lawsuit in accordance with Delaware law.
In April 1998, the Trustee filed a lawsuit against the five former directors of
FoxMeyer, in which the Trustee alleges that the defendants breached their
fiduciary duty in connection with the June 19, 1996 dividend of certain assets
to the Corporation. In October 1997, in connection with the settlement of a
separate lawsuit brought by the Trustee against the Corporation, the Corporation
was released by the Trustee from all liability and the director-defendants in
this lawsuit received covenants not to execute from the Trustee. The Corporation
has agreed to pay the initial defense costs of the individuals who are named as
defendants in the lawsuit by reason of the fact that they may have been serving
at the request of the Corporation as a director or officer of FoxMeyer.
On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed a
lawsuit, allegedly on behalf of the Corporation, against seven of the
Corporation's current directors and three of its former directors who were
members of its Personnel and Compensation Committee, under No. 602773198 in the
Supreme Court of New York, County of New York. The plaintiffs are holders of the
Corporation's Series A preferred stock, and the lawsuit relates primarily to
agreements and transactions between the Corporation and its Co-Chairmen and
Co-Chief Executive Officers, Abbey Butler and Melvyn Estrin. The plaintiffs
allege that, in connection with such agreements and transactions, (i) the
defendants breached their fiduciary duty to the Corporation's stockholders, (ii)
the compensation arrangements between the Corporation and Messrs. Butler and
Estrin constitute corporate waste, and (iii) the defendants caused the
Corporation's subsidiaries and affiliates to improperly purchase the
Corporation's common stock based on confidential non-public information. The
plaintiffs seek damages, injunctive relief and an accounting. In January 1999, a
stipulation was executed providing that the litigation, insofar as brought by
Stephen Mizel IRA, was voluntarily discontinued with prejudice. In April 1999,
the Court denied the remaining plaintiff's motion to amend its complaint to
allege additional claims. Discovery is proceeding in the lawsuit. The
Corporation has been paying the defense costs of the defendants in accordance
with Delaware General Corporation Law, the Corporation's charter and by-laws,
and the terms and conditions of Indemnification Agreements between the
Corporation and certain of the defendants.
There are various other pending claims and lawsuits arising out of the normal
conduct of the Corporation's businesses. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material effect on
the consolidated financial condition or results of operations of the
Corporation.
48
<PAGE>
NOTE O - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments was determined by the
Corporation based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates are not necessarily indicative of the amounts that the Corporation
might realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies might have had a material effect on
the estimated fair value at March 31, 1999 or 1998, respectively.
The carrying amounts of cash and short-term investments, accounts and notes
receivable, accounts payable and other accrued liabilities were reasonable
estimates of their fair value.
The carrying value of long-term debt was $34.7 million and $23.4 million at
March 31, 1999 and 1998, respectively, while the estimated fair value was $33.9
million and $23.4 million, respectively, based upon interest rates available to
the Corporation for issuance of similar debt with similar terms and remaining
maturities. The fair market value of the interest rate swap with a notional
value of $12.5 million was immaterial.
Debt and equity securities classified as "available for sale" or "trading" were
carried at their estimated fair value (see Notes A and F).
The fair value of the Corporation's redeemable preferred stock, based on quoted
market prices at March 31, 1999 and 1998, was $14.5 million and $69.3 million,
respectively.
An investment in a partnership, with a book value of $3.0 million, held publicly
traded securities with a market value of $12.7 million at March 31, 1998.
The carrying value of other investments was estimated to be at fair value, or it
was not practicable to estimate their fair value without incurring substantial
costs. The carrying value of these investments at March 31, 1999 and 1998 was
$1.4 million and $3.0 million, respectively.
The fair value estimates were based on pertinent information available to
management as of March 31, 1999 and 1998. Such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates, and current estimates of fair value may differ significantly from the
amounts presented herein.
49
<PAGE>
NOTE P - SEGMENT INFORMATION
Under the definition of segments used in SFAS No. 131, the Corporation has two
reportable segments: the real estate segment and the investment segment. The
real estate segment included the operations of hotels and an office building.
The investment segment included equity investments in Phar-Mor as well as
investments in other public and private companies and partnerships. It also
includes all costs incurred by the corporate office. The accounting policies for
the segments are the same as those described in the summary of significant
accounting policies (Note A). The Corporation evaluates performance on income
before income taxes and minority interest. There are no intersegment sales or
transfers. The following table includes segment information for the three years
ended March 31, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
Real
Estate Investments Other Consolidated
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues $ 10,509 $ - $ - $ 10,509
Operating income (loss) 1,546 (7,319) - (5,773)
Other income (expense) 85 (1,560) - (1,475)
Interest income 61 1,813 - 1,874
Interest expense 1,649 768 - 2,417
Equity in income of affiliates - 1,263 1,263
Income (loss) before income taxes and
minority interest 43 (6,571) - (6,528)
Depreciation and amortization 1,188 43 - 1,231
Identifiable assets 33,441 83,779 - 117,220
Capital expenditures 12,356 18 - 12,374
-----------------------------------------------------------------------------------------------------------
1998
Revenues $ 12,228 $ - $ - $ 12,228
Operating income (loss) 1,855 (11,433) - (9,578)
Other income (expense) 930 (12,267) - (11,337)
Interest income 83 1,626 - 1,709
Interest expense 2,185 3,048 - 5,233
Equity in income (loss) of affiliates 159 (3,495) - (3,336)
Income (loss) before income taxes and
minority interest 842 (28,617) (53,184) (80,959)
Depreciation and amortization 917 41 958
Identifiable assets 23,479 95,824 - 119,303
Capital expenditures 5,583 10 - 5,593
-----------------------------------------------------------------------------------------------------------
1997
Revenues $ 12,463 $ - $ - $ 12,463
Operating income (loss) 2,608 (4,999) - (2,391)
Other income 7,350 11,878 - 19,228
Interest income 706 972 - 1,678
Interest expense 2,270 4,146 - 6,416
Equity in income (loss) of affiliates 459 (5,658) - (5,199)
Income (loss) before income taxes and
minority interest 8,853 (1,953) 9,620 16,520
Depreciation and amortization 934 534 - 1,468
Identifiable assets 26,665 95,541 44,961 167,167
Capital expenditures 6,707 186 27,855 34,748
===========================================================================================================
</TABLE>
The "Other" column includes information for items not considered part of an
operating segment by management. These amounts include NSC assets and the income
or loss from those assets which were dedicated to meeting
50
<PAGE>
certain obligations to NSC (see Note G). The column also includes capital
expenditures for the first three months of the 1997 fiscal year by FoxMeyer,
a discontinued operation (see Note B). There are no foreign operations in any
segment.
NOTE Q - QUARTERLY DATA (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of continuing
operations for the two years ended March 31, 1999 (in thousands of dollars,
except per share amounts):
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Revenues $ 2,576 $ 2,353 $ 2,615 $ 2,965
Operating loss (1,199) (1,535) (1,594) (1,445)
Net loss from continuing operations (2,582) (2,784) (638) (583)
Loss per common share from continuing
operations after preferred stock dividends:
Basic and Diluted, as restated (0.70) (0.75) (0.60) (0.61)
Basic and Diluted, as previously reported (0.68) (0.71) (0.56) -
- ------------------------------------------------------------------------------------------------------------
1998:
Revenues $ 3,163 $ 3,660 $ 2,974 $ 2,431
Operating income (loss) (33,472) 850 3,777 19,267
Net income (loss) from continuing operations (36,946) (1,585) (59,176) 16,488
Earnings (loss) per common share from
continuing operations after preferred
stock dividends:
Basic (3.12) (0.57) (4.76) 0.71
Diluted (3.12) (0.57) (4.76) 0.66
============================================================================================================
</TABLE>
As a result of the investment by Phar-Mor in the common stock of the
Corporation during fiscal 1999, the Corporation had increased its
stockholders' deficit by its equity in the $5.0 million cost of that
investment (see Note I). The Corporation did not reduce the number of shares
outstanding in calculating earnings per share for the financial statements on
Form 10-Q for the quarters ending June 30, 1998, September 30, 1998 or
December 31, 1998. The Corporation has determined that the effect of
Phar-Mor's investment in the Corporation reduces the Corporation's weighted
average number of shares outstanding by 427,407 shares, 786,843 shares and
801,101 shares, respectively, for each of the first three quarters of fiscal
1999. Basic and diluted loss per share would have increased by $(0.02) per
share for the three months ended June 30, 1998; $(0.04) and $(0.07) per share
for the three and six months ended September 30, 1998, respectively; and
$(0.04) and $(0.10) per share for the three and nine months ended December
31, 1998, respectively.
In addition to those items discussed below, the Corporation's quarterly results
were significantly affected by the realized and unrealized gains or losses on
securities and other investments.
During the fourth quarter of 1998, the Corporation recognized a gain of $21.3
million on the termination and settlement of retiree healthcare and life
insurance benefits (Note L). In the third quarter of 1998, the Corporation
recognized a loss of $59.0 million on the NSC Settlement (Note G) and a gain of
$5.6 million on the settlement of certain pension and other postretirement
benefit claims of former officers and employees (Note N). In the second quarter
of 1998, the Corporation recognized $1.7 million in gains on the settlement of
litigation, primarily the settlement of certain environmental liability claims
(see Note N). In the first quarter of 1998, the Corporation recognized a $33.3
million charge related to the FoxMeyer Settlement with the Trustee (see Note N).
Per share amounts were computed independently for each quarter based on the
average number of shares outstanding during that quarter. As a result, the
sum of the quarterly per share amounts may not equal the per share amount for
the entire year.
NOTE R - GOING CONCERN
During the year ended March 31, 1998, the Corporation had significant success in
resolving a number of matters which threatened its existence including: (i) a
significant reduction in operating cash outflows; (ii) the settlement with the
FoxMeyer Trustee of certain claims against the Corporation and the release of
the Corporation's assets from a temporary restraining order and injunction;
(iii) the restoration of the Corporation's liquidity and the elimination of
substantial healthcare, environmental and other liabilities through an
aggressively negotiated settlement of the Corporation's preferred stock
investment in NSC; and (iv) the elimination of certain other material benefit
obligations owed by the Corporation or its subsidiaries. Nevertheless, the
Corporation will likely continue to report operating losses, which together with
a continuing common stockholders' deficiency and various pending claims and
litigation as described in Note N, raise doubt as to the Corporation's ability
to continue as a going concern.
51
<PAGE>
Building on these successes, management has turned its full attention to the
remaining issues.
The following specific actions are planned: (i) to overcome the operating
losses, management will continually review and assess its investment portfolio
in order to identify those investments which should be liquidated and those
which merit new or additional investment (see discussion below) and may seek to
identify and acquire an operating company; (ii) to address its common
stockholders' deficiency, the Corporation's Board of Directors has approved a
merger with Xetava which would eliminate the preferred stock obligation (see
Note S); and (iii) to address its pending litigation, management remains firm in
its belief that such claims are without merit and will continue its vigorous
defense of the matters.
As part of this plan to overcome the remaining issues, the Corporation made
several investments in fiscal 1999. These include investments in RAS Holding
Corp. ("RAS"), Chemlink and HPD Holdings Corp. ("HPD"). Details concerning these
investments follow.
In April 1998, the Corporation invested in RAS by purchasing 10% Series B
convertible preferred stock ("Series B Stock"). In July 1998 and February
1999, the Corporation made additional purchases of the Series B Stock after
RAS met certain performance goals. The Corporation's total investment was
approximately $1.4 million. The Corporation also received two-year warrants
to purchase additional Series B Stock for an additional investment of $0.9
million. On a fully-diluted basis, assuming the exercise of all convertible
preferred stock, warrants and options outstanding, the Corporation would own
approximately 12.9% of the common stock of RAS. RAS, through its wholly-owned
subsidiary Presby Corp., has developed a surgical technique called the
Surgical Reversal of Presbyopia ("SRP"), which uses a patented medical
device, the Scleral Expansion Band ("SEB"), to treat presbyopia in the
human eye. Presbyopia is, in general, the loss of the ability of the human
eye to focus on near objects due to aging. RAS is in the process of marketing
the SEBs in certain international markets where the SEB has received
regulatory approval. The Corporation has been advised that in March 1999 RAS
received conditional approval from the FDA to begin its SRP clinical trials
in the United States, but that the outcomes of the trials and achieving
commercial success of the technique are each highly uncertain. The
Corporation has a consulting contract with RAS and also licenses office space
at its Dallas, Texas office to RAS.
See Note B for a discussion of the Chemlink investment.
In April 1998, the Corporation invested $1.25 million in preferred and common
stock of HPD. The Corporation acquired 2.5% of the common stock of HPD. HPD
Laboratories ("HPD Labs"), a wholly owned subsidiary of HPD, purchased the
assets associated with Block Drug Company's household product lines. The
Corporation has been advised that HPD Labs intends to continue and extend the
current product lines and expand into compatible lines.
The Corporation's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from the
resolution of these uncertainties.
NOTE S - SUBSEQUENT EVENT
On June 18, 1999, the Corporation announced that it had entered into an
Amended and Restated Agreement and Plan of Merger (the "Revised Merger
Agreement") with its wholly-owned subsidiary, Xetava. The Revised Merger
Agreement amends and restates the Agreement and Plan of Merger between the
Corporation and Xetava dated April 9, 1998. Under the Revised Merger
Agreement, which was approved by the Corporation's Board of Directors, Xetava
will merge with and into the Corporation, and the Corporation's existing
preferred stockholders will receive new Class A common stock of the
Corporation or, alternately, a combination of cash, secured notes, warrants
and other consideration. The Corporation's common stockholders will receive
new Class A common stock of the Corporation on a one-for-one basis for their
current common stock. Consummation of the proposed merger is subject to,
among other things, (i) the approval of the merger by holders of a majority
of the Corporation's common stock and by the holders of at least two-thirds
of each
52
<PAGE>
series of preferred stock, voting separately as a class, (ii) the
effectiveness of a registration statement filed with the Securities and
Exchange Commission with respect to the Class A shares, the notes and
warrants described below, and (iii) the dismissal of Delaware lawsuits filed
in connection with the April 1998 merger agreement. The Corporation
anticipates a stockholder meeting to approve the merger will take place in
the fall of 1999.
Under the Revised Merger Agreement, each share of existing convertible
preferred stock will be converted into 9.134 shares of Class A common stock
of the Corporation or, at the election of the holder, into $3.7408 in cash,
$8.34 principal amount of a 6.75% note to be issued by Avatex Funding, Inc.
("Funding"), a new wholly-owned subsidiary of the Corporation, and warrants
to purchase 0.67456 shares of Class A common at $2.25 per share. Each share
of Series A Preferred Stock will be converted into 7.253 shares of Class A
common stock of the Corporation or, at the election of the holder, into
$2.9705 in cash, $6.623 principal amount of a 6.75% note, and warrants to
purchase 0.53567 shares of Class A common at $2.25 per share. In addition,
the shareholders of the two series of preferred stock who elect the cash,
note and warrant option will receive a deferred contingent right to a portion
of any net recovery, up to $7.5 million, that the Corporation may receive in
certain litigation brought by the Corporation against McKesson and a number
of large pharmaceutical manufacturers. The amount will be equal to 20% of
such net recovery, up to $7.5 million, with 84% of such recovery available to
all the stockholders of the Series A Preferred Stock and 16% available to all
the stockholders of the convertible preferred stock, with the per share
amount to be received by each preferred stockholder equal to its pro rata
share of an amount that is calculated based on the total number of shares of
preferred stock outstanding immediately before the merger.
Funding will be a new subsidiary whose purpose will be to issue the new 6.75%
notes and to own 3,571,533 shares of common stock of Phar-Mor, which are now
owned by the Corporation. The shares of Phar-Mor will be pledged to secure
the notes. The principal of the notes will be due in three years from the
date of issuance, and the interest will be payable semi-annually in cash. The
Corporation will also guarantee the notes. The warrants to be issued in the
merger will expire 5 years and 3 months after closing of the proposed merger.
Assuming each of the preferred stockholders elects to receive the cash, note
and warrant option in the proposed merger, the Corporation will be required
to pay approximately $15.3 million in cash and issue warrants to purchase
approximately 2,750,000 shares of the Class A common stock. Funding will be
required to issue approximately $34.0 million principal amount of the 6.75%
notes. Under one of the agreements discussed below, stockholders who
represent approximately 48.5% of the convertible preferred and 50.1% of the
Series A preferred stock outstanding have agreed to elect this cash, note and
warrant option.
The Corporation has also entered into settlement, stockholder and voting
agreements with the preferred stockholder plaintiffs in the three Delaware
lawsuits pending against the Corporation, Xetava and certain of their
directors. Under the Stipulation of Settlement entered into by the
Corporation and the plaintiffs in the class action lawsuits on behalf of all
holders of existing preferred stock and for the plaintiff in the non-class
action lawsuit, subject to court approval and effective upon the closing of
the merger, all three Delaware lawsuits will be settled and the Corporation
will pay up to $1.1 million in plaintiffs' attorneys' fees. Under a voting
agreement with one of the named plaintiffs in one of the class action
lawsuits, such plaintiff and its affiliates have agreed to vote in favor of
the proposed merger and to waive any appraisal rights in connection with the
proposed merger. Such plaintiff will also receive $0.3 million in exchange
for a ten year standstill agreement, a general release of liabilities
(subject to certain specified exceptions) and other consideration. Under a
separate agreement with the plaintiff in the third Delaware lawsuit and
another party, these parties and their affiliates and associated companies
have agreed to vote in favor of the merger, to elect to receive the cash,
note and warrant option and to waive any appraisal rights in connection with
the proposed merger. These parties will also receive $0.6 million in exchange
for a ten year standstill agreement, a general release of liabilities and
other consideration. In addition, these parties have entered into a stock
purchase agreement with Phar-Mor, under which, subject to the consummation of
the proposed merger, Phar-Mor has agreed to purchase 2,862,400 shares of the
Corporation's common stock from these parties at $2.00 per share with closing
to occur at the same time as the Xetava merger. Phar-Mor has been granted a
proxy to vote these shares of the Corporation's common stock in favor of the
merger. Phar-Mor will control, if the proposed purchase is made, 35.8% of the
Corporation's common stock outstanding. The purchase will result in a charge
to the stockholders' deficit of approximately $2.2 million and will also reduce
the common stock outstanding for calculating earnings per share by
approximately 1,099,000 shares. These reductions represent the Corporation's
38.4% equity in its common stock that Phar-Mor has agreed to purchase.
53
<PAGE>
On May 12, 1999, the Corporation announced that it had entered into an
agreement to sell its interests in its three remaining real estate
developments. On May 27, 1999, one property was sold to a third party and the
Corporation's interests in the partnerships that owned the other two
properties were sold to the other partners or their affiliates. The
Corporation received $11.4 million in cash and a one-year, $0.6 million
secured note. The note is secured by the Corporation's former interests in
the two partnerships that were sold to its partners or their affiliates. As a
result of these transactions, the Corporation will recognize a gain in fiscal
2000 of approximately $6.2 million ($5.6 million net of taxes).
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of the Corporation consists of seven directors elected
by the holders of the Corporation's common stock and four directors elected
by the holders of the Corporation's two series of preferred stock. The first
seven directors identified below were elected by the holders of the
Corporation's common stock. The last four directors were elected by the
written consent of a majority of the holders of the Corporation's two series
of preferred stock in April 1998. At the time of their election to the Board,
these four directors were employed by Stonington Management Corp.
("Stonington"). Stonington is controlled by Mr. Paul Singer, who also
controls Elliott and Westgate International, L.P., which collectively are
significant holders of the Corporation's common and preferred stock. The
following sets forth, with respect to each member of the Corporation's Board
of Directors, his name, age, period served as director, present position, if
any, with the Corporation and other business experience.
THE BOARD OF DIRECTORS
ABBEY J. BUTLER, age 62, has served as a director of the Corporation since 1990.
Mr. Butler has also served as Co-Chairman of the Board of the Corporation since
March 1991 and was appointed Co-Chief Executive Officer of the Corporation in
October 1991. He also serves as Co-Chairman of the Board and Co-Chief Executive
Officer of Phar-Mor; as managing partner of Centaur Partners, L.P., an
investment partnership with ownership interests in the Corporation; and as the
President and a director of C.B. Equities Corp., a private investment company.
Mr. Butler presently serves as a director and a member of the Executive
Committee of GrandBanc, Inc. ("GrandBanc"), the holding company of Grand Bank,
Maryland, and, in connection with investments by the Corporation and its
subsidiaries, as a director of Carson, RAS, Caring, HPD and Cyclone,
Incorporated ("Cyclone"), and as a member of the Board of Managers of Chemlink.
Mr. Butler is a trustee and a member of the Executive Committee of the Board of
Trustees of The American University, and a director of the Starlight Foundation,
a charitable organization. He was appointed by President George Bush to serve on
the President's Advisory Committee on the Arts, and he now serves as President
of the National Committee for the Performing Arts, John F. Kennedy Center,
Washington, D.C. Mr. Butler also served as Co-Chairman of the Board of FoxMeyer
since March 1991 and was Co-Chief Executive Officer of FoxMeyer from May 1993 to
November 1996, and also served as Co-Chairman of the Board of Ben Franklin from
November 1991 until March 1997. FoxMeyer, FoxMeyer Drug and Ben Franklin each
filed for relief under the Bankruptcy Code in 1996.
MELVYN J. ESTRIN, age 56, has served as a director of the Corporation since
1990. Mr. Estrin has also served as Co-Chairman of the Board of the Corporation
since March 1991 and was appointed Co-Chief Executive Officer of the Corporation
in October 1991. He also serves as Co-Chairman of the Board and Co-Chief
Executive Officer of Phar-Mor; as managing partner of Centaur Partners, L.P., an
investment partnership; and has served as Chairman of the Board and Chief
Executive Officer of Human Service Group, Inc., a private management and
investment firm, since 1983. Mr. Estrin presently serves as a director and a
member of the Executive Committee of GrandBanc, as a director of Washington Gas
Light Company and, in connection with investments by the Corporation and its
subsidiaries, as a director of Carson, RAS, Caring, and HPD, and as a member of
the Board of Managers of Chemlink. Mr. Estrin also served as a Trustee of the
University of Pennsylvania and was appointed by President George Bush to serve
as Commissioner of the National Capital Planning Commission. Mr. Estrin also
served as Co-Chairman of the Board of FoxMeyer since March 1991 and was Co-Chief
Executive Officer of FoxMeyer from May 1993 to November 1996, and also served as
Co-Chairman of the Board of Ben Franklin from November 1991 until March 1997.
FoxMeyer, FoxMeyer Drug and Ben Franklin each filed for relief under the
Bankruptcy Code in 1996.
55
<PAGE>
HYMAN H. FRANKEL, PH.D., age 78, has served as a director of the Corporation
since February 1997. Dr. Frankel holds a Ph.D. in Sociology, and has served as a
consultant to the Corporation since 1992. See "COMPENSATION OF DIRECTORS" below.
He has served as President and a director of Human Service Group, Inc., a
private management and investment firm, and was also a founder and has served as
an executive officer and a director of University Research Co, LLC since 1965.
Both of these companies are controlled by Mr. Estrin. Dr. Frankel has also
served as Chairman of the Board of The Center for Human Service, Inc., a
non-profit health and education research organization, and as Vice President and
a director of American Health Services, an operator of general and psychiatric
hospitals and nursing homes. Dr. Frankel has held teaching and research
positions in social sciences at a number of universities throughout the United
States during the past 35 years, and has served in various capacities in
connection with a number of government commissions and other programs.
FRED S. KATZ, age 60, has served as a director of the Corporation since February
1997. Mr. Katz is President of First Taconic Capital Corporation ("First
Taconic"), a private merchant banking and consulting firm, since 1996. Mr. Katz
has also served as a Managing Director of Whale Securities, L.P., a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., from June 1991 to December 1996, and as Chairman of the Board of Cyclone,
a former business unit of USX Corporation, since 1994. Mr. Katz is also a
director of UNSI Corporation ("UNSI"). In 1994 and 1995, a subsidiary of the
Corporation, M & A Investments, Inc. ("M&A"), invested in UNSI and Cyclone. See
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" below. Mr. Katz
has over 30 years of diversified investment and merchant banking experience
specializing in investments in emerging growth companies and industries through
private placements or public offerings of securities.
WILLIAM A. LEMER, age 58, has served as a director of the Corporation since
February 1997. Mr. Lemer is a private investor and real estate developer. He has
served as President of Bethesda Avenue Photo, Inc. and Pentagon Concourse Photo,
Inc., franchisees of One Hour Moto Photo, since June 1992. Since April 1988, he
has been the general partner of Metro Associates Limited Partnership, which owns
a shopping center in Woodbridge, Virginia. Until March 1997, Mr. Lemer also
served as a Director of Ben Franklin, which filed for protection under the
Bankruptcy Code in July 1996. Mr. Lemer is the brother-in-law of Mr. Estrin.
CHARLES C. PECARRO, age 61, has served as a director of the Corporation since
February 1997. Mr. Pecarro is the Chief Financial Officer of Human Service
Group, Inc. and President of University Research Co, LLC, both of which are
companies controlled by Mr. Estrin. Mr. Pecarro has worked for the companies
since 1972, and he has been a certified public accountant since 1968. Mr.
Pecarro also serves on the Board of Directors of the Center for Technical
Cooperation, a private non-profit corporation.
JOHN L. WINEAPPLE, age 59, has served as a director of the Corporation since
February 1997. Mr. Wineapple has been the principal of John Wineapple
Associates, Inc., a marketing and business development consulting firm that
has advised such clients as Regent International, Inc., Fleet Street, Ltd.,
Kellwood Company, Chateau International, Moretz, Inc., Sara Lee Corporation,
Wal-Mart Stores, Inc., Mondani, Inc. and Fabrictex, Inc. From 1988 to 1995,
he served as Senior Vice President and Partner of ScotchMaid, Inc., a
division of Sara Lee Corporation engaged in mass market distribution to large
retailers. Mr. Wineapple also served as an independent director of FoxMeyer
Funding, Inc., a subsidiary of FoxMeyer, during a portion of fiscal 1997.
DANIEL GROPPER, age 28, has served as a director of the Corporation since
April 1998. Mr. Gropper joined Stonington as an Analyst in 1995, and is
currently a Portfolio Manager working on a variety of projects including
bankruptcies, restructurings, liquidations, activist positions and distressed
high yield situations. Prior to joining Stonington, Mr. Gropper was an
Associate in the Investment Banking Department of Interstate/Johnson Lane,
where he worked on public offerings and merger transactions. Prior to his
position with Interstate/Johnson Lane, Mr. Gropper was an Analyst in the
Financial Institutions Group of the Investment Banking Division of Goldman,
Sachs & Co. Mr. Gropper has a Bachelor of Science in Commerce with
Distinction from the University of Virginia.
VINCENT INTRIERI, age 42, has served as a director of the Corporation since
April 1998. Mr. Intrieri is a Portfolio Manager at a New York investment
firm. Prior thereto, Mr. Intrieri was a Portfolio Manager with Stonington
since 1995, where he analyzed investments and managed a
56
<PAGE>
portfolio of stocks and high yield bonds in a variety of industries. Prior to
joining Stonington, Mr. Intrieri was a Partner in the Corporate Recovery
Services Group in the Chicago office of Arthur Anderson & Co., where he had
extensive experience in accounting, finance and consulting services for major
Fortune 500 corporations. Prior to Arthur Anderson & Co., Mr. Intrieri was a
Director in the Bankruptcy and Reorganization Services Group of Price
Waterhouse. Mr. Intrieri has a Bachelor of Science in Accounting with
Distinction from Pennsylvania State University, and was previously a director
of Australian Food and Fiber Limited, Marvel Holdings, Inc. and Marvel
(Parent) Holding, Inc.
RALPH DELLACAMERA, JR., age 45, has served as a director of the Corporation
since June 1998. Mr. DellaCamera is currently President and Chief Executive
Officer of Brean, Murray & Co., Inc., a New York City based brokerage firm that
is a member of the New York Stock Exchange. Prior thereto, Mr. DellaCamera was
employed by Stonington, most recently as Head Trader and Senior Risk Manager
where he was responsible for managing investments in distressed securities,
equities, commodities and currencies. Mr. DellaCamera holds a Bachelor of
Science in Business Administration from the University of New Haven.
BRIAN MILLER, age 33, has served as a director of the Corporation since June
1998. Mr. Miller joined Stonington as a trader in 1991 and is currently a
Portfolio Manager specializing in equity arbitrage strategies. Prior to joining
Stonington, Mr. Miller was employed by Yamaichi International as a derivatives
trader. Mr. Miller has a Bachelor of Science in Economics with Honors from
Albany State University.
EXECUTIVE OFFICERS
A brief biography of each executive officer of the Corporation (other than the
Co-Chairmen of the Board and Co-Chief Executive Officers, whose biographies are
set forth above) who served during fiscal 1999 is provided below. Executive
officers are typically elected by the Board of Directors at its annual meeting
and hold office until the next annual meeting of the Board of Directors or until
their successors have been duly elected and qualified. All of these individuals
were also formerly officers of FoxMeyer and FoxMeyer Drug, which filed for
relief under Chapter 11 of the Bankruptcy Code in 1996.
EDWARD L. MASSMAN, age 40, has served as Senior Vice President and Chief
Financial Officer of the Corporation since May 1996. Prior thereto, he served
the Corporation as Senior Vice President of Finance and Controller since
February 1996, as Vice President and Controller since July 1994 and as
Controller since July 1993. He also served as Senior Vice President and Chief
Financial Officer of FoxMeyer and FoxMeyer Drug from May 1996 to September
1996 and, prior thereto, as Vice President and Controller from September 1994
to February 1996 and as Director of Accounting since September 1990. Mr.
Massman was employed by Deloitte & Touche LLP from January 1983 to September
1990, serving most recently as Senior Audit Manager. Mr. Massman and the
Corporation have entered into a separation agreement under which he will be
separated from the Corporation effective June 28, 1999 (see EMPLOYMENT AND
INDEMNIFICATION AGREEMENTS below).
JOHN G. MURRAY, age 44, has served as Vice President - Finance of the
Corporation since July 1997. Prior thereto, he was a consultant to the
Corporation from July 1996 to July 1997 and served as Vice President and
Assistant Treasurer of the Corporation from April 1996 to July 1996 and as
Director of Special Projects and Assistant Treasurer from August 1993 to March
1996. He also served as Vice President and Assistant Treasurer of FoxMeyer and
FoxMeyer Drug from April 1996 to November 1996, and as Director of Special
Projects and Assistant Treasurer from August 1993 to March 1996. Mr. Murray was
Senior Vice President and Treasurer of Phoenix Ventures, Inc., a venture capital
firm, from April 1989 to August 1993.
GRADY E. SCHLEIER, age 47, has served as Vice President and Treasurer since
November 1995. Effective as of June 28, 1999, Mr. Schleier will also be Chief
Financial Officer of the Corporation. He also served as Vice President and
Treasurer of FoxMeyer and FoxMeyer Drug from November 1995 to November 1996
and, prior thereto, as Director of Project Finance since June 1993. He also
served as Treasurer of FoxMeyer Canada Inc., a former subsidiary of the
Corporation, until October 1996. Mr. Schleier was the Chief Financial Officer
and a director of American EnviroTech, Inc., a hazardous waste management
company, from February 1988 to September 1992.
SCOTT E PETERSON, age 47, has served as Vice President - Finance and Controller
of the Corporation since November
57
<PAGE>
1996. He served as Vice President and Controller of FoxMeyer and FoxMeyer
Drug from March 1996 to November 1996 and, prior thereto, as Assistant
Controller since May 1995. Mr. Peterson served in various capacities, most
recently Vice President, Controller, Assistant Secretary and Treasurer, for
Tom Thumb Food & Drugs, Inc. from February 1993 to July 1994. Prior thereto,
he was Vice President and Treasurer of Tom Thumb Stores, Inc. from September
1989 to January 1993. Mr. Peterson and the Corporation have entered into a
separation agreement under which his employment with the Corporation will
terminate effective June 30, 1999.
ROBERT H. STONE, age 39, has served as Vice President, General Counsel and
Secretary of the Corporation since November 1996. From November 1994 to November
1996, he served as Associate General Counsel and Assistant Secretary of the
Corporation, FoxMeyer and FoxMeyer Drug. Mr. Stone was an attorney with the law
firm of Jones, Day, Reavis & Pogue from 1986 to November 1994.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Corporation's directors, executive officers and persons who
beneficially own more than 10 percent of a registered class of the
Corporation's equity securities ("10% Owners") to file reports of beneficial
ownership of the Corporation's securities and changes in such beneficial
ownership with the Securities and Exchange Commission (the "Commission").
Directors, executive officers and 10% Owners are also required by rules
promulgated by the Commission to furnish the Corporation with copies of all
forms they file pursuant to Section 16(a).
Based solely upon a review of the copies of the forms filed pursuant to Section
16(a) furnished to the Corporation, or written representations that no year-end
Form 5 filings were required for transactions occurring during fiscal 1999, the
Corporation believes that its directors, executive officers and 10% Owners
complied with Section 16(a) filing requirements applicable to them during fiscal
1999 and prior fiscal years, except that United Equities Commodities Company,
Momar Corporation and Moses Marx (collectively, "United"), which is a 10% Owner,
increased its beneficial ownership of common stock, Series A preferred stock and
convertible preferred stock during fiscal 1999 and did not furnish the
Corporation a Form 4 with respect thereto.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the three fiscal years ended
March 31, 1999 received by the Corporation's Co-Chief Executive Officers and the
next three most highly compensated executive officers of the Corporation for
fiscal 1999:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (A) Compensation
------------------------------------------------------------------------------------
Awards Payouts
--------------------------------
Other Securities
Annual Underlying LTIP All Other
Name and Principal Fiscal Bonus Compensa- Options/ Payouts Compensa-
Position Year Salary($) ($) tion($) SARs(#) ($) tion($) (B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbey J. Butler (C) 1999 790,484 203,900 - - 410,000 0 130,445
Co-Chairman of the 1998 370,833 750,000 - - 400,000 451,404 26,751
Board and Co-Chief 1997 649,765 0 - - 994,640 0 17,773
Executive Officer
58
<PAGE>
Melvyn J. Estrin (C) 1999 790,484 203,900 - - 410,000 0 112,269
Co-Chairman of the 1998 370,833 750,000 - - 400,000 451,404 7,064
Board and Co-Chief 1997 649,765 0 - - 994,640 0 7,274
Executive Officer
Edward L. Massman (D) 1999 300,000 100,000 - - 0 0 6,170
Former Senior Vice President 1998 237,500 600,000 - - 400,000 341,973 7,410
and Chief Financial Officer 1997 203,364 500,000 - - 52,000 0 4,184
Robert H. Stone (E) 1999 200,000 0 - - 0 0 5,741
Vice President, General 1998 158,333 300,000 - - 100,000 177,826 6,728
Counsel and Secretary 1997 129,200 80,400 - - 21,834 0 2,360
Grady E. Schleier (F) 1999 200,000 0 - - 0 0 5,643
Vice President, Chief 1998 158,333 200,000 - - 100,000 177,826 6,784
Financial Officer and 1997 153,168 82,500 - - 20,000 0 3,199
Treasurer
</TABLE>
(A) The amounts listed under fiscal 1999 consist of compensation paid by the
Corporation during fiscal 1999 and compensation paid by Phar-Mor during its most
recent fiscal year ended June 27, 1998. No amounts are provided under the column
entitled "Other Annual Compensation" because the aggregate amount of perquisites
and personal benefits did not exceed the lesser of $50,000 or 10 percent of such
executive officer's total salary and bonus for the fiscal year.
(B) In fiscal 1999, All Other Compensation consisted of for Mr. Butler (i)
$7,094 for company-paid split-dollar life insurance, (ii) $1,656 for
company-paid term life insurance, (iii) $4,904 in company matching
contributions to its Employees' Savings and Profit Sharing Plan (the "401(k)
Plan"), (iv) $111,691 for Phar-Mor paid life insurance premiums, and (v)
$5,100 in Phar-Mor contributions to its non-qualified deferred compensation
plan; for Mr. Estrin (i) $6,435 for company-paid split-dollar life insurance,
(ii) $1,656 for company-paid term life insurance, (iii) $99,078 for
Phar-Mor-paid life insurance premiums, and (iv) $5,100 in Phar-Mor
contributions to its non-qualified deferred compensation plan; for Mr.
Massman (i) $4,928 in company matching contributions to the 401(k) Plan and
(ii) $1,242 for company-paid term life insurance; for Mr. Stone (i) $4,913 in
company matching contributions to the 401(k) Plan and (ii) $828 for
company-paid term life insurance; and for Mr. Schleier (i) $4,856 in company
matching contributions to the 401(k) Plan and (ii) $787 for company-paid term
life insurance. In fiscal 1998, All Other Compensation consisted of for Mr.
Butler (i) $17,897 for company-paid split-dollar life insurance, (ii) $1,268
for company-paid term life insurance and (iii) $7,586 in company matching
contributions to the 401(k) Plan; for Mr. Estrin (i) $5,796 for company-paid
split-dollar life insurance and (ii) $1,268 for company-paid term life
insurance; for Mr. Massman (i) $6,553 in company matching contributions to
the 401(k) Plan and (ii) $857 for company-paid term life insurance; for Mr.
Stone (i) $6,163 in company matching contributions to the 401(k) Plan and
(ii) $565 for company-paid term life insurance; and for Mr. Schleier (i)
$6,192 in company matching contributions to the 401(k) Plan and (ii) $592 for
company-paid term life insurance. In fiscal 1997, All Other Compensation
consisted of for Mr. Butler (i) $13,619 for Company-paid split dollar life
insurance and (ii) $4,154 in Company matching contributions to FoxMeyer's
401(k) plan; for Mr. Estrin, (i) $3,120 for Company-paid split-dollar life
insurance and (ii) $4,154 in Company matching contributions by FoxMeyer to
its 401(k) plan through November 1996; and for Messrs. Massman, Stone and
Schleier, matching contributions by FoxMeyer to its 401 (k) plan through
November 1996. The de minimis amounts of FoxMeyer paid term life insurance
during fiscal 1997 are not readily available to the Corporation and are not
included in the table.
(C) In fiscal 1999, Mr. Butler and Mr. Estrin each received $475,000 in salary
from the Corporation and $315,484 in salary and a $203,900 bonus from Phar-Mor,
and were each granted options to purchase 410,000 shares of Phar-Mor common
stock. In fiscal 1998, all compensation received by Mr. Butler and Mr. Estrin
was paid by the
59
<PAGE>
Corporation, and they were each granted options to purchase 400,000 shares of
Common Stock. In fiscal 1997, Mr. Butler and Mr. Estrin each received
$350,000 from the Corporation, $231,314 from FoxMeyer, and $68,451 from Ben
Franklin, and all of the options to purchase 994,640 shares of common stock
that were previously granted to each of Mr. Butler and Mr. Estrin, including
options to purchase 99,440 shares of common stock that expired in fiscal
1997, were repriced and/or replaced by the Corporation. In addition, in
fiscal 1997, Mr. Butler and Mr. Estrin received severance payments from
McKesson, which assumed FoxMeyer's obligations under their respective
employment agreements with FoxMeyer in connection with McKesson's acquisition
of substantially all of the assets of FoxMeyer and FoxMeyer Drug.
In addition, Mr. Butler and Mr. Estrin have each received compensation for
serving as outside directors of the following companies in which the Corporation
owns an interest. In fiscal 1999,(i) Carson awarded Mr. Butler 20,625 shares and
Mr. Estrin 10,125 shares of restricted stock and granted each of them options to
purchase 5,000 shares of common stock and (ii) Caring granted Mr. Estrin options
to purchase 20,000 shares of common stock. In fiscal 1998, (i) Phar-Mor paid
each of Mr. Butler and Mr. Estrin $12,500 as his pro rata portion of annual
director fees, plus per meeting fees, and granted each of them options to
purchase 10,000 shares of common stock and credited each with 7,703 shares of
common stock under its Phantom Stock Plan, (ii) Imagyn paid each of Mr. Butler
and Mr. Estrin $21,000 in director fees and granted each of them options to
purchase 7,500 shares of common stock, (iii) Carson awarded each of Mr. Butler
and Mr. Estrin 2,710 shares of restricted stock and options to purchase 5,000
shares of common stock and (iv) Caring granted Mr. Estrin options to purchase
10,000 shares of common stock. In fiscal 1997, (i) Phar-Mor paid each of Mr.
Butler and Mr. Estrin $25,000 in annual director fees, plus per meeting fees,
and granted each of them options to purchase 5,000 shares of common stock and
credited each with 4,050 shares of common stock under its Phantom Stock Plan,
(ii) Imagyn paid each of Mr. Butler and Mr. Estrin $11,000 and $10,000 in
director fees, respectively, and granted each of them options to purchase 7,500
shares of common stock, and (iii) Carson granted each of Mr. Butler and Mr.
Estrin options to purchase 1,500 shares of common stock. In addition, Mr. Butler
served as an outside director of CST Entertainment, Inc. ("CST") during fiscal
1997, and the Corporation has been unable to obtain any information from CST
regarding director fees because it liquidated its assets and filed for relief
under Chapter 7 of the Bankruptcy Code during fiscal 1997.
(D) FoxMeyer Drug paid all compensation through November 1996, including
$100,000 pursuant to an August 8, 1996 incentive agreement. In fiscal 1997,
the Corporation paid $300,000 and assigned to Mr. Massman a 50% interest in
all amounts received by the Corporation from the proceeds of any sale of any
assets of, or its interests in, the Alumet Partnership. As of the date of the
assignment, its fair market value was estimated to be $100,000. Certain
mineral rights of the Partnership were subsequently sold in fiscal 1998,
thereby increasing the value of the assignment. Mr. Massman will be separated
from the Corporation effective as of June 28, 1999.
(E) FoxMeyer Drug paid all compensation through November 1996, including a
$5,400 stay pay bonus.
(F) FoxMeyer Drug paid all compensation through November 1996, including a
$7,500 stay pay bonus.
OPTION/SAR GRANTS IN FISCAL YEAR 1999 TO EXECUTIVE OFFICERS
The Corporation did not grant any options during fiscal 1999 to any of its
executive officers.
AGGREGATE OPTIONS/SAR EXERCISES IN FISCAL 1998 BY EXECUTIVE OFFICERS AND
FISCAL YEAR-END OPTION/SAR VALUES
The executive officers named in the Summary Compensation Table did not exercise
any options during fiscal 1999. Because the market value of the Corporation's
common stock on March 31, 1999 was less than the exercise price of all of the
outstanding options held by the named executive officers, there were no
in-the-money unexercised options held at the end of fiscal 1999.
60
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options/SAR's at FY-End (#)
---------------------------------------
Name Exercisable Unexercisable
------------------------------------------------------------------------------
<S> <C> <C>
Abbey J. Butler 1,127,973 266,667
Melvyn J. Estrin 1,127,973 266,667
Edward L. Massman 185,333 266,667
Robert H. Stone 55,167 66,667
Grady E. Schleier 53,333 66,667
</TABLE>
LONG-TERM INCENTIVE PLANS -- AWARDS
IN LAST FISCAL YEAR
The Corporation previously adopted a Performance Incentive Plan (the
"Incentive Plan") that provided for the distribution of amounts to
participants based on specified percentages of (a) Net Income (as defined in
the Incentive Plan) and (b) Litigation Income, which consists of net income
generated in connection with the Corporation's lawsuit against McKesson and
various other defendants. In fiscal 1998, the Corporation granted awards
which total 17.5% of any future Litigation Income to all participants, and
the Incentive Plan provides that neither the percentage of Litigation Income
nor the percentage award levels applicable to such participants can be
changed in any manner whatsoever, irrespective of when Litigation Income is
accrued or received by the Corporation, unless the participant has
voluntarily terminated his or her employment with the Corporation or is
terminated by the Corporation for cause. Thus, although the Incentive Plan
has not been renewed with respect to Net Income for the fiscal year beginning
April 1, 1999, the Incentive Plan continues to be effective with respect to
Litigation Income.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Corporation or one of its
subsidiaries or members of the Executive and Nominating Committee receive an
annual fee of $22,500. They also receive $1,000 for each meeting of the Board of
Directors or of a committee of the Board of Directors (other than the Executive
and Nominating Committee) they attend. The Chairman of each of the committees
receive an additional $1,000 for each meeting of the committee they attend.
Directors are reimbursed for travel and lodging expenses in connection with
board and committee meetings.
Under the terms of the 1993 Restated Stock Option and Performance Award Plan,
directors who are not officers or employees of the Corporation or one of its
subsidiaries are automatically granted options to purchase 15,000 shares of the
Corporation's common stock when first elected to serve on the Board of Directors
and, in each year each director continues to serve as a member of the Board of
Directors, options to purchase 1,000 shares of common stock on the third trading
date following the later of (i) the date on which the annual meeting of the
Corporation's stockholders, or any adjournment thereof, is held each year or
(ii) the date on which the Corporation's earnings for the fiscal quarter
immediately preceding the date of such annual meeting are released to the
public.
The Corporation also maintains a Director's Retirement Plan that provides for
the payment of retirement benefits to directors who have a minimum number of
years of service, other than directors who are, or at any time subsequent to
December 31, 1975 have been, officers of the Corporation or any affiliated
corporation. Each qualifying director is entitled, at the later of retirement or
age 60, to receive a monthly benefit for a period equal to his years of service
61
<PAGE>
or 15 years, whichever is less. Such monthly benefit is equal to one-twelfth
(1/12) of the highest annual fee in effect for directors during such director's
years of service on the Board of Directors.
Each of the directors who served on the Board of Directors during fiscal 1998 is
also a party to an indemnification agreement with the Corporation dated as of
October 23, 1997, the terms of which are substantially the same as the
indemnification agreements between the Corporation and its executive officers.
See EMPLOYMENT AND INDEMNIFICATION AGREEMENTS below.
One of the outside directors of the Corporation, Hyman H. Frankel, has also
served as a business consultant to the Corporation since February 1992. Dr.
Frankel and the Corporation are parties to a written agreement that is
terminable by either party on thirty days prior written notice. Under the
agreement, the Corporation paid Dr. Frankel a monthly consulting fee of $7,500
until March 31, 1999, after which it was reduced to $3,750.
EMPLOYMENT AND INDEMNIFICATION AGREEMENTS
THE CORPORATION.
Abbey J. Butler and Melvyn J. Estrin, the Co-Chairmen and Co-Chief Executive
Officers of the Corporation, each has an employment agreement with the
Corporation dated as of February 27, 1995, and amended effective as of February
1, 1998. The agreements are each for a rolling three year term at a minimum
annual base salary of $475,000, subject to periodic increases by the
Corporation's Board of Directors. Mr. Butler and Mr. Estrin are also entitled to
participate in the benefits generally available to senior executives of the
Corporation, and are permitted to engage in activities with other companies,
ventures or investments, provided that such activities do not unreasonably
impede the performance of his duties for the Corporation, and to retain any
compensation and other benefits he may receive in such capacity. If either Mr.
Butler's or Mr. Estrin's employment with the Corporation is terminated "Without
Just Cause" (as such term is defined in the agreements, including but not
limited to in the event of a change of control of the Corporation), Mr. Butler
or Mr. Estrin, as the case may be, will be entitled to receive a one-time lump
sum payment equal to one hundred fifty percent (150%) times the full amount of
his monthly base salary and cash bonus awards that otherwise would have been
earned by him during the full term of his agreement, plus payment of certain
allocated office overhead expenses, payment of premiums payable by the
Corporation for life insurance policies applicable to Mr. Butler or Mr. Estrin,
as the case may be, and certain tax adjustment payments in respect of any
amounts that constitute excess parachute payments under federal tax laws. In
addition, the Butler and Estrin employment agreements provide that if (i) any
"person" (as such term is defined in Section 13(d) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of either (x) thirty-five
percent (35%) of the outstanding shares of the Corporation's common stock or (y)
securities of the Corporation representing thirty-five percent (35%) of the
combined voting power of the Corporation's then outstanding voting securities,
or (ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Corporation
cease, at any time after the beginning of such period, for any reason to
constitute a majority of the Board of Directors of the Corporation, unless each
new director was nominated, or the election of such director was ratified, by at
least two-thirds of the directors still in office who were directors at the
beginning of such two-year period, then Mr. Butler or Mr. Estrin shall have the
right to elect to treat such event as constituting a termination "Without Just
Cause" under their respective employment agreements.
Edward L. Massman, the former Senior Vice President and Chief Financial
Officer of the Corporation, entered into a Separation Agreement with the
Corporation, effective as of June 28, 1999. Under the agreement, Mr. Massman
will be separated from the Corporation as of June 28, 1999. In full
satisfaction of the Corporation's obligations under Mr. Massman's prior
employment agreement with the Corporation, Mr. Massman will be paid $50,000
as a pro-rated portion of his contractual bonus that would otherwise be
payable in November 1999, and will also be paid $150,000 for each of the next
two years. In addition, for each of the Corporation's fiscal years ending on
March 31, 2000 and March 31, 2001 (or, in certain limited circumstances, for
the fiscal year ending
62
<PAGE>
on March 31, 2002), the Corporation will pay Mr. Massman an amount equal to
the total amount of bonuses paid and/or accrued by the Corporation with
respect to its General Counsel and its Chief Financial Officer for the
applicable fiscal year. Mr. Massman will also generally retain his existing
options to purchase the Corporation's common stock, which will be exercisable
until their expiration dates in 2002, and his existing 2.86% interest in
Litigation Income under the Incentive Plan.
Robert H. Stone, the Vice President, General Counsel and Secretary of the
Corporation, has an employment agreement with the Corporation dated as of
November 12, 1996, and amended effective as of February 1, 1998. Under the
agreement, which expires on January 31, 2000, Mr. Stone's minimum annual base
salary is $200,000, and he is also entitled to participate in the benefits
generally available to senior executives of the Corporation. If Mr. Stone's
employment with the Corporation is terminated "Without Cause" (as such term is
defined in the agreement), he would be entitled to receive, at his option (i) a
single lump sum severance payment equal to the amount of total compensation that
would otherwise have been paid during the forthcoming nine months or (ii)
monthly severance payments for a period of eighteen months. In addition, under
the agreement, in 1996 the Corporation paid Mr. Stone $75,000 in respect of his
agreement to be employed by the Corporation and thereby forego additional
compensation and severance benefits to which he was entitled under his
Employment Agreement with FoxMeyer, which had been assumed by McKesson.
Grady E. Schleier, the Vice President, Chief Financial Officer and Treasurer of
the Corporation and John G. Murray, the Vice President - Finance of the
Corporation, each has an employment agreement with the Corporation that is
substantively identical to the employment agreement described above between the
Corporation and Mr. Stone.
Each executive officer has entered into an indemnification agreement with the
Corporation dated as of October 23, 1997. Each agreement terminates upon the
later of (i) ten years following the date that such officer ceases to serve in
his capacity with the Corporation, any majority-owned subsidiary, other
enterprise of the Corporation or an employee benefit plan or trust related
thereto which such officer served at the Corporation's request and (ii) the
final termination of any proceeding to which indemnification or advancement of
expenses relates pursuant to such agreements. Under each indemnification
agreement, the executive officer is entitled to indemnification for damages and
expenses in any proceeding involving the Corporation (whether or not brought by
or in the right of the Corporation) subject to certain conditions and
limitations depending on the circumstances of the proceeding and conduct of such
officer. In addition, each executive officer is entitled to be advanced expenses
in connection with any such proceeding upon request by such executive officer
and subject to certain conditions.
If there is a change of control (as defined in each indemnification agreement),
upon the request of any executive officer in connection with any proceedings for
which indemnification or advancement of expenses is provided, the Corporation is
required to create a trust and fund such trust in an amount sufficient to cover
any expenses (as determined by an independent counsel appointed in accordance
with the terms of the indemnification agreement) incurred by such executive
officer relating to such proceeding.
PHAR-MOR.
Mr. Butler and Mr. Estrin each has an employment agreement with Phar-Mor. The
agreements are each for a rolling three-year term commencing on October 1, 1997
that provide for Messrs. Butler and Estrin to serve as Co-Chief Executive
Officers and Co-Chairmen of the Board. The initial annual base salary of each of
Messrs. Butler and Estrin is $425,000, subject to annual increases of 8%. The
agreements provide for an annual incentive bonus under a company-sponsored bonus
plan (if a bonus plan is approved, or otherwise as provided under a separate
agreement between Phar-Mor and each of Messrs. Butler and Estrin), if reasonable
performance objectives approved by the Board are achieved, with a maximum bonus
of 60% and a minimum bonus of 21% of annual base salary, commencing in
Phar-Mor's fiscal year ending June 27, 1998, provided, however, that if the
performance objectives are exceeded, then such bonus will be increased to a
level commensurate with the amount of bonuses payable to senior officers of
Phar-Mor who are situated similarly to Messrs. Butler and Estrin.
63
<PAGE>
Each of Messrs. Butler and Estrin was also been granted options to purchase
200,000 shares of common stock of Phar-Mor at an exercise price of $6.84375 per
share under the Phar-Mor Stock Incentive Plan, which options vest with respect
to 33.34% of the underlying shares on the date of grant (October 1, 1997), and
with respect to an additional 33.33% on each of the first and second
anniversaries of the date of grant. The term of the options is seven years and
unless Messrs. Butler and Estrin elect otherwise, to the fullest extent
permitted by law and under the plan, such options shall be treated and reported
as incentive stock options. Each of Messrs. Butler and Estrin were granted
incentive stock options to purchase 200,000 shares of common stock of Phar-Mor
at an exercise price of $9.625 per share on June 23, 1998 on terms similar to
the earlier grants.
Pursuant to their respective employment agreements, Messrs. Butler and Estrin
are permitted to engage in activities (except certain activities that are
competitive with Phar-Mor's business), in addition to serving as Co-Chief
Executive Officers and Co-Chairmen of the Board, and pursue other investments
(except ownership of more than a 10% interest in an entity that derives more
than 50% of its gross revenues from the retail sale, at a discount, of
pharmaceuticals, unless Messrs. Butler and Estrin or their respective immediate
families owned or controlled, directly or indirectly, an ownership interest of
at least 1% in the entity as of October 1, 1997). The agreements do not require
Messrs. Butler and Estrin to provide services at Phar-Mor's principal locations.
The employment agreements with Messrs. Butler and Estrin also provide for
long-term performance payouts to each of them, commencing with the three-year
period ending September 30, 2000 and each third year thereafter during the term
of the employment agreement, in an amount (subject to the offset referred to in
the last sentence of this paragraph) equal to 1.5% of any excess of (i) the
aggregate market value of the publicly-traded shares of common stock of Phar-Mor
based on the average closing price for the thirty (30)-day period ending on the
last day of the subject period (less the sum of (a) the proceeds from the
exercise during such period of any options or warrants plus (b) any cash or
property consideration actually received by Phar-Mor during such period from the
issuance of any shares of its common stock) over (ii) the aggregate market value
of the publicly traded shares of common stock of Phar-Mor based on the average
closing price for the thirty (30)-day period ending on the last day of the
immediately prior subject period (provided that for the first day of the period
ending on September 30, 2000, such average closing price shall be deemed to be
$6.84375 per share). One-half of the aggregate annual bonuses paid or payable in
respect of the applicable three-year period will be offset against the long-term
payout amount.
The employment agreements with Messrs. Butler and Estrin further provide for
various employee benefits and perquisites, including but not limited to,
payment, on a tax reimbursed, "grossed-up" basis, for a $1.5 million whole life
insurance policy on Messrs. Butler and Estrin's lives or, at the election of
either of them, a term policy requiring an equivalent premium; disability
insurance adequate to pay Messrs. Butler and Estrin 60% of their respective base
salaries until age 75; reimbursement of all medical, hospitalization and dental
costs for Messrs. Butler and Estrin and their families; the use of a car owned
or leased by Phar-Mor and the provision of other transportation for Messrs.
Butler's and Estrin's travel requirements such as the lease of an aircraft; and
business expenses at locations other than Phar-Mor's headquarters.
Each of the agreements with Messrs. Butler and Estrin provides that, if it is
terminated without cause (as defined), such officer will be entitled to the
present value of his base salary, discounted at 5%, for the remaining contract
term, annual and long-term incentive payments payable for the remainder of the
term, all compensation, benefits, stock options, health and disability benefits
accruing under the agreement for the remainder of the term (or, at their option,
the value of such stock options determined in accordance with the "Black
Scholes' Formula"), tax reimbursement in respect of any termination payments
that constitute excess parachute payments under federal income tax laws, and the
accelerated vesting (and extended post-termination exercise periods) of all
stock options. Under each agreement, termination with cause by Phar-Mor is
limited to the entry of a felony conviction, voluntary resignation, death, or
permanent disability (as defined in each agreement).
64
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Finance and Personnel Committee (the "Finance Committee") of the
Corporation's Board of Directors performs the functions of a compensation
committee. The Finance Committee is comprised of three directors: Mr. John L.
Wineapple, who is the Chairman, and Messrs. Fred S. Katz and William A. Lemer.
Mr. Katz also serves as Chairman of the Board and is a shareholder of Cyclone.
Abbey J. Butler, is the Co-Chairman and Co-Chief Executive Officer of the
Corporation and of a subsidiary of the Corporation, M&A, and is also a director
of Cyclone.
REPORT OF THE FINANCE AND PERSONNEL COMMITTEE
The Finance Committee is comprised of three directors: Mr. John L. Wineapple,
who is the Chairman, and Messrs. Fred S. Katz and William A. Lemer.
EXECUTIVE COMPENSATION
Compensation for the Corporation's executive officers consists of base salary,
annual performance incentive payments, long-term incentive awards, stock option
grants, and participation in the 401(k) Plan and other employee health and
welfare benefit plans. Executive officers are also eligible to receive
discretionary bonuses as an incentive for superior performance. The goals of the
Corporation's executive compensation policy are to motivate and reward its
executive officers for overseeing and managing the Corporation's operations and
investments, contributing towards long-term strategic planning and improving
long-term stockholder value, and to attract and retain high-quality executive
talent.
The Finance Committee's philosophy regarding executive compensation also
attempts to recognize the unique financial history of the Corporation during the
past three years, as well as the extensive knowledge of the Corporation's
executive officers with respect to the events and circumstances which occurred
during that time. Absent the continued employment of and involvement by these
individuals, the Finance Committee believes that the Corporation would be
significantly hindered, if not entirely precluded, from moving forward
effectively on its most critical strategies and initiatives. In particular,
these individuals have extensive and critical knowledge and experience regarding
the facts and circumstances underlying (i) the McKesson Litigation, which is
being prosecuted in Texas state court and is also the subject of an injunction
action in Delaware, (ii) the consolidated class action shareholder lawsuits
pending against the Corporation in federal and state court in Dallas, which
relate to actions of the Corporation and FoxMeyer that occurred in 1995 and
1996, and (iii) the Trustee's lawsuits against certain third parties that
significantly harmed the FoxMeyer entities, of which 30% of the proceeds are
payable to the Corporation and are pledged as collateral by it to secure its $8
million obligation to the Trustee. In addition, a number of the executive
officers were instrumental in bringing certain investment opportunities to the
Corporation's attention. The Finance Committee believes that the involvement of
these and other executive officers is and will continue to be essential to the
ongoing development of, and ultimate realization of value from, these
investments.
During fiscal 1999, each of the Corporation's officers and key employees was
paid a specified salary pursuant to the terms of his or her employment
agreement with the Corporation. All of these employment agreements were
executed and/or amended prior to fiscal 1999. Except with respect to a
contractual bonus paid to the Corporation's former Senior Vice President and
Chief Financial Officer and fiscal 1998 bonuses that were paid in May 1999,
the Finance Committee did not approve, and the Corporation did not pay, any
bonus to any of the Corporation's officers and key employees for fiscal 1999.
The Corporation's officers and key employees were also covered by an Incentive
Plan during fiscal 1999. The Incentive Plan, which was adopted and approved by
the Finance Committee beginning in fiscal 1997, provided for a fixed percentage
of the Corporation's Net Income and Litigation Income (as such terms are defined
in the Incentive Plan) to be paid to such officers and employees based on a
fixed allocation schedule. There was no Net Income or Litigation Income under
the Incentive Plan during fiscal 1999 and, accordingly, no amounts were awarded
or paid to any persons thereunder. With respect to fiscal 2000, the Committee
has recently determined that the Incentive Plan provisions regarding Net Income
will not be renewed, and that bonuses, if any, should be awarded and paid on
65
<PAGE>
a discretionary basis. The Incentive Plan's provisions regarding Litigation
Income, however, provide that awards granted in prior fiscal years may not be
changed. Accordingly, to the extent that the Corporation receives any net
recovery from the McKesson Litigation in fiscal 2000 and future years, the
Corporation's executive officers and key employees will receive incentive
payments based on awards granted in fiscal 1998.
CO-CHIEF EXECUTIVE OFFICERS
The Finance Committee also makes compensation decisions regarding Abbey J.
Butler and Melvyn J. Estrin, the Co-Chief Executive Officers of the Corporation.
During fiscal 1999, in accordance with amendments to their respective employment
agreements entered into in fiscal 1998, the Corporation paid each of Messrs.
Butler and Estrin a annual salary of $475,000. With respect to other annual
compensation, Messrs. Butler and Estrin were treated substantially the same as
the Corporation's other executive officers, as the Finance Committee did not
approve, and the Corporation did not pay, any bonus to either Mr. Butler or Mr.
Estrin for fiscal 1999, whether under the Incentive Plan or otherwise.
Section 162(m) of the Internal Revenue Code (the "Code") limits the
deductibility on the Corporation's tax return of compensation over $1 million to
any of its named executive officers unless, in general, the compensation is paid
pursuant to a plan that is performance related, non-discriminatory and has been
approved by shareholders. Because the compensation of certain executive officers
may exceed $1 million in any one year, the Code may limit the deductibility of
such compensation unless an exception to such limitation is available. In such
event, and because of the uncertainties surrounding the application and
interpretation of these limits, no assurance can be given that any such
compensation will be fully deductible. In addition, the Corporation and each of
Messrs. Butler and Estrin have entered into amendments to their respective
employment agreements that contain certain severance provisions applicable in
the event of a change of control of the Corporation. To the extent benefits
received by Messrs. Butler or Estrin pursuant to such severance provisions equal
or exceed 300% of his average annual taxable compensation (as defined in the
applicable regulations), the full amount of such excess ("parachute payments")
will not be deductible by the Corporation and the amount of the parachute
payments will reduce the $1 million limit under Section 162(m).
JOHN L. WINEAPPLE (CHAIRMAN)
FRED S. KATZ
WILLIAM A. LEMER
The foregoing report is not incorporated by reference in any prior or future
filings of the Corporation under the Securities Act or under the Exchange Act
directly or by reference to the incorporation of proxy statements of the
Corporation, unless the Corporation specifically incorporates the report by
reference, and the report shall not otherwise be deemed filed under such Acts.
PERFORMANCE GRAPH
The following graph compares the performance of the Corporation's common stock,
the Standard & Poor's 500 Index and the Standard & Poor's SmallCap 600 Index for
the Corporation's last five fiscal years. The graph assumes that the value of
the investment in the Corporation's common stock and in each index was $100 on
April 1, 1994, and that all dividends were reinvested.
66
<PAGE>
<TABLE>
<CAPTION>
[Graph]
Fiscal Year Ended March 31,
--------------------------------------------------------------
4/1/94 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Corporation $ 100.00 $ 121.09 $ 113.28 $ 6.25 $ 12.89 $ 6.25
S&P 500 Index 100.00 115.57 152.67 182.93 270.74 320.71
S&P SmallCap 600 100.00 105.28 138.11 149.70 221.07 186.08
</TABLE>
The foregoing graph is not incorporated in any prior or future filings of the
Corporation under the Securities Act or the Exchange Act, directly or by
reference to the incorporation of proxy statements of the Corporation, unless
the Corporation specifically incorporates the graph by reference, and the graph
shall not otherwise be deemed filed under such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 14, 1999 with
respect to the beneficial ownership of the Corporation's common stock by (i)
persons believed by the Corporation to be the beneficial owners of more than 5%
of the outstanding shares of the Corporation's common stock, (ii) all directors
and nominees for election as directors of the Corporation, (iii) each of the
named executive officers of the Corporation, and (iv) all directors and named
executive officers as a group.
The number of shares of the Corporation's common stock beneficially owned by
each individual set forth below is determined under rules of the Commission and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which an individual has sole or shared voting power or investment power and any
shares that an individual presently, or within 60 days of the date of June 29,
1999 (the date on which this report is due at the Commission, the "Due Date"),
has the right to acquire through the exercise of any stock option or other
right. Unless otherwise indicated, each individual has sole voting and
investment power (or shares such powers with his spouse) with respect to the
shares of the Corporation's common stock set forth in the following table.
67
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Number of Shares
Common Stock Percentage of That May Be
Name and Address of Beneficial Owner (1) Beneficially Owned Outstanding Acquired Within
(2) Shares (3) Sixty Days (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Centaur Group (4)
c/o Centaur Partners IV
17 Battery Place, Suite 709 1,504,055 8.6% 0
New York, New York 10004
Directors and Nominees for Director
(including those who are also Executive
Officers):
- ----------------------------------------------
Abbey J. Butler (5) 2,765,361 15.8% 1,261,306
Melvyn J. Estrin (5) 2,769,117 15.8% 1,261,306
Hyman H. Frankel 16,000 * 16,000
Fred S. Katz 16,000 * 16,000
William A. Lemer 16,000 * 16,000
Charles C. Pecarro 16,000 * 16,000
John L. Wineapple 21,000 * 16,000
Ralph DellaCamera, Jr. (6) 0 0.0% 0
Daniel Gropper (6) 0 0.0% 0
Vincent Intrieri (6) 0 0.0% 0
Brian Miller (6) 0 0.0% 0
Named Executive Officers:
- ----------------------------------------------
Edward L. Massman 318,666 1.8% 318,666
Robert H. Stone 88,500 * 88,500
Grady E. Schleier 86,666 * 86,666
All Directors and Named Executive Officers
as a Group 4,609,255 26.3%
Other Holders (7):
- ----------------------------------------------
BEA Associates
153 East 53rd Street
New York, NY 10022 712,000 4.1% 0
Elliott Associates, L.P. (6) (9)
712 Fifth Ave. 36th Floor
New York, NY 10019 1,050,251 6.0% 216,351
68
<PAGE>
Number of Shares of Number of Shares
Common Stock Percentage of That May Be
Name and Address of Beneficial Owner Beneficially Outstanding Acquired Within
(1) Owned (2) Shares (3) Sixty Days (2)
- ------------------------------------------------------------------------------------------------------
National Intergroup, Inc. Retirement Program
and Davenport, Inc. Pension Plan 1,361,500 7.8% 0
Phar-Mor, Inc. (9)
20 Federal Plaza West
P O Box 400
Youngstown, Ohio 44501 2,086,200 11.9% 0
United Equities Commodities Company, et. al. (8) (9)
160 Broadway
New York, NY 10038 2,424,624 13.8% 396,124
</TABLE>
- - * Indicates less than 1%.
(1) Except as provided in the Table, the business address of the directors and
executive officers, the National Intergroup, Inc. Retirement Program, and the
Davenport, Inc. Pension Plan is c/o Avatex Corporation, 5910 North Central
Expressway, Suite 1780, Dallas, Texas 75206.
(2) Includes shares of common stock underlying Convertible Preferred Stock and
options that are exercisable within 60 days of the Due Date.
(3) Percentages are based on a total of 17,515,406 shares of common stock, which
consists of (i) 13,806,487 shares outstanding as of June 14, 1999, (ii)
3,096,444 shares underlying options that are exercisable within 60 days of the
Due Date held by directors and named executive officers, and (iii) 612,475
shares into which the convertible preferred stock held by the entities listed in
the Table is convertible.
(4) The Centaur Group is comprised of Messrs. Butler and Estrin, Centaur
Partners IV, a New York general partnership ("Centaur IV"), Estrin Equities
Limited Partnership, a Maryland limited partnership ("Estrin Equities"), and
Butler Equities II, L.P., a Delaware limited partnership ("Butler Equities").
The general partners of Centaur IV are Estrin Equities and Butler Equities. AB
Acquisition Corp. is the sole general partner of Butler Equities, and Mr. Butler
owns all of the outstanding capital stock of AB Acquisition Corp. HSG
Acquisition Co. is the general partner, and Human Service Group, Inc. is the
largest limited partner, of Estrin Equities, and Mr. Estrin owns all of the
outstanding capital stock of HSG Acquisition Co. and Human Service Group, Inc.
The Centaur Group in the aggregate holds 1,504,055 shares of common stock, which
are held directly by the persons and entities described above as follows:
Centaur IV, 1,000 shares; Mr. Butler, 1,185,600 shares; Mr. Estrin, 310,455
shares (including 18,080 shares held in two trusts for which Mr. Estrin is a
co-trustee, the beneficial ownership of which he disclaims), and Estrin
Equities, 7,000 shares. Pursuant to the terms of the Centaur IV partnership
agreement, neither Estrin Equities nor Butler Equities may acquire or dispose of
shares of common stock without the consent of Centaur IV. In addition, pursuant
to the Centaur IV partnership agreement, Estrin Equities and Butler Equities
must vote all shares of common stock owned by each such entity as directed by
Centaur IV. Accordingly, Centaur IV, which directly holds 1,000 shares, may be
deemed to share the power to direct the voting and disposition of the 7,000
shares held by Estrin Equities.
Estrin Equities has designated Mr. Estrin and Butler Equities has designated Mr.
Butler to act as a "Coordinating Person" pursuant to the Centaur IV partnership
agreement. Messrs. Estrin and Butler, acting together, manage the affairs of
Centaur IV and have the authority to make all decisions concerning Centaur IV's
interest in common stock.
Estrin Equities disclaims beneficial ownership of the shares of common stock
owned by Mr. Butler individually, and Butler Equities disclaims beneficial
ownership of the shares of common stock owned by Estrin Equities and Mr. Estrin
individually.
(5) Includes beneficial ownership of common stock through The Centaur Group
and, for Mr. Estrin, 3,756 shares of common stock owned through FoxMeyer's
401(k) plan.
(6) Elliott and Westgate International, L.P. stated in filings with the
Commission that Paul E. Singer and Braxton Associates, L.P., which is
controlled by Mr. Singer, are the general partners of Elliott and that
Hambledon, Inc. is the sole general partner of Westgate International, L.P.
Messrs. Gropper and Miller are employees of Stonington, and Messrs.
DellaCamera and Intrieri are former employees of
69
<PAGE>
Stonington. Stonington is also controlled by Mr. Singer. The business address
of Messrs. Gropper and Miller is Elliott Associates, L.P., 712 Fifth Ave.,
36th Floor, New York, NY 10019, the business address of Mr. DellaCamera is
Brean Murray & Co. Inc., 570 Lexington Avenue, New York, NY 10002, and the
address of Mr. Intrieri is 235 East 95th Street, Apt. 17B-C, New York,
NY 10128.
(7) The information provided for "Other Holders" is based on Schedule 13D and
Schedule 13G reports filed with the Commission and other written information
provided to the Corporation.
(8) United stated in filings with the Commission that Moses Marx, as a result of
his position with and ownership interest in United Equities Commodities Company
and Momar Corporation, could be deemed to have voting and/or investment power
with respect to shares of the Corporation beneficially owned by them.
(9) The Corporation has been advised that Elliott, Mr. Marx and their
respective affiliates and associated companies have entered into a Stock
Purchase Agreement, dated June 18, 1999, with Phar-Mor. Subject to the
consummation of the proposed merger of Xetava into the Corporation, Phar-Mor
has agreed to purchase the 2,862,400 shares of the Corporation's common stock
owned by Elliott, Mr. Marx and their respective affiliates and associated
companies for $2.00 per share, with the closing to occur simultaneously with
the closing of the proposed merger. The remaining shares of the
Corporation's common stock that are beneficially owned by Elliott, Mr. Marx
and their respective affiliates and associated companies are based on their
ownership of the Corporation's convertible preferred stock. Pursuant to the
Stockholders' Agreement executed in connection with the proposed merger, the
holders of these shares will elect to receive cash, notes, warrants and other
consideration, rather than new common stock, under the proposed merger.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With respect to Hyman H. Frankel, Ph.D., who is a director of the Corporation,
see "COMPENSATION OF DIRECTORS" above. With respect to Fred S. Katz, who is a
director of the Corporation, see "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION" above.
In April 1998, 13 persons and entities (the "Purchasers") committed to purchase
a total of $3 million of Series B preferred stock of RAS. The securities were
purchased in three separate closings that occurred in April 1998, July 1998 and
February 1999. The Purchasers also received warrants to purchase additional
shares of Series B convertible preferred stock for an aggregate exercise price
of $2 million. The Purchasers included the Corporation; Cabot Noble, Inc.
("Cabot Noble"), which is a wholly-owned subsidiary of Phar-Mor; all of the
Corporation's executive officers and its Director of Accounting (and/or their
designees); one non-officer director of the Corporation, Charles Pecarro; and
two additional parties related to, or referred to by, Abbey Butler or Melvyn
Estrin. Of the total amount invested, the Corporation's share was approximately
46.7%, Cabot Noble's share was 25%, the officers/designees' share was 19.8%, the
non-officer director's share was 1% and the related parties' share was
approximately 7.5%. The largest share invested by an officer or director of the
Corporation (or his designee) was 5% of the total amount invested. Mr. Butler
and Mr. Estrin are directors of RAS, and Mr. Butler and Mr. Schleier are
directors of a RAS subsidiary, Presby Corp.
In April 1999, RAS distributed to its stockholders, including the Purchasers,
shares of common stock in two RAS subsidiaries, PC Lens Corp. and Medical
Internet Technologies, Inc. These stockholders also purchased additional shares
of common stock of these entities based on the number of shares they were
entitled to purchase had they exercised their warrants to purchase RAS preferred
stock. The purchase price for these shares was their $.001 par value per share.
In addition, the Corporation is a party to a consulting agreement with RAS,
under which the Corporation provides certain financial, accounting and other
management consulting services to RAS, and also licenses to RAS a portion of the
office space leased by the Corporation in Dallas, Texas.
In April 1998, the Corporation and Cabot Noble each purchased $1.25 million of
preferred stock of HPD in connection with the acquisition by a HPD subsidiary of
certain assets of Block Drug Company, Inc. used in or related to the
manufacture, sale or distribution of its household product lines. In addition,
the Corporation and Cabot Noble each acquired 2.5% of the common stock of HPD as
part of the transaction. The largest shareholder of HPD is HPD Partners, LP, a
Delaware limited partnership, and Mr. Butler and Mr. Estrin are limited partners
of HPD Partners, LP and directors of HPD.
In March and December 1998, certain persons and entities purchased a total of
$7.2 million of membership interests in CLAC, which in turn purchased a total
of 50% of the membership interests in Chemlink. These persons and entities
included the Corporation; Phar-Mor; four of the Corporation's officers, Mr.
Butler, Mr. Estrin, Mr. Massman and Mr. Schleier (and/or their designees);
one non-officer director of the Corporation, Mr. Pecarro; and five additional
parties related to, or referred to by, Mr. Butler or Mr. Estrin. Of the total
amount invested in CLAC, the Corporation's share was approximately 41.1%,
Phar-Mor's share was approximately 35.8%, the officers/designees' share was
approximately 14.4%, the non-officer director's share was approximately 0.7%,
and the related parties' share was approximately 8.0%. The largest share
invested by a Corporation officer or director (or his designee) was
70
<PAGE>
approximately 6.1% of the total amount invested. In May 1999, each of the
members of CLAC, along with the other members of Chemlink (or their
respective stockholders), loaned a total of $250,000 to Chemlink on a pro
rata basis based on their ultimate ownership interests in Chemlink, in the
form of one year interest bearing notes. Mr. Butler and Mr. Estrin are
members of the Board of Managers of Chemlink. In addition, the Corporation is
a party to a consulting agreement with Chemlink, under which the Corporation
provides certain financial, accounting and other management consulting
services to Chemlink.
In May 1999, the Corporation purchased a $1 million secured promissory note
from Caring. The Corporation has been advised that certain other stockholders
of Caring are exercising their rights under Caring's Stockholders Agreement
to purchase notes on the same terms and conditions as the note purchased by
the Corporation. The Corporation, six of its officers, and seven additional
parties related to or referred by Mr. Butler, Mr. Estrin or Mr. Massman
currently own Series B preferred stock of Caring, and Mr. Butler and Mr.
Estrin are directors of Caring. In addition, the Corporation licenses to
Caring a portion of the office space leased by the Corporation in Dallas,
Texas along with certain personal property located therein. In June 1999, Mr.
Massman became the Chief Executive Officer of Caring.
The Corporation, through a number of wholly-owned subsidiaries (the
"Subsidiaries"), engages in the buying, holding, operating and disposing of real
estate, notes secured by real estate and other similar investments. These
activities are conducted through limited partnerships (the "Partnerships") in
which one or more of the Subsidiaries is a general and/or limited partner. The
other partner in each of the Partnerships is an affiliate of The Bernstein
Companies ("Bernstein Co"), a real estate development firm based in Washington,
D.C. Mr. Estrin, Co-Chairman and the Co-Chief Executive Officer of the
Corporation, is a director of each of the Development Subsidiaries. Mr. Estrin
is the brother of Wilma E. Bernstein and the brother-in-law of Stuart A.
Bernstein, owners of Bernstein Co.
In March 1999, the Corporation and the Subsidiaries entered into a letter
agreement (the "Letter Agreement") with Bernstein Co, under which (i) a hotel
and related property located in northwest Washington, D.C. (the "Property")
owned by one of the Partnerships would be sold and (ii) upon the sale of the
Property, Bernstein Co. would purchase the Subsidiaries' interests in the
other two Partnerships, which own a hotel located in the Scott Circle area of
Washington, D.C. and a hotel and an adjoining office building located in
Annapolis, Maryland. As contemplated by the Letter Agreement, in May 1999,
the Property was sold to a third party and the Subsidiaries sold their
interests in the Partnerships and the stock of one of the Subsidiaries to
affiliates of Bernstein Co. As a result of these transactions, the
Corporation and the remaining Subsidiaries received a total of $12 million,
of which $11.4 million was in cash and $600,000 is evidenced by a one year
promissory note and a guaranty executed by Bernstein Co. and certain of its
affiliates, the payment of which is secured by the partnership interests that
were sold by the Subsidiaries to affiliates of Bernstein Co. As of May 31,
1999, the only remaining Bernstein Co.-related investment by the Corporation
was a $200,000 investment made in 1995 in one non-real estate joint venture.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Reference is made to the listing on page 74 of all financial
statements filed as part of this report.
(2) FINANCIAL STATEMENT SCHEDULES
Reference is made to the listing on page 74 of all financial
statement schedules filed as part of this report.
(3) EXHIBITS
71
<PAGE>
Reference is made to the Exhibit Index beginning on page 83
for a list of all exhibits filed as part of this report.
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 1999, the Corporation
filed the following Current Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K on
February 1, 1999 which announced that the New York Stock
Exchange had halted trading in the common and preferred
stocks of the Corporation.
The Corporation filed the following Current Reports on Form
8-K after March 31, 1999 but prior to the date of filing this
Annual Report on Form 10-K:
The Corporation filed a Current Report on Form 8-K on May
19, 1999, which announced the terms of the sale of its
current real estate holdings.
The Corporation filed a Current Report on Form 8-K on
June 24, 1999, which announced the revised terms of a merger
between the Corporation and Xetava and the settlement of
certain related lawsuits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Avatex Corporation
By /s/ Grady E. Schleier
--------------------------------------------
Grady E. Schleier
June 29, 1999 Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Corporation and
in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Abbey J. Butler
- -------------------------- Co-Chairman of the Board and
Abbey J. Butler Co-Chief Executive Officer June 29, 1999
/s/ Melvyn J. Estrin Co-Chairman of the Board and
- -------------------------- Co-Chief Executive Officer June 29, 1999
Melvyn J. Estrin
/s/ Grady E. Schleier Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer) June 29, 1999
Grady E. Schleier
/s/ Scott E Peterson Vice President - Finance and Controller
- -------------------------- (Principal Accounting Officer) June 29, 1999
Scott E Peterson
72
<PAGE>
ADDITIONAL DIRECTORS:
/s/ Hyman H. Frankel
- -------------------------- Director June 29, 1999
Hyman H. Frankel
/s/ Fred S. Katz
- -------------------------- Director June 29, 1999
Fred S. Katz
/s/ William A. Lemer
- -------------------------- Director June 29, 1999
William A. Lemer
/s/ Charles C. Pecarro
- -------------------------- Director June 29, 1999
Charles C. Pecarro
/s/ John L. Wineapple
- -------------------------- Director June 29, 1999
John L. Wineapple
- -------------------------- Director June 29, 1999
Daniel Gropper
- -------------------------- Director June 29, 1999
Vincent Intrieri
/s/ Ralph DellaCamera, Jr.
- -------------------------- Director June 29, 1999
Ralph DellaCamera, Jr.
- -------------------------- Director June 29, 1999
Brian Miller
</TABLE>
73
<PAGE>
ITEM 14(a)(1) AND (2) AND ITEM 14(d)
AVATEX CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Avatex Corporation and subsidiaries are
included in Item 14(a)(1):
<TABLE>
<CAPTION>
Page No. in
Form 10-K
-----------
<S> <C>
Independent Auditors' Report 22
Consolidated Statements of Operations - For the Three Years Ended March 31, 1999 23
Consolidated Statements of Comprehensive Loss - For the Three Years Ended March 31, 1999 24
Consolidated Balance Sheets - March 31, 1999 and 1998 25
Consolidated Statements of Stockholders' Equity (Deficit) - For the Three Years Ended
March 31, 1999 26
Consolidated Statements of Cash Flows - For the Three Years Ended March 31, 1999 27
Notes to Consolidated Financial Statements - For the Three Years Ended March 31, 1999 28
The following financial statement schedules of Avatex Corporation and
subsidiaries are included in Item 14(d):
Page No. in
Form 10-K
-----------
Schedule I - Condensed Financial Information of Registrant 75
Schedule II - Valuation and Qualifying Accounts 80
Schedule III - Real Estate and Accumulated Depreciation 81
Independent Auditors' Consent 82
</TABLE>
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the consolidated financial
statements and notes thereto or such information is not applicable.
In accordance with Regulation S-X, audited financial statements of Phar-Mor,
Inc. (a 38% owned affiliate) for the fiscal year ending June 26, 1999 will be
filed as an amendment to the Corporation's Form 10-K within 90 days of Phar-Mor
Inc.'s fiscal year end.
74
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING COSTS
Administrative and general expenses $ 7,810 $ 7,317 $ 5,792
Depreciation and amortization 43 41 8
Unusual items - 26,096 -
- -----------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (7,853) (33,454) (5,800)
OTHER INCOME (EXPENSE) (9) (12,310) 24,740
INTEREST INCOME 1,785 1,598 788
INTEREST EXPENSE 768 2,108 3,173
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL
STEEL CORPORATION, EQUITY IN INCOME (LOSS) OF SUBSIDIARIES
AND AFFILIATES AND INCOME TAX PROVISION (BENEFIT) (6,845) (46,274) 16,555
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income - 5,854 9,620
Loss on National Steel Corporation settlement - (59,038) -
Equity in income (loss) of subsidiaries and affiliates 258 18,199 (8,556)
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAX PROVISION (BENEFIT) (6,587) (81,259) 17,619
Income tax provision (benefit) - (40) 29,863
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (6,587) (81,219) (12,244)
DISCONTINUED OPERATIONS
Equity in loss from discontinued operations - - (21,057)
Equity in gain on disposal of discontinued operations - 3,719 8,417
Loss on disposal of discontinued operations - - (254,472)
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS (6,587) (77,500) (279,356)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - - 59
Reclassification adjustment for losses included in net loss - - 21
Equity in foreign currency translation adjustment - - (42)
- -----------------------------------------------------------------------------------------------------------------------
Net foreign currency translation adjustment - - 38
- -----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities (210) 19 -
Reclassification adjustment for gains included in net loss (33) - -
Equity in unrealized gains on securities 895 1,149 17
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains 652 1,168 17
- -----------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment - (6,187) (8,897)
Loss on plan termination from National Steel
Corporation settlement included in net loss - 79,718 -
- -----------------------------------------------------------------------------------------------------------------------
Net minimum pension liability adjustment - 73,531 (8,897)
- -----------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 652 74,699 (8,842)
- -----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (5,935) $ (2,801) $(288,198)
=======================================================================================================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
75
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
(in thousands of dollars) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 26,284 $ 32,926
Receivables, less allowance for possible losses of
$15 in 1999 and $11 in 1998 2,526 9,701
Other current assets 1,320 3,532
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 30,130 46,159
INVESTMENT IN SUBSIDIARIES AND AFFILIATES 70,182 68,597
PROPERTY AND EQUIPMENT 214 196
Less accumulated depreciation and amortization 92 49
- ---------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 122 147
OTHER ASSETS 14,588 12,016
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 115,022 $ 126,919
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,434 $ 1,273
Other accrued liabilities 1,236 4,055
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,670 5,328
INTERCOMPANY PAYABLES 29,528 30,426
LONG-TERM DEBT 9,001 8,322
OTHER LONG-TERM LIABILITIES 8,587 9,749
REDEEMABLE PREFERRED STOCK 243,169 214,996
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized 50,000,000 shares; issued:
13,806,487 shares in 1999 and 13,806,375 shares in 1998 69,032 69,032
Capital in excess of par value 119,103 119,100
Accumulated other comprehensive income 1,820 1,168
Accumulated deficit (365,967) (331,202)
- ---------------------------------------------------------------------------------------------------------------
(176,012) (141,902)
Less: equity in cost of common stock of the Corporation held by
Phar-Mor, Inc. (1,921) -
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (177,933) (141,902)
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 115,022 $ 126,919
===============================================================================================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
76
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,587) $ (77,500) $(279,356)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Net preferred income from National Steel Corporation - (5,854) (9,620)
Loss on National Steel Corporation settlement - 59,038 -
Equity in loss (income) of subsidiaries and affiliates (258) (21,918) 21,196
Deferred income tax provision - - 29,863
Other non-cash charges (credits) (571) (5,284) 2,018
Loss (gain) on investments 249 12,313 (26,435)
Loss on disposal of discontinued operations - - 254,472
Cash provided (used) by working capital items:
Receivables and other current assets 7,593 35,368 (32,139)
Accounts payable and accrued liabilities (4,119) (6,762) (5,827)
Net intercompany activity with subsidiaries (898) 2,772 51,547
Other 45 39 19
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (4,546) (7,788) 5,738
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of affiliates and investments (5,004) (12,571) -
Sale of affiliates and investments 2,926 59,675 37,442
Purchase of property and equipment (18) (10) (186)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,096) 47,094 37,256
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on revolving credit facilities - - (15,000)
Proceeds from the issuance of long-term debt - 8,000 -
Repayment of long-term debt - (14,900) (5,100)
Debt issuance costs - - (178)
Purchase of treasury stock - - (16,726)
Purchase of preferred stock - - (8,845)
Dividends paid on redeemable preferred stock - - (2,697)
Exercise of stock options - - 1,680
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES - (6,900) (46,866)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (6,642) 32,406 (3,872)
Cash and short-term investments, beginning of year 32,926 520 4,392
- -------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 26,284 $ 32,926 $ 520
===================================================================================================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
77
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1999
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
The condensed financial statements of the registrant should be read in
conjunction with the consolidated financial statements included in Item 8
contained herein. The notes for these condensed financial statements contain
only the additional disclosure required for this schedule. In particular, see
Note N to the consolidated financial statements concerning various pending
claims and lawsuits involving the registrant.
The preparation of the condensed financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at the dates of the
financial statements and reported amounts of revenues and expenses during such
reporting periods. Actual results could differ from these estimates.
The Parent Company's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from the
resolution of the uncertainties discussed in Note R to the consolidated
financial statements. See Note S to the consolidated financial statements for a
discussion of (i) a proposed merger which would eliminate the preferred stock
liability and (ii) the sale by subsidiaries of the Corporation's current real
estate holdings.
Deferred Tax Asset: The Parent Company's deferred tax asset consists almost
entirely of tax net operating loss carryforwards and liabilities which were not
deductible for federal income tax purposes when accrued. The valuation allowance
is equal to the net deferred tax asset as the Parent Company believes it may not
be able to realize its deferred tax asset (see Note M to the consolidated
financial statements).
Intercompany Payables: The intercompany payables between the Parent Company and
its subsidiaries are generally not evidenced by notes and do not bear interest.
Unusual items: In 1998, unusual items consisted of a $33.3 million charge from
the settlement of certain litigation with FoxMeyer Corporation's ("FoxMeyer")
Bankruptcy Trustee, a gain of $1.6 million from the settlement of other
litigation with insurance carriers related to environmental liabilities and a
gain of $5.6 million related to the settlement or termination of certain pension
and other postretirement liabilities (see Note N to the consolidated financial
statements).
Other income (expense): In 1999, other expense consisted of a loss of a $1.8
million from a reduction in the carrying value of the Parent Company's
investment in Imagyn Technologies, Inc. ("Imagyn"). The reduction was almost
completely offset by $1.8 million in gains, primarily from recoveries on
investments which had been written off in prior years, a royalty payment from a
property sold in the prior year and dividends on investments. In 1998, other
expense consisted of a loss of $12.9 million from the adjustment during the year
in the carrying value of Imagyn to its market value, partially offset by $0.6
million in gains on other investments. In 1997, other income consisted of a gain
of $34.0 million on the sale of FoxMeyer Canada Inc. partially offset by the
write-off of the Parent Company's investment in Ben Franklin Retail Stores, Inc.
of $2.0 million and $7.3 million in other losses (including a $6.2 million
trading loss on Imagyn).
78
<PAGE>
NOTE B - DIVIDENDS RECEIVED
The Parent Company received a dividend of $105.9 million from FoxMeyer on June
19, 1996 consisting of marketable securities, certain subsidiaries of FoxMeyer
and the forgiveness of a $30.0 million note receivable from the Parent Company
plus any accrued interest thereon.
NOTE C - TAX SHARING PAYMENTS
The Corporation does not have tax sharing agreements with any of its
subsidiaries except for FoxMeyer. Under that tax sharing agreement, no tax
sharing payments were received during the three years ended March 31, 1999.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided for interest and
income taxes paid and for non-cash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 62 $ 1,215 $ 2,050
Income tax refund - (40) -
Non-cash transactions:
Note received as part of National Steel Corporation
Settlement - 9,442 -
Payment of dividends-in-kind on Series A Preferred Stock - - 4,354
Cumulative dividends accrued but not paid 25,268 23,101 10,806
Dividend received from FoxMeyer - - 105,888
========================================================================================================
</TABLE>
79
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AVATEX CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on notes
and accounts receivable $ 27 $ 15 $ - $ 1 $ 41
Year Ended March 31, 1998
Allowance for possible losses on notes
and accounts receivable $ 539 $ 9 $ - $ 521 (2) $ 27
Year Ended March 31, 1997
Allowance for possible losses on notes
and accounts receivable $23,540 $ 3,906 (1) $ - $ 26,907 (1) $ 539
Reserve for inventory shrinkage 5,036 - - 5,036 (1) -
</TABLE>
Notes:
(1) Principally relates to discontinued operations.
(2) Principally the collection and write-off of receivables retained on the sale
of discontinued operations.
80
<PAGE>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AVATEX CORPORATION AND SUBSIDIARIES
March 31, 1999
(in thousands of dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COL A COL B COL C COL D COL E
- --------------------------------------------------------------------------------------------------------------------------------
Cost capitalized Gross amount
Initial cost subsequent at which carried
to company to acquisition at close of period
-------------------------------------------------------------------------------------------
Encum- Buildings and Carrying Buildings and
Description brances Land improvements Improvements costs Land improvements Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office building and
hotel Annapolis MD. $ 5,146 $ 1,079 $ 3,402 $ 1,098 $ - $ 1,079 $ 4,500 $ 5,579
Hotel Washington D.C. 7,292 4,000 2,310 2,948 - 4,000 5,258 9,258
Hotel Washington D.C. 13,238 552 1,001 11,936 325 552 13,262 13,814
----------------------------------------------------------------------------------------------------------
Total $25,676 $ 5,631 $ 6,713 $ 15,982 $ 325 $ 5,631 $ 23,020 $ 28,651
==========================================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL A COL F COL G COL H COL I
- -----------------------------------------------------------------------------------------------------
Life on
which
Date depreciation
Accumulated of Date is
Description depreciation construction acquired computed
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office building and Hotel - 1971
hotel Annapolis MD. $ 789 Office - 1989 November 1993 5-39 years
Hotel Washington D.C. 934 1961 October 1994 5-20 years
Hotel Washington D.C. 146 1955 May 1996* 5-40 years
--------
Total $ 1,869
========
NOTES: The cost of land and buildings and improvements for federal income tax
purposes is approximately $24.7 million.
* Started operations in October 1998.
Reconciliation of real estate and accumulated depreciation for each of the
last three fiscal years ended March 31, 1999 is as follows:
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------------------------------------------------------------------------
Accumulated Accumulated Accumulated
Real estate depreciation Real estate depreciation Real estate depreciation
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 19,899 $ 1,217 $ 18,667 $ 727 $ 18,172 $ 1,023
Acquisitions during period:
Acquisitions other than through foreclosure - - 7,676 - 2,900 -
Improvements 8,752 - 5,450 - 4,052 -
Contribution of joint venture assets - - - - 4,000 -
Depreciation - 652 - 613 - 397
--------------------------------------------------------------------------------
28,651 1,869 31,793 1,340 29,124 1,420
Deductions during period:
Cost of real estate sold - - 11,894 123 10,457 693
--------------------------------------------------------------------------------
Balance at end of period $ 28,651 $ 1,869 $ 19,899 $ 1,217 $ 18,667 $ 727
================================================================================
</TABLE>
81
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-56097 on Form S-8 and No. 33-37531 on Form S-3 of Avatex Corporation of our
report dated April 30, 1999, except for Note S which is as of June 18, 1999,
which report expresses an unqualified opinion and includes an explanatory
paragraph regarding the Corporation's ability to continue as a going concern,
appearing in and incorporated by reference in this Annual Report on Form 10-K
of Avatex Corporation for the year ended March 31, 1999.
Deloitte & Touche LLP
Dallas, Texas
June 28, 1999
82
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3-A Restated Certificate of Incorporation of the Corporation and all
subsequent amendments thereto. (Filed as Exhibit 3-A to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993 and incorporated herein by reference.)
3-B Certificate of Amendment of Restated Certificate of Incorporation of
the Corporation dated October 12, 1994. (Filed as Exhibit 3-A to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference.)
3-C Certificate of Resolution relating to the Corporation's $5 Cumulative
Convertible Preferred Stock. (Filed as Exhibit 4-B to the Corporation's
Registration Statement on Form 8-B (File No. 1-8549) and incorporated
herein by reference.)
3-D Certificate of Designations, Rights and Preferences relating to the
Corporation's $4.20 Cumulative Exchangeable Series A Preferred Stock.
(Filed as Exhibit 9(c)(1) to the Corporation's Schedule 13E-4 Issuer
Tender Offer Statement dated October 6, 1993 and incorporated herein by
reference.)
3-E By-laws of the Corporation. (Filed as Exhibit 3-D to the Corporation's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and
incorporated herein by reference.)
3-F Certificate of Ownership and Merger merging CareStream Holdings, Inc.
into FoxMeyer Health Corporation. (Filed as Exhibit 3-E to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 and incorporated herein by reference.)
10-A National Intergroup, Inc. 1993 Stock Option and Performance Award Plan.
(Filed as Exhibit 10-A to the Corporation's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994 and incorporated herein by
reference.)
10-B National Intergroup, Inc. Director's Retirement Plan dated December 1,
1983. (Filed as Exhibit 10-A to the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1992 and incorporated herein
by reference.)
10-C Amendment dated October 12, 1994 to the 1993 Stock Option and
Performance Award Plan of the Corporation. (Filed as Exhibit 10-D to
the Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference.)
10-D Second Amendment dated June 21, 1999 to the 1993 Stock Option and
Performance Award Plan of the Corporation. *
10-E Performance Incentive Plan of the Corporation, effective January 1,
1997. (Filed as Exhibit 10-W to the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1997 and incorporated herein
by reference.)
10-F Amendment No. 1 to the Performance Incentive Plan of the Corporation.
(Filed as Exhibit 10-A to the Corporation's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference.)
83
<PAGE>
10-G Avatex Corporation Employees' Savings and Profit Sharing Plan,
effective as of April 1, 1997. (Filed as Exhibit 10-X to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 and incorporated herein by reference.)
10-H Agreement, dated as of November 25, 1997, among the Corporation,
National Steel Corporation, NKK Corporation and NKK U.S.A. Corporation.
(Filed as Exhibit 2 to the Corporation's Current Report on Form 8-K
filed December 5, 1997 and incorporated herein by reference.)
10-I Employment Agreement, dated as of February 27, 1995, between the
Corporation and Abbey J. Butler. (Filed as Exhibit 10-AF to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference.)
10-J Employment Agreement, dated as of February 27, 1995, between the
Corporation and Melvyn J. Estrin. (Filed as Exhibit 10-AG to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference.)
10-K Employment Agreement dated as of November 12, 1996 between the
Corporation and Grady L. Schleier. (Filed as Exhibit 10-T to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 and incorporated herein by reference.)
10-L Employment Agreement dated as of November 12, 1996 between the
Corporation and Robert H. Stone. (Filed as Exhibit 10-U to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 and incorporated herein by reference.)
10-M Amendment to Employment Agreement between the Corporation and Abbey J.
Butler, effective as of February 1, 1998. (Filed as Exhibit 10-N to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein be reference.)
10-N Amendment to Employment Agreement between the Corporation and Melvyn J.
Estrin, effective as of February 1, 1998. (Filed as Exhibit 10-O to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein be reference.)
10-O Employment Agreement between the Corporation and John G. Murray,
effective as of February 1, 1998. (Filed as Exhibit 10-Q to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein be reference.)
10-P Amendment to Employment Agreement between the Corporation and Grady E.
Schleier, effective as of February 1, 1998. (Filed as Exhibit 10-S to
the Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein be reference.)
10-Q Amendment to Employment Agreement between the Corporation and Robert H.
Stone, effective as of February 1, 1998. (Filed as Exhibit 10-T to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 and incorporated herein be reference.)
10-R Amendment No. 2 to the Performance Incentive Plan of the Corporation,
effective as of June 23, 1997. (Filed as Exhibit 10-U to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31. 1998 and incorporated herein be reference.)
10-S Form of Indemnification Agreement between the Corporation and certain
of its officers and directors. *
10-T Agreement and Restated Agreement and Plan of Merger, dated as of June
18, 1999, by and between the Corporation and Xetava Corporation. (Filed
as Exhibit 2 to the Corporation's Current Report on Form 8-K filed
June 24, 1999 and incorporated herein by reference.)
10-U Stockholders' Agreement dated June 18, 1999, by and among the
Corporation, Elliott Associates, L.P., Martely International, Inc.,
Moses Marx, Momar Corporation, and United Equities Commodities
Company. (Filed as Exhibit 10-A to the Corporation's Current Report
on Form 8-K filed June 24, 1999 and incorporated herein by reference.)
10-V Voting Agreement dated June 18, 1999, by and among the Corporation,
Mark S. Zucker, Anvil Investment Partners, L.P., and Anvil
Investors, Inc. (Filed as Exhibit 10-B to the Corporation's Current
Report on Form 8-K filed June 24, 1999 and incorporated herein by
reference.)
10-W Separation Agreement between the Corporation and Edward L. Massman
effective as of June 28, 1999. *
84
<PAGE>
21 Subsidiaries of the Corporation. *
23 Consent of Independent Auditors is included in the List of Financial
Statements and Financial Statement Schedules.
27 Financial Data Schedule.*
- -------------------
* Filed herewith
</TABLE>
85
<PAGE>
SECOND AMENDMENT TO THE AVATEX CORPORATION 1993 STOCK OPTION AND PERFORMANCE
AWARD PLAN (FORMERLY KNOWN AS THE NATIONAL
INTERGROUP, INC. 1993 STOCK OPTION AND PERFORMANCE AWARD PLAN)
THIS SECOND AMENDMENT (this "Amendment") to the Avatex Corporation Stock
Option and Performance Award Plan (formerly known as the National Intergroup,
Inc. 1993 Stock Option and Performance Award Plan), as amended by the Amendment
thereto dated October 12, 1994 (the "Plan"), dated as of June __, 1999, is made
and entered into by Avatex Corporation, a Delaware corporation formerly known as
National Intergroup, Inc. (the "Company"). Terms not used in this Amendment
shall have the meaning ascribed thereto in the Plan unless otherwise
specifically defined herein.
WHEREAS, Section 15 of the Plan provides that the Board of Directors of the
Company may amend the Plan at any time; and
WHEREAS, the Company has determined to change the name of the Plan to
conform to the change in the name of the Company; and
WHEREAS, the Company desires to clarify the ability of the Committee to
determine in certain circumstances the periods during which Options may be
exercisable and the restrictions to be applicable to such Options;
NOW, THEREFORE, the Plan is hereby amended effective June __, 1999 as
follows:
1. The name of the Plan shall be amended to the Avatex Corporation 1993
Stock Option and Performance Award Plan.
2. Section 6 is hereby amended by adding the following subsection to the
end thereof:
"j. Notwithstanding anything to the contrary herein, in
connection with the termination of employment of an optionee or the
separation of an optionee from the Company, the Committee shall have
complete discretion to amend any Option previously granted to such
optionee so as to extend the period during which such Option is
exercisable and/or remove any restrictions applicable to such Option,
including the acceleration of the vesting thereof."
3. In all other respects, the Plan is hereby ratified and confirmed and
any actions taken by the Committee with respect to any outstanding Options prior
to the date hereof but consistent with the amendments contained herein are
hereby ratified and confirmed.
IN WITNESS WHEREOF, the Company hereby executes this Amendment on the date
first above written.
AVATEX CORPORATION
By: ________________________
Name: ______________________
<PAGE>
Title: _____________________
2
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, is made and entered into as of October 23,
1997, (this "Agreement"), by and between Avatex Corporation, a Delaware
corporation (the "Company"), and ___________ ("Indemnitee").
WHEREAS, highly competent persons have become more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation; and
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that, to attract and retain qualified individuals, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to
protect persons serving the Company and its subsidiaries from certain
liabilities. Although the furnishing of such insurance has been a customary and
widespread practice among United States-based corporations and other business
enterprises, the Company believes that, given current market conditions and
trends, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors, officers, and
other persons in service to corporations or business enterprises are being
increasingly subjected to expensive and time-consuming litigation relating to,
among other things, matters that traditionally would have been brought only
against the Company or business enterprise itself; and
WHEREAS, the uncertainties relating to such insurance and to
indemnification have increased the difficulty of attracting and retaining such
persons; and
WHEREAS, the Board has determined that the increased difficulty in
attracting and retaining such persons is detrimental to the best interests of
the Company's stockholders and that the Company should act to assure such
persons that there will be increased certainty of such protection in the future;
and
WHEREAS, the Company's Certificate of Incorporation and By-laws currently
provide certain protections to such persons, and the Certificate, the By-laws
and the Delaware indemnification statute each is nonexclusive and therefore
contemplates that contracts may be entered into with respect to indemnification
of directors, officers and employees; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify, and to advance expenses on
behalf of, such persons to the fullest extent permitted by applicable law so
that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance of the
By-laws of the Company and any resolutions adopted pursuant thereto, and
shall not be deemed a substitute therefor or to diminish or abrogate any
rights of Indemnitee thereunder; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. SERVICE BY INDEMNITEE. Indemnitee agrees to serve as a
director, officer, employee, agent, fiduciary or counsel of the Company, and, at
the request of the Company, may agree to serve as a director, officer, employee,
agent, fiduciary or counsel of a majority-owned direct or indirect subsidiary or
other enterprise of the Company or an employee benefit plan or trust related
thereto. Indemnitee may at be any time and for any reason resign from such
position (subject to any other contractual obligation or any obligation imposed
by operation of
<PAGE>
law), in which event the Company shall have no obligation under this
Agreement to continue Indemnitee in such position. This Agreement shall not
be deemed an employment contract between the Company (or any of its
subsidiaries) and Indemnitee. This Agreement shall continue in force after
Indemnitee has ceased to serve as an director, officer, employee, agent,
fiduciary or counsel of the Company.
Section 2. INDEMNIFICATION - GENERAL. The Company shall indemnify, and
advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this
Agreement and (b) (subject to the provisions of this Agreement) to the fullest
extent permitted by applicable law in effect on the date hereof and as amended
from time to time. The rights of Indemnitee provided under the preceding
sentence shall include, but shall not be limited to, the rights set forth in the
other Sections of this Agreement.
Section 3. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE
COMPANY. Indemnitee shall be entitled to the rights of indemnification provided
in this Section 3 if, by reason of his Corporate Status (as hereinafter
defined), he is, or is threatened to be made, a party to or a participant in any
threatened, pending, or completed Proceeding (as hereinafter defined), other
than a Proceeding by or in the right of the Company. Pursuant to this Section
3, Indemnitee shall be indemnified against all Expenses, judgments, penalties,
fines and amounts paid in settlement (including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses,
judgments, penalties, fines and amounts paid in settlement) actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
or any claim, issue or matter therein, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal Proceeding, had no reasonable cause to
believe his conduct was unlawful.
Section 4. PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 4
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or a participant in any threatened, pending or completed Proceeding
brought by or in the right of the Company to procure a judgment in its favor.
Pursuant to this Section, Indemnitee shall be indemnified against all Expenses
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses) actually and reasonably incurred
by him or on his behalf in connection with such Proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company; PROVIDED, HOWEVER, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
Section 5. PARTIAL INDEMNIFICATION. Notwithstanding any other provision
of this Agreement, to the extent that Indemnitee is, by reason of his Corporate
Status, a party to (or a participant in) and is successful, on the merits or
otherwise, in defense of any Proceeding, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in defense of such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
For purposes of this Section and without limitation, the termination of any
claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter. If Indemnitee is entitled under any provision of this agreement to
indemnification by the Company for some or a portion of the Expenses, judgments,
penalties, fines and amounts paid in settlement (including all interest,
assessments and other charges paid or payable in connection with or in respect
of such Expenses, judgments, penalties, fines and amounts paid in settlement)
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion to which Indemnitee is entitled.
2
<PAGE>
Section 6. INDEMNIFICATION FOR ADDITIONAL EXPENSES.
(a) The Company shall indemnify Indemnitee against any and all
Expenses and, if requested by Indemnitee, shall (within seven (7) business days
of such request) advance such Expenses to Indemnitee, which are incurred by
Indemnitee in connection with any action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or By-law of the Company now or hereafter in
effect or (ii) recovery under any directors' and officers' liability insurance
policies maintained by the Company, regardless of whether Indemnitee ultimately
is determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be.
(b) Notwithstanding any other provision of this Agreement, to
the extent that Indemnitee is, by reason of his Corporate Status, a witness in
any Proceeding to which Indemnitee is not a party, he shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
Section 7. ADVANCEMENT OF EXPENSES. The Company shall advance all
reasonable Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding within seven (7) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 7 shall be subject to the condition
that, if, when and to the extent that the Company determines that Indemnitee
would not be permitted to be indemnified under applicable law, the Company shall
be entitled to be reimbursed, within thirty (30) days of such determination, by
Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; PROVIDED, HOWEVER, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Company that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any advance of
Expenses until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
Section 8. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) To obtain indemnification under this Agreement,
Indemnitee shall submit to the Company a written request, including therein
or therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what
extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board partnership, joint venture, trust, that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 8(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined) in
a written opinion to the Board, a copy of which shall be delivered to
Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by a
majority vote of the Disinterested Directors (as hereinafter defined), even
though less than a quorum of the Board, or (B) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by
Independent Counsel in a written opinion to the Board, a copy of which shall be
delivered to Indemnitee, or (C) if so directed by the Board, by the stockholders
of the Company; and, if it is so determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within seven (7) days after
such determination. Indemnitee shall cooperate with the person, persons
3
<PAGE>
or entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating with the person, persons or entity making such
determination shall be borne by the Company (irrespective of the determination
as to Indemnitee's entitlement to indemnification) and the Company hereby
indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 8(b)
hereof, the Independent Counsel shall be selected as provided in this Section
8(c). If a Change of Control shall not have occurred, the Independent Counsel
shall be selected by the Board and the Company shall give written notice to
Indemnitee advising him of the identity of the Independent Counsel so selected.
If a Change of Control shall have occurred, the Independent Counsel shall be
selected by Indemnitee (unless Indemnitee shall request that such selection be
made by the Board in which event the preceding sentence shall apply), and
Indemnitee shall give written notice to the Company advising it of the identity
of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within 10 days after such written notice of
selection shall have been given, deliver to the Company or to Indemnitee, as the
case may be, a written objection to such selection; PROVIDED, HOWEVER, that such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel" as defined in
Section 18 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. If such written objection is
so made and substantiated, the Independent Counsel so selected may not serve as
Independent Counsel unless and until such objection is withdrawn or a court has
determined that such objection is without merit. If, within 20 days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 8(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware for resolution of any objection which shall have been
made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the Court or by such other person as the Court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 8(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 8(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 8(c), regardless of the
manner in which such Independent Counsel was selected or appointed. Upon the
due commencement of any judicial proceeding or arbitration pursuant to Section
10(a)(iii) of this Agreement, Independent Counsel shall be discharged and
relieved of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of
the Indemnitee to the settlement of any Proceeding which the Company has
undertaken to defend if the Company assumes full and sole responsibility for
such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability. The Company shall
not be liable for any amount paid by the Indemnitee in settlement of any
Proceeding that is not defended by the Company, unless the Company has consented
to such settlement, which consent shall not be unreasonably withheld.
Section 9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(a) In making a determination with respect to entitlement to
indemnification or the advancement of expenses hereunder, the person or persons
or entity making such determination shall presume that Indemnitee is entitled
to indemnification or advancement of expenses under this Agreement if Indemnitee
has submitted a request for indemnification or the advancement of expenses in
accordance with Section 8(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
Neither the failure of
4
<PAGE>
the Company (including its Board or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this
Agreement that indemnification is proper in the circumstances because
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Company (including its Board or Independent Counsel)
that Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under
Section 8 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; PROVIDED, HOWEVER, that such 60-day period may be extended for a
reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 9(b) shall not apply (i)
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 8(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board has resolved to submit such determination to the
stockholders for their consideration at an annual meeting thereof to be held
within seventy five (75) days after such receipt and such determination is made
thereat, or (B) a special meeting of stockholders is called within fifteen (15)
days after such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after having been so
called and such determination is made thereat, or (ii) if the determination of
entitlement to indemnification is to be made by Independent Counsel pursuant to
Section 8(b) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) RELIANCE AS SAFE HARBOR. For purposes of any determination
of Good Faith, Indemnitee shall be deemed to have acted in good faith if
Indemnitee's action is based on the records or books of account of the Company
or relevant enterprise, including financial statements, or on information
supplied to Indemnitee by the officers of the Company or relevant enterprise in
the course of their duties, or on the advise of legal counsel for the Company or
relevant enterprise or on information or records given or reports made to the
Company or relevant enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company or
relevant enterprise. The provisions of this Section 9(d) shall not be deemed to
be exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met the applicable standard of conduct set
forth in this Agreement.
(e) ACTIONS OF OTHERS. The knowledge and/or actions, or failure
to act, of any director, officer, agent or employee of the Company or relevant
enterprise shall not be imputed to Indemnitee for purposes of determining the
right to indemnification under this Agreement.
Section 10. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made pursuant to
Section 8 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 7 of this Agreement, (iii) no determination of entitlement to
indemnification shall have
5
<PAGE>
been made pursuant to Section 8(b) of this Agreement within 90 days after
receipt by the Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Section 5 or 6 of this Agreement
within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within ten (10) days
after a determination has been made that Indemnitee is entitled to
indemnification, Indemnitee shall be entitled to an adjudication by the Court
of Chancery of the State of Delaware of his entitlement to such
indemnification or advancement of Expenses. Alternatively, Indemnitee, at
his option, may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. Indemnitee shall commence such proceeding seeking an
adjudication or an award in arbitration within 180 days following the date on
which Indemnitee first has the right to commence such proceeding pursuant to
this Section 10(a); PROVIDED, HOWEVER, that the foregoing clause shall not
apply in respect of a proceeding brought by Indemnitee to enforce his rights
under Section 5 of this Agreement.
(b) In the event that a determination shall have been made
pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 10 shall be conducted in all respects as a DE NOVO trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding or arbitration commenced pursuant to this Section 10, the
Company shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section
8(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 10, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 10,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 18 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in the judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
or advancement of expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated. The Company shall indemnify Indemnitee against any and all Expenses
and, if requested by Indemnitee, shall (within ten (10) days after receipt by
the Company of a written request therefor) advance such expenses to Indemnitee,
which are incurred by Indemnitee in connection with any action brought by
Indemnitee for indemnification or advance of Expenses from the Company under
this Agreement or under any directors' and officers' liability insurance
policies maintained by the Company, regardless of whether Indemnitee ultimately
is determined to be entitled to such indemnification, advancement of Expenses or
insurance recovery, as the case may be.
(e) The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 10 that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
Section 11. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled
6
<PAGE>
under applicable law, the Company's Certificate of Incorporation, the
Company's By-Laws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement
or of any provision hereof shall limit or restrict any right of Indemnitee
under this Agreement in respect of any action taken or omitted by such
Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the General Corporation Law of the
State of Delaware, whether by statute or judicial decision, permits greater
indemnification or advancement of Expenses than would be afforded currently
under the Company's By-Laws and this Agreement, it is the intent of the
parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. No right or remedy herein conferred is
intended to be exclusive of any other right or remedy, and every other right
and remedy shall be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) To the extent that the Company maintains an insurance policy
or policies providing liability insurance for directors, officers, employees,
agents, fiduciaries or counsel of the Company, or of any majority-owned direct
or indirect subsidiary or other enterprise of the Company or an employee benefit
plan or trust related thereto which such person serves at the request of the
Company, Indemnitee shall be covered by such policy or policies in accordance
with its or their terms to the maximum extent of the coverage available for any
such director, officer, employee, agent, fiduciary or counsel under such policy
or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
(e) The Company's obligation to indemnify or advance expenses
hereunder to Indemnitee who is or was serving at the request of the Company as a
director, officer, employee, agent, fiduciary or counsel of any majority-owned
direct or indirect subsidiary or other enterprise of the Company or an employee
benefit plan or trust related thereto shall be reduced by any amount Indemnitee
has actually received as indemnification or advancement of expenses from such
subsidiary, other enterprise, employee benefit plan or trust.
Section 12. ESTABLISHMENT OF TRUST. In the event of a Change in Control,
the Company shall, upon written request by Indemnitee, create a trust (the
"Trust") for the benefit of the Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all Expenses reasonably anticipated at the time of each such request to
be incurred in connection with investigating, preparing for, participating in,
and/or defending any Proceeding. The amount or amounts to be deposited in the
Trust pursuant to the foregoing funding obligation shall be determined by the
Independent Counsel. The terms of the Trust shall provide that (i) the Trust
shall not be revoked or the principal thereof invaded, without the written
consent of the Indemnitee, (ii) the Trustee shall advance, within seven (7) days
after the receipt by the Trustee of a statement or statements from Indemnitee
requesting such advance, any and all Expenses to the Indemnitee (and the
Indemnitee hereby agrees to reimburse the Trust under the same circumstances for
which the Indemnitee would be required to reimburse the Company under Section 7
of this Agreement), (iii) the Trust shall continue to be funded by the Company
in accordance with the funding obligation set forth above, (iv) the Trustee
shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall
be entitled to indemnification pursuant to this Agreement or otherwise, and (v)
all unexpended funds in the Trust shall revert to the Company upon a final
determination by the Independent Counsel or a court of competent jurisdiction,
as the case may be, that the Indemnitee has been fully indemnified under the
terms of this Agreement. The Trustee shall be chosen by the Indemnitee.
Nothing in this
7
<PAGE>
Section 12 shall relieve the Company of any of its obligations under this
Agreement. All income earned on the assets held in the Trust shall be
reported as income by the Company for federal, state, local and foreign tax
purposes. The Company shall pay all costs of establishing and maintaining
the Trust and shall indemnify the Trustee against any and all expenses
(including attorneys' fees), claim, liabilities, loss, and damages arising
out of or relating to this Agreement or the establishment and maintenance of
the Trust.
Section 13. DURATION OF AGREEMENT. This Agreement shall continue until
and terminate upon the later of: (a) 10 years after the date that Indemnitee
shall have ceased to serve as a director, officer, employee, agent, fiduciary
or counsel of the Company, or as a director, officer, employee, agent, fiduciary
or counsel of a majority-owned direct or indirect subsidiary or other enterprise
of the Company or an employee benefit plan or trust related thereto which
Indemnitee served at the request of the Company; or (b) the final termination of
any Proceeding then pending in respect of which Indemnitee is granted rights of
indemnification or advancement of expenses hereunder and of any proceeding
commenced by Indemnitee pursuant to Section 10 of this Agreement relating
thereto. This Agreement shall be binding upon the Company and its successors
and assigns and shall inure to the benefit of Indemnitee and his heirs,
executors and administrators.
Section 14. SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever; (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties
hereto; and (c) to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 15. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF
EXPENSES. Except as provided in Section 6(a) of this Agreement, Indemnitee
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding brought by Indemnitee (other than a
Proceeding by Indemnitee to enforce his rights under this Agreement), or any
claim therein prior to a Change in Control, unless the bringing of such
Proceeding or making of such claim shall have been approved by the Board.
Section 16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
Section 17. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
Section 18. DEFINITIONS. For purpose of this Agreement:
(a) "Change in Control" means a change in control of the
Company occurring after the Effective Date of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or
in response to any similar item on any similar schedule or form) promulgated
under the Securities Exchange Act of 1934 (the "Act"), whether or not the
Company is then subject to such reporting requirement; PROVIDED, HOWEVER,
that, without limitation, such a Change in Control shall be deemed to have
occurred if after the Effective Date (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding
8
<PAGE>
securities without the prior approval of at least two-thirds of the members
of the Board in office immediately prior to such person attaining such
percentage interest; (ii) there occurs a proxy contest, or the Company is a
party to a merger, consolidation, sale of assets, plan of liquidation or
other reorganization not approved by at least two-thirds of the members of
the Board then in office, as a consequence of which members of the Board in
office immediately prior to such transaction or event constitute less than a
majority of the Board thereafter; or (iii) during any period of two
consecutive years, other than as a result of an event described in clause
(a)(ii) of this Section 18, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period) cease for any
reason to constitute at least a majority of the Board.
(b) "Corporate Status" describes the status of a person who
is or was a director, officer, employee, agent, fiduciary or counsel of the
Company, or after the Effective Date as a director, officer, employee, agent,
fiduciary or counsel of a majority-owned direct or indirect subsidiary or
other enterprise of the Company or an employee benefit plan or trust related
thereto which Indemnitee served at the request of the Company.
(c) "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(d) "Effective Date" means October 23, 1997.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to be a witness in, or
otherwise participating in, a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, not in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material to either such party, or (ii) any other
party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees of the Independent
Counsel referred to above and to fully indemnify such counsel against any and
all Expenses, claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(g) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Corporation
or otherwise and whether civil, criminal, administrative or investigative, in
which Indemnitee was, is, may be or will be involved as a party or otherwise, by
reason of the fact that Indemnitee is or was a director, officer, employee,
agent, fiduciary or counsel of the Company, by reason of any action taken by him
or of any inaction on his part while acting as director, officer, employee,
agent, fiduciary or counsel of the Company, or by reason of the fact that he is
or was after the Effective Date serving at the request of the Company as a
director, officer, employee, agent, fiduciary or counsel of any majority-owned
direct or indirect subsidiary or other enterprise of the Company or an employee
benefit plan or trust related thereto; in each case whether or not he is acting
or serving in any such capacity at the time any liability or expense is incurred
for which indemnification or advancement of expenses can be provided under this
Agreement; except one (i) initiated by an Indemnitee pursuant to Section 10 of
this Agreement to enforce his rights under this Agreement or (ii) pending on or
before the Effective Date.
9
<PAGE>
Section 19. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby to
induce Indemnitee to serve as a director and/or officer of the Company, and the
Company acknowledges that Indemnitee is relying upon this Agreement in serving
as a director and/or officer of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
Section 20. MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver or any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) not shall such waiver constitute a continuing waiver.
Section 21. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder. The failure of Indemnitee to so notify the Company shall not
relieve the Company of any obligation which it may have to the Indemnitee under
this Agreement or otherwise.
Section 22. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee to:
-----------------------
-----------------------
-----------------------
(b) If to the Company to:
Avatex Corporation
Attention: General Counsel
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
Section 23. CONTRIBUTION. To the fullest extent permissible under
applicable law, if the indemnification provided for in this Agreement is
unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of
indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee,
whether for judgments, fines, penalties, excise taxes, amounts paid or to be
paid in settlement and/or for Expenses, in connection with any claim relating to
an indemnifiable event under this Agreement, in such proportion as is deemed
fair and reasonable in light of all of the circumstances of such Proceeding to
reflect (i) the relative benefits received by the Company and Indemnitee as a
result of the event(s) and/or transaction(s) giving cause to such Proceeding;
and/or (ii) the relative
10
<PAGE>
fault of the Company (and its directors, officers, employees and agents) and
Indemnitee in connection with such event(s) and/or transaction(s).
Section 24. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and
the legal relations among the parties shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware, without regard
to its conflict of laws rules. Except with respect to any arbitration commenced
by Indemnitee pursuant to Section 10(a) of this Agreement, the Company and
Indemnitee hereby irrevocably and unconditionally (i) agree that any action or
proceeding arising out of or in connection with this Agreement shall be brought
only in the Chancery Court of the State of Delaware (the "Delaware Court"), and
not in any other state or federal court in the United States of America or any
court in any other country, (ii) consent to submit to the exclusive jurisdiction
of the Delaware Court for purposes of any action or proceeding arising out of or
in connection with this Agreement, (iii) waive any objection to the laying of
venue of any such action or proceeding in the Delaware Court, and (iv) waive,
and agree not to plead or to make, any claim that any such action or proceeding
brought in the Delaware Court has been brought in an improper or otherwise
inconvenient forum.
Section 25. MISCELLANEOUS. Use of the masculine pronoun shall be deemed
to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year above written.
AVATEX CORPORATION: INDEMNITEE:
By:
----------------------------- -----------------------------
Melvyn J. Estrin
Co-Chief Executive Officer
and Co-Chairman of the Board
of Directors
11
<PAGE>
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (this "Agreement") is made and entered into as
of June 28, 1999, by and among Avatex Corporation, a Delaware corporation
(the "Company"), and Edward L. Massman, an individual ("Employee").
RECITALS
A. Employee and the Company are parties to an Employment Agreement
dated on or about November 12, 1996, as amended by the Amendment to
Employment Agreement, dated February 1, 1998, (the "Employment Agreement"),
under which the Company has employed Employee as the Company's Senior Vice
President and Chief Financial Officer.
B. The Company and Employee have agreed that Employee's employment by
the Company shall terminate at the end of the day on June 28, 1999 (the
"Separation Date"), unless terminated for cause prior thereto in accordance
with the terms of the Employment Agreement.
C. This Agreement is entered into to resolve all matters between the
Company and Employee in connection with separation of Employee from with the
Company, including but not limited to any payments claimed due by Employee.
Notwithstanding anything in this Agreement to the contrary, this Agreement
(other than this sentence) shall have no force and effect if Employee's
employment with the Company is terminated for cause prior to the Separation
Date in accordance with the terms of the Employment Agreement.
UNDERTAKINGS, AGREEMENTS, AND ACKNOWLEDGMENTS
1. With respect to Employee's status as an employee of the Company and
as a director or manager of certain entities in which the Company or its
subsidiaries has an investment:
(a) Employee shall continue to be employed by the Company and shall
continue to be paid his current salary through the Separation Date. The
Employment Agreement shall terminate on the Separation Date, except that
Sections 5 and 7 of the Employment Agreement shall continue in full force and
effect. On the Separation Date, Employee shall be deemed to have resigned
from his position as an officer of the Company and all of its subsidiaries of
which he was an officer immediately prior to the Separation Date.
(b) On the Separation Date, Employee shall execute and deliver to the
Company a letter of resignation, dated and effective as of the Separation
Date, resigning as a director of RAS Holding Corp., Presby Corp., PC Lens
Corp. and Medical Internet Technologies, Inc., in the form of Exhibit A
hereto.
2. In consideration for the release being given by Employee and
Employee's full and complete performance of the obligations herein and in
full satisfaction of the Company's
<PAGE>
obligation under the Employment Agreement and any policies or agreements to
pay a severance amount, the Company shall pay to Employee, less applicable
deductions required by law, the following amounts:
(a) In respect of Employee's contractual bonus that would otherwise be
payable in November 1999, the Company shall pay $50,000.00 to Employee, less
applicable deductions required by law, on the later of (i) the Separation
Date or (ii) the expiration of the seven (7) day revocation period described
in Section 10 of this Agreement.
(b) The Company shall pay to Employee (i) $150,000.00, less applicable
deductions required by law, on the expiration of the seven (7) day revocation
period described in Section 10 of this Agreement and (ii) $150,000.00, less
applicable deductions required by law, on June 28, 2000.
(c) The Company shall calculate and, if required, make an annual
payment to Employee as follows:
(1) As soon as practicable after the end of each of the Company's fiscal
years ending on March 31, 2000 and March 31, 2001, the Company shall
calculate an amount (the "Avatex Bonus Amount") equal to the total
amount of bonuses paid and/or accrued by the Company with respect to
its General Counsel and its Chief Financial Officer for the applicable
fiscal year. The Avatex Bonus Amount, if any, shall be paid by the
Company to Employee, less applicable deductions required by law, on
or about the date that the Company pays any bonus to its General
Counsel for the applicable fiscal year.
(2) If no bonus is paid or accrued by the Company with respect to both
its General Counsel and its Chief Financial Officer for either of the
Company's fiscal years ending on March 31, 2000 and March 31, 2001,
then, as soon as practicable after the end of the Company's fiscal
year ending on March 31, 2002 ("Fiscal 2002"), the Company shall
calculate the Avatex Bonus Amount for Fiscal 2002. The Avatex Bonus
Amount for Fiscal 2002, if any, shall be paid by the Company to
Employee, less applicable deductions required by law, on or about the
date that the Company pays any bonus to its General Counsel for Fiscal
2002.
(3) If the position of either General Counsel or Chief Financial
Officer of the Company is not filled (i) for one of the Company's
fiscal years or (ii) at the time a bonus is paid or accrued for one
of the Company's fiscal years, then, for the purpose of calculating
the amount of any Avatex Annual Bonus for such period under
Subsection 2(c)(1) and (2) above, such position shall be deemed to
have been paid or accrued, as applicable, the same bonus as the
filled position. If the positions of both General Counsel and Chief
Financial Officer of the
-2-
<PAGE>
Company are not filled (x) for one of the Company's fiscal years or
(y) at the time a bonus is paid or accrued for one of the Company's
fiscal years, then the Company and Employee shall negotiate in good
faith to reach an agreement on the amount, if any, of any bonus to be
paid to Employee for such period.
3. In addition to the foregoing, Employee shall receive the following
consideration:
(a) As of the date hereof, Employee owns the following options to
purchase the Company's common stock ("Options") that were previously granted
to him by the Company, which as of the date hereof have the following grant
dates, vesting schedules, exercise prices and expiration dates:
<TABLE>
- -------------------------------------------------------------------------------
Grant Date No. Of Options Vesting Date Exercise Price Expiration Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
02-12-97 52,000 vested $1.1875 02-12-02
- -------------------------------------------------------------------------------
07-02-97 133,333 vested $1.1250 07-02-02
- -------------------------------------------------------------------------------
07-02-97 133,333 07-02-99 $1.1250 07-02-02
- -------------------------------------------------------------------------------
07-02-97 133,334 07-02-00 $1.1250 07-02-02
- -------------------------------------------------------------------------------
</TABLE>
Notwithstanding anything in any stock option agreement to the contrary, (i)
Employee shall be permitted to retain all of these Options, irrespective of
whether the Options have vested as of the Separation Date, (ii) any Options
that have not vested as of the Separation Date will vest in accordance with
the vesting schedule set forth in the applicable stock option agreement, as
set forth above, and (iii) Employee may exercise any vested Options at any
time or times until the expiration date of the Option. Employee and the
Company agree that nothing herein shall be deemed or interpreted to extend
the expiration date of any Options grant, and any Options that Employee fails
to exercise before the applicable expiration date shall be terminated and
void at the close of business on such date. Employee expressly acknowledges
that the exercise of any Options remains subject to all restrictions imposed
(x) by the applicable stock option agreement between the Company and Employee
(to the extent such restrictions are not modified by this Agreement) and (y)
under applicable law.
(b) Employee shall have the right to elect continued medical insurance
coverage in accordance with applicable law from July 1, 1999 through December
31, 1999. If Employee elects to continue such coverage after the Separation
Date, Employee shall timely make all payments of all premiums to or at the
direction of the Company. Nothing herein shall be deemed to expand the
period for which coverage is otherwise required to be provided under any
applicable law. Any other benefits that were available to Employee during
his employment with the Company, other than those set forth in this
Agreement, are not available to Employee after the Separation Date.
(c) For the purpose of Employee's participation in the Company's
Performance Incentive Plan, as amended (the "Plan"), Employee's employment
with the Company shall be
-3-
<PAGE>
considered a termination other than for cause, and Employee shall retain his
2.86% interest in Litigation Income (as such term is defined in the Plan), to
the same extent that the other participants in the Plan retain their
respective interests in Litigation Income under the Plan.
(d) The Company shall maintain, for a period of at least three years
from the Separation Date, directors and officer liability insurance providing
at least $30 million of coverage with respect to the Company's present and
former officers and directors and other similar coverage as the current
policies maintained by or on behalf of the Company, and containing terms and
conditions that are no less advantageous with respect to matters existing or
occurring at or prior to the Separation Date, and in the event any claim is
made against present or former directors or officers of the Company, that is
covered, in whole or in part, or potentially so covered by insurance, the
Company shall not do anything that would forfeit, jeopardize, restrict or
limit the insurance coverage available for that claim until the final
disposition of that claim; provided, however, that if the cost of maintaining
such insurance exceeds twice the current cost related to providing such
insurance (the "Current Cost"), then the Company shall maintain such director
and officer liability insurance with the maximum amount of coverage
obtainable at twice such Current Cost.
4. Employee hereby acknowledges that the payments to be made and other
consideration to be provided pursuant to Sections 2 and 3 of this Agreement
constitute items of value to Employee that are in excess of anything of value
to which Employee may already be entitled. The payments provided for in
Sections 2 and 3 hereof are premised on Employee's compliance with this
Agreement and Section 5 of the Employment Agreement.
5. In exchange for the payments and other consideration set forth in
Sections 2 and 3 above, Employee, on his own behalf and behalf of his
executors, heirs, agents, representatives, assigns, legal representatives and
attorneys (collectively, the "Employee Parties"), hereby releases the Company
together with its directors, officers, parents, owners, shareholders,
affiliates, subsidiaries, employees, agents, representatives, assigns, heirs,
predecessors, successors, legal representatives and attorneys (collectively,
the "Company Parties"), of and from any and all debts, claims, demands,
damages, obligations, suits, controversies, expenses, liabilities and causes
of action of any kind whatsoever, whether known or unknown, that the Employee
Parties have or might have against the Company Parties based on or related to
Employee's employment with the Company or the separation of Employee from the
Company, whether or not due to the negligence or misconduct of the Company or
any of the other Company Parties. Employee understands and agrees that
Employee is hereby releasing any rights or claims that Employee may have
under the Age Discrimination in Employment Act of 1967, which prohibits age
discrimination in employment; Title VII of the Civil Rights Act of 1964,
which prohibits discrimination in employment based on race, color, national
origin, religion or sex; the Civil Rights Act of 1866; the Civil Rights Act
of 1871; the Civil Rights Act of 1991; the Equal Pay Act, which prohibits
paying men and women unequal pay for equal work; the Labor Management
Relations Act; the Americans with Disability Act of 1990; or any other
federal, state or local
-4-
<PAGE>
laws, regulations, or orders that regulate, without limitation, employment
discrimination, fair employment practices, labor relations, civil rights,
wages, occupational safety and health, worker's compensation, discrimination
or any other aspect of employment. Employee further understands and agrees
that, except as expressly provided herein, Employee is releasing any claims
for wrongful discharge, any claims arising under common law, any claims for
any bonus, any claims under any relocation, severance, vacation or incentive
plan or policy, and any claims based upon any contract, whether oral or
written, or any tort. Employee further understands and agrees that Employee
is releasing not only claims that Employee knows about, but also any claims
existing at the time of this Agreement about which Employee may not know.
Notwithstanding the foregoing, nothing herein shall affect Employee's rights
(a) under this Agreement or (b) to indemnification, whether arising under the
Indemnification Agreement dated as of October 23, 1997 between the Company
and Employee or otherwise.
6. The Company hereby releases Employee from all claims and demands the
Company may have based on Employee's employment with the Company or the
separation of Employee from the Company, whether or not due to Employee's
negligence or misconduct. Notwithstanding the foregoing, nothing herein shall
affect the Company's rights (a) under this Agreement or Sections 5 and 7 of
the Employment Agreement or (b) with respect to Employee's right to
indemnification, whether arising under the Indemnification Agreement dated as
of October 23, 1997 between the Company and Employee or otherwise.
7. Employee and the Company agree never to file a lawsuit asserting any
claims that are released in Sections 5 or 6 of this Agreement.
8. Employee acknowledges that he was given a period of up to twenty-one
(21) days during which to consider this Agreement before signing it.
9. Employee acknowledges that the Company advised Employee to consult
with an attorney before signing this Agreement and that Employee has read and
understood this Agreement. Any consultation by Employee with an attorney is
at Employee's sole cost.
10. Employee may revoke this Agreement within seven (7) days of Employee
signing it. Revocation can be made by delivering a written notice of
revocation to the Company. For such revocation to be effective, notice must
be received no later than the seventh (7th) day after Employee signs this
Agreement. If Employee revokes this Agreement, the Agreement shall not be
effective or enforceable and Employee shall not receive the consideration
described in Sections 2 and 3 of this Agreement and shall refund to the
Company any payments made by the Company to Employee under this Agreement.
11. By making this Agreement, neither the Company nor Employee admits
that it or he has done anything wrong or unlawful.
12. Neither party shall intentionally interfere with or liable or
slander Employee or
-5-
<PAGE>
the Company or its management, officers or directors.
13. Employee shall be available to cooperate with the Company and its
affiliates from time to time after the date of this Agreement, as reasonably
requested by the Company, for matters in which Employee was involved
pertaining to the Company, including, but not limited to lawsuits filed
against the Company. In providing assistance, Employee shall work in good
faith with the Company's representatives. The Company shall give reasonable
advance notice to Employee regarding any assistance it requests.
14. Until two years from the date of this Agreement, without the prior
written consent of the Company, Employee agrees not to, and agrees to cause
Caring not to, directly or indirectly solicit any person who was an officer
or employee of the Company on the date hereof to become employed or retained
by Caring in any capacity, including, without limitation, as an employee,
consultant or independent contractor.
15. Notwithstanding any provisions in this Agreement to the contrary, in
the event that Employee breaches the provisions of Sections 7, 12, 13 or 14
of this Agreement, in addition to any legal or equitable rights and remedies
Company may have under this Agreement or otherwise with respect to such
breach, the Company shall have no further obligations to Employee under this
Agreement. The prevailing party in any legal proceeding based upon this
Agreement shall be entitled to reasonable attorneys fees' and court costs in
addition to any other recovery allowed.
16. If any provision of this Agreement is determined to be invalid by a
court of competent jurisdiction, the invalidity of that provision shall not
affect the validity of any other provision of the Agreement.
17. This is the entire Agreement between Employee and the Company. No
promises have been made to Employee other than those in this Agreement. This
Agreement supersedes any other agreement or policy in effect between Employee
and the Company or its affiliates regarding employment or severance,
including but not limited to any provision set forth in the Avatex
Corporation Policy and Procedure Manual or the Employment Agreement;
provided, however, that the Plan and any stock option agreement between
Employee and the Company shall remain in effect except as amended or modified
by this Agreement.
18. Employee's rights and interests herein shall not be assignable or
transferrable (in law or in equity) by Employee. Any obligation by the
Company to make payments hereunder are not subject to alienation, sale,
transfer, claims of creditors, pledge, attachment, garnishment, levy,
execution or encumbrance of any kind.
19. Employee is responsible for payment of all individual taxes on all
payments or benefits received by him under this Agreement. Any payments or
benefits received under this Agreement shall be subject to withholding for
such taxes to the extent and at the rate required by applicable law.
-6-
<PAGE>
20. This Agreement shall be governed by and construed in accordance
with, the laws of the State of Texas.
21. All notices and other communications under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered
personally, mailed by certified mail (return receipt requested) or sent by
overnight delivery service, cable, telegram, facsimile transmission or telex
to the parties. Any notice or communication with respect to this Agreement
shall be directed to:
If to the Company: Avatex Corporation
Attn: General Counsel
5910 North Central Expressway
Suite 1780
Dallas, TX 75206
If to Employee: Mr. Edward L. Massman
7523 Marquette Street
Dallas, TX 75225
22. If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable under applicable law, then such illegality,
invalidity or unenforceability shall not invalidate the entire Agreement.
Such provision shall be deemed to be modified to the extent necessary to
render it legal, valid and enforceable, and if no such modification shall
render it legal, valid and enforceable, then this Agreement shall be
construed as if not containing the provision held to be illegal, invalid or
unenforceable and the rights and obligations of the respective parties shall
be construed and enforced accordingly.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT, UNDERSTANDS IT
AND IS VOLUNTARILY ENTERING INTO IT.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed to become effective as of
June 30, 1999.
AVATEX CORPORATION
By: _________________________
Name:________________________
Title:_______________________
_______________________
Edward L. Massman
-8-
<PAGE>
EXHIBIT A
To the Boards of Directors of RAS Holding Corp., Presby Corp., PC Lens Corp.
and Medical Internet Technologies, Inc.:
The undersigned hereby resigns my position as a director of RAS Holding
Corp., Presby Corp., PC Lens Corp. and Medical Internet Technologies, Inc.,
effective as of the close of business on June __, 1999.
_______________________
Edward L. Massman
<PAGE>
EXHIBIT 21
AVATEX CORPORATION
SUBSIDIARIES OF THE CORPORATION
AS OF MAY 31, 1999
All subsidiaries are 100% owned except where otherwise indicated:
Davenport, Inc. (Delaware)
Intergroup Services, Inc. (Delaware)
M&A Investments, Inc. (Delaware)
National Aluminum Corporation (Delaware)
National Intergroup Realty Arlington, Inc. (Delaware)
National Intergroup Realty Corporation (Delaware)
National Intergroup Realty Development, Inc. (Delaware)
National Intergroup Realty Funding, Inc. (Delaware)
National Intergroup Ventures, Inc. (Delaware)
Natmin Development Corporation (Delaware)
NII Health Care Corporation (Delaware)
Oceanside Enterprises, Inc. (Delaware)
Riverside Insurance Co., Ltd. (Bermuda)
Starcom International, Inc. (Delaware) (80%)
US HealthData Interchange, Inc. (Delaware)
Xetava Corporation (Delaware)
The following subsidiaries are in Chapter 7 bankruptcy proceedings
(except for FoxMeyer Funding, Inc.):
FoxMeyer Corporation (Delaware)
FoxMeyer Drug Company (Delaware)
FoxMeyer Funding, Inc. (Delaware)
Health Mart, Inc. (Colorado)
FoxMeyer Software, Inc. (Delaware) (80%)
Healthcare Transportation System, Inc. (Delaware)
Merchandise Coordinator Services Corporation (Delaware)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE TWELVE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 27,993
<SECURITIES> 1,077
<RECEIVABLES> 2,808
<ALLOWANCES> 41
<INVENTORY> 0
<CURRENT-ASSETS> 32,583
<PP&E> 33,030
<DEPRECIATION> 2,756
<TOTAL-ASSETS> 117,220
<CURRENT-LIABILITIES> 5,260
<BONDS> 34,268
243,169
0
<COMMON> 69,032
<OTHER-SE> (246,965)
<TOTAL-LIABILITY-AND-EQUITY> 117,220
<SALES> 10,509
<TOTAL-REVENUES> 10,509
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,417
<INCOME-PRETAX> (6,579)
<INCOME-TAX> 8
<INCOME-CONTINUING> (6,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,587)
<EPS-BASIC> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
