<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
AVATEX CORPORATION
--------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 25-1425889
------------------------------------ -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5910 N. Central Expressway, Suite 1780, Dallas, Texas 75206
----------------------------------------------------- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's Telephone Number, Including Area Code 214-365-7450
-----------------
Indicate by check mark whether the registrant (1) had filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes __X___ No _______ .
Number of shares of Common Stock outstanding as of October 31, 2000: 19,637,360
shares before deducting 2,066,431 shares which represent the Corporation's 41.8%
equity interest in common stock of the Corporation owned by Phar-Mor, Inc.
<PAGE>
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-----------------------
(in thousands, except per share amounts) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING COSTS
Operating costs, including general and administrative costs $ 1,642 $ 2,180
Depreciation and amortization 6 10
-------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS (1,648) (2,190)
OTHER INCOME (EXPENSE) (5) 443
INTEREST AND DIVIDEND INCOME 518 615
INTEREST EXPENSE (1,281) (194)
-------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY
IN LOSS OF AFFILIATES (2,416) (1,326)
Equity in loss of affiliates (3,751) (1,691)
-------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (6,167) (3,017)
DISCONTINUED OPERATIONS
Gain on disposal of discontinued operations, net of tax - 2,366
-------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM (6,167) (651)
Extraordinary item, gain on extinguishment of debt 112 -
-------------------------------------------------------------------------------------------
NET LOSS (6,055) (651)
Preferred stock dividends - 7,668
-------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(6,055) $(8,319)
===========================================================================================
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.35) $ (0.82)
Discontinued operations 0.18
Extraordinary item 0.01 -
-------------------------------------------------------------------------------------------
LOSS PER SHARE $ (0.34) $ (0.64)
===========================================================================================
Average number of common shares outstanding 17,678 13,005
-------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $(8,319) $(1,470)
===========================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
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AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months
ended September 30,
-----------------------
(in thousands, except per share amounts) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING COSTS
Operating costs, including general and administrative costs $ 2,556 $ 4,254
Depreciation and amortization 12 21
--------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS (2,568) (4,275)
OTHER EXPENSE (1) (293)
INTEREST AND DIVIDEND INCOME 984 1,084
INTEREST EXPENSE (2,501) (379)
--------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSS
OF AFFILIATES (4,086) (3,863)
Equity in loss of affiliates (8,872) (2,890)
--------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (12,958) (6,753)
DISCONTINUED OPERATIONS
Income from discontinued operations, net of tax - 259
Gain on disposal of discontinued operations, net of tax - 7,935
--------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (12,958) 1,441
Extraordinary item, gain on extinguishment of debt 284 -
Equity in extraordinary item of affiliate 172 -
--------------------------------------------------------------------------------------------
NET INCOME (LOSS) (12,502) 1,441
Preferred stock dividends - 15,150
--------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(12,502) $(13,709)
============================================================================================
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.73) $ (1.68)
Discontinued operations - 0.63
Extraordinary item 0.02 -
--------------------------------------------------------------------------------------------
LOSS PER SHARE $ (0.71) $ (1.05)
============================================================================================
Average number of common shares outstanding 17,707 13,005
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COMPREHENSIVE LOSS $(14,549) $ (994)
============================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, March 31,
(in thousands of dollars) 2000 2000
-------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 17,187 $ 10,754
Receivables - net 1,908 2,374
Other current assets 7,614 20,614
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 26,709 33,742
INVESTMENT IN AFFILIATES 12,522 24,577
PROPERTY AND EQUIPMENT 172 172
Less accumulated depreciation and amortization 108 96
-------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 64 76
OTHER ASSETS 21,164 18,151
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 60,459 $ 76,546
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,561 $ 1,698
Other accrued liabilities 1,897 3,017
Long-term debt due within one year 10,185 9,745
-------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,643 14,460
LONG-TERM DEBT 20,161 20,577
OTHER LONG-TERM LIABILITIES 10,618 10,667
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock $0.01 par value; authorized 50,000,000 shares;
issued: 19,637,360 shares 196 196
Capital in excess of par value 193,170 193,170
Accumulated other comprehensive income (loss) (65) 1,982
Accumulated deficit (172,887) (160,385)
-------------------------------------------------------------------------------------------------
20,414 34,963
Less: equity in cost of common stock of the Corporation
held by Phar-Mor, Inc. (4,377) (4,121)
-------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,037 30,842
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,459 $ 76,546
=================================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months
ended September 30,
---------------------------------
(in thousands of dollars) 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (12,502) $ 1,441
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Equity in loss of affiliates 8,700 2,890
Depreciation and amortization 12 21
Loss on investments 341 651
Other non-cash expense (income) items 576 (398)
Gain on extraordinary item (284) -
Gain on disposal of discontinued operations - (7,935)
Cash provided (used) by working capital items:
Receivables 477 3,770
Other assets 4,613 (1,221)
Accounts payable and accrued liabilities (1,514) (834)
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 419 (1,615)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (3)
Purchase of investments (1,750) -
Proceeds from sale of investments 9,005 14,046
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,255 14,043
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repurchases (1,241) -
--------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,241) -
--------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 6,433 12,428
Cash and short-term investments, beginning of period 10,754 27,159
--------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 17,187 $ 39,587
==================================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that, along
with its subsidiaries, owns interests in other corporations and partnerships.
Through Phar-Mor, Inc. ("Phar-Mor"), our 40.8% owned affiliate, we are involved
in operating a chain of discount retail drugstores. Through Phar-Mor and
Chemlink Acquisition Company, LLC ("CLAC"), we own approximately 38% of
Chemlink Laboratories, LLC ("Chemlink"). Chemlink is primarily engaged in the
development, manufacture and distribution of effervescent tablet formulations
for consumers and businesses for use in cleaning, disinfectant and
sterilization applications.
BASIS OF PRESENTATION: The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and the disclosure of contingent assets and
liabilities, at the dates of the financial statements and the reported amounts
of revenues and expenses during such reporting periods. Actual results could
differ from these estimates.
These financial statements have been prepared on a going concern basis
that contemplates the realization of our assets and the settlement of our
liabilities and commitments in the normal course of business. See Note 7 for a
discussion of our ability to continue as a going concern and our plans for
addressing those issues.
We sold our real estate operations in May 1999 and have presented our
real estate segment as a discontinued operation in our fiscal 2000 financial
statements.
Our condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of operations and comprehensive loss for the
three and six months ended September 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the six months ended September 30,
2000 and 1999, are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited consolidated financial
statements, and include all adjustments necessary for the fair presentation of
financial position, results of operations and cash flows. Such adjustments were
of a normal recurring nature. The results of operations for the three and six
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the entire year. The condensed consolidated balance
sheet as of March 31, 2000 was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. Additional information is contained in our Annual Report on Form
10-K filed with the Securities and Exchange Commission for the fiscal year
ended March 31, 2000, and should be read in conjunction with this quarterly
report.
EXTRAORDINARY ITEM: The extraordinary item represents gains realized on the
early extinguishment of approximately $2.1 million face value of the 6.75%
Notes issued by our subsidiary, Avatex Funding, Inc. ("Avatex Funding"), which
were purchased by us in the open market. See Note 5. Equity in extraordinary
item of affiliate represents our equity in Phar-Mor's gain on the early
extinguishment of its debt.
COMPREHENSIVE INCOME (LOSS): The difference in comprehensive income (loss) and
net income (loss) is due to unrealized gains or losses on marketable securities
for the three and six months ended September 30, 2000 and September 30, 1999,
and to a minimum pension liability adjustment for the six months ended
September 30, 2000. The details of other comprehensive loss for these periods
are as follows (in thousands of dollars):
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<TABLE>
<CAPTION>
For the three months ended For the six months ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gains (losses) on securities $ 1,146 $ (731) $ 1,398 $ (1,859)
Reclassification adjustment for gains
included in net income (loss) (3,410) (88) (3,410) (576)
------------------------------------------------------------------------------------------------------------
Net unrealized loss (2,264) (819) (2,012) (2,435)
------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment - - (35) -
------------------------------------------------------------------------------------------------------------
Total other comprehensive loss $ (2,264) $ (819) $ (2,047) $ (2,435)
============================================================================================================
</TABLE>
NEWLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities"
which, as amended, is effective for fiscal years beginning after June 15, 2000.
Therefore, we will be required to adopt SFAS No. 133 for our fiscal year
beginning April 1, 2001. 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. We believe that the
adoption of SFAS No. 133 will not have a material impact on our financial
condition or results of operations.
COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: Phar-Mor currently
owns 4,948,600 shares or 25.2% of our issued Class A common stock. We account
for our investment in Phar-Mor on an equity basis and treat Phar-Mor's
investment in our common stock similar to treasury stock, with a reduction in
our stockholders' equity of $4.4 million at September 30, 2000 (for the
equivalent of 2,019,944 shares of our common stock) and $4.1 million at March
31, 2000 (for the equivalent of 1,900,263 shares of our stock). The reduction
was equal to our 40.8% ownership interest at September 30, 2000 and our 38.4%
ownership interest at March 31, 2000 in the cost and number of shares of our
common stock held by Phar-Mor.
In addition, the weighted average number of shares outstanding used in
calculating earnings per share was reduced by 1,959,228 and 1,929,907 for the
three and six months ended September 30, 2000, respectively, and 801,101 for
both the three and six months ended September 30, 1999. The reduction was equal
to our ownership interest in our common stock since its acquisition by Phar-Mor.
NOTE 2 - LOSS PER SHARE OF COMMON STOCK
The loss per share from continuing operations for basic and diluted
earnings per share was calculated by dividing the loss from continuing
operations for each of the three and six month periods ended September 30, 2000
and 1999, respectively, after deducting any dividends on preferred stock, by
the weighted average number of common shares outstanding. The weighted average
number of shares outstanding was reduced by our equity in the shares of our
stock held by Phar-Mor as explained in Note 1.
Options to purchase approximately 3.9 million shares of common stock
outstanding during the three and six month periods ended September 30, 2000 and
1999, respectively, were not included in the computation of diluted earnings
per share because the average market price of our common stock was less than
the exercise price of the options or the effect of including the options in the
calculation would be anti-dilutive. Conversion of our former convertible
preferred stock, until its cancellation on December 7, 1999, was also not
included in the calculation of diluted earnings per share for the three and six
months ended September 30, 1999 as it would have been anti-dilutive. Warrants
to purchase approximately 2.3 million shares of our Class A common stock at
$2.25 per share were issued on December 7, 1999. These warrants were not
included in the computation of diluted earnings per share at September 30, 2000
because the average market price of our common stock was less than the exercise
price of the warrants.
6
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NOTE 3 - SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION
The following supplemental cash flow information is provided for
interest and income taxes paid and for non-cash transactions (in thousands of
dollars):
<TABLE>
<CAPTION>
For the six months
ended September 30,
2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 1,003 $ 349
Income taxes paid - 313
Non-cash transactions:
Note received on sale of investments - 600
Cumulative dividends in arrears accrued - 13,520
-----------------------------------------------------------------------------------
</TABLE>
The following supplemental information is provided for other assets and
other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
-------------------------------------------------------------------------------------
<S> <C> <C>
Other assets:
Prepaid pension cost $ 13,271 $ 12,358
Securities available for sale 4,156 2,880
Other investments, at cost 1,288 1,288
Other 2,449 1,625
-------------------------------------------------------------------------------------
Total $ 21,164 $ 18,151
=====================================================================================
Other long-term liabilities:
Pension and postretirement benefits $ 4,896 $ 4,862
Environmental liabilities 1,111 1,134
Liabilities related to discontinued operations 2,611 2,611
Other 2,000 2,060
-------------------------------------------------------------------------------------
Total $ 10,618 $ 10,667
=====================================================================================
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
We have retained responsibility for certain potential environmental
liabilities attributable to former operating units. We are subject to federal,
state and local environmental laws, rules and regulations, including the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, and similar state superfund statutes related to sites of these 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. We and our
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 September 30, 2000, we had reserves of approximately $1.2 million
for environmental assessments, remediation activities, penalties or fines at
seven 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. Our
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
7
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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 amount of reserves for environmental liabilities is difficult to
estimate due to such factors as the unknown extent of the remedial actions that
may be required and, in the case of sites not formerly owned by us, the unknown
extent of our probable liability in proportion to the probable liability of
other parties. Moreover, we may have environmental liabilities that we cannot,
in our judgment, estimate at this time and losses attributable to remediation
costs may arise at other sites. We recognize that additional work may need to
be performed to ascertain the ultimate liability for such sites, and further
information could ultimately change our current assessment. A change in the
estimated liability could have a material impact on our financial condition and
results of operations.
We and certain of our current and former officers and directors have
been named in a series of purported class action lawsuits that were filed and
subsequently consolidated under ZUCKERMAN, ET AL. V. FOXMEYER HEALTH
CORPORATION, ET AL., in the United States District Court for the Northern
District of Texas, Dallas Division, Case No. 396-CV-2258-T. The lawsuit
purports to be brought on behalf of purchasers of our common and our formerly
outstanding preferred stocks during the period July 19, 1995 through August 27,
1996. On May 1, 1997, plaintiffs in the lawsuit filed a consolidated amended
class action complaint, which alleges that we and the defendant officers and
directors made misrepresentations of material facts in public statements or
omitted material facts from public statements, including the failure to
disclose purportedly negative information concerning our National Distribution
Center and Delta computer systems and the resulting impact on our existing and
future business and financial condition. On March 31, 1998, the court denied
our motion to dismiss the amended complaint in the lawsuit. We intend to
continue to vigorously defend ourselves in the lawsuit. We are unable at this
time to estimate the possible loss, if any, that may accrue from this lawsuit.
In 1997, the bankruptcy trustee and certain creditors of our former
17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"), filed
lawsuits against us, certain former officers and directors of Ben Franklin and
certain of our current and former officers and directors. We along with our
officers and directors have since been dropped as defendants in the lawsuits.
In connection with paying our own defense costs and those of our officers and
directors, we also initially paid a portion of the defense costs of certain
individuals who are named as defendants in these lawsuits by reason of the fact
that they may have been serving at our request as a director or officer of Ben
Franklin. In October 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 defendant. In January 2000, the United States
District Court for the Northern District of Illinois entered an amended order
in the bankruptcy trustee's lawsuit, which found that the Bankruptcy's Court's
conclusions of law were correct with the exception of the trustee's failure to
state a cognizable claim. The same order also affirmed the Bankruptcy Court's
dismissal of the lawsuit brought by certain of Ben Franklin's lenders. In June
2000, the Bankruptcy Court entered two more orders; in the trustee's lawsuit,
the Court denied the trustee's motion to amend his complaint and re-entered
Recommendations Upon Remand, which recommended that the case be dismissed. In
the lenders' lawsuit, the Court denied the plaintiffs' motion to amend their
complaint and re-entered Recommendations Upon Remand, which recommended that
the case be dismissed against all defendants, save counts I and II against a
former Ben Franklin employee. The plaintiffs in these cases have filed
objections to the Recommendations. In the third lawsuit, pending in Illinois
state court, the court dismissed the plaintiffs' third amended complaint
without prejudice, and the plaintiffs filed a fourth amended petition in
December 1999. The court has dismissed the plaintiff's fourth amended petition
with prejudice, and the plaintiffs have appealed the court's ruling. If
liability is ever imposed in any of the lawsuits, we may, if appropriate, agree
at a future date to indemnify certain of the remaining defendants in the
lawsuit in accordance with Delaware law.
In April 1998, the FoxMeyer Corporation ("FoxMeyer") Bankruptcy
Trustee (the "Trustee") filed a lawsuit against five former directors of
FoxMeyer, in which the Trustee alleges that the defendants breached their
fiduciary duty in connection with the June 19, 1996 dividend of certain
assets to us. In October 1997, in connection with the settlement of a
separate lawsuit brought by the Trustee against us, the Trustee released us
from all liability and provided the director-defendants in this lawsuit with
covenants
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not to execute. We are paying the initial defense costs of the individuals who
are named as defendants in the lawsuit by reason of the fact that they may have
been serving at our request as a director or officer of FoxMeyer. In September
1999, the Delaware Bankruptcy Court entered an order establishing procedures
for a joint insolvency trial in the lawsuit and in certain other lawsuits
brought by the Trustee against other persons and entities related to the
FoxMeyer bankruptcy cases.
On June 5, 1998, Steven Mizel IRA and Anvil Investment Partners, L.P.
filed a lawsuit, allegedly on our behalf, against seven of our current
directors and three of our former directors who were members of our Board's
Personnel and Compensation Committee, under Case No. 602773198 in the Supreme
Court of New York, County of New York. The plaintiffs were holders of our
formerly outstanding Series A Preferred Stock, and the lawsuit relates
primarily to agreements and transactions between us and our Co-Chairmen and
Co-Chief Executive Officers, Abbey J. Butler and Melvyn J. Estrin. The
plaintiffs allege that, in connection with such agreements and transactions,
(i) the defendants breached their fiduciary duty to our stockholders, (ii) the
compensation arrangements between us and Messrs. Butler and Estrin constitute
corporate waste, and (iii) the defendants caused our subsidiaries and
affiliates to improperly purchase our common stock based on confidential
non-public information. The plaintiffs seek damages, injunctive relief and an
accounting. In January 1999, a stipulation was executed providing that the
litigation, insofar as it was brought by Stephen Mizel IRA, was voluntarily
discontinued with prejudice. In April 1999, the court denied the remaining
plaintiff's motion to amend its complaint to allege additional claims. In
October 1999, the defendants moved for summary judgment, and a hearing on the
motion was held on January 26, 2000. The court has not yet ruled on this
motion. Subject to our rights of reimbursement under the applicable directors'
insurance policies, we have been paying the defense costs of the defendants in
accordance with Delaware General Corporation Law, our charter and by-laws, and
the terms and conditions of Indemnification Agreements between us and certain
of the defendants.
There are various other pending claims and lawsuits arising out of
the normal conduct of our businesses. In our opinion, the ultimate outcome of
these claims and lawsuits will not have a material effect on our consolidated
financial condition or results of operations.
NOTE 5 - DEBT
The maturity date of the note due to the Trustee has been extended
to December 8, 2000. The original maturity date was October 8, 2000. Interest
continues to accrue at the prime rate (9.5% at September 30, 2000). No other
terms of the note were changed. The amount due as of September 30, 2000 is
shown as long-term debt due within one year.
The extraordinary item represents gains realized on the early
extinguishment of approximately $2.1 million face value of the 6.75% Notes
issued by our subsidiary, Avatex Funding, which were purchased by us in the
open market. The notes were purchased for approximately $1.2 million. The gain
of $0.3 million represents the difference in the purchase price and the
discounted carrying value of the notes at the time of purchase. The remaining
principal amount of the notes is approximately $26.6 million.
NOTE 6 - INVESTMENTS
We purchased an additional 292,500 shares of Phar-Mor common stock in
the open market during the second quarter of the current fiscal year for
approximately $0.4 million, which brings our ownership percentage to
approximately 40.8% at September 30, 2000 from 38.4% at June 30, 2000. As a
result of the increase in our equity ownership, the amount and number of shares
of our common stock held by Phar-Mor that are considered treasury stock has
also increased (see Note 1).
As a result of continuing operating losses at Phar-Mor, the
significant reduction in the value of its internet investments, and the
continuing decline in its per share market price, we have reviewed the carrying
value of our investment in Phar-Mor to determine if there has been an other
than temporary
9
<PAGE>
decline in the value of that investment. Based on information available to us
about Phar-Mor's current and future operations and information gathered about
similar companies, management believes that there has been such a decline in
value and has arrived at an estimated fair value for our investment in
Phar-Mor of $9.9 million. We have recognized a loss of $3.8 million in "Other
expense" in the condensed consolidated statements of operations for the three
and six months ended September 30, 2000 to reduce our carrying value to fair
value. The market value of our investment, based on Phar-Mor's closing price
at September 29, 2000, of $1.25 on the NASDAQ National Market, is $6.2
million.
During the current fiscal year, we also made the following
investments: (i) purchased $1.0 million of Series B Preferred Stock of RAS
Holding Corp. ("RAS") through the exercise of our options and from another
stockholder, (ii) purchased an equity investment for approximately $0.2 million
in a limited partnership that acquired the rights to the "Cyclone Fence" name,
(iii) invested $0.1 million in a debenture issued by HPD Holdings Corp. ("HPD")
and (iv) invested an additional $0.1 million in CLAC as part of a $0.3 million
additional investment by CLAC in Chemlink. Our equity interest in CLAC and
CLAC's equity interest in Chemlink did not change as a result of the additional
investment. We also disposed of our 11.4% interest in Carson, Inc. ("Carson")
in August 2000 and recognized a gain on the sale of our investment of $3.4
million in "Other expense".
NOTE 7 - GOING CONCERN
We believe we have resolved many of the issues that resulted in doubts
about our continuing as a going concern as noted in Note R to the consolidated
financial statements at March 31, 2000. Nevertheless, we will likely continue
to report operating losses, which together with the remaining pending
litigation, as discussed in Note 4, continue to raise substantial doubt as to
our ability to continue as a going concern.
To overcome these remaining matters, we will continue our vigorous
defense of our remaining litigation until these matters are finally resolved.
In addition, the companies in which we have invested also need additional time
to continue the development of their business plans. Until then, there is no
assurance that any of these investments will produce adequate returns to
overcome our operating losses and provide adequate funds for our future growth.
We will continue to manage our investments and look for additional
opportunities to try to successfully return to profitability.
Our 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.
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AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
Avatex Corporation is a holding company that, along with its
subsidiaries, owns interests in other corporations and partnerships. Through
Phar-Mor, our 40.8% owned affiliate, we are involved in operating a chain of
discount retail drugstores. Through Phar-Mor and CLAC, we own approximately 38%
of Chemlink. Chemlink is primarily engaged in the development, manufacture and
distribution of effervescent tablet formulations for consumers and businesses
for use in cleaning, disinfectant and sterilization applications.
The extraordinary item for the six months ended September 30, 2000
represents gains realized on the early extinguishment of approximately $2,072
face value of the 6.75% Notes issued by our subsidiary, Avatex Funding, which
were purchased by us in the open market. The notes were purchased for
approximately $1,241. The gain of $284 represents the difference in the
purchase price and the discounted carrying value of the notes at the time of
purchase. Equity in extraordinary item of affiliate represents our equity in
Phar-Mor's gain on the early extinguishment of its debt.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 1999
OPERATING COSTS
Total operating costs decreased $542 to $1,648 for the three months
ended September 30, 2000 compared to $2,190 for the three months ended
September 30, 1999. Operating costs decreased primarily as a result of $422
of expenses related to our merger with Xetava Corporation ("Xetava") incurred
in the prior fiscal year and a settlement payment received by us for $400 in
our lawsuit against McKesson HBOC, Inc. ("McKesson") in the current fiscal
year. There were also decreases of $88 in pension charges and $56 in
insurance expense when compared to the prior year. These decreases were
partially offset by $473 in increased legal expenses. The increase in legal
expense related primarily to our defense of the Trustee's lawsuit against the
former directors of FoxMeyer (see Note 4 to the condensed consolidated
financial statements) and our continuing prosecution of our lawsuit against
McKesson. The increase was partially offset by decreased legal expense
related primarily to the derivative lawsuit where our insurance carrier is
paying the defense costs.
Total operating costs decreased $1,707 to $2,568 for the six months
ended September 30, 2000 compared to $4,275 for the six months ended September
30, 1999. Salaries and benefits were $380 less than in the prior year primarily
due to the separation of two of our officers at the end of June 1999. In
addition, expenses of $858 related to our merger with Xetava were incurred in
the prior fiscal year. There were also decreases of $240 in pension charges and
$111 in insurance expense when compared to the prior year.
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OTHER INCOME (EXPENSE)
Other expense was $5 and $1 for the three and six months ended
September 30, 2000, respectively. Other expense related primarily to the $3,751
write-down of our investment in Phar-Mor to its estimated fair value offset
primarily by a gain on the sale of our investment in Carson of $3,410 and by a
gain of $325 related to a payment received on an asset sold in a prior fiscal
year.
Other income of $443 for the three months ended September 30, 1999
related primarily to a $350 payment on an asset sold in a prior fiscal year and
gains on the sale of securities sold during the quarter. Other expense of $293
for the six months ended September 30, 1999 related to a $1,077 reduction in
the carrying value of our investment in Imagyn Medical Technologies, Inc. to
its market value and a write-down of $150 in the carrying value of an
investment in a non-public company. The losses were offset by $934 in other
income primarily from $576 in gains on the sale of securities sold during the
period and the $350 gain related to a payment received on an asset sold in a
prior fiscal year.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased $97 to $518 for the three
months ended September 30, 2000 compared to $615 for the three months ended
September 30, 1999. In addition, interest and dividend income decreased $100 to
$984 for the six months ended September 30, 2000 compared to $1,084 for the six
months ended September 30, 1999. The decrease for both periods was due
primarily to a decline of $155 and $220 for the three and six months ended
September 30, 2000, respectively, in interest income as a result of lower cash
balances in the current versus prior fiscal year. The decrease in interest
income was partially offset by a $27 and $71 increase, respectively, in
interest accrued on investments, consisting primarily of the note receivable
from iLife Systems, Inc. which had a higher principal balance in the current
fiscal year. Dividend income increased $31 and $49 for the three and six months
ended September 30, 2000, respectively, as compared to the prior year from
additional investments in preferred stock of RAS and HPD.
INTEREST EXPENSE
Interest expense increased $1,087 to $1,281 for the three months ended
September 30, 2000 and $2,122 to $2,501 for the six months ended September 30,
2000 compared to the prior year principally due to the issuance of the Avatex
Funding 6.75% Notes in December 1999.
EQUITY IN LOSS OF AFFILIATES
Equity in loss of affiliates was $3,751 for the three months ended
September 30, 2000 compared to equity in loss of $1,691 for the three months
ended September 30, 1999. For the six month period, the equity in loss was
$8,872 in the current fiscal year compared to $2,890 for the prior fiscal year.
The increase in our equity in loss of affiliates for both periods was due
primarily to our equity in Phar-Mor's net losses, which net losses were
significantly higher than in the same period of the prior year due to larger
operating and investment losses when compared to the prior year.
INCOME TAXES
We recorded no federal income tax provision for the current or prior
year. Any income tax expense or benefit related to the current or prior year's
income (loss) was offset by a corresponding change in the deferred tax asset
valuation allowance.
DISCONTINUED OPERATIONS
Income from discontinued operations was $259 for the six months ended
September 30, 1999. This amount related only to the discontinued real estate
segment and represented two months of our equity interest in the remaining
properties until their sale in May 1999.
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The gain on disposal of discontinued operations of $2,366 for the
three months ended September 30, 1999 resulted from a gain of $2,377 on a
contingent payment received in fiscal 2000 on the fiscal 1997 sale of a
discontinued operation less $11 related to taxes on the sale of our
discontinued real estate properties. The gain of $7,935 for the six months
ended September 30, 1999, relates to the $2,377 gain on the contingent payment
and a gain of $5,558 on the sale of our interest in our discontinued real
estate properties, net of taxes.
EXTRAORDINARY ITEM, GAIN ON EXTINGUISHMENT OF DEBT
We recognized a gain of $112 and $284 for the three and six months
ended September 30, 2000, respectively, on the purchase and subsequent
cancellation of $716 and $2,072 face value of the 6.75% Notes of Avatex Funding
during the three and six months ended September 30, 2000, respectively. We also
recognized our equity in Phar-Mor's gain on the early extinguishment of its
debt of $172.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $7,668 and $15,150 for the three and
six months ended September 30, 1999. There are no preferred stock dividends in
fiscal 2001 because our preferred stock was eliminated on December 7, 1999 upon
our merger with Xetava.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and short-term investments of
approximately $17,187. In addition, we had $7,000 in cash investments in "Other
current assets" which mature in December 2000. During the six months ended
September 30, 2000, we purchased preferred stock of RAS for $1,011, invested
$150 for a 41% interest in a new limited liability company that acquired the
rights to the "Cyclone Fence" name, made an additional investment in CLAC of
$123, loaned approximately $81 to HPD and purchased $385 in Phar-Mor common
stock raising our ownership from 38.4% to 40.8%.
Our debt consists of a note payable to the Trustee and the 6.75%
Notes issued by Avatex Funding in connection with our merger with Xetava. The
6.75% Notes issued by Avatex Funding require semi-annual cash interest
payments of approximately $898 with the remaining principal balance of
approximately $26,604 due in December 2002. Since we have guaranteed the
6.75% Notes and Avatex Funding has no assets other than the Phar-Mor common
stock securing the notes, we have made and may make additional capital
contributions to Avatex Funding so it can satisfy its interest and principal
obligations on the notes. The note due to the Trustee is payable in full in
December 2000 and is carried in "Long-term debt due within one year" in the
balance sheets.
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 the cash requirements for environmental liabilities are
uncertain. We will likely be required to fund any cash to be paid by Avatex
Funding to its note holders. We expect to receive cash from the collection of
receivables and from interest and dividend income earned on our investments. We
continuously evaluate current and potential investments in connection with an
ongoing review of our investment strategies and, as opportunities arise, may
continue to invest in publicly and privately held companies.
We will rely on cash on hand, any cash payments from our investments
and, if necessary, the sale of our investments to meet future obligations. We
are involved in litigation which, if we were to lose, would have a material
impact on our financial condition, liquidity and results of operations. These
financial statements have been prepared on a going concern basis which
contemplates the realization of our assets and the settlement of our
liabilities and commitments in the normal course of business. See Note 7
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to the condensed consolidated financial statements for the quarter ended
September 30, 2000 for a discussion of our ability to continue as a going
concern and management's plans for addressing those issues.
OTHER
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. Therefore,
we will be required to adopt SFAS No. 133 for our fiscal year beginning April
1, 2001. We do not believe the impact, if any, from the adoption of SFAS No.
133 will be material.
Cautionary Statement under the Private Securities Litigation Reform
Act of 1995: This Quarterly Report on Form 10-Q 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 our management. When used in this document, the words "anticipate,"
"believe," "continue," "estimate," "expect," "intend," "may," "should," and
similar expressions are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks and uncertainties, including, but not limited to, the
risk that we may be unable to implement our strategies to continue as a going
concern. In industries in which we operate or invest, we also face risks
associated with competitive pressures; the ability of the management of the
companies in which we have invested to develop, implement and market their
products and services; and other such risks. These other risks include
decreased consumer spending, customer concentration issues and the effects of
general economic conditions. In addition, our business, operations and
financial condition are subject to the risks, uncertainties and assumptions
which are described in our reports and statements we have 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, our 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 we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the valuation of securities
available for sale or long-term debt from those amounts reported in Item 7A. of
the Form 10-K for the year ended March 31, 2000 except as follows:
The value of securities available for sale with an expected maturity
date of 2005 is $2,355 at September 30, 2000. The increase represents
additional investments in the redeemable preferred stock of RAS. The securities
available for sale with expected maturities after 2005 increased to
approximately $1,775 primarily due to the receipt of additional shares of HPD
redeemable preferred stock as a result of the pay-in-kind dividend on the HPD
preferred stock we received. The value of the investments in other available
for sale equity securities was approximately $26 at September 30, 2000.
The carrying value of long-term debt maturing in 2003 decreased to
$20,161 as a result of the repurchase of $2,072 face value of Avatex Funding
6.75% Notes during the six months ended September 30, 2000 partially offset by
the amortization of the original issue discount on the notes.
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PART II - OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL
With respect to the matters reported in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2000, the following additional information
is provided:
MCKESSON/VENDOR LITIGATION. With reference to the Texas lawsuit we
brought against McKesson Corporation and certain pharmaceutical
manufacturers, (i) we have entered into settlement agreements with or
otherwise settled the claims of all twelve of the manufacturer defendants in
the litigation, under which we received or will receive confidential
settlement payments, (ii) we have amended our petition to modify our claims
of relief and to include additional claims for relief against the sole
remaining defendant, McKesson, (iii) McKesson has amended its counterclaims
to allege additional facts, but has not added any additional material claims
for relief, and (iv) the current Judge has specially set the case for trial
in February 2001, but a new Judge was elected in November 2000 and may modify
this date.
BEN FRANKLIN LITIGATION. With reference to the three lawsuits relating
to Ben Franklin Retail Stores, Inc. ("Ben Franklin"), in June 2000, the United
States Bankruptcy Court for the Northern District of Illinois entered two more
orders in two of the lawsuits. In the lawsuit commenced by Ben Franklin's
bankruptcy trustee, the Court denied the trustee's motion to amend his
complaint and re-entered Recommendations Upon Remand, which recommended that
the case be dismissed. In the lawsuit commenced by certain of Ben Franklin's
lenders, the Court denied the plaintiffs' motion to amend their complaint and
re-entered Recommendations Upon Remand, which recommended that the case be
dismissed against all defendants, save counts I and II against David Brainard.
The plaintiffs in these cases have filed objections to the Recommendations. In
the third lawsuit, pending in Illinois state court, the court has dismissed the
plaintiffs' fourth amended petition with prejudice, and the plaintiffs have
appealed the court's ruling.
GREEN RIVER. With reference to the amended demand received from the
Environmental Protection Agency for payment of its past costs at the Green
River Disposal Site located in Davies County, Kentucky, National Aluminum
Corporation ("NAC") believes that the demand has been resolved in a manner that
will not require any additional funds to be paid by NAC. In addition, in August
2000, the Environmental Protection Agency issued a record of decision ("ROD")
regarding groundwater remediation at the site, which requires the potentially
responsible parties to put in place institutional controls to prevent future
use of the groundwater. NAC believes that its share of the cost to implement
the ROD will not be material. Periodic groundwater monitoring may also be
necessary to demonstrate that the remedial action at the site is effective, and
NAC will be responsible for its volumetric share of these costs, which likely
will be incurred as part of ongoing operation and maintenance work at the site.
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ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
We held our annual meeting on September 19, 2000. At
that meeting, the following three individuals were elected by
our common stockholders to serve as directors until the annual
meeting of stockholders in the year 2003, and the number of
votes cast for or withheld for each of these individuals was
as follows:
-------------------------------------------------------------
Number of
Votes For Withheld
-------------------------------------------------------------
Hyman H. Frankel 17,959,667 6,331
-------------------------------------------------------------
Fred S. Katz 17,964,259 1,739
-------------------------------------------------------------
Charles C. Pecarro 17,965,590 408
-------------------------------------------------------------
In addition, the following are the continuing directors, who did
not stand for re-election at this annual meeting, whose term of office
do not expire until 2001 or 2002: William A. Lemer, John L. Wineapple,
Abbey J. Butler and Melvyn J. Estrin.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 - Financial Data Schedule
(B) REPORTS ON 8-K
No Current Reports on Form 8-K were filed by us
during the three months ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we
have duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
AVATEX CORPORATION
November 10, 2000 By: /s/ Grady E. Schleier
---------------------------------
Grady E. Schleier
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
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