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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 1997
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AMERISOURCE HEALTH CORPORATION
(A DELAWARE CORPORATION)
(FORMERLY AMERISOURCE DISTRIBUTION CORPORATION)
(REGISTRANT, STATE OF
(COMMISSION INCORPORATION (IRS EMPLOYER
FILE NUMBER) ADDRESS AND TELEPHONE NUMBER) IDENTIFICATION NO.)
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33-27835-01 P.O. BOX 959, VALLEY FORGE, 23-2546940
PENNSYLVANIA 19482
(610) 296-4480
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
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The number of shares of common stock of AmeriSource Health Corporation
outstanding as of June 30, 1997 was: Class A -- 17,075,808, Class
B -- 6,490,370, Class C -- 173,483.
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INDEX
AMERISOURCE HEALTH CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- June 30, 1997 and September 30, 1996
Consolidated statements of operations -- Three months ended June 30, 1997 and
June 30, 1996
Consolidated statements of operations -- Nine months ended June 30, 1997 and June
30, 1996
Consolidated statements of cash flows -- Nine months ended June 30, 1997 and June
30, 1996
Management's Discussion and Analysis of Financial Condition and Results of
Item 2. Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
ITEM 1. AMERISOURCE HEALTH CORPORATION FINANCIAL STATEMENTS (UNAUDITED)
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 83,925 $ 65,575
Restricted cash.................................................. 8,434 5,626
Accounts receivable less allowance for doubtful accounts:
6/97 -- $19,192, 9/96 -- $14,848.............................. 490,626 390,331
Merchandise inventories.......................................... 795,122 650,296
Prepaid expenses and other....................................... 5,179 3,236
---------- ----------
Total current assets..................................... 1,383,286 1,115,064
Property and Equipment, at cost.................................... 111,167 91,508
Less accumulated depreciation.................................... 45,640 39,842
---------- ----------
65,527 51,666
Other assets....................................................... 53,523 21,230
---------- ----------
$ 1,502,336 $ 1,187,960
========== ==========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1997 1996
----------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 874,315 $ 714,984
Accrued expenses and other....................................... 41,518 29,446
Accrued income taxes............................................. 9,454 6,002
Deferred income taxes............................................ 39,579 35,350
---------- ----------
Total current liabilities................................ 964,866 785,782
Long-Term Debt:
Revolving credit facility........................................ 219,230 205,047
Receivables securitization financing............................. 303,904 226,878
Other debt....................................................... 9,201 1,768
---------- ----------
532,335 433,693
Other Liabilities.................................................. 11,180 5,293
Stockholders' Equity
Common Stock, $.01 par value:
Class A (Voting and convertible):
50,000,000 shares authorized; issued 6/97 -- 17,426,890
shares; 9/96 -- 17,291,100 shares.......................... 174 173
Class B (Non-voting and convertible):
15,000,000 shares authorized; issued 6/97 -- 9,440,370
shares; 9/96 -- 9,440,370 shares........................... 95 95
Class C (Non-voting and convertible):
2,000,000 shares authorized; issued 6/97 -- 173,483 shares;
9/96 -- 242,298 shares..................................... 2 2
Capital in excess of par value................................... 230,000 228,537
Retained earnings (deficit)...................................... (230,096) (259,395)
Cost of common stock in treasury................................. (6,220) (6,220)
---------- ----------
(6,045) (36,808)
---------- ----------
$ 1,502,336 $ 1,187,960
========== ==========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---------- ----------
(UNAUDITED)
Revenues............................................................ $2,064,174 $1,420,006
Cost of goods sold.................................................. 1,963,714 1,339,475
---------- ----------
Gross Profit........................................................ 100,460 80,531
Selling and administrative expenses................................. 76,211 51,378
Depreciation........................................................ 3,257 2,429
---------- ----------
Operating income.................................................. 20,992 26,724
Interest expense.................................................... 10,611 9,088
---------- ----------
Income before taxes and extraordinary item.......................... 10,381 17,636
Taxes on income..................................................... 4,049 7,231
---------- ----------
Income before extraordinary item.................................... 6,332 10,405
Extraordinary charge-early retirement of debt, net of income tax
benefit........................................................... -- (7,242)
---------- ----------
Net income........................................................ $ 6,332 $ 3,163
========== ==========
Earnings per share (fully diluted):
Income before extraordinary item.................................. $ .26 $ .45
Extraordinary item................................................ -- (.31)
---------- ----------
Net income..................................................... $ .26 $ .14
========== ==========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---------- ----------
(UNAUDITED)
Revenues............................................................ $5,596,578 $4,064,575
Cost of goods sold.................................................. 5,317,065 3,836,161
---------- ----------
Gross Profit........................................................ 279,513 228,414
Selling and administrative expenses................................. 188,517 143,623
Depreciation........................................................ 8,427 6,393
---------- ----------
Operating income.................................................. 82,569 78,398
Interest expense.................................................... 30,966 28,090
---------- ----------
Income before taxes and extraordinary item.......................... 51,603 50,308
Taxes on income..................................................... 20,322 20,953
---------- ----------
Income before extraordinary item.................................... 31,281 29,355
Extraordinary charge-early retirement of debt, net of income tax
benefit........................................................... (1,982) (7,242)
---------- ----------
Net income........................................................ $ 29,299 $ 22,113
========== ==========
Earnings per share (fully diluted):
Income before extraordinary item.................................. $ 1.29 $ 1.29
Extraordinary item................................................ (.08) (.32)
---------- ----------
Net income..................................................... $ 1.21 $ .97
========== ==========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
----------- ----------
(UNAUDITED)
OPERATING ACTIVITIES
Net income....................................................... $ 29,299 $ 22,113
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation.................................................. 8,427 6,393
Amortization.................................................. 2,125 2,041
Provision for losses on accounts receivable................... 3,252 1,140
Gain on disposal of property and equipment.................... 2,929 (16)
Deferred income taxes......................................... 6,025 8,815
Loss on early retirement of debt.............................. 3,250 11,142
Changes in operating assets and liabilities (net of effect of
companies acquired):
Restricted cash............................................. (2,808) 8,547
Accounts receivable......................................... (25,213) 7,094
Merchandise inventories..................................... (49,518) (179,122)
Prepaid expenses............................................ (263) (657)
Accounts payable, accrued expenses and income taxes......... 92,053 102,166
Miscellaneous................................................. 32 2,059
----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...... 69,590 (8,285)
INVESTING ACTIVITIES
Capital expenditures............................................. (12,735) (12,008)
Proceeds from sales of property and equipment.................... 1,967 527
Cost of companies acquired....................................... (138,652) (28,725)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................... (149,420) (40,206)
FINANCING ACTIVITIES
Long-term debt borrowings........................................ 1,615,923 1,324,712
Long-term debt repayments........................................ (1,517,307) (1,298,166)
Net proceeds from public offering................................ -- 49,300
Deferred financing costs and other............................... (1,900) --
Exercise of stock options........................................ 1,464 42
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................ 98,180 75,888
----------- ---------
Increase in cash and cash equivalents.............................. 18,350 27,397
Cash and cash equivalents at beginning of period................... 65,575 32,171
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 83,925 $ 59,568
=========== =========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of AmeriSource Health Corporation
and its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to present fairly
the financial position as of June 30, 1997, the results of operations for the
three and nine months ended June 30, 1997 and 1996 and the cash flows for the
nine months ended June 30, 1997 and 1996 have been included. Certain information
and footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles, but which are not
required for interim reporting purposes, have been omitted. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996.
NOTE 2 -- LEGAL MATTERS AND CONTINGENCIES
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings and governmental investigations, including
antitrust, environmental, product liability and regulatory agency and other
matters. In some of these proceedings, plaintiffs may seek to recover large and
sometimes unspecified amounts and the matters may remain unresolved for several
years. On the basis of information furnished by counsel and others, the Company
does not believe that these matters, individually or in the aggregate, will have
a material adverse effect on its business or financial condition.
The Company is subject to contingencies pursuant to environmental laws and
regulations at one of its former distribution centers that may require the
Company to take remediation efforts. In fiscal 1994, the Company accrued $4.1
million to cover future consulting, legal, and remediation and ongoing
monitoring costs. The accrued liability, which is reflected in other long-term
liabilities on the accompanying consolidated balance sheet ($3.8 million at June
30, 1997), is based on an engineering analysis prepared by outside consultants
and represents an estimate of the extent of contamination and choice of remedy,
existing technology and presently enacted laws and regulations. However, changes
in remediation standards, improvements in cleanup technology and discovery of
additional information concerning the site could affect the estimated liability
in the future. The Company is investigating the possibility of asserting claims
against responsible parties for recovery of these costs. Whether or not any
recovery may be forthcoming is unknown at this time, although the Company
intends to vigorously enforce its rights and remedies.
In November 1993, the Company, along with six other wholesale distributors
and twenty-four pharmaceutical manufacturers, was named as a defendant in the
United States District Court for the Southern District of New York, in a series
of purported class action antitrust lawsuits alleging violations of various
antitrust laws associated with the chargeback pricing system. In addition, the
Company is a party to parallel suits filed in state courts in Minnesota,
Mississippi and Alabama. Plaintiffs seek injunctive relief, treble damages,
attorneys' fees, and costs. In October 1994, the Company entered into a
Judgement Sharing Agreement with other wholesaler and pharmaceutical
manufacturer defendants. Under the Judgement Sharing Agreement (a) the
manufacturer defendants agreed to reimburse the wholesaler defendants for
litigation costs incurred, up to an aggregate of $9 million; and (b) if a
judgement is entered into against both manufacturers and wholesalers, the total
exposure for joint and several liability of the Company is limited to the lesser
of 1% of such judgement or $1 million. Pursuant to the Judgement Sharing
Agreement, the Company has released any claims that it might have had against
the manufacturers for the claims presented
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
by the plaintiffs in these lawsuits. The Judgement Sharing Agreement covers the
federal court litigation as well as cases which have been filed in various state
courts. On April 4, 1996, the federal court granted the wholesalers' motion for
summary judgment. The plaintiffs are appealing the grant of summary judgement in
favor of the wholesalers to the United States Court of Appeals for the Seventh
Circuit.
NOTE 3 -- EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number
of shares outstanding during the periods presented (23,739,661 and 22,733,126
for the three months ended June 30, 1997 and June 30, 1996, respectively; and
23,706,386 and 22,358,166 for the nine months ended June 30, 1997 and June 30,
1996, respectively) plus the dilutive effect of stock options (598,737 and
612,204 for the three and nine months ended June 30, 1997, respectively; and
401,142 and 355,737 for the three and nine months ended June 30, 1996,
respectively on a fully diluted basis).
NOTE 4 -- ACQUISITION
In March 1997, the Company acquired all of the equity interests of Walker
Drug Company, L.L.C. in a cash transaction. Walker Drug Company, L.L.C. is
wholesale pharmaceutical distributor based in Pelham, Alabama with annualized
revenues of approximately $800 million. The purchase price was $138.7 million.
The acquisition was accounted for by the purchase method and, accordingly is
included in the consolidated financial statements from the date of acquisition.
The excess of the purchase price over net assets acquired of $28.2 million has
been allocated to goodwill (which is included in other assets) and is being
amortized on a straight line basis over 40 years. Changes in purchase accounting
activities may result in a reallocation of the purchase price within one year of
the acquisition. The acquisition was funded by borrowings under the Company's
revolving credit agreement. The following table reflects financial results on a
pro forma basis, assuming the acquisition had occurred at the beginning of the
periods presented:
NINE MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---------- ----------
Revenues.................................................... $5,974,533 $4,584,332
Income before extraordinary items........................... 34,391 30,313
Net income.................................................. 32,409 23,071
Earnings per share (fully diluted):
Income before extraordinary item.......................... $ 1.41 $ 1.34
Extraordinary item........................................ (.08) (.32)
---------- ----------
Net income........................................ $ 1.33 $ 1.02
========== ==========
NOTE 5 -- LONG-TERM DEBT
In January 1997, the Company entered into a new revolving credit agreement
(the "Credit Agreement") with a syndicate of senior lenders providing a senior
secured facility of $500 million. Among other things, the Credit Agreement: (1)
is for a term of five years, expiring in January, 2002; (2) provides for
interest rate step downs to as low as LIBOR plus 25 basis points upon the
attainment of certain financial ratios; (3) provides for the release of security
upon the attainment of certain financial ratios or once the Company achieves
investment grade senior, unsecured debt ratings from two credit rating agencies;
(4) provides for a borrowing base of 70% of the eligible inventory; and (5)
provides higher limits for possible acquisitions. An extraordinary loss of $2.0
million (net of tax benefits of $1.3 million) was recorded in the second quarter
of fiscal 1997, representing the write-off of the unamortized financing fees
related to the retirement of the prior $380 million revolving credit facility.
In connection with the Credit Agreement, the Company incurred approximately $3.0
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
million in financing fees which have been deferred and are being amortized on a
straight-line basis over the five-year term of the Credit Agreement.
Revolving loans made under the Credit Agreement may be prepaid during its
term, without premium and may subsequently be reborrowed. Commitments under the
Credit Agreement may be permanently reduced in full or in part at any time at
the option of the Company upon prior written notice.
Borrowings under the Credit Agreement bear interest at the rate of LIBOR
plus an applicable margin (1.25% at June 30, 1997). Interest on loans under the
Credit Agreement is payable quarterly. Under the terms of the Credit Agreement,
the Company granted the senior lenders perfected first priority security on
interest in the Company's inventory for collateral against borrowings under the
Credit Agreement. The Company is required to pay a commitment fee on the average
unused portion of the Credit Agreement (.31% per annum at June 30, 1997) plus an
annual administration fee. At June 30, 1997, the $219.2 million outstanding
under the Credit Agreement bore interest at the rate of 7.6% per annum.
The indentures governing the Credit Agreement contain restrictions and
covenants which include limitations on incurrence of additional indebtedness,
restrictions on dividends and distributions to stockholders, the repurchase of
stock and the making of certain other restricted payments, the issuance of
preferred stock, the creation of certain liens, transactions with subsidiaries
and other affiliates and certain corporate acts such as mergers, consolidation
and the sale of substantially all assets. Additional covenants require
compliance with financial tests, including maintenance of minimum net worth,
leverage, and fixed charge coverage.
Pursuant to its receivable securitization financing, the Company issued $90
million of Floating Rate Class A Trade Receivables Participation Certificates
Series 1997-1 (the "Series 1997-1 Certificates") in April 1997. The Series
1997-1 Certificates consist of AAA rated fixed principal, variable rate
certificates with a term of five years and a rate of LIBOR plus .20%. The
proceeds from the issuance were used to pay down borrowings under the Credit
Agreement. In connection with the Series 1997-1 Certificates, the Company
incurred approximately $.7 million in financing fees which have been deferred
and are being amortized on a straight-line basis over the five year term of the
Series 1997-1 Certificates.
NOTE 6 -- CHANGE IN ESTIMATE
During its second quarter of fiscal 1997, the Company changed its method of
estimating its interim LIFO inventory from a detailed quarterly index
calculation method to a method which allocates a portion of the estimated annual
LIFO provision to each quarter based on each quarter's actual inventory
appreciation. The new method provides for a better match between current costs
and revenues and reduces interim fluctuations caused by changes in product mix
during the year. Prior to this change, substantially all of the Company's annual
LIFO provision was recorded in its first six fiscal months. Approximately 80% of
the Company's estimated annual LIFO provision was recorded in the first nine
months of fiscal 1997 under the new estimation method.
NOTE 7 -- RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share of $.01 for the three months
ended June 30, 1997 and have no effect on the three months ended June 30, 1996;
and increases of $.03 and $.02 for the nine months ended June 30, 1997 and June
30, 1996, respectively. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these periods is not expected to be material.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Both Statements become effective for fiscal periods
beginning after December 15, 1997 with early adoption permitted. The Company is
evaluating the effects these Statements will have on its financial reporting and
disclosures. The Statement is expected to have no effect on the Company's
results of operations, financial position, capital resources or liquidity.
NOTE 8 -- FACILITY CONSOLIDATIONS AND OTHER CHARGES
The Company commenced cost reduction plans in the third quarter of fiscal
1997 to consolidate three of its pharmaceutical distribution facilities into
other existing facilities and to restructure its sales force. The cost reduction
initiatives will be completed by December 1997 and resulted in the following
charges included in selling and administrative expense in the third quarter of
fiscal 1997.
(DOLLARS IN THOUSANDS)
Write-downs of assets..................................... $3,857
Severance................................................. 1,832
Lease cancellations....................................... 727
------
$6,416
======
Write-downs of assets include buildings, warehouse and computer equipment,
and other assets to be disposed of primarily related to the facility closings.
Severance includes the termination costs of 240 warehouse and sales employees.
Approximately 20 of these employees were terminated by June 30, 1997 and the
remainder are expected to be terminated by December 1997. The above amounts
exclude the shut-down costs of a facility acquired in the Walker Drug Company
acquisition that was contemplated in the acquisition and accordingly, included
in the purchase price allocation.
In addition to the above charges, the Company incurred $5.2 million of
charges related to the retirement of its former President and CEO as well as
other executive terminations during the third quarter of fiscal 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1997 increased 45% to $2.1
billion from $1.4 billion in the corresponding period in fiscal 1996. For the
nine months ended June 30, 1997, revenues were $5.6 billion, an increase of 38%
compared to the prior year. The year-to-year revenue gains reflect increases
across all customer groups and all geographic regions. The acquisitions of
Walker Drug Company, L.L.C. ("Walker Drug Company") in March 1997, and Gulf
Distribution, Inc. in February 1996, resulted in an increase in revenues of 13%
and 7% for the three and nine months ending June 30, 1997, respectively. During
the nine months ended June 30, 1997, sales to hospitals increased 36%, sales to
independent drug store customers increased 43%, and sales to the chain drug
store customer group increased 32%, as compared with the prior period.
Approximately 31% of the hospital revenue increase is due to the addition of one
large mail order pharmacy customer. During the nine months ended June 30, 1997
sales to hospitals accounted for 48% of total revenues, while sales to
independent drug stores accounted for 33% and sales to chain drug stores for 19%
of the total.
Gross profit of $100.5 million in the third quarter of fiscal 1997
increased by 25% over 1996 due to the increase in revenues. As a percentage of
revenues, the gross profit in the third quarter of fiscal 1997 was 4.87% as
compared to 5.67% in the prior year. For the nine months ended June 30, 1997,
the gross profit percentage was 4.99% as compared to 5.62% in the prior year.
Approximately 25% and 30% of the decline in gross profit percentage from the
prior year quarter and nine months, respectively, was due to the addition of a
large ($280 million in annualized revenues) mail order pharmacy customer at a
gross profit percentage significantly lower than normal percentages. However,
this customer is expected to provide the Company with its normal return on
committed capital due to a low cost to service and a relatively low working
capital requirement. The third quarter percentage was also impacted by less
inventory appreciation profits than in the prior year as a percentage of revenue
due to increased inventory turns and fewer manufacturer price increases. A
reduction in selling margin percentage due to continuing price competition
throughout the industry and the higher than average growth of the Company's
largest customers also contributed to the decline. Gross profit may continue to
be impacted by price competition and changes in customer and product mix.
The Company commenced cost reduction plans in the third quarter of fiscal
1997 to consolidate three of its pharmaceutical distribution facilities into
other existing facilities and to restructure its sales force. The cost reduction
initiatives will be completed by December 1997 and resulted in a $6.4 million
charge to selling and administrative expense in the third fiscal quarter of
1997. Write-downs of $3.9 million of assets includes buildings, warehouse and
computer equipment, and other assets to be disposed of primarily related to the
facility closings. Severance charges of $1.8 million were recorded for the
termination of 240 sales and warehouse employees. Approximately 20 of these
employees were terminated by June 30, 1997 and the remainder are expected to be
terminated by December 31, 1997. Additionally, $0.7 million of costs related to
lease terminations were recorded. The above amounts exclude the shut-down costs
of a facility acquired in the Walker Drug Company acquisition that was
contemplated in the acquisition, and accordingly, included in the purchase price
allocation. In addition to the cost reduction initiatives, the Company incurred
$5.2 million of charges related to the retirement of its former President and
CEO as well as other executive terminations during the third quarter. Annualized
cost savings of $6.0 to $8.0 million are expected as a result of the cost
reduction initiatives.
Operating expenses, including the $11.6 million of special charges
discussed in the preceding paragraph, increased by $25.7 million or 48%, in the
third quarter of fiscal 1997 compared with the prior year, and as a percentage
of revenues, were 3.85% in 1997 and 3.79% in 1996. Excluding the $11.6 million
of special charges, operating expenses as a percentage of revenues were 3.29%
for the third quarter of fiscal 1997. For the first nine months of fiscal 1997,
operating expenses increased 31% compared to the prior year and represented
3.52% of revenues versus 3.69% of revenues in the prior year. Excluding the
special charges, operating expenses as a percentage of revenues were 3.31% for
the nine months ended June 30, 1997. The increase in expenses was due to
increased delivery and warehouse expense associated with the significant revenue
increase. The decrease as a percentage of revenue in fiscal 1997 is primarily
due to continued economies of
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scale at the Company's established locations and the low service cost associated
with the large mail order customer which has offset higher than anticipated
integration costs of the Company's Orlando, FL facility.
Operating income of $21.0 million in the third quarter of fiscal 1997
decreased by 21% from the prior year. For the nine months ended June 30, 1997
operating income increased by 5%. Excluding the effect of the special charges of
$11.6 million in the third quarter of fiscal 1997, operating income increased
22% and 20% for the three and nine months ended June 30, 1997, respectively, as
compared to the prior year. Excluding the special charges, the Company's
operating margin declined to 1.58% and 1.68% for the three and nine months ended
June 30, 1997, respectively, as compared to 1.88% and 1.93% for the comparable
prior year periods. The decrease is due to the decrease in gross profit
percentage discussed above, offset in part by reduced operating expenses as a
percentage of revenues.
Interest expense of $10.6 million in the third quarter of fiscal 1997
represents an increase of 17% compared to the prior year quarter. For the nine
month period ended June 30, 1997 interest expense increased 10% versus the prior
year period. The increase over the prior year was due to increased borrowings to
fund the Company's strong revenue increase and the purchase of Walker Drug
Company in March 1997. Average borrowings during the quarter ended June 30, 1997
were $619 million as compared to average borrowings of $489 million in the prior
year third quarter. For the nine months ended June 30, 1997, average borrowings
were $597 million versus average borrowings of $487 million in the prior year.
The increased average indebtedness was offset in part by reduced borrowing rates
compared to the prior year due to the redemption of the remaining $74.3 million
of 11 1/4% senior debentures in the third quarter of fiscal 1996 and rate
reductions under the Company's revolving credit facility and receivables
securitization financing.
The income tax provisions for the three and nine months ended June 30, 1997
were computed based on an estimate of the full year effective tax rate. The
extraordinary charge in fiscal 1997 of $2.0 million, net of a tax benefit of
$1.3 million, was due to the write-off of unamortized deferred financing fees
related to the retirement of the prior $380 million revolving credit facility.
During the second quarter the Company changed its method of estimating its
interim LIFO inventory. The new estimation method better matches current costs
and revenues and reduces interim fluctuations caused by changes in product mix
during the year. Prior to this change, substantially all of the Company's annual
LIFO provision was recorded in its first six fiscal months. Approximately 80% of
the Company's estimated annual LIFO provision was recorded in the first nine
months of fiscal 1997 under the new estimation method.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended June 30, 1997, the Company's operating
activities generated $69.6 million in cash. An increase in inventory turns, a
reduction in days sales outstanding and an increase in days payables outstanding
offset the increased working capital requirements of the significant revenue
growth. Operating cash uses during the nine month period ended June 30, 1997
included $27.4 million in interest payments and $11.1 million in income tax
payments.
Capital expenditures for the nine months ended June 30, 1997 were $12.7
million and relate principally to investments in warehouse automation, warehouse
improvements, and information technology which are expected to continue
throughout the year.
In March 1997, the Company acquired all of the equity interests of Walker
Drug Company Inc. in a cash transaction. The transaction was funded by
borrowings under the revolving credit facility. Walker Drug Company is a Pelham,
Alabama-based pharmaceutical wholesaler with annualized revenues of
approximately $800 million. The purchase price was $138.7 million and the
transaction was accounted for by the purchase method. The excess of the purchase
price over net assets acquired of $28.2 million has been allocated to goodwill
and is being amortized over 40 years.
Cash provided by financing activities during the first nine months of
fiscal 1997 represents borrowings under the Company's revolving credit facility
and its receivable securitization financing primarily to fund its
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working capital requirements and the purchase of Walker Drug Company. In January
1997, the Company entered into a new revolving credit agreement (the "Credit
Agreement") with a syndicate of senior lenders providing a senior secured
facility of $500 million. Proceeds from borrowings under this Credit Agreement
were used to retire the $380 million revolving credit facility. Among other
things, the Credit Agreement (1) is for a term of five years, expiring in
January 2002; (2) provides for interest rate step downs upon the attainment of
certain financial ratios; (3) provides for the release of security upon the
attainment of certain financial ratios or once the Company achieves investment
grade senior, unsecured debt ratings from two credit rating agencies; (4)
provides for a borrowing base of 70% of the eligible inventory; and (5) provides
higher limits for potential acquisitions. At June 30, 1997, borrowings under the
Company's $500 million revolving credit facility were $219 million (at an
average interest rate of 7.6%) and borrowings under the $375 million Receivables
Program were $304 million (at an average interest rate of 6.0%). In April 1997,
the Company issued $90 million of Floating Rate Class A Trade Receivable
Participation Certificates Series 1997-1 under its Receivable Program. These
certificates consist of AAA rated fixed principal, variable rate certificates
with a term of five years and a rate of LIBOR plus .20%. The proceeds from the
issuance were used to pay down borrowings under the Credit Agreement.
An increase in interest rates would adversely affect the Company's
operating results and the cash flow available after debt service to fund
operations and expansion and, if permitted to do so under its revolving credit
facility, to pay dividends on its capital stock.
The Company's operating results have generated sufficient cash flow which,
together with borrowings under its debt agreements and credit terms from
suppliers, have provided sufficient capital resources to finance working capital
and cash operating requirements, fund capital expenditures, and interest
currently payable on outstanding debt. The Company's primary ongoing cash
requirements will be to fund payment of interest on indebtedness, finance
working capital, and fund capital expenditures and routine growth and expansion
through new business opportunities. Future cash flows from operations and
borrowings are expected to be sufficient to fund the Company's ongoing cash
requirements.
The Company is subject to certain contingencies pursuant to environmental
laws and regulations at one of its former distribution centers that may require
remediation efforts. In fiscal 1994, the Company accrued a liability of $4.1
million to cover future consulting, legal and remediation, and ongoing
monitoring costs. The accrued liability ($3.8 million at June 30, 1997), which
is reflected in other long-term liabilities on the accompanying consolidated
balance sheet, is based on an estimate of the extent of contamination and choice
of remedy, existing technology, and presently enacted laws and regulation,
however, changes in remediation standards, improvements in cleanup technology,
and discovery of additional information concerning the site could affect the
estimated liability in the future. The Company is investigating the possibility
of asserting claims against responsible parties for recovery of these costs.
Whether or not any recovery may be forthcoming is unknown at this time.
Certain information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements as such term is defined in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Certain factors such as changes in interest
rates, competitive pressures, customer and product mix, inventory investment
buying opportunities, and capital markets could cause actual results to differ
materially from those in forward-looking statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 4.1 -- Amendment to Pooling and Servicing Agreement and
Receivables Purchase Agreement, dated as of March 5, 1997
among AmeriSource Receivables Corporation, AmeriSource
Corporation, and Manufacturers and Traders Trust Company, as
Trustee.
4.2 -- Certificate Purchase Agreement, dated as of April 11,
1997, among AmeriSource Corporation, AmeriSource Receivables
Corporation, BT Securities Corporation, Bankers Trust
International PLC, and Bankers Trust Australia Limited.
4.3 -- Amendment to Pooling and Servicing Agreement and
Receivables Purchase Agreement dated as of April 17, 1997
among AmeriSource Receivables Corporation, AmeriSource
Corporation, and Manufacturers and Traders Trust Company, as
Trustee.
4.4 -- Series 1997-1 Supplement to Pooling and Servicing
Agreement dated as of April 17, 1997 among AmeriSource
Receivables Corporation as Transferor, AmeriSource
Corporation, as initial Servicer and Manufacturers and
Traders Trust Company as Trustee.
27 -- Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended June 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERISOURCE HEALTH CORPORATION
/s/ KURT J. HILZINGER
--------------------------------------
Kurt J. Hilzinger
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Date: August 13, 1997
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