UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1994
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
- - ------------- ---------------------------------- ------------------
0-13813 AmeriSource Corporation 23-2353106
(a Delaware Corporation)
(formerly Alco Health Services Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 296-4480
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
--- ---
The number of shares of common stock of AmeriSource Corporation outstanding as
of June 30, 1994 was 1,000.
INDEX
AMERISOURCE CORPORATION
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- June 30, 1994 and
September 30, 1993
Consolidated statements of operations -- Three months
ended June 30, 1994 and June 30, 1993
Consolidated statements of operations -- Nine months
ended June 30, 1994 and June 30, 1993
Consolidated statements of cash flows -- Nine months
ended June 30, 1994 and June 30, 1993
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- - ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. AmeriSource Corporation Financial Statements (Unaudited)
--------------------------------------------
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------------------
(dollars in thousands)
June 30 September 30
ASSETS 1994 1993
- - ------ --------- ------------
Current Assets
Cash $ 23,572 $ 27,098
Accounts receivable less
allowance for doubtful
accounts: 6/94 - $8,971
9/93 - $7,681 283,010 251,999
Merchandise inventories 362,076 346,371
Prepaid expenses 2,118 1,977
-------- --------
Total current assets 670,776 627,445
Property and Equipment, at cost 66,318 57,282
Less accumulated depreciation 25,699 21,176
-------- --------
40,619 36,106
Other Assets
Excess of cost over net assets
acquired 183,810
Deferred financing costs and other,
less accumulated amortization:
6/94 - $6,055; 9/93 - $3,703 13,795 15,453
-------- --------
13,795 199,263
-------- --------
$725,190 $862,814
======== ========
See notes to consolidated financial statements.
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------
(dollars in thousands)
June 30 September 30
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
- - ------------------------------------ ---------- -------------
Current Liabilities
Current portion of other debt $ 128 $ 122
Accounts payable 414,608 379,826
Accrued expenses 25,935 24,507
Accrued income taxes 14,839 7,899
Deferred income taxes 31,650
--------- --------
Total current liabilities 487,160 412,354
Long-Term Debt
Revolving credit facility 238,079 248,000
Senior subordinated notes 166,134 170,562
Other debt 1,300 1,311
Convertible subordinated debentures 238 238
--------- --------
405,751 420,111
Other Liabilities
Deferred compensation 517 701
Other 8,234 740
--------- --------
8,751 1,441
Stockholder's Equity
Common stock, $.01 par value:
1,000 shares authorized and issued 1 1
Capital in excess of par value 78,050 78,050
Retained earnings (deficit) (254,523) (49,143)
--------- --------
(176,472) 28,908
--------- --------
$ 725,190 $862,814
========= ========
See notes to consolidated financial statements.
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------
(dollars in thousands)
Three Months Ended
June 30
----------------------
1994 1993
---------- ---------
Revenues $1,079,302 $918,499
Costs and expenses
Cost of goods sold 1,021,847 868,197
Selling and administrative 36,008 33,285
Environmental remediation 4,075
Depreciation 1,620 1,439
Write-off of excess of cost over net
assets acquired 179,824
Interest 11,611 11,357
---------- --------
1,254,985 914,278
Income (loss) before taxes (175,683) 4,221
Taxes on income 2,270 2,450
---------- --------
Net income (loss) $ (177,953) $ 1,771
========== ========
See notes to consolidated financial statements.
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------
(dollars in thousands)
Nine Months Ended
June 30
-----------------------
1994 1993
---------- ----------
Revenues $3,192,190 $2,756,375
Costs and expenses
Cost of goods sold 3,022,256 2,601,310
Selling and administrative 106,427 100,735
Environmental remediation 4,075
Depreciation 4,698 4,199
Write-off of excess of cost over
net assets acquired 179,824
Interest 36,226 35,433
Non-recurring charges 1,982
---------- ----------
3,353,506 2,743,659
Income (loss) before taxes, extraordinary
items and cumulative effects of accounting
changes (161,316) 12,716
Taxes on income 8,577 7,250
---------- ----------
Income (loss) before extraordinary items and
cumulative effects of accounting
changes (169,893) 5,466
Extraordinary charge - early retirement
of debt, net of income tax benefit (442)
Extraordinary charge - write-off of
deferred financing fees, net of income
tax benefit (2,635)
Cumulative effect of change in accounting
for postretirement benefits other than
pensions (1,199)
Cumulative effect of change in accounting
for income taxes (33,846)
---------- ----------
Net income (loss) $ (205,380) $ 2,831
========== ==========
See notes to consolidated financial statements.
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------
(dollars in thousands)
Nine Months Ended
June 30
-----------------------
1994 1993
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $(205,380) $ 2,831
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 4,698 4,199
Amortization 6,980 7,116
Write-off of excess of cost over net
assets acquired 179,824
Provision for losses on accounts receivable 2,207 2,265
Loss on disposal of property and equipment 151 2,070
Loss on early retirement of debt 679
Write-off of deferred financing fees 3,285
Cumulative effects of changes in accounting
principles 35,045
Changes in operating assets and liabilities:
Accounts receivable (33,218) 8,328
Merchandise inventories (15,705) 53,500
Prepaid expenses (141) (586)
Accounts payable, accrued expenses and
income taxes 41,224 68,826
Other long-term liabilities 4,075
Miscellaneous (2,873) (56)
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 17,566 151,778
INVESTING ACTIVITIES
Capital expenditures (5,886) (4,780)
Proceeds from sales of property and equipment 380 1,015
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (5,506) (3,765)
FINANCING ACTIVITIES
Long-term debt borrowings 662,075 708,864
Long-term debt repayments (677,057) (804,653)
Deferred financing costs (604) (8,164)
--------- ---------
NET CASH (USED IN)
FINANCING ACTIVITIES (15,586) (103,953)
--------- ---------
(Decrease) Increase in cash (3,526) 44,060
Cash at beginning of period 27,098 13,768
--------- ---------
CASH AT END OF PERIOD $ 23,572 $ 57,828
========= =========
See notes to consolidated financial statements.
AMERISOURCE 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 Corporation
(formerly Alco Health Services Corporation) (the "Company"). All material
intercompany accounts and transactions of the Company have been eliminated in
consolidation. The Company is a wholly-owned subsidiary of AmeriSource
Distribution Corporation ("Distribution").
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, 1994, the results of operations for the three and nine
months ended June 30, 1994 and 1993 and the cash flows for the nine months ended
June 30, 1994 and 1993 have been included. Earnings (loss) per share are not
presented, as all of the Company's issued and outstanding common stock is owned
by Distribution. 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, 1993.
Note 2 - Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired ("goodwill") was recorded at the
time of the leveraged buyout transaction ("Acquisition") in 1988. Since the
Acquisition, the Company has been unable to achieve the operating results
projected at the time of the Acquisition. The projections at the time of the
Acquisition were developed based on historical experience, industry trends and
management's estimates of future performance. These projections assumed
significant growth rates in revenues, stable gross profit margins and cash flow
from operations to reduce Acquisition indebtedness and did not anticipate long-
term losses or indicate an inability to recover the value of goodwill. Due to
persistent competitive pressures and a shift in the customer mix to larger
volume, lower margin customers, gross profit margins have declined from 7.10% in
fiscal 1989 to 5.63% in fiscal 1993 and 5.32% for the nine months ended June 30,
1994, resulting in: operating results which are substantially below the
projections made at the time of the Acquisition; an increase in Distribution's
indebtedness; and an accumulated deficit in Distribution's retained earnings at
June 30, 1994 before the goodwill write-off of $126.4 million.
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Excess of Cost Over Net Assets Acquired (continued)
During the period since the Acquisition, the Company has been affected by price
competition for market share within the industry, health care industry
consolidation and the impact of group purchasing organizations, managed care and
health care reform on drug prices. Until fiscal 1994, the Company believed the
results since the Acquisition were not indicative of long-term market conditions
affecting pricing within the industry. In fiscal 1994, the Company determined
its poor operating results since the Acquisition and its expectations for future
operating results were being significantly affected by fundamental changes in
the market place in which the Company operates. As these factors became clear
and in conjunction with the increases in interest rates, a detailed,
comprehensive evaluation of the Company's future prospects was prepared. The
evaluation determined the Company's financial losses were and continue to be
significantly affected by price sensitivity, aggressive pricing by better
capitalized competitors, consolidations in the wholesale drug distribution
industry and the impact of larger buying groups. Based on current industry
trends, interest rate trends and the health care reform environment, in the
third quarter of fiscal 1994, the Company has concluded that the projected
operating results would not support the future recovery of the remaining
goodwill balance.
The methodology employed to assess the recoverability of the Company's goodwill
was to project results of operations forward 36 years, which approximates the
remaining amortization period of the goodwill balance at June 30, 1994. The
Company then evaluated the recoverability of goodwill on the basis of this
projection of future operations.
The projection reflects significant cumulative losses indicating that the
carrying value of goodwill is not recoverable. Management believes that unless
the Company is able to develop successful strategic, operating or financing
initiatives which would change the assumptions used in the projection, the
projected future operating results based on these assumtpions is the best
estimate of the Company's projected performance given the Company's existing
high leverage and industry trends. As a result, the Company concluded that the
carrying value of goodwill cannot be recovered from expected future operations.
Accordingly, the Company wrote off its remaining goodwill balance of $179.8
million in the third quarter of fiscal 1994. More importantly, while the
Company believes the reliability of any projection over such an extended period
is highly uncertain, the projection also indicates that the Company's long-term
viability will require modification of its current capital structure to reduce
its indebtedness and increase its equity in the near to mid-term future. While
the projection indicates that in fiscal 1998 cash flow from operations will not
be sufficient to satisfy required interest and principal payments on its current
debt obligations, the Company believes and the projection indicates, that cash
flow generated from operations in the near-term (fiscal years 1994 through 1997)
is sufficient to service its current debt obligations. No assurance can be
given that the Company will be successful in efforts to restructure or
recapitalize in order to be able to operate in a profitable manner for the long-
term.
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Long-Term Debt
In October, 1993, the Company redeemed an aggregate principal amount of
$4,428,000 of senior subordinated notes. The extraordinary charge of $442,000
from the early retirement of this debt relates to the write-off of unamortized
financing fees and premiums paid on redemption, net of a tax benefit.
During the nine months ended June 30, 1994, the Company completed an exchange of
$40,329,000 principal amount of 14 1/2% Senior Subordinated Notes due 1999,
Series A (the "New Notes") and $101,000 in cash for $40,329,000 principal amount
of its 14 1/2% Senior Subordinated Notes due 1999 (the "Existing Notes"). The
only material difference between the terms of the New Notes and the terms of the
Existing Notes is that the indenture of the New Notes does not have the minimum
consolidated net worth provisions set forth in the indenture of the Existing
Notes. The indenture of the Existing Notes requires the Company to maintain a
consolidated net worth (as defined) of $80 million. If the Company's
consolidated net worth, as defined in the indenture of the Existing Notes, is
less than $80 million at the end of each of any two consecutive fiscal quarters,
the Company is required to offer to purchase (the "Offer") an amount of Existing
Notes equal to 20% of the principal amount of Existing Notes outstanding at the
time the Offer is made. The purchase price in any Offer is equal to 100% of the
principal amount purchased plus accrued interest to the date of purchase. The
Offer required could be triggered if the Company generated losses from
operations, had charges or expenses relating to a restructuring or
recapitalization, or reductions in the book value of tangible or intangible
assets, if in each case the losses or charges are of a sufficient magnitude. As
a result of the elimination of the minimum consolidated net worth provision in
the indenture of the New Notes, the Company would not be required to make an
Offer to holders of the New Notes, even in the event of a material decrease in
the Company's consolidated net worth. In addition to the exchange noted above,
the Company paid the holders of an aggregate of $125,388,000 in principal amount
of Existing Notes cash consideration of $520,000 in exchange for each holder's
agreement not to tender any of the Existing Notes as a result of any required
Company Offer or to exercise any rights they have or may have with respect to
the consolidated net worth provision of the indenture of the Existing Notes. The
total cash consideration of $621,000 noted above as well as related fees and
expenses of $600,000 were recognized as interest expense during the nine months
ended June 30, 1994.
Note 4 - 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 and regulatory agency 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. 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.
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (continued)
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in fourteen
civil actions filed by independent retail pharmacies in the United States
District Court for the Southern District of New York. Plaintiffs seek to
establish these lawsuits and over thirty-four others (to which the Company is
not a party) filed by other pharmacies as class actions. In essence, these
lawsuits all claim that the manufacturer and wholesaler defendants have
combined, contracted and conspired to fix the prices charged to plaintiffs and
class members for prescription brand name pharmaceuticals. Specifically,
plaintiffs claim that the defendants use "chargeback agreements" to give some
institutional pharmacies discounts that are not made available to retail drug
stores. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and
costs. These actions have been transferred to the United States District Court
for the Northern District of Illinois for consolidated and coordinated pretrial
proceedings. The Company believes it has meritorious defenses to the claims
asserted in these lawsuits and intends to vigorously defend itself in all of
these cases.
The Company has become aware that its former Charleston, South Carolina
distribution center, was previously owned by a fertilizer manufacturer and that
there is evidence of residual contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and initiated
a groundwater study during fiscal year 1994. The preliminary results of the
groundwater study indicate that there is lead in the groundwater at levels
requiring further investigation and response. A preliminary engineering
analysis was prepared by outside consultants during the third quarter of fiscal
1994, and indicated that, if both soil and groundwater remediation are required,
the most likely cost of remediation efforts at the Charleston site is estimated
to be $4.1 million. Accordingly, a liability of $4.1 million was recorded
during the third quarter of fiscal 1994 to cover future consulting, legal and
remediation and ongoing monitoring costs. The Company has notified the
appropriate state regulatory agency from whom approval must be received before
proceeding with any further tests or with the actual site remediation. The
approval process and remediation could take several years to accomplish and the
actual costs may differ from the liability which has been recorded. The accrued
liability, 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 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 intends to make
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.
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (continued)
The Company has been named as a defendant in several lawsuits based upon alleged
injuries and deaths attributable to the product L-Tryptophan. The Company did
not manufacture L-Tryptophan; however, prior to an FDA recall, The Company did
distribute the L-Tryptophan products of several of its vendors. The Company
believes that it is entitled to full indemnification by its suppliers and the
manufacturer of L-Tryptophan with respect to these lawsuits and any other
lawsuits involving L-Tryptophan in which the Company may be named in the future.
To date, the indemnity to the Company in such suits has not been in dispute and,
although the Company believes it is unlikely it will incur any loss as a result
of such lawsuits, the Company believes that its insurance coverage and supplier
endorsements are adequate to cover any losses should they occur.
At June 30, 1994, there were contingent liabilities with respect to taxes,
guarantees of borrowings by certain customers, lawsuits and environmental and
other matters occurring in the ordinary course of business. On the basis of
information furnished by counsel and others, management believes that none of
these contingencies will materially affect the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
---------------------
(dollars in thousands)
----------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1994 1993 1994 1993
----------- --------- ----------- ----------
Revenues $1,079,302 $918,499 $3,192,190 $2,756,375
Cost of goods sold 1,021,847 868,197 3,022,256 2,601,310
---------- -------- ---------- ----------
Gross profit 57,455 50,302 169,934 155,065
Operating expenses:
Selling and administrative 34,643 31,920 102,321 96,635
Environmental remediation 4,075 4,075
Depreciation 1,620 1,439 4,698 4,199
Amortization of intangibles 1,365 1,365 4,106 4,100
Write-off of excess of cost
over net assets acquired 179,824 179,824
---------- -------- ---------- ----------
Operating income (164,072) 15,578 (125,090) 50,131
Interest expense - in cash 10,852 10,429 33,352 32,417
Amortization of deferred
financing costs 759 928 2,874 3,016
Non-recurring charges 1,982
---------- -------- ---------- ----------
Income (loss) before taxes,
extraordinary items and
cumulative effects of
accounting changes (175,683) 4,221 (161,316) 12,716
Taxes on income 2,270 2,450 8,577 7,250
---------- -------- ---------- ----------
Income (loss)before
extraordinary items and
cumulative effects of
accounting changes (177,953) 1,771 (169,893) 5,466
Extraordinary charge - early
retirement of debt, net of
income tax benefit (442)
Extraordinary charge - write-off
of deferred financing fees,
net of income tax benefit (2,635)
Cumulative effect of change in
accounting for postretirement
benefits other than pensions (1,199)
Cumulative effect of change in
accounting for income taxes (33,846)
---------- -------- ---------- ----------
Net income (loss) $ (177,953) $ 1,771 $ (205,380) $ 2,831
========== ========= ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Revenues in the third quarter of fiscal 1994 increased 17% to $1.1 billion from
$918 million in fiscal 1993. For the nine months ended June 30, 1994, revenues
were $3.2 billion, an increase of 16% over the $2.8 billion reported for the
nine months ended June 30, 1993, reflecting real volume growth as well as the
pass through to customers of price increases from manufacturers. Price
increases accounted for approximately one-tenth of the 16% revenue growth. The
most significant part of the revenue increase for the nine months ended June 30,
1994 was attributable to the hospital customer group, where revenues were 31%
ahead of the comparable period of the prior year. Excluding brokerage business,
sales to the chain drug store customer group increased 6%, while sales to
independent drug store customers increased 1% during the nine months ended June
30, 1994 as compared with the prior year. During the nine months ended June 30,
1994, sales to hospitals accounted for 46% of total revenues, while sales to
independent drug stores represented 34% and sales to chain drug stores, 20% of
the total.
Gross profit in the three months ended June 30, 1994 increased to $57.5 million,
an increase of 14% from the same quarter of fiscal 1993, due to increased
revenues. As a percentage of revenues, the gross profit margin for the third
quarter was 5.32% as compared to 5.48% in the prior year. For the nine months
ended June 30, 1994, the gross profit margin percentage was 5.32% versus 5.63%
in 1993. The declines in the gross profit margin percentages reflect continuing
industry price competition and increased sales to larger volume, lower margin
customers, such as hospitals.
Selling and administrative expenses for the third quarter of fiscal 1994 were
$34.6 million compared to $31.9 million for the third quarter of fiscal 1993, an
increase of 8.5%. For the first nine months of fiscal 1994, selling and
administrative expenses were $102.3 million, an increase of 5.9% over the prior
year. The cost increases reflect inflationary increases and increases in
warehouse and delivery expenses which are variable with the level of sales
volume. As a percentage to revenues, selling and administrative expenses
improved to 3.2% in the nine months ended June 30, 1994 from 3.5% in the 1993
period. The decrease in the ratio of expenses to revenues reflects the
Company's ongoing efforts to control costs in response to the decline in the
gross profit margin as a percentage of revenues and the economies associated
with increased business with larger volume, lower cost to service customers.
As further described below, in the third quarter of fiscal 1994, the Company
recorded a $4.1 million reserve to cover the expected remediation costs at its
former Charleston, South Carolina distribution center.
In the third quarter of fiscal 1994, the Company completed a detailed evaluation
of the recovery of the recorded value of the excess of cost over net assets
acquired ("goodwill") and concluded that projected operating results would not
support the future recovery of the remaining goodwill balance. Accordingly, the
Company wrote off the remaining goodwill balance of $179.8 million in the third
quarter of fiscal 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
The increase in interest expense in the third quarter and for the nine months of
fiscal 1994 in comparison to the fiscal 1993 periods was as a result of higher
interest rates on the Company's variable rate borrowings offset in part by lower
variable rate borrowing levels and the reduction in principal amount of the
senior subordinated notes. Interest expense in the third quarter and for the
nine months ended June 30, 1994 reflects reductions as a result of the purchase
and retirement of an aggregate principal amount of $8.9 million of senior
subordinated notes, which occurred during the fourth quarter of fiscal 1993 and
first quarter of fiscal 1994. Interest expense for the nine months ended June
30, 1994 includes $621,000 paid to the holders of an aggregate of $165.7 million
in principal amount of senior subordinated notes (see Note 3 of "Notes to
Consolidated Financial Statements"). During the nine-month period ended June
30, 1994, the average outstanding debt level was $445 million at an average
interest rate of 9.8%. During the nine-month period ended June 30, 1993, the
comparable average outstanding debt level was $462 million at an average
interest rate of 9.3%. Interest expense in 1994 includes $2.9 million in
amortization of financing fees as compared with $3.0 million in 1993.
As noted below, the Company changed its method of accounting for income taxes
effective October 1, 1993. Income taxes for the three and nine month periods
ended June 30, 1994, were computed on a regular tax basis and based on an
estimate of the full year effective tax rate. The extraordinary charge of
$679,000, net of a tax benefit of $237,000, relates to the purchase and
retirement of an aggregate principal amount of $4.4 million of senior
subordinated notes.
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement 106) and Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (Statement 109). The Company recorded, as of
October 1, 1993, a total of $35.0 million in non-cash charges to net income for
the effects of transition to these two new standards. Statement 106 requires
that the expected cost of providing postretirement medical benefits be accrued
during employees' working years rather than on a pay-as-you-go basis as was
previously permitted. The cumulative effect of this change in accounting
principle resulted in a non-cash charge to net income of $1.2 million as of
October 1, 1993. Statement 109 requires a change in the method of accounting
for income taxes from the deferred method to the liability method. Under the
liability method, deferred taxes result from differences between the tax and
financial reporting bases of assets and liabilities and are adjusted for changes
in tax rates and tax laws when changes are enacted. The cumulative effect of
this change in accounting principle resulted in a non-cash charge to net income
of $33.8 million as of October 1, 1993, principally related to the provision of
deferred income taxes to reflect the tax consequences on future years of the
difference between the tax and financial reporting basis of merchandise
inventories.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources
Historically, the Company's operating results have generated sufficient cash
flows which, together with borrowings under the revolving credit facility 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. Future cash
flows are expected to be sufficient to fund capital expenditures and interest
currently payable over the near term.
During the nine-month period ended June 30, 1994, the Company's operating
activities generated $17.6 million in cash. Accounts receivable and merchandise
inventories increased during the period by $33.2 million and $15.7 million,
respectively, offset by an increase of $34.8 million in accounts payable. The
increases in accounts receivable and merchandise inventories are commensurate
with the Company's revenue growth. A portion of the increase in merchandise
inventories was the result of the opening of the Dallas, Texas distribution
facility, which occurred in the first quarter of fiscal 1994. Operating cash
uses during the nine-month period ended June 30, 1994 included $30.1 million in
interest payments and $3.3 million in income tax payments.
Capital expenditures for the nine months ended June 30, 1994 were $5.9 million
and relate principally to improvements in warehouse distribution and management
information systems. Capital expenditures for the fiscal year ended September
30, 1994 are projected to approximate $8.0 million. Cash used in investing
activities during the nine months ended June 30, 1994 included $5.0 million in
payments associated with the redemption of an aggregate principal amount of $4.4
million of senior subordinated notes. As a result of the positive cash flow
during the nine months ended June 30, 1994, borrowings under the Company's
revolving credit facility were reduced to $238.1 million (at an average interest
rate of 7.5%) from the $248.0 million (at an average interest rate of 6.4%)
outstanding at September 30, 1993.
The Company has become aware that its former Charleston, South Carolina
distribution center, was previously owned by a fertilizer manufacturer and that
there is evidence of residual contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and initiated
a groundwater study during fiscal 1994. The preliminary results of the
groundwater study indicate that there is lead in the groundwater at levels
requiring further investigation and response. A preliminary engineering
anlaysis was prepared by outside consultants during the third quarter of fiscal
1994, and indicated that, if both soil and groundwater remediation are required,
the most likely cost of remediation efforts at the Charleston site is estimated
to be $4.1 million. Accordingly a liability of $4.1 million was recorded during
the third quarter of
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
fiscal 1994 to cover future consulting, legal and remediation and ongoing
monitoring costs. The Company has notified the appropriate state regulatory
agency from whom approval must be received before proceeding with any further
tests or with the actual site remediation. The approval process and remediation
could take several years to accomplish and the actual costs may differ from the
liability which has been recorded. The accrued liability, 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 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 intends to make 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.
The Company's primary ongoing cash requirements will be to fund payment of
principal and interest on indebtedness, finance working capital and fund capital
expenditures. 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 any expansion and, if permitted to do so under its revolving
credit facility and the indenture for the senior subordinated notes, to pay
dividends on its capital stock.
The goodwill was recorded at the time of the leveraged buyout transaction
("Acquisition") in 1988. Since the Acquisition, the Company has been unable to
achieve the operating results projected at the time of the Acquisition. The
projections at the time of the Acquisition were developed based on historical
experience, industry trends and management's estimates of future performance.
These projections assumed significant growth rates in revenues, stable gross
profit margins and cash flow from operations to reduce Acquisition indebtedness
and did not anticipate long-term losses or indicate an inability to recover the
value of goodwill. Due to persistent competitive pressures and a shift in the
customer mix to larger volume, lower margin customers, gross profit margins have
declined from 7.10% in fiscal 1989 to 5.63% in fiscal 1993 and 5.32% for the
nine months ended June 30, 1994, resulting in: operating results which are
substantially below the projections made at the time of the Acquisition; an
increase in Distribution's indebtedness; and an accumulated deficit in
Distribution's retained earnings at June 30, 1994 before the goodwill write-off
of $126.4 million.
During the period since the Acquisition, the Company has been affected by price
competition for market share within the industry, health care industry
consolidation and the impact of group purchasing organizations, managed care and
health care reform on drug prices. As a result of the negative impact of these
factors to date, and the Company's expectation that such factors will continue
to negatively impact operating results into the foreseeable future, the Company
initiated a detailed evaluation of the long-term expected effects of these
factors on the ability to recover the recorded value of goodwill over its
remaining estimated life. Based on current industry trends, interest rate
trends and the health care reform environment, in the third quarter of fiscal
1994, the Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
has revised its operating projections and has concluded that the projected
operating results would not support the future recovery of the remaining
goodwill balance.
The methodology employed to assess the recoverability of the Company's goodwill
was to project results of operations forward 36 years, which approximates the
remaining amortization period of the goodwill balance at June 30, 1994. The
Company then evaluated the recoverability of goodwill on the basis of this
projection of future operations.
The Company's projection assumes that, based on current industry conditions and
competitive pressures, future revenue growth will approximate 12.6% in the near-
term, gradually declining to approximately 5% over the longer-term. These
assumptions reflect expected benefits in the near-term from continued industry
consolidation, and an expectation that manufacturers will continue to increase
their reliance on wholesalers in their own cost control measures in the face of
healthcare reform. Over the next five to ten year period, growth in revenue is
expected to moderate as the industry consolidation trend is completed, and over
the long-term (next twenty years), stable growth of 5% is assumed. The gross
profit percentage is projected to gradually decline over the projected period
from the current rate of 5.32% to 3.60% in the fiscal year 2000 and to 2.68% in
the longer term. The short-term gross profit declines reflect the impact of the
worsened trends in 1994 caused by consolidation of certain major competitors and
deteriorated gross profit margins from existing contracts with certain group
purchasing organizations. The long-term decline in gross profit reflects the
Company's belief that continued industry wide competitive pricing pressures will
drive margins down, as the consolidated industry attempts to maintain market
share. Operating expenses are projected to increase 6% per year in the near
term and 5% per year in the longer-term principally reflecting the Company's
expectations regarding inflation. Working capital levels (as a percentage of
revenues) are projected to improve as the Company aggressively manages its
investment in receivables and inventory over the projected period. For purposes
of the projection, the Company has assumed that it will be able to refinance its
current revolving credit facility when it expires in 1996. For purposes of the
projection, the Company has assumed that it will be able to increase its
variable rate borrowings to finance increasing working capital and interest
payment requirements. In order to meet the working capital and interest payment
requirements projected in fiscal year 2000, the revolving credit facility will
have to be increased to $460 million. Interest rates on the variable rate
revolving credit facility were assumed to increase to 9.75% to reflect current
expectations of future short-term borrowing rates. The projection also
indicates that cash flow from operations will not be sufficient to satisfy
maturities of the Company's and Distribution's fixed rate debt obligations,
which consist of the 14 1/2% senior subordinated notes due in fiscal 1998 and
fiscal 1999 and the 11 1/4% senior debentures due in fiscal 2005. The
projection assumes that these fixed rate debt obligations will be refinanced at
the time of the scheduled maturities at identical interest rates. Management
believes that unless the Company is able to develop successful strategic,
operating, or
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
financing initiatives which would change these assumptions, the projected future
operating results based on these assumptions is the best estimate of the
Company's projected performance given the Company's existing high leverage and
industry trends.
The projection reflects significant cumulative losses indicating that the
carrying value of goodwill is not recoverable. Accordingly, the Company wrote
off its remaining goodwill balance of $179.8 million in the third quarter of
fiscal 1994. More importantly, while the Company believes the reliability of
any projection over such an extended period is highly uncertain, the projection
also indicates that the Company's long-term viability will require modification
of its current capital structure to reduce its indebtedness and increase its
equity in the near to mid-term future. While the projection indicates that in
fiscal 1998 cash flow from operations will not be sufficient to satisfy required
interest and principal payments on its current debt obligations, the Company
believes and the projection indicates, that cash flow generated from operations
in the near-term (fiscal years 1994 through 1997) is sufficient to service its
current debt obligations. No assurance can be given that the Company will be
successful in efforts to restructure or recapitalize in order to be able to
operate in a profitable manner for the long-term.
PART II. OTHER INFORMATION
- - ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 31, 1994 at 10:00 a.m, the Company's annual meeting of
stockholders was held at the Company's corporate offices in Malvern,
Pennsylvania, to amend the Certificate of Incorporation to change the
name of the corporation to AmeriSource Corporation and elect the
following directors: John F. McNamara, Bruce C. Bruckmann, Lawrence C.
Karlson, Harold O. Rosser II, George Strong and Barton J. Winokur. A
total of 1,000 votes were cast to approve the amendment of the
Certificate of Incorporation and for each of the directors named above.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: No exhibits are filed as part of this report.
--------
(b) Reports on Form 8-K: No reports on Form 8-K were filed
-------------------
during the quarter ended June 30, 1994.
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 CORPORATION
/s/ John F. McNamara
----------------------------
John F. McNamara
Chairman, President and
Chief Executive Officer
(Principal Financial Officer)
Date: August 10, 1994 /s/ John A. Kurcik
----------------------------
John A. Kurcik
Vice President, Controller
(Principal Accounting Officer)