<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31, 2000: 19,637,360
shares before deducting 1,900,263 shares which represent the Corporation's
38.4% equity interest in common stock of the Corporation owned by Phar-Mor,
Inc.
<PAGE>
EXPLANATORY NOTE
This Amendment on Form 10-Q/A to the Quarterly Report of Avatex
Corporation hereby amends, in its entirety, the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000. This
amendment reflects the restatement of our financial statements related to our
equity investment in Phar-Mor, Inc.
We filed our Form 10-Q based on information provided by Phar-Mor as of
the date of our filing on August 14, 2000. However, on September 29, 2000,
Phar-Mor announced a write-down of one of its investments by $5.5 million.
Phar-Mor stated that it had recently become aware of information that
indicated that the value of one of its investments had suffered an other than
temporary decline in value from its carrying cost of $6.5 million to $1.0
million. Phar-Mor stated that it believed the decline in value occurred
during the three months ended July 1, 2000 and, therefore, it recognized the
$5.5 million additional loss in the fourth quarter of its fiscal year ended
July 1, 2000. We, therefore, have restated our financial statements for the
quarterly period ended June 30, 2000 to reflect an additional equity loss of
approximately $2.1 million, which is equal to our 38.4% ownership interest in
the $5.5 million additional loss reported by Phar-Mor.
In addition, we have reclassified a portion of Phar-Mor's equity loss for
the quarter ended June 30, 2000 to equity in extraordinary item of affiliates
to reflect our equity in Phar-Mor's extraordinary item from gain on the early
extinguishment of debt. At the time we filed our Form 10-Q, Phar-Mor had not
yet provided us with the information necessary to reclassify the
extraordinary item from other operating accounts.
<PAGE>
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
(in thousands, except per share amounts) 2000 1999
----------------------------------------------------------------------------------------------------
As restated, see
Note 5
<S> <C> <C>
OPERATING COSTS
Operating costs, including general and administrative costs $ 914 $ 2,074
Depreciation and amortization 6 11
----------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS (920) (2,085)
OTHER INCOME (EXPENSE) 4 (736)
INTEREST AND DIVIDEND INCOME 466 469
INTEREST EXPENSE (1,220) (185)
----------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSS
OF AFFILIATES (1,670) (2,537)
Equity in loss of affiliates (5,121) (1,199)
----------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (6,791) (3,736)
DISCONTINUED OPERATIONS
Income from discontinued operations, net of tax - 259
Gain on disposal of discontinued operations, net of tax - 5,569
----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (6,791) 2,092
Extraordinary item, gain on extinguishment of debt 172 -
Equity in extraordinary item of affiliates 172 -
----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (6,447) 2,092
Preferred stock dividends - 7,482
----------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(6,447) $(5,390)
====================================================================================================
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $(0.38) $ (0.86)
Discontinued operations - 0.45
Extraordinary item 0.02 -
----------------------------------------------------------------------------------------------------
LOSS PER SHARE $(0.36) $ (0.41)
====================================================================================================
Average number of common shares outstanding 17,737 13,005
----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(6,230) $ 476
====================================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
(in thousands of dollars) 2000 2000
---------------------------------------------------------------------------------------------------------------------
As restated, see
Note 5
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $17,500 $ 10,754
Receivables - net 1,840 2,374
Other current assets 8,802 20,614
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 28,142 33,742
INVESTMENT IN AFFILIATES 19,791 24,577
PROPERTY AND EQUIPMENT 172 172
Less accumulated depreciation and amortization 102 96
---------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 70 76
OTHER ASSETS 20,103 18,151
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $68,106 $ 76,546
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,342 $ 1,698
Other accrued liabilities 1,448 3,017
Long-term debt due within one year 9,961 9,745
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,751 14,460
LONG-TERM DEBT 20,114 20,577
OTHER LONG-TERM LIABILITIES 10,628 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 2,199 1,982
Accumulated deficit (166,831) (160,385)
---------------------------------------------------------------------------------------------------------------------
28,734 34,963
Less: equity in cost of common stock of the Corporation
held by Phar-Mor, Inc. (4,121) (4,121)
---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 24,613 30,842
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,106 $ 76,546
=====================================================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
(in thousands of dollars) 2000 1999
------------------------------------------------------------------------------------------------------------
As restated, see
Note 5
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,447) $ 2,092
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Equity in loss of affiliates 4,949 1,199
Depreciation and amortization 6 11
Loss on investments - 739
Other non-cash expense (income) items, net 261 (461)
Gain on disposal of discontinued operations - (5,569)
Gain on extinguishment of debt (172) -
Cash provided (used) by working capital items:
Receivables 541 (1,205)
Other assets 11,688 (401)
Accounts payable and accrued liabilities (2,100) (35)
------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 8,726 (3,630)
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,165) -
Proceeds from investments - 13,958
------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,165) 13,958
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repurchases (815) -
------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (815) -
------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 6,746 10,328
Cash and short-term investments, beginning of period 10,754 27,159
------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 17,500 $37,487
============================================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 38% 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 which contemplates the realization of our assets and the settlement of
our liabilities and commitments in the normal course of business. See Note 6
for a discussion of our ability to continue as a going concern and our plans
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 June 30, 2000, the
condensed consolidated statements of operations and comprehensive income
(loss) for the three months ended June 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the three months ended June 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
months ended June 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.
COMPREHENSIVE INCOME (LOSS): The difference in comprehensive income (loss)
and net income (loss) is due to unrealized gains or losses on marketable
securities for the three months ended June 30, 2000 and June 30, 1999, and to
a minimum pension liability adjustment at June 30, 2000.
EXTRAORDINARY ITEM: The extraordinary item represents gains realized on the
early extinguishment of approximately $1.4 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. The notes were purchased for
approximately $0.8 million. The gain 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 affiliates represents our equity in
Phar-Mor's gain on the early extinguishment of its debt.
NEWLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for
4
<PAGE>
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 $4.1 million at June 30, 2000 and March 31, 2000.
The reduction was equal to our 38.4% ownership interest in the cost 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
1,900,263 for the three months ended June 30, 2000 and 801,101 for the three
months ended June 30, 1999. The reduction was equal to our 38.4% equity
interest in our common stock since its acquisition by Phar-Mor.
NOTE 2 - LOSS PER SHARE OF COMMON STOCK
The amounts used in the calculation of loss per share from continuing
operations were as follows (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the three months ended
June 30,
--------------------------
2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Loss from continuing operations $ (6,791) $ (3,736)
Deduct dividends on preferred shares - 7,482
-------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders for BASIC and DILUTED earnings per share $ (6,791) $ (11,218)
-------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
for calculation of BASIC and DILUTED earnings per share 17,737 13,005
-------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders
Basic and Diluted $ (0.38) $ (0.86)
-------------------------------------------------------------------------------------------
</TABLE>
Options to purchase approximately 3.9 million shares of common stock
each at June 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. 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 at June 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 June 30, 2000
because the average market price of our common stock was less than the
exercise price of the warrants.
5
<PAGE>
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 three months
ended June 30,
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 993 $ 349
Income taxes paid - 8
Non-cash transactions:
Note received on sale of investments - 600
Cumulative dividends in arrears accrued - 6,682
------------------------------------------------------------------------------
</TABLE>
The following supplemental information is provided for other assets and
other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------------------------------------------------------------------------------
<S> <C> <C>
Other assets:
Prepaid pension cost $ 12,814 $ 12,358
Securities available for sale 4,145 2,880
Other investments, at cost 1,288 1,288
Other 1,856 1,625
-------------------------------------------------------------------------------
Total $ 20,103 $ 18,151
-------------------------------------------------------------------------------
Other long-term liabilities:
Pension and postretirement benefits $ 4,888 $ 4,862
Environmental liabilities 1,129 1,134
Liabilities related to discontinued operations 2,611 2,611
Other 2,000 2,060
------------------------------------------------------------------------------
Total $ 10,628 $ 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 June 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 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.
6
<PAGE>
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, which 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 plaintiffs' 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 Bankruptcy Trustee (the
"FoxMeyer 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 not to execute. We have agreed to pay the initial defense costs of
the individuals who are named as defendants in the lawsuit by reason of the
fact that they may have been serving at our request as a director or officer
of FoxMeyer. 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.
7
<PAGE>
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 the our businesses. In our opinion, the ultimate
outcome of these claims and lawsuits will not have a material effect on our
consolidated financial condition or results of operations.
NOTE 5 - RESTATEMENT
On August 14, 2000, we issued our condensed consolidated financial
statements for the three months ended June 30, 2000. These financial
statements included our equity in Phar-Mor's loss for the three months ended
July 1, 2000 based on information provided to us by Phar-Mor prior to the
issuance of our financial statements. After we issued these financial
statements, Phar-Mor, on September 29, 2000, announced a revision of their
previously announced earnings to reflect a write-down of an investment by
$5.5 million. In the announcement, Phar-Mor stated that it had recently
become aware of information that indicated that the value of one of its
investments had suffered an other than temporary decline in value from its
carrying cost of $6.5 million to $1.0 million. Phar-Mor stated that it
believed the decline in value occurred during the three months ended July 1,
2000 and, therefore, it recognized the $5.5 million additional loss in the
fourth quarter of its fiscal year ended July 1, 2000. We, therefore, have
restated our condensed consolidated financial statements for the three month
period ended June 30, 2000 to reflect an additional equity loss of
approximately $2.1 million, which is equal to our 38.4% ownership interest in
the $5.5 million additional loss reported by Phar-Mor.
In addition, we have reclassified a portion of Phar-Mor's equity
loss to equity in extraordinary item of affiliates to reflect our equity in
Phar-Mor's extraordinary item from the gain on the early extinguishment of
its debt. At the time of the issuance of our condensed consolidated financial
statements, Phar-Mor had not yet provided us with the necessary information
to reclassify the extraordinary item from other operating accounts.
A summary of the significant effects of the restatement is as follows
(in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
As
Previously
Reported As Restated
----------------------------
<S> <C> <C>
At June 30, 2000:
Investment in affiliates $ 21,904 $ 19,791
Accumulated deficit (164,718) (166,831)
For the three months ended June 30, 2000:
Equity in loss of affiliates (2,836) (5,121)
Loss before extraordinary item (4,506) (6,791)
Equity in extraordinary item of affiliates - 172
Net loss (4,334) (6,447)
Basic and diluted loss per share:
Loss from continuing operations $ (0.25) $ (0.38)
Extraordinary item 0.01 0.02
Loss per share (0.24) (0.36)
</TABLE>
NOTE 6 - 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.
8
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 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 38% 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.
On August 14, 2000, we issued our condensed consolidated financial
statements for the three months ended June 30, 2000. These financial
statements included our equity in Phar-Mor's loss for the three months ended
July 1, 2000 based on information provided to us by Phar-Mor prior to the
issuance of our financial statements. After we issued these financial
statements, Phar-Mor, on September 29, 2000, announced a revision of their
previously announced earnings to reflect a write-down of an investment by
$5,500. In the announcement, Phar-Mor stated that it had recently become
aware of information that indicated that the value of one of its investments
had suffered an other than temporary decline in value from its carrying cost
of $6,500 to $1,000. Phar-Mor stated that it believed the decline in value
occurred during the three months ended July 1, 2000 and, therefore, it
recognized the $5,500 additional loss in the fourth quarter of its fiscal
year ended July 1, 2000. We, therefore, have restated our condensed
consolidated financial statements for the three month period ended June 30,
2000 to reflect an additional equity loss of $2,113, which is equal to our
38.4% ownership interest in the $5,500 additional loss reported by Phar-Mor.
In addition, we have reclassified a portion of Phar-Mor's equity loss to
equity in extraordinary item of affiliates to reflect our equity in
Phar-Mor's extraordinary item from the gain on the early extinguishment of
its debt. At the time of the issuance of our condensed consolidated financial
statements, Phar-Mor had not yet provided us with the necessary information
to reclassify the extraordinary item from other operating accounts. See Note
5 to the condensed consolidated financial statements.
The extraordinary item for the three months ended June 30, 2000
represents gains realized on the early extinguishment of approximately $1,356
face value of the 6.75% Notes issued by our subsidiary, Avatex Funding, Inc.,
which were purchased by us in the open market. The notes were purchased for
approximately $815. The gain of $172 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 affiliates represents our equity in
Phar-Mor's gain on the early extinguishment of its debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
OPERATING COSTS
Total operating costs decreased $1,165 to $920 for the three months
ended June 30, 2000 compared to $2,085 for the three months ended June 30,
1999. Salaries and benefits were $400 less than in the prior year primarily
due to the separation of two of our officers at the end of June 1999. Legal
expenses decreased $376 primarily from a $257 reimbursement from our
insurance carriers in the current quarter for legal bills expensed in the
prior fiscal year and from a decrease in the number of cases where we may be
responsible for costs incurred. In addition, expenses of $436 related to our
merger with Xetava Corporation ("Xetava") were incurred in the prior fiscal
year. There were also decreases in our pension charges and insurance expense
when compared to the prior year. These decreases were partially offset by a
settlement payment received by us in the prior fiscal year from a defendant
in our lawsuit against McKesson HBOC, Inc.
OTHER INCOME (EXPENSE)
Other income was $4 for the three months ended June 30, 2000. Other
expense of $736 for the three months ended June 30, 1999 related to a
reduction of $1,077 in the carrying value of our investment in Imagyn 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 partially offset by
$491 in other income primarily from gains on the sale of securities held for
sale.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased $3 to $466 for the three months
ended June 30, 2000 compared to $469 for the three months ended June 30, 1999.
The decrease was due primarily to a decline in interest income as our cash
balance was $37,487 at June 30, 1999 compared to $17,500 at June 30,
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2000. This decrease was partially offset by an increase in dividend income
from additional investments in preferred stock of HPD Holdings Corp. ("HPD")
and RAS Holding Corp. ("RAS").
INTEREST EXPENSE
Interest expense increased $1,035 to $1,220 for the three months
ended June 30, 2000 compared to $185 for the three months ended June 30,
1999. Interest expense increased $986 due to the issuance of the Avatex
Funding 6.75% Notes in December 1999 and $49 due to the increase in the
interest rate on the FoxMeyer Trustee note, which is based on the prime rate,
and to the effect of the yearly compounding on that note.
EQUITY IN LOSS OF AFFILIATES
Equity in loss of affiliates was $5,121 for the three months ended
June 30, 2000 compared to equity in loss of $1,199 for the three months ended
June 30, 1999. The increase was due primarily to the results of Phar-Mor
which are significantly lower than in the prior year. In addition to higher
operating losses when compared to the prior year, Phar-Mor also had a $5,500
charge in the current year related to the write-down of an investment. Our
equity in the write-down of that investment was a loss of $2,113.
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 three months
ended June 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.
The gain on disposal of discontinued operations for the three months
ended June 30, 1999 resulted from the sale of our interest in these real
estate properties, net of taxes.
EXTRAORDINARY ITEM, GAIN ON EXTINGUISHMENT OF DEBT
We recognized a gain of $172 on the purchase and subsequent
cancellation of $1,356 face value of the 6.75% Notes of Avatex Funding during
the three months ended June 30, 2000. 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 $7,482 for the three months ended
June 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 June 30, 2000, we had cash and short-term investments of
approximately $17,500. During the three months ended June 30, 2000, we
purchased preferred stock of $934 issued by, and loaned approximately $81 to,
companies in which we had previously invested. We also invested $150 for a
41% interest in a new limited liability company that acquired the rights to
the "Cyclone Fence" name.
Our debt consists of a note payable to the FoxMeyer Trustee and the
debt 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 $922 with the remaining principal balance of
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approximately $27,320 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 FoxMeyer Trustee is payable in
full in October 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 6 to
the condensed consolidated financial statements for the quarter ended June
30, 2000 for a discussion of our ability to continue as a going concern and
management's plans 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.
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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 $2,335 at June 30, 2000. The increase represents an
additional investment in the redeemable preferred stock of RAS through the
exercise of warrants in April 2000. 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 on
the pay-in-kind preferred stock we own. The value of the investments in other
available for sale equity securities was approximately $7,828 at June 30,
2000.
The value of long-term debt maturing in 2003 decreased as a result
of the repurchase of $1,356 par value of Avatex Funding 6.75% Notes during
the three months ended June 30, 2000.
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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:
GREEN RIVER. With reference to the amended demand received from the
Environmental Protection Agency ("EPA") 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 is being resolved in a
manner that will not require any additional funds to be paid by NAC.
MCKESSON/VENDOR LITIGATION. With reference to the Texas lawsuit we
brought against McKesson HBOC, Inc. and certain pharmaceutical manufacturers,
in June 2000, the Texas Court Master entered three Master's Reports. As to a
motion and pleas filed by American Home Products, the Master granted the
portion of a motion which asserted that we lack standing to assert claims
predicated on our lost value, equity or investment in FoxMeyer Corporation,
denied all other aspects of the motion and pleas, and ruled that a
no-evidence motion was premature. As to a motion filed by Pfizer, the Master
granted the portion of a motion which asserted that we lack standing to
assert claims predicated on our lost value, equity or investment in FoxMeyer
Corporation, took under advisement other portions of the motion, and ruled
that a no-evidence motion was premature. The Master also denied summary
judgment motions filed by Hoescht Marion, Jansenn Pharmaceutica and
SmithKline Beecham. Objections and appeals to all three Reports have been
filed by the various parties. In addition, we have entered into settlement
agreements with a total of six manufacturer defendants in the litigation,
under which we received confidential settlement payments. The current judge
has specially set the case for trial in February 2001, but a new judge will
be 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3-E - By-Laws of the Registrant
27 - Financial Data Schedule
(b) REPORTS ON 8-K
The following Current Report on Form 8-K was filed
by us during the three months ended June 30, 2000:
We filed a Current Report on Form 8-K on April 5,
2000, announcing that any proposals to be presented to our
stockholders at our 2000 annual meeting must be received by us
for inclusion in our proxy statement for the meeting by May
31, 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
October 9, 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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