UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION REGISTRANT, STATE OF INCORPORATION IRS EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
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0-13813 AmeriSource Corporation 23-2353106
(a Delaware Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 296-4480
33-27835-01 AmeriSource Distribution Corporation 23-2546940
(a Delaware Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 296-4480
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
AMERISOURCE CORPORATION: NONE
AMERISOURCE DISTRIBUTION
CORPORATION: NONE
AMERISOURCE CORPORATION: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
AMERISOURCE DISTRIBUTION
CORPORATION: NONE
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Non-affiliates of AmeriSource Distribution Corporation, as of December 1, 1994,
held 7,000 shares of voting stock. The original purchase price was $1.00 per
share, after giving effect to a stock split, on September 14, 1989. There is no
established public trading market for the voting stock of AmeriSource
Distribution Corporation. There is no voting stock of AmeriSource Corporation
held by non-affiliates of AmeriSource Corporation.
The number of shares of common stock of AmeriSource Corporation outstanding as
of December 1, 1994 was 1,000. The number of shares of common stock of
AmeriSource Distribution Corporation outstanding as of December 1, 1994 was:
Class A--160,512.5; Class B--3,854,162.5; Class C--500,000.
AMERISOURCE CORPORATION
AMERISOURCE DISTRIBUTION CORPORATION
1994 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 10
Item 3. Legal Proceedings..................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Financial Data............................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
Item 8. Financial Statements and Supplementary Data........................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 64
PART III
Item 10. Directors and Executive Officers of the Registrants................................... 64
Item 11. Executive Compensation................................................................ 66
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 72
Item 13. Certain Relationships and Related Transactions........................................ 73
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 74
PART I
ITEM 1. BUSINESS
AmeriSource Distribution Corporation, formerly named Alco Health Distribution
Corporation, (the "Company"), through its direct wholly-owned subsidiary
AmeriSource Corporation, formerly named Alco Health Services Corporation
("AmeriSource ") is one of the five largest, full-service drug wholesalers in
the United States, currently operating 16 full-service drug wholesale
distribution facilities and one specialty products distribution facility.
Approximately 90% of fiscal 1994 revenues of $4.3 billion was attributable to
sales of ethical pharmaceuticals. The remainder was comprised of sales of
health and personal care products, cosmetics and fragrances, home health care
supplies and general merchandise. The Company services, often on a daily basis,
over 16,000 customers throughout the United States including hospitals,
independent community pharmacies, chain drug stores, nursing homes, clinics and
others. No single customer accounted for more than 10% of the Company's
revenues during fiscal 1994.
The Company has benefited from the dramatic growth of the full-service drug
wholesale industry in the United States. Industry sales grew at a compound rate
of approximately 14%, from $10.2 billion in 1982 to $47.5 billion in 1993. As
both manufacturers and customers increased their reliance on drug wholesalers
in order to improve distribution and inventory efficiencies, the percentage of
total pharmaceutical sales through wholesale drug distributors increased from
approximately 59% in 1981 to approximately 75.5% in 1992 and is projected to
increase to 85% by the year 2000. In addition to this increased reliance on
distributors, sales of pharmaceuticals have also increased due to the aging of
the population, the use of new and more expensive pharmaceuticals, and the use
of outpatient drug therapies instead of extended, expensive hospital stays.
The Company's business strategy is: (i) to increase its market share in
current customer segments including hospitals and managed care providers; (ii)
to improve operating efficiencies through additional facility consolidations
and enhancements of management information systems; (iii) to target growth
opportunities by pursuing new types of customers (including the Veterans'
Administration and other governmental entities) and new facility locations
(such as the facilities the Company recently opened in Dallas, Texas,
Springfield, Massachusetts and Portland, Oregon); and (iv) to improve working
capital and asset management.
The Company's operating strategy is to maintain its long-standing structure
as an organization of decentralized operating units. This structure provides
local management with the discretion to set operating policies and to respond
to customers' needs quickly and efficiently. In addition, the Company will
continue to offer its customers services that assist in pricing and inventory
management, and will maintain an above-industry-average number of inventory
items or stock keeping units ("SKUs") to facilitate a high order fill-rate and
faster product delivery.
Over the past five years, the Company has focused on improving operating
efficiencies. The Company undertook an extensive facility consolidation
program, which reduced the total number of facilities from 31 in fiscal 1989 to
17 (including the three new facilities) today, in order to reduce operating
expenses and working capital requirements, and it substantially upgraded its
regional management information systems. As a result of the consolidation
program, since fiscal 1989 the Company significantly increased revenues per
facility and reduced, as a percentage of revenues, operating expenses and its
investment in working capital. The Company has increased revenues per facility
from $91.9 million in fiscal 1989 to $287 million in fiscal 1994, while
reducing operating expenses as a percentage of revenues from 5.0% in fiscal
1989 to 3.4% in fiscal 1994. The Company believes its revenues per facility is
among the highest, and its operating expenses, as a percentage of revenues, is
among the lowest, in the drug wholesale industry.
The outstanding common stock of the Company is owned by 399 Venture Partners
Inc. ("VPI"), certain management employees (the "Management Investors"),
current and former directors and certain others, including purchasers of debt
incurred to finance the Acquisition (as defined herein). The Company was
incorporated in Delaware in November 1988. AmeriSource was incorporated in
Delaware in June 1985. The address of the principal executive office of the
Company (also defined herein as "Distribution") and AmeriSource is P.O. Box
959, Valley Forge, Pennsylvania 19482, and their telephone number is
(610) 296-4480.
1
INDUSTRY OVERVIEW
The Company has benefited from the dramatic growth of the full-service drug
wholesale industry in the United States. Industry sales grew at a compound rate
of approximately 14%, from $10.2 billion in 1982 to $47.5 billion in 1993. The
factors causing this growth, and the sources of future growth for the industry,
include (i) favorable demographics, (ii) the expanding role of the wholesaler,
(iii) the introduction of new and more expensive pharmaceuticals, (iv) the use
of more outpatient drug therapies instead of extended, expensive hospital stays
or surgical procedures and (v) rising pharmaceutical prices that exceeds the
Consumer Price Index.
Favorable Demographics. The number of individuals over age 65 in the United
States has grown 23% from approximately 26 million in 1980 to approximately 32
million in 1990 and is projected to increase an additional 9% to more than 35
million by the year 2000. This age group suffers from a greater incidence of
chronic illnesses and disabilities than the rest of the population and is
estimated to account for approximately two-thirds of total health care
expenditures in the United States.
Expanding Role of Wholesale Drug Distributors. Over the past decade,
manufacturers of pharmaceuticals have significantly increased the distribution
of their products through wholesalers as the cost and complexity of maintaining
inventories and arranging for delivery of pharmaceutical products has risen.
The percentage of total pharmaceutical sales through wholesale drug
distributors increased from approximately 59% in 1981 to approximately 75.5% in
1992 and is projected to increase to 85% by the year 2000. By focusing on order
processing, inventory management and product delivery, wholesale drug
distributors have been able to service customers more efficiently than
pharmaceutical manufacturers. This allows manufacturers to allocate their
resources to research and development, manufacturing and marketing their
products. Customers have benefitted from this shift by having a single source
of supply for a full line of pharmaceutical products as well as lower inventory
costs, more timely and efficient delivery, and improved purchasing and
inventory information. Certain customers (particularly independent drug stores,
small chains and hospitals) have also benefitted from the range of value-added
programs developed by wholesale drug distributors which are targeted to the
specific needs of these customers.
Introduction of New Pharmaceuticals. Advances in traditional pharmaceutical
developments as well as the advent of new technologies, such as biotech drugs,
have generated new compounds that are more effective in treating diseases.
These developments have been responsible for significant increases in
pharmaceutical sales. The Company believes that ongoing research and
development expenditures by the leading pharmaceutical manufacturers will
contribute to continued growth of the industry.
Cost Containment Efforts. In response to rapidly rising health care costs,
governmental and private payors have adopted cost containment measures which
encourage, where appropriate, the use of efficient drug therapies to prevent or
treat diseases instead of expensive prolonged hospital stays and surgical
procedures. While national attention has been focused on the dramatic increase
in overall health care costs, the Company believes drug therapy has had a
beneficial impact on overall health care costs by reducing expensive surgeries
and hospital stays. Pharmaceuticals account for less than 8% of healthcare
costs, and manufacturers' emphasis on research and development is expected to
continue the introduction of cost effective drug therapies.
Pharmaceutical Manufacturing Price Increases. According to industry data,
between 1988 and 1991 the Consumer Price Index for prescription products grew
at a compound annual rate of 8.8%, outpacing the 4% annual rate for the overall
Consumer Price Index. The Company believes that this increase has been due in
large part to the relatively inelastic demand in the face of higher prices
charged for patented drugs (as manufacturers have attempted to recoup costs
associated with the development, clinical testing and Food and Drug
Administration ("FDA") approval of new products). The Company believes that
pharmaceutical price increases will continue to exceed increases in the overall
Consumer Price Index, although not at the rates experienced historically.
At the same time that sales through the wholesale drug industry have grown,
the number of pharmaceutical wholesalers has decreased 59%, from 145 in 1980 to
60 as of December 31, 1993. In addition,
2
as a result of this concentration, the top ten wholesalers in 1993 distributed
approximately 88% of the industry's annual volume. Industry analysts expect
this consolidation trend to continue during the 1990s, with the industry's
largest companies increasing their percentage of total industry sales.
BUSINESS STRATEGY
The Company's business strategy is: (i) to increase its market share in
current customer segments including hospitals and managed care providers; (ii)
to improve operating efficiencies through additional facility consolidations
and enhancements of management information systems; (iii) to target growth
opportunities by pursuing new types of customers and new facility locations;
and (iv) to improve working capital and asset management.
Increase Market Share in Existing Markets. The Company believes that its
automated, high volume distribution facilities enable it to achieve an
economies of scale advantage and to extend its business in these current
markets. The Company intends to expand in the markets it currently serves by
focusing on existing customer segments, such as hospitals and managed care
providers, that are not fully serviced in its markets. The Company believes it
is one of the leaders in serving the hospital market and believes this market
offers substantial future growth opportunities. The Company believes that its
increased sales in the hospital market are in part responsible for the
improvements in the operating efficiencies and working capital management
discussed below.
Improve Operating Efficiencies. Over the past five years, the Company has
focused on improving operating efficiencies through consolidation of
facilities, reducing operating expenses as a percentage of revenues, lowering
investment in working capital as a percentage of revenues, improving regional
management information systems and divesting non-core businesses. Since fiscal
1989, the consolidation program has reduced the total number of facilities
within the Company from 31 to 17 (including the three newly opened facilities)
as of December 1, 1994. In conjunction with this reduction of facilities, the
Company continued to increase its revenues in each fiscal year since 1989.
During fiscal 1994, the Company's average revenue per facility was
approximately $287 million, compared to the calendar year 1993 industry average
of approximately $172.8 million. In addition, operating expenses as a
percentage of revenues were reduced from 5.0% in fiscal 1989 to 3.4% for fiscal
1994. In the opinion of management, the Company's revenue per facility is among
the highest, and the Company's operating expenses as a percentage of revenues
are among the lowest, in the drug wholesale industry. The Company expects
additional savings, as a percentage of revenues, to result from consolidations
completed within the past twelve months. Additional consolidation opportunities
are under review for implementation during the next two to three years.
Target Growth Opportunities. The Company plans to pursue new types of
customers, including government entities. Since 1993, the Company has been
awarded eleven prime vendor contracts by the Veterans' Administration to
provide pharmaceuticals to 184, or 80%, of the Veterans' Administration
facilities nationwide. In addition, the Company has been awarded contracts to
deliver pharmaceuticals to certain Department of Defense, Indian Health Service
and Bureau of Prisons facilities. These facilities were formerly serviced
directly by pharmaceutical manufacturers. By pursuing these opportunities, the
Company believes that expansion opportunities may become available within or
adjacent to markets currently served by the Company. The Company may take
advantage of these situations by opening new distribution facilities such as
the facilities the Company recently opened in Dallas, Texas, Springfield,
Massachusetts and Portland, Oregon. In addition, the Company believes that
industry consolidation pressure will continue, and that opportunities may arise
to make selected acquisitions of existing facilities. These expansion
opportunities could be used to fill gaps within the Company's current service
area or to expand geographically.
Improve Working Capital Management. Over the last five years, Amerisource has
reduced its overall investment in net working capital through facility
consolidations, by eliminating duplicate inventory investments, by limiting its
investment in inventory in advance of manufacturers' price increases, through
the use of computer-based purchasing systems, and through incentivizing
management to maximize return on net assets employed. As a result, from
September 30, 1989 to September 30, 1994, net working capital (on a FIFO basis)
as a percentage of prior twelve month's revenues decreased from 11% to 6.1%,
respectively.
3
OPERATING STRATEGY
The Company's operating strategy is: (i) to maintain its long-standing
structure as an organization of decentralized operating units; (ii) to continue
to offer its customers services that assist in pricing and inventory management
and (iii) to maintain an above-industry-average number of inventory items or
SKUs to facilitate a high order fill-rate and faster product delivery.
Decentralized Structure. The Company intends to maintain its long-standing
structure as an organization of decentralized operating units. This structure
provides local management with the discretion to set operating policies and to
respond to customers' needs quickly and efficiently. Additionally, management
of each operating unit has fiscal responsibility for its unit, and the
operating unit's financial results affect management compensation. The Company
believes its decentralized operating philosophy has facilitated in attracting
and retaining experienced management at each of its facilities.
Customized Services. The Company believes that its broad range of services
assists in attracting new customers and developing customer loyalty. The
Company is continually enhancing its services and packaging these services into
programs designed to enable customers to improve sales and compete more
effectively. The Company's Family Pharmacy (R) program, for example, provides
independent pharmacies with many of the same services that chain drugstores
have, including merchandising and pricing, shelf labels, store operations
manuals, advertising and promotional campaigns, and monthly newsletters. The
Company also distributes private label vitamins and health and beauty aids to
member pharmacies under the Family Pharmacy (R) label, providing the retailer
with higher profit margins. Under the Company's Prime Vendor program for
hospitals, the Company services hospitals as a prime vendor distributor under
long-term supply contracts, and the Company's PrimeNet (R) program allows
hospital pharmacies to purchase as a group and to participate in the economies
of collective purchasing. In addition, the Company offers Income RePax, Income
Pax, Income Rx and Partner Pak programs to all of its customers. Under the
Income RePax program, the Company purchases bulk quantities of pharmaceuticals
from the manufacturer and repackages them into smaller dispensing units,
allowing pharmacies to participate in bulk discount purchasing. The Company's
Income Pax program provides customers with monthly promotional calendars
highlighting vendor promotional programs available through the Company, the
Income Rx program provides a wide range of reasonably priced generic
pharmaceuticals to the Company's retail pharmacy customers and the Partner Pak
program provides a quarterly promotional directory to the Company's pharmacy
customers.
Single Source Provider. The Company aims to become the single supplier of
pharmaceuticals to each of its customers. The Company's operating units offer
on average approximately 27,600 SKUs, higher than the 1993 industry average of
22,243. The Company's higher SKU count allows it to meet the needs of customers
who require a broad variety of products, as demonstrated by the Company's
consistently high order fill-rate, and positions it to pursue any customer
segment in the market. The Company has managed to maintain its higher SKU count
and high order fill-rates while maintaining an inventory turn ratio above the
industry average.
BUSINESS OPERATIONS
General. The Company currently operates 16 full-service drug wholesale
distribution facilities and one specialty products distribution facility,
organized into two groups, Eastern and Central, and seven regions across the
United States. Several operating units of the Company have over 100 years of
history in the business and are among the nation's first drug distribution
houses. Unlike its more centralized competitors, the Company is structured as
an organization of locally managed operating units. Each operating unit has
retained its historic identity in its local market but operates under the
AmeriSource name. Management of each operating unit has fiscal responsibility
for its unit, and each operating unit has an established executive, sales and
operations staff. The operating unit's results, including earnings and asset
management goals, have
4
a direct impact on management compensation. The operating units utilize the
Company's corporate staff for marketing, financial, legal and executive
management resources and corporate coordination of asset and working capital
management.
Customers and Markets. The Company's customer base is diverse, consisting of
over 16,000 customers, including hospitals, independent community pharmacies
and chain drug stores. The table below summarizes how the Company's customer
sales mix has changed over time.
FISCAL YEAR ENDED
SEPTEMBER 30,
----------------------------------------------
1991 1992 1993 1994
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Hospitals....................... $1,001 35% $1,253 38% $1,554 42% $1,968 46%
Independents(*)................. 1,203 43 1,356 41 1,397 37 1,450 34
Chains.......................... 623 22 721 21 768 21 884 20
------ --- ------ --- ------ --- ------ ---
Total......................... $2,827 100% $3,330 100% $3,719 100% $4,302 100%
====== === ====== === ====== === ====== ===
- - - --------
(*) Includes nursing homes and clinics.
No single customer represented more than 10% of the Company's total business
during fiscal 1994. The Company's top ten customers represented approximately
41% of total business during fiscal 1994. The Company believes it is less
dependent on any single customer than its four largest competitors. A profile
of each customer segment follows:
. Hospitals. The Company believes it is one of the leaders in serving the
hospital market segment, which is currently the fastest growing customer
segment in the industry. Because hospitals purchase large volumes of high
priced, easily handled pharmaceuticals, the Company benefits from quick
turnover of both inventory and receivables and lower than average
operating expenses. The contribution to overall AmeriSource sales from
the hospital segment increased from 35% in fiscal 1991 to 46% in fiscal
1994, growing at a compounded rate of 25.3% over this period.
. Independents. Independent community pharmacy owners represent the largest
segment of the industry and provide the greatest opportunity for the
Company's value-added services. In total, the Company currently has
approximately 7,000 independent customers. The Company's sales to
independent customers have risen at a compounded rate of 6.4% over the
three-year period from fiscal 1991 through fiscal 1994 due to the general
growth of this customer segment and to the success of the Company's
customized marketing programs, such as its Family Pharmacy(R) program.
. Chains. This category includes chain drug stores, food stores with
pharmacies and the deep discount drug store segment. The Company's sales
to chains have risen at a compounded rate of 12.4% over the three-year
period from fiscal 1991 through fiscal 1994. This growth rate reflects
the discontinuance of certain chain accounts, at the Company's election,
because of their minimal profit contribution, offset by the Company
entering into new contracts with several drug store chains. The Company
plans to target the smaller chain business for which the Company can
provide higher margin value-added services.
Products and Services. The Company provides services which improve operating
efficiencies of both its customers and suppliers. In addition, the Company
strives to be the primary source of supply for its customers. To achieve these
objectives, the Company is continually enhancing its services and packaging
these services into programs designed to address the special needs of its
various customer segments. These programs include a variety of management,
merchandising and information processing services and programs, that enable
customers to improve sales, operate more efficiently and compete more
effectively.
5
The proportion of the Company's sales attributable to pharmaceutical products
is approximately 90% of sales in fiscal 1994. The Company believes this is due
to the increased number of pharmaceutical SKUs, the higher average cost per SKU
of pharmaceutical products, and the increase in pharmaceutical-only hospital
business. The Company's operating units offer on average approximately 27,600
SKUs, higher than the calendar 1993 industry average of 22,243. The Company's
higher SKU count allows it to provide full service to accounts requiring a
broad variety of products, as demonstrated by the consistently high order fill-
rate, and positions it to pursue any customer segment in the market. Each
facility maintains an assortment of products suited to its local market
requirements.
As with the industry, the Company has increased sales of generic and multi-
source pharmaceuticals over the past five years. Revenues attributable to the
sale of generic and multi-source pharmaceuticals have increased to
approximately $200 million today, more than twice what they were three years
ago. These products generate higher gross profit margins for wholesalers than
branded pharmaceuticals. It is estimated that sales of these products will
double by 1996 due to the number of brands losing patent protection as well as
third party payors' continuing emphasis on cost containment.
The Company provides its customers with an electronic order entry system,
which permits a customer to transmit orders daily from its place of business
over regular telephone lines. Orders are transmitted to a regional computer
through a hand-held data terminal provided by the Company to the customer. The
computer automatically prepares invoices, case labels and customized price
stickers and shelf labels. It also assures rapid order processing by generating
picking lists and packing slips for Company employees. As a result, the
customer can achieve better inventory balance and reduced inventory investment.
As an additional benefit, the computer records the reduction in the Company's
inventory quantities and compares the reduced quantities to a predetermined
service level. If needed, a warehouse replenishment order is automatically
generated which in many cases can be communicated electronically to a
manufacturer's computer. As a result of electronic order entry, the costs of
receiving and processing orders have not increased as rapidly as sales volume.
During the past several years, virtually all orders were generated by customers
using electronic order entry. The Company believes its electronic order entry
system strengthens relationships with its customers and facilitates providing
value-added services to customers as described below. The Company anticipates
developing additional customized systems in the future. Basic programs are
developed internally by the Company's in-house MIS professionals. These
programs are tested on a small scale with certain of the Company's customers
and then are introduced on a large scale once they have been tailored to the
customers' needs.
For its hospital and managed care customers, the Company has introduced
ECHO(R)--a software program that provides ordering and inventory management
assistance for pharmaceutical products. The ECHO(R) system, which is currently
utilized by approximately 2,000 customers, is an interactive computerized
method for reviewing pricing history, placing orders and tracing purchasing
effectiveness. By creating a master file for each customer, the system
automatically updates pricing data, monitors contract compliance, provides
generic and therapeutic equivalent alternative purchase information and
suggests order quantity information based on the customer's historical
purchasing.
The Company offers Prime Vendor and PrimeNet(R) programs to its hospital
customers. Under the Prime Vendor program, the Company services hospitals as a
prime vendor distributor under long-term supply contracts and provides its
hospital customers with specially designed inventory reports, 24 hour emergency
delivery services, and lower inventory management costs. Under the PrimeNet(R)
program, the Company serves as the purchasing agent and distribution center for
not-for-profit member hospitals, allowing them to participate in the economies
of collective purchasing.
The Family Pharmacy(R) program provides independent and small chain community
pharmacy customers with many of the same services that chain drugstore
competitors receive from their headquarter organizations. These services
include merchandising and pricing information, shelf labels and plan-o-grams,
readily identifiable logos, signs and store decor, store operations manuals,
advertising and promotional
6
campaigns, and monthly newsletters. The Company also distributes private label
vitamins and health and beauty aids under the Family Pharmacy(R) label, which
provides higher profit margins both to the Company and the retailer. The Family
Pharmacy(R) program, initiated in 1982, had approximately 1,900 member stores
as of September 30, 1994, and in effect constitutes America's fourth largest
drug chain.
For all customer segments, the Company offers its Income RePax, Income Pax,
Income Rx and Partner Pak programs. The Income RePax drug repackaging program,
through which the Company purchases bulk quantities of certain pharmaceuticals
and repackages them into smaller dispensing units, enables pharmacists to
market pharmaceuticals at prices competitive with those of national drug chain
operations. The Company's repackaging facility, located in Louisville,
Kentucky, is licensed by the FDA and maintains rigid quality control standards.
Under the Income Pax program, the Company provides a monthly promotional
calendar consisting of special promotional programs from nationally recognized
suppliers. The Company's Income Rx generic program provides reasonably priced
generic drugs to chain retail and hospital pharmacists. The Company reviews the
market for generic values and incorporates them into the Income Rx program,
relieving the pharmacist from the task of searching the market for the best
value available. The Partner Pak program provides a quarterly promotional
directory to approximately 4,500 of the Company's pharmacy customers. The
directory chronicles current information relating to the Income Repax, Income
Pax, Income Rx and Family Pharmacy(R) programs, highlights special purchase
opportunities for selected products and supplies retail customers with
advertising materials for use in promoting the products and their pharmacies.
Sales and Marketing. The Company has an organization of over 200 sales
professionals. A specially trained group of telemarketing/customer service
representatives makes regular contact with customers regarding special offers.
Within the sales organization, there is also a field force of 50 hospital
representatives, including six regional hospital directors. The Company's
corporate marketing department works with manufacturer suppliers to develop
national programs and promotions. Tailored to specific customer classes, these
programs can be further customized at the operating unit level to adapt to
local market conditions. The marketing department gathers and disseminates
information to each operating unit's purchasing and sales organization in order
to enhance their competitive effectiveness.
Operations. Each of the Company's operating units carries an inventory line
necessary for its local market. The efficient distribution of small orders is
possible through the extensive use of computerization and modern warehouse
techniques. These include computerized warehouse product location, routing and
inventory replenishment systems, gravity-flow racking, mechanized order
selection and efficient truck loading and routing. The Company delivers its
products on a scheduled basis, including on a daily basis where required. It
utilizes a fleet of owned and leased vans and trucks and contract carriers.
Night picking operations in its distribution facilities have further reduced
delivery time. According to customer need, orders can be delivered in fewer
than 24 hours.
The Company's 16 full service distribution facilities and one specialty
products facility are organized into seven regions throughout the United
States. The following table presents certain information regarding the
Company's operating units.
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1990 1991 1992 1993 1994
--------- --------- --------- --------- ----------
(DOLLARS IN MILLIONS; SQUARE FEET IN THOUSANDS)
Revenue..................... $ 2,564.0 $ 2,827.2 $ 3,329.9 $ 3,719.0 $ 4,301.8
Number of facilities........ 19 19 18 16 15
Average revenue/facility.... $ 134.9 $ 148.8 $ 185.0 $ 232.4 $ 286.8
Total square feet........... 1,420.1 1,476.5 1,486.0 1,444.3 1,394.1
Average revenue/square foot. $ 1,806.0 $ 1,915.0 $ 2,241.0 $ 2,575.0 $ 3,086. 0
7
Beginning in fiscal 1989, the Company undertook an extensive consolidation
program, which reduced the total number of facilities within the Company from
31 to 17 as of December 1, 1994. During the course of this consolidation
program, the Company continued to increase its revenues in each fiscal year.
Today, the Company operates some of the largest and most efficient warehouse
facilities in the industry. During fiscal 1994, the Company's average revenue
per facility was approximately $287 million, compared to the calendar 1993
industry average of $172.8 million. Five facilities have annual volume of over
$400 million and an additional seven facilities have annual volume in excess of
$175 million, which provides the Company significant leverage of fixed overhead
and other costs. Average revenue per square foot for fiscal 1993 was $2,575,
which was higher than the 1993 industry average of $2,256. For fiscal 1994, the
Company's average revenue per square foot was $3,086.
Purchasing and Suppliers. Purchasing is centralized on a regional basis in
five major locations. Computerized inventory management systems and computer
linkups with many of its suppliers enable the Company to purchase and manage
its inventories more efficiently. This, in turn, enables the Company to provide
just-in-time inventory management to customers. Computerized inventory
management helps the Company minimize obsolete inventory and maximize inventory
return-on-investment.
The Company purchases pharmaceutical and other products from a number of
manufacturers, none of which account for more than approximately 7% of its
purchases. The five largest suppliers in fiscal 1994 accounted for
approximately 27% of total purchases. Historically, the Company has not
experienced difficulty in purchasing desired products from suppliers. The loss
of a contract with a principal supplier could adversely affect the Company's
business because many suppliers are the sole manufacturers of certain
pharmaceuticals under their exclusive patents. To continue serving its
customers, the Company would have to purchase these patented pharmaceuticals
from other distributors on less favorable terms. The Company has agreements
with many of its suppliers which generally require the Company to maintain an
adequate quantity of a supplier's products in inventory. The majority of
contracts with suppliers are terminable upon 30 days notice by either party.
The Company believes that its relationships with its suppliers are good.
The Company aims to become the single supplier of pharmaceuticals to each of
its customers. The Company's operating units offer on average approximately
27,600 SKUs, higher than the 1993 industry average of 22,243. The Company's
higher SKU count allows it to meet the needs of customers who require a broad
variety of products, as demonstrated by the Company's consistently high order
fill-rate and positions it to pursue any customer segment in the market. The
Company has managed to maintain its highest SKU count and high order fill-rates
while maintaining an inventory turn ratio above the industry average.
While each facility on average carries a broad range of items from
approximately 800 suppliers, purchases are concentrated among the top 25
manufacturers and about 250 items (SKUs). It is estimated that products from
these 25 manufacturers account for approximately half the total annual sales
volume of the Company.
Management Information Systems. Management information systems serve several
important functions in the Company's business. Due to the large volume of
transactions processed, the quality and reliability of the internal management
information systems and the accuracy and timeliness of the financial controls
they produce are important for maximizing profitability. The Company's
management information systems also provide for, among other things, electronic
order entry by customers, invoice preparation and purchasing and inventory
tracking. In addition, the Company's management information systems form the
basis for a number of the value-added services the Company provides to its
customers, including marketing data, inventory replenishment, single-source
billing, computer price updates and price labels.
Each region is responsible for maintaining its own management information
system. All of the Company's regions utilize IBM computer equipment and
complementary software packages. The Company believes that its management
information systems are capable of serving the Company's needs for the
foreseeable future. The Company has instituted programs to centralize selected
management information
8
system functions, such as purchasing in advance of manufacturers' price
increases and inventory level monitoring. In addition, during fiscal 1993, the
Company installed a corporate clearinghouse computer that will act as a central
depository for information on sales, products, vendors, customers and
contracts. This has enhanced the information the Company provides to its large
hospital group and chain customers, which span regional boundaries, and has
increased the quality of information available to corporate and regional
management. The Company believes that the clearinghouse computer has increased
productivity by reducing the cost of making changes to application programs
common to each region, and will enable the Company to centralize selected
administrative functions that are currently performed regionally.
COMPETITION
The Company engages in the wholesale distribution of pharmaceuticals, health
and beauty aids and other products in a highly competitive environment. The
Company competes with numerous national and regional distributors, including
McKesson Corporation, Bergen Brunswig Corporation, Cardinal Health, Inc. and
FoxMeyer Corporation. In addition, the Company competes with local
distributors, direct-selling manufacturers and other specialty distributors.
Competitive factors include price, service and delivery, credit terms, breadth
of product line, customer support and marketing programs.
EMPLOYEES
As of September 30, 1994, the Company employed approximately 2,370 persons,
of which approximately 2,154 were full-time employees. Approximately 11% of
full and part-time employees are covered by collective bargaining agreements.
The Company believes that its relationship with its employees is good.
REGULATORY MATTERS
The United States Drug Enforcement Administration, the FDA and various state
boards of pharmacy regulate the distribution of pharmaceutical products and
controlled substances, requiring wholesale distributors of these substances to
register for permits and to meet various security and operating standards. As a
wholesale distributor of pharmaceuticals and certain medical/surgical products,
the Company is subject to these regulations. The Company has received all
necessary regulatory approvals and believes that it is in substantial
compliance with all applicable wholesale distribution requirements.
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 soil 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
analysis was prepared by outside consultants 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 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 that has been
recorded. The accrued liability, which is reflected in other long-term
liabilities on the Company's 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 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.
9
ITEM 2. PROPERTIES
As of December 1, 1994, the Company conducted its business from office and
operating unit facilities at 26 locations throughout the United States. In the
aggregate, the Company's operating units occupy approximately 1.5 million
square feet of office and warehouse space, of which approximately 754,000
square feet is owned and the balance is leased under lease agreements with
expiration dates ranging from 1995 to 2009. The facilities range in size from
approximately 3,900 square feet to 151,000 square feet. Leased facilities are
located in the following states: Kentucky, Massachusetts, Minnesota, New
Jersey, Ohio, Oregon, Pennsylvania, Tennessee and Texas. Owned facilities are
located in the following states: Georgia, Indiana, Kentucky, Maryland,
Missouri, Ohio, Pennsylvania, Tennessee and Virginia.
ITEM 3. LEGAL PROCEEDINGS
AmeriSource has been named as a defendant in several lawsuits based upon
alleged injuries and deaths attributable to the product L-Tryptophan.
AmeriSource did not manufacture L-Tryptophan; however, prior to an FDA recall,
AmeriSource did distribute products containing L-Tryptophan from several of its
vendors. The Company believes that AmeriSource 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 AmeriSource may be named in the future. To date, the indemnity to
AmeriSource 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.
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. Effective October 26, 1994, the Company entered into a Judgment
Sharing Agreement with other wholesaler and pharmaceutical manufacturer
defendants. Under the Judgment 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 judgment 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
judgment or one million dollars. In addition, the Company has released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. The Judgment Sharing Agreement
covers the federal court litigation as well as the cases which have been filed
in various state courts. 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.
AmeriSource is a party to various lawsuits arising in the ordinary course of
business. AmeriSource , however, does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse effect
on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(No response to this Item is required.)
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Distribution is the only record holder of AmeriSource's common stock.
10
There is no established public trading market for Distribution's Class A
Common Stock and Class B Common Stock. As of December 15, 1994, there were 24
record holders of Distribution's Class A Common Stock and 11 record holders of
Distribution's Class B Common Stock.
Distribution's Class C Common Stock was held by approximately 12 holders of
record as of September 30, 1994. The Class C Common Stock trades on a limited
basis in the over-the-counter market, and information concerning the historical
trading prices for the Class C Common Stock is not published by nationally-
recognized independent sources.
AmeriSource has not paid any dividends to Distribution and no cash dividends
have been declared on any class of Distribution's common stock. Restrictions
contained in AmeriSource's and Distribution's financial arrangements currently
materially limit their ability to pay dividends. The credit agreement with
AmeriSource's senior lenders currently limits Distribution's ability to pay
dividends, and the credit agreement and the indentures for AmeriSource's 14
1/2% Senior Subordinated Notes due 1999 and 14 1/2% Senior Subordinated Notes
due 1999, Series A (collectively, the "Notes") allow AmeriSource to pay only
limited dividends to Distribution for specified purposes, such as to allow
Distribution to make payments with respect to certain specified indebtedness,
to pay expenses and to repurchase securities pursuant to the terms of certain
management investment and incentive plans. The indentures for the Notes, in
addition, allow AmeriSource to make dividend payments if certain financial
tests are met; however, AmeriSource does not currently meet these financial
tests. On December 13, 1994, notices for redemption of the Notes were mailed to
noteholders that specified a redemption date of January 12, 1995.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited
consolidated financial statements of AmeriSource and Distribution. This data
should be read in conjunction with the consolidated financial statements,
including the notes thereto, included elsewhere in this report.
AMERISOURCE
---------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- ------------- -------------
1994 1993 1992 1991 1990
------------- ------------- ------------- ------------- -------------
Revenues................ $4,301,832 $3,718,960 $3,329,909 $2,827,161 $2,564,008
Net Income (Loss)....... (207,728) 1,190 683 (14,532) (20,549)
Total Assets............ 705,955 862,814 848,687 782,357 756,894
Long-Term Debt.......... 343,562 420,111 492,640 479,616 458,656
Per Share (1)
- - - --------
(1) Income (loss) per share of AmeriSource is not presented, as all of
AmeriSource's common stock is owned by Distribution.
DISTRIBUTION
---------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- ------------- -------------
1994 1993 1992 1991 1990
------------- ------------- ------------- ------------- -------------
Revenues................ $4,301,832 $3,719,025 $3,329,909 $2,827,161 $2,564,008
Net Income (Loss)....... (207,671) (18,618) (6,476) (23,319) (29,489)
Total Assets............ 711,644 867,944 848,474 783,145 756,932
Long-Term Debt.......... 487,575 549,220 587,983 570,939 539,682
Per Share
Primary Earnings
(Loss)................ (41.53) (3.72) (1.30) (4.66) (5.90)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents a separate discussion and analysis of financial
condition and results of operations for AmeriSource Corporation, the operating
company, and for AmeriSource Distribution Corporation, the operating company
consolidated with its parent.
11
AMERISOURCE CORPORATION
The following discussion should be read in conjunction with the Consolidated
Financial Statements contained elsewhere herein.
RESULTS OF OPERATIONS
YEAR YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1992
------------- ------------- -------------
Revenues............................ $4,301,832 $3,718,960 $3,329,909
Cost of goods sold.................. 4,066,641 3,509,587 3,130,186
---------- ---------- ----------
Gross profit...................... 235,191 209,373 199,723
Operating expenses:
Selling and administrative........ 142,393 129,908 125,672
Environmental remediation......... 4,075
Depreciation...................... 6,640 5,809 5,384
Amortization of intangibles....... 4,147 5,467 5,549
Write-off of excess of cost over
net assets acquired.............. 179,824
---------- ---------- ----------
Operating income (loss)........... (101,888) 68,189 63,118
Interest expense--in cash......... 43,734 42,561 49,757
Amortization of deferred financing
costs............................ 3,539 3,862 4,004
Non-recurring charges............. 2,223 2,244
---------- ---------- ----------
Income (loss) before taxes,
extraordinary items and cumulative
effects of accounting changes...... (149,161) 19,543 7,113
Taxes on income..................... 23,080 12,953 6,649
---------- ---------- ----------
Income (loss) before extraordinary
items and cumulative effects of
accounting changes................. (172,241) 6,590 464
Extraordinary charge--early
retirement of debt, net of income
tax benefit........................ (442) (5,884)
Extraordinary credit--reduction of
income tax provision from
carryforward of prior year
operating losses................... 484 219
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)................. $ (207,728) $ 1,190 $ 683
========== ========== ==========
YEAR ENDED SEPTEMBER 30, 1994 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1993
Revenues of $4.3 billion for the fiscal year ended September 30, 1994
represented an increase of 15.7% over the amount reported for the fiscal year
ended September 30, 1993, reflecting real volume growth as well as the pass
through to customers of price increases from manufacturers. Approximately one-
tenth of the revenue increase resulted from higher selling prices. As compared
with the prior fiscal year, sales to hospitals grew by 27%, sales to chain drug
stores, excluding brokerage business, increased by 8% and sales to independent
drug store customers increased by 4%. During 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 of $235.2 million for 1994 increased by 12.3% over 1993,
primarily due to the increase in revenues. As a percentage of revenues, gross
profit declined to 5.47% in 1994 from 5.63% in 1993. The reduction in the gross
profit percentage resulted from continued industry price competition and
increased sales to larger volume, lower margin customers, such as hospitals.
12
Selling and administrative expenses for 1994 were $142.4 million compared to
$129.9 million for 1993, an increase of 9.6%. The cost increases reflect
inflationary increases and increases in warehouse and delivery expenses which
are variable with the level of sales volume. Continued emphasis on cost
containment programs as well as the economies associated with the significant
revenue growth, reduced overall selling and administrative expenses as a
percentage of revenues to 3.3% in 1994 from 3.5% in 1993.
Operating expenses in 1994 include a provision of $4.1 million to cover the
expected environmental remediation costs with respect to the Company's former
Charleston, South Carolina distribution center. In addition, 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.
Interest expense which is payable currently (cash interest), principally
related to the revolving credit facility and the senior subordinated notes, was
$43.7 million in 1994 as compared with $42.6 million in 1993, an increase of
2.8%. The increase 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 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 in 1994 includes $621,000 paid
to the holders of an aggregate of $165.7 million in principal amount of senior
subordinated notes (see Note 4 of "Notes to Consolidated Financial
Statements"). During 1994, the average outstanding debt level was $430 million
at an average interest rate of 10.0%. In 1993, the comparable average
outstanding debt level was $444 million at an average interest rate of 9.6%.
Interest expense in 1994 includes $3.5 million in amortization of financing
fees as compared with $3.9 million in 1993.
Income taxes provided have been determined as if the Company filed a tax
return on a separate entity basis. As noted below, the Company changed its
method of accounting for income taxes effective October 1, 1993. The
extraordinary charge of $679,000 in 1994, 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.
YEAR ENDED SEPTEMBER 30, 1993 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1992
Revenues for the fiscal year ended September 30, 1993 were $3.7 billion, an
increase of 11.7% over the $3.3 billion in revenues for 1992. The revenue
growth, which occurred for all customer groups, was attributable to the
addition of new accounts, increased sales to existing accounts through value
added services and price increases. Price increases accounted for approximately
one-fourth of the revenue increase in 1993. As compared with the prior fiscal
year, sales to hospitals increased by 24%, sales to independent drug store
13
customers increased by 3% and sales to chain stores grew by 7%. Sales to
hospitals accounted for 42% of total revenues in 1993, while sales to
independent drug stores represented 37% and sales to chain drug stores, 21% of
the total.
As a percentage of revenues, gross profit declined to 5.6% in 1993 from 6.0%
in 1992. The decline in 1993 resulted from: increased sales to large volume,
lower margin and lower-cost-to-service customers, principally hospitals; price
competition within the industry; and a reduction in inventory purchasing gains
associated with the decline in the rate and frequency of manufacturer price
increases.
Selling and administrative expenses for the year ended September 30, 1993
were $129.9 million, or 3.5% of revenues, compared to $125.7 million, or 3.8%
of revenues for the prior year. Selling and administrative expenses, which
increased by $4.2 million, or 3.4% from the prior year, reflect the economies
associated with the revenue growth and reductions due to cost containment
measures and productivity improvements. The expense percentage improvement in
1993 also reflects the partial benefits of two distribution facility
consolidations completed during the latter part of 1993. Expenses in 1993
include $1 million in costs incurred with respect to the two completed facility
consolidations as well as an additional consolidation which was begun in late
1993 and is expected to be completed during the first quarter of fiscal 1994.
As a result of the above, operating income increased 8.0%, or $5.1 million,
to $68.2 million for the fiscal year ended September 30, 1993 in comparison to
the prior year, while operating income as a percentage of revenues was 1.83% in
1993 versus 1.90% in 1992.
Interest expense which is payable currently (cash interest), principally
related to the revolving credit facility and the senior subordinated notes, was
$42.6 million in 1993 as compared with $49.8 million in 1992, a decrease of
14.5%. The decrease is attributable to reduced borrowings and lower average
interest rates. During 1993, the average outstanding debt level was $444
million at an average interest rate of 9.6%. In 1992, the comparable average
outstanding debt level was $480 million at an average interest rate of 10.3%.
Interest expense in 1993 includes $3.9 million in amortization of financing
fees as compared with $4.0 million in 1992.
The non-recurring charges in 1993 consist of $1,254,000 in losses on the
disposal of three warehouses and charges of $969,000 for the write-down to net
realizable value of two additional warehouses no longer in operation which are
designated for sale. The non-recurring charges in 1992 consist of a loss of
$287,000 incurred on the sale of a warehouse no longer in operation and the
write-off of $1,957,000 in professional fees incurred in connection with a
public offering attempted during 1992 which was later abandoned due to market
conditions.
Income tax expense has been determined as if the Company filed a tax return
on a separate entity basis. Income tax expense in 1993 has been computed on a
regular tax basis. The effective tax rate in 1993 differed from the federal
statutory rate primarily as a result of the non-deductibility of the goodwill
amortization and the effect of timing differences for which no deferred tax
benefits were provided. Income tax expense in 1992 was computed based on the
alternative minimum tax system.
The extraordinary charge of $9.9 million, net of a tax benefit of $4.0
million relates to the write-off of unamortized financing fees relating to the
refinancings of the revolving credit facility and Distribution's debt and
premiums paid on the purchase and retirement of a portion of the senior
subordinated notes. The extraordinary credits in 1993 and 1992 represent the
utilization of net operating losses carried forward from earlier periods.
INFLATION
The Company uses the LIFO method of accounting in order to minimize the
effect of inflation on inventory value. Under this method, the effect of
suppliers' price increases is charged directly to cost of goods sold.
Concurrently, the Company increases selling prices, where possible, in order to
maintain its gross profit
14
margin. The effect of price inflation, as measured by the excess of LIFO costs
over FIFO costs, was $5.3 million in 1994, $13.5 million in 1993 and $13.2
million in 1992.
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 fiscal year ended September 30, 1994, operating activities
provided cash of $83.9 million, compared to a generation of $100.7 million in
cash during the fiscal year ended September 30, 1993. Accounts receivable and
merchandise inventories increased during fiscal 1994 by $24.9 million and $5.3
million, respectively, offset by an increase of $70.2 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 fiscal 1994 included $46.1 million in interest
payments and $3.9 million in income tax payments.
Capital expenditures required for the Company's business historically have
not been substantial. Capital expenditures for the fiscal year ended September
30, 1994 were $8.5 million and related principally to improvements in warehouse
distribution and management information systems. Capital expenditures for
fiscal 1995 are projected to approximate $9.5 million. Cash used in financing
activities during fiscal 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 cash generated during fiscal 1994,
borrowings under the Company's revolving credit facility were reduced to $175.9
million at September 30, 1994 from the $248.0 million 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 soil 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
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 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.
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
15
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 5.47% in
fiscal 1994, resulting in: operating results which are substantially below the
projections made at the time of the Acquisition; an increase in the Company'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 has revised its operating projections and has concluded that
the projected operating results (the "Projection") 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 the Projection.
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 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
16
maturities of the Company'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. Unless the Company is able
to develop successful strategic, operating or 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 1995 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.
In December 1994, the Company sold substantially all of its trade accounts
and notes receivable (the "Receivables") to AmeriSource Receivables
Corporation ("ARC"), a special purpose wholly-owned subsidiary, pursuant to a
trade receivables securitization program (the "Receivables Program"). As
contemplated by the Receivables Program, the Company formed and capitalized
ARC through a contribution of $40 million. Contemporaneously, the Company
entered into a Receivables Purchase Agreement with ARC, whereby ARC agreed to
purchase on a continuous basis Receivables originated by the Company. Pursuant
to the Receivables Program, ARC will transfer such Receivables to a master
trust in exchange for, among other things, certain trade receivables-backed
certificates (the "Certificates") representing a right to receive a variable
principal amount. Contemporaneously, Certificates in an aggregate principal
amount of up to $230 million face amount were sold to investors. During the
five year term of the Receivables Program, the cash generated by collections
on the Receivables will be used to purchase, among other things, additional
Receivables originated by the Company. The Certificates bear interest at a
rate selected by the Company equal to (i) the higher of (a) the prime lending
rate and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50
basis points. In addition, during the first seventy five days of the
Receivables Program, the Company may select an interest rate equal to the
federal funds rate plus 125 basis points. The interest rates for the
Certificates are subject to step-ups to a maximum amount of an additional 100
basis points over the otherwise applicable rate.
At the same time that it entered into the Receivables Program, the Company
and its senior lenders amended its existing Credit Agreement. Among other
things, the Amended and Restated Credit Agreement: (i) extended the term of
the Credit Agreement until January 3, 2000; (ii) established the amount the
Company may borrow at $380 million; (iii) reduced the initial borrowing rate
to LIBOR plus 225 basis points and provided for further interest rate
stepdowns upon the occurrence of certain events; (iv) modified the borrowing
base availability from inventory and receivable based to inventory based; and
(v) increased the Company's ability to make acquisitions and pay dividends.
Contemporaneously with the consummation of the Receivables Program and the
execution of the Amended and Restated Credit Agreement, the Company called for
optional redemption all of the outstanding Notes and New Notes at a redemption
price of 106% of the principal amount plus accrued interest through the
redemption date of January 12, 1995.
17
AMERISOURCE DISTRIBUTION CORPORATION
The following discussion should be read in conjunction with the Consolidated
Financial Statements contained elsewhere herein.
RESULTS OF OPERATIONS
YEAR YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1992
------------- ------------- -------------
Revenues............................. $4,301,832 $3,719,025 $3,329,909
Cost of goods sold................... 4,066,641 3,509,587 3,130,186
---------- ---------- ----------
Gross profit....................... 235,191 209,438 199,723
Operating expenses:
Selling and administrative......... 142,497 130,338 125,696
Environmental remediation.......... 4,075
Depreciation....................... 6,640 5,809 5,384
Amortization of intangibles........ 4,147 5,467 5,549
Write-off of excess of cost over
net assets acquired............... 179,824
---------- ---------- ----------
Operating income (loss)............ (101,992) 67,824 63,094
Interest expense--in cash.......... 43,734 42,354 49,757
Interest expense--pay in kind...... 14,904 20,402 17,264
Amortization of deferred financing
costs............................. 3,973 3,940 4,004
Non-recurring charges.............. 2,223 2,244
---------- ---------- ----------
(Loss) before taxes, extraordinary
items and cumulative effects of
accounting changes ................. (164,603) (1,095) (10,175)
Taxes on income...................... 7,814 6,379 2,649
---------- ---------- ----------
(Loss) before extraordinary items
and cumulative effects of
accounting changes................ (172,417) (7,474) (12,824)
Extraordinary charge--early
retirement of debt, net of income
tax benefit......................... (656) (11,890)
Extraordinary credits:
Settlement of litigation........... 4,486
Reduction of income tax provision
from carryforward of prior year
operating losses.................. 746 1,862
Cumulative effect of change in
accounting for postretirement
benefits other than pensions........ (1,199)
Cumulative effect of change in
accounting for income taxes......... (33,399)
---------- ---------- ----------
Net (loss)......................... $ (207,671) $ (18,618) $ (6,476)
========== ========== ==========
YEAR ENDED SEPTEMBER 30, 1994 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1993
Revenues of $4.3 billion for the fiscal year ended September 30, 1994
represented an increase of 15.7% over the amount reported for the fiscal year
ended September 30, 1993, reflecting real volume growth as well as the pass
through to customers of price increases from manufacturers. Approximately one-
tenth of the revenue increase resulted from higher selling prices. As compared
with the prior fiscal year, sales to hospitals grew by 27%, sales to chain drug
stores, excluding brokerage business, increased by 8% and sales to independent
drug store customers increased by 4%. During 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.
18
Gross profit of $235.2 million for 1994 increased by 12.3% over 1993,
primarily due to the increase in revenues. As a percentage of revenues, gross
profit declined to 5.47% in 1994 from 5.63% in 1993. The reduction in the gross
profit percentage resulted from continued industry price competition and
increased sales to larger volume, lower margin customers, such as hospitals.
Selling and administrative expenses for 1994 were $142.5 million compared to
$130.3 million for 1993, an increase of 9.3%. The cost increases reflect
inflationary increases and increases in warehouse and delivery expenses which
are variable with the level of sales volume. Continued emphasis on cost
containment programs as well as the economies associated with the significant
revenue growth, reduced overall selling and administrative expenses as a
percentage of revenues to 3.3% in 1994 from 3.5% in 1993.
Operating expenses in 1994 include a provision of $4.1 million to cover the
expected environmental remediation costs with respect to the Company's former
Charleston, South Carolina distribution center. In addition, 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.
Interest expense which is payable currently (cash interest), principally
related to the revolving credit facility and the senior subordinated notes, was
$43.7 million in 1994 as compared with $42.4 million in 1993, an increase of
3.3%. The increase 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 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 in 1994 includes $621,000 paid
to the holders of an aggregate of $165.7 million in principal amount of senior
subordinated notes (see Note 4 of "Notes to Consolidated Financial
Statements"). During 1994, the average outstanding debt level was $430 million
at an average interest rate of 10.0%. In 1993, the comparable average
outstanding debt level was $441 million at an average interest rate of 9.6%.
The decrease in interest expense which is not currently payable (pay-in-kind
interest) of $5.5 million was due to the refinancing in July, 1993 of the 18%
senior subordinated debentures, 18 1/2% merger debentures and 19 1/2% junior
subordinated debentures with the 11 1/4% senior debentures. Interest expense in
1994 includes $4.0 million in amortization of financing fees as compared with
$3.9 million in 1993.
Income taxes provided in 1994 and 1993 have been determined based on the
alternative minimum tax system. As noted below, the Company changed its method
of accounting for income taxes effective October 1, 1993. The extraordinary
charge of $679,000, net of a tax benefit of $23,000, 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 $34.6 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 $33.4 million as
19
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.
YEAR ENDED SEPTEMBER 30, 1993 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1992
Revenues for the fiscal year ended September 30, 1993 were $3.7 billion, an
increase of 11.7% over the $3.3 billion in revenues for 1992. The revenue
growth, which occurred for all customer groups, was attributable to the
addition of new accounts, increased sales to existing accounts through value
added services and price increases. Price increases accounted for approximately
one-fourth of the revenue increase in 1993. As compared with the prior fiscal
year, sales to hospitals increased by 24%, sales to independent drug store
customers increased by 3% and sales to chain stores grew by 7%. Sales to
hospitals accounted for 42% of total revenues in 1993, while sales to
independent drug stores represented 37% and sales to chain drug stores, 21% of
the total.
As a percentage of revenues, gross profit declined to 5.6% in 1993 from 6.0%
in 1992. The decline in 1993 resulted from: increased sales to large volume,
lower margin and lower-cost-to-service customers, principally hospitals; price
competition within the industry; and a reduction in inventory purchasing gains
associated with the decline in the rate and frequency of manufacturer price
increases.
Selling and administrative expenses for the year ended September 30, 1993
were $130.3 million, or 3.5% of revenues, compared to $125.7 million, or 3.8%
of revenues for the prior year. Selling and administrative expenses, which
increased by $4.6 million, or 3.7% from the prior year, reflect the economies
associated with the revenue growth and reductions due to cost containment
measures and productivity improvements. The expense percentage improvement in
1993 also reflects the partial benefits of two distribution facility
consolidations completed during the latter part of 1993. Expenses in 1993
include $1 million in costs incurred with respect to the two completed facility
consolidations as well as an additional consolidation which was begun in late
1993 and is expected to be completed during the first quarter of fiscal 1994.
As a result of the above, operating income increased 7.5%, or $4.7 million,
to $67.8 million for the fiscal year ended September 30, 1993 in comparison to
the prior year, while operating income as a percentage of revenues was 1.82% in
1993 versus 1.89% in 1992.
Interest expense which is payable currently (cash interest), principally
related to the revolving credit facility and the senior subordinated notes, was
$42.4 million in 1993 as compared with $49.8 million in 1992, a decrease of
14.9%. The decrease is attributable to reduced borrowings and lower average
interest rates. During 1993, the average outstanding debt level was $441
million at an average interest rate of 9.6%. In 1992, the comparable average
outstanding debt level was $480 million at an average interest rate of 10.3%.
Interest expense in 1993 includes $3.9 million in amortization of financing
fees as compared with $4.0 million in 1992. Interest on the senior debentures,
senior subordinated debentures, merger debentures and junior subordinated
debentures which, at the option of the Company, is not currently payable (pay
in kind interest), amounted to $20.4 million in 1993 as compared with $17.3
million in 1992.
The non-recurring charges in 1993 consist of $1,254,000 in losses on the
disposal of three warehouses and charges of $969,000 for the write-down to net
realizable value of two additional warehouses no longer in operation which are
designated for sale. The non-recurring charges in 1992 consist of a loss of
$287,000 incurred on the sale of a warehouse no longer in operation and the
write-off of $1,957,000 in professional fees incurred in connection with a
public offering attempted during 1992 which was later abandoned due to market
conditions.
Income tax expense in both 1993 and 1992 was computed based on the
alternative minimum tax system. The extraordinary charge of $16.7 million, net
of a tax benefit of $4.8 million, relates to the write-off of unamortized
financing fees relating to the refinancings of the revolving credit facility
and Distribution's debt and premiums paid on the purchase and retirement of a
portion of the senior subordinated notes. The
20
extraordinary credits for income taxes in 1993 and 1992 represent the
utilization of net operating losses carried forward from earlier periods.
INFLATION
The Company uses the LIFO method of accounting in order to minimize the
effect of inflation on inventory value. Under this method, the effect of
suppliers' price increases is charged directly to cost of goods sold.
Concurrently, the Company increases selling prices, where possible, in order to
maintain its gross profit margin. The effect of price inflation, as measured by
the excess of LIFO costs over FIFO costs, was $5.3 million in 1994, $13.5
million in 1993 and $13.2 million in 1992.
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 fiscal year ended September 30, 1994, operating activities
provided cash of $84.0 million, compared to a generation of $99.2 million in
cash during the fiscal year ended September 30, 1993. Accounts receivable and
merchandise inventories increased during fiscal 1994 by $24.9 million and $5.3
million, respectively, offset by an increase of $70.2 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 fiscal 1994 included $46.1 million in interest
payments and $3.9 million in income tax payments.
Capital expenditures required for the Company's business historically have
not been substantial. Capital expenditures for the fiscal year ended September
30, 1994 were $8.5 million and related principally to improvements in warehouse
distribution and management information systems. Capital expenditures for
fiscal 1995 are projected to approximate $9.5 million. Cash used in financing
activities during fiscal 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 cash generated during fiscal 1994,
borrowings under the Company's revolving credit facility were reduced to $175.9
million at September 30, 1994 from the $248.0 million 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
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
21
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.
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 5.47% in
fiscal 1994, resulting in: operating results which are substantially below the
projections made at the time of the Acquisition; an increase in the Company's
indebtedness; and an accumulated deficit in 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 has revised its operating projections and has concluded that
the projected operating results (the "Projection") 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 the Projection.
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 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
woresened 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%
22
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 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. Unless the
Company is able to develop successful strategic, operating or 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 1995 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.
In December 1994, the Company sold substantially all of its trade accounts
and notes receivable (the "Receivables") to AmeriSource Receivables Corporation
("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade
receivables securitization program (the "Receivables Program"). As contemplated
by the Receivables Program, the Company formed and capitalized ARC through a
contribution of $40 million. Contemporaneously, the Company entered into a
Receivables Purchase Agreement with ARC, whereby ARC agreed to purchase on a
continuous basis Receivables originated by the Company. Pursuant to the
Receivables Program, ARC will transfer such Receivables to a master trust in
exchange for, among other things, certain trade receivables-backed certificates
(the "Certificates") representing a right to receive a variable principal
amount. Contemporaneously, Certificates in an aggregate principal amount of up
to $230 million face amount were sold to investors. During the five year term
of the Receivables Program, the cash generated by collections on the
Receivables will be used to purchase, among other things, additional
Receivables originated by the Company. The Certificates bear interest at a rate
selected by the Company equal to (i) the higher of (a) the prime lending rate
and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis
points. In addition, during the first seventy five days of the Receivables
Program, the Company may select an interest rate equal to the federal funds
rate plus 125 basis points. The interest rates for the Certificates are subject
to step-ups to a maximum amount of an additional 100 basis points over the
otherwise applicable rate.
At the same time that it entered into the Receivables Program, the Company
and its senior lenders amended its existing Credit Agreement. Among other
things, the Amended and Restated Credit Agreement: (i) extended the term of the
Credit Agreement until January 3, 2000; (ii) established the amount the Company
may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR
plus 225 basis points and
23
provided for further interest rate stepdowns upon the occurrence of certain
events; (iv) modified the borrowing base availability from inventory and
receivable based to inventory based; and (v) increased the Company's ability to
make acquisitions and pay dividends.
Contemporaneously with the consummation of the Receivables Program and the
execution of the Amended and Restated Credit Agreement, the Company called for
optional redemption all of the outstanding Notes and New Notes at a redemption
price of 106% of the principal amount plus accrued interest through the
redemption date of January 12, 1995.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholder of
AmeriSource Corporation
We have audited the accompanying consolidated balance sheets of AmeriSource
Corporation (formerly Alco Health Services Corporation) and subsidiaries, as of
September 30, 1994 and 1993, and the related consolidated statements of
operations, changes in stockholder's equity, and cash flows for each of the
three years in the period ended September 30, 1994. Our audits also included
the financial statement schedules listed in the Index at Item 14(a).
AmeriSource Corporation is a wholly-owned subsidiary of AmeriSource
Distribution Corporation (formerly Alco Health Distribution Corporation). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedules presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AmeriSource Corporation and subsidiaries at September 30, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in the notes to the consolidated financial statements (Notes 3
and 5), in 1994 the Company changed its methods of accounting for
postretirement benefits other than pensions and income taxes.
Ernst & Young LLP
Philadelphia, Pennsylvania
November 2, 1994, except for Note 10,
as to which the date is December 13, 1994
25
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------- -------------
Current Assets
Cash............................................. $ 25,273 $ 27,098
Accounts receivable less allowance for doubtful
accounts: 1994-$9,370; 1993-$7,681.............. 272,281 251,999
Merchandise inventories.......................... 351,676 346,371
Prepaid expenses................................. 2,442 1,977
-------- --------
Total current assets........................... 651,672 627,445
Property and Equipment, at cost.................... 67,598 57,282
Less accumulated depreciation.................... 26,416 21,176
-------- --------
41,182 36,106
Other Assets
Excess of cost over net assets acquired.......... 183,810
Deferred financing costs and other, less
accumulated amortization: 1994-$6,727; 1993-
$3,703.......................................... 13,101 15,453
-------- --------
13,101 199,263
-------- --------
$705,955 $862,814
======== ========
26
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S EQUITY
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------- -------------
Current Liabilities
Current portion of other debt.................... $ 133 $ 122
Accounts payable................................. 449,991 379,826
Accrued expenses................................. 22,047 24,507
Accrued income taxes............................. 19,542 7,899
Deferred income taxes............................ 32,366
-------- --------
Total current liabilities...................... 524,079 412,354
Long-Term Debt
Revolving credit facility........................ 175,897 248,000
Senior subordinated notes........................ 166,134 170,562
Other debt....................................... 1,293 1,311
Convertible subordinated debentures.............. 238 238
-------- --------
343,562 420,111
Other Liabilities
Deferred compensation............................ 522 701
Other............................................ 9,264 740
-------- --------
9,786 1,441
Stockholder's Equity
Common stock, $.01 par value: 1,000 shares autho-
rized and issued................................ 1 1
Capital in excess of par value................... 85,398 78,050
Retained earnings (deficit)...................... (256,871) (49,143)
-------- --------
(171,472) 28,908
-------- --------
$705,955 $862,814
======== ========
See notes to consolidated financial statements.
27
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Revenues................................... $4,301,832 $3,718,960 $3,329,909
Costs and Expenses
Cost of goods sold....................... 4,066,641 3,509,587 3,130,186
Selling and administrative............... 146,540 135,375 131,221
Environmental remediation................ 4,075
Depreciation............................. 6,640 5,809 5,384
Write-off of excess of cost over net
assets acquired......................... 179,824
Interest................................. 47,273 46,423 53,761
Non-recurring charges.................... 2,223 2,244
---------- ---------- ----------
4,450,993 3,699,417 3,322,796
---------- ---------- ----------
Income (Loss) Before Taxes, Extraordinary
Items and Cumulative Effects of Accounting
Changes................................... (149,161) 19,543 7,113
Taxes on Income............................ 23,080 12,953 6,649
---------- ---------- ----------
Income (Loss) Before Extraordinary Items
and Cumulative Effects of Accounting
Changes................................. (172,241) 6,590 464
Extraordinary Charge--early retirement of
debt, net of income tax benefit........... (442) (5,884)
Extraordinary Credit--reduction of income
tax provision from carryforward of prior
year operating losses..................... 484 219
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)........................ $ (207,728) $ 1,190 $ 683
========== ========== ==========
See notes to consolidated financial statements.
28
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
CAPITAL IN RETAINED
EXCESS OF EARNINGS
COMMON STOCK PAR VALUE (DEFICIT) TOTAL
------------ ---------- --------- ---------
September 30, 1991............... $ 1 $79,529 $ (51,016) $ 28,514
Net income..................... 683 683
Capital transactions with
Distribution:
Income tax benefit........... 1,839 1,839
Settlements of appraisal
action...................... (8,723) (8,723)
--- ------- --------- ---------
September 30, 1992............... 1 72,645 (50,333) 22,313
Net income..................... 1,190 1,190
Capital transactions with
Distribution:
Conversion of convertible
subordinated debentures..... 278 278
Income tax benefit........... 5,127 5,127
--- ------- --------- ---------
September 30, 1993............... 1 78,050 (49,143) 28,908
Net (loss)..................... (207,728) (207,728)
Capital transactions with
Distribution:
Income tax benefit........... 7,348 7,348
--- ------- --------- ---------
September 30, 1994............... $ 1 $85,398 $(256,871) $(171,472)
=== ======= ========= =========
See notes to consolidated financial statements.
29
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss)......................... $ (207,728) $ 1,190 $ 683
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation............................. 6,640 5,809 5,384
Amortization............................. 7,686 9,329 11,510
Provision for losses on accounts
receivable.............................. 4,612 3,186 3,443
Loss on disposal of property and
equipment............................... 185 2,267 332
Write-off of excess of cost over net
assets acquired......................... 179,824
Provision for deferred income taxes...... 1,890
Loss on early retirement of debt......... 679 9,871
Cumulative effects of changes in
accounting principles .................. 35,045
Changes in operating assets and
liabilities:
Accounts receivable..................... (24,894) (6,115) (31,130)
Merchandise inventories................. (5,305) (10,346) (65,048)
Prepaid expenses........................ (465) (33) 377
Accounts payable, accrued expenses and
income taxes........................... 84,770 85,249 62,697
Payments to settle litigation........... (5,250)
Other long-term liabilities............. 4,075
Miscellaneous............................. (3,083) 319 (1,005)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.............................. 83,931 100,726 (18,007)
INVESTING ACTIVITIES
Capital expenditures...................... (8,483) (7,571) (8,297)
Proceeds from sales of property and
equipment................................ 457 1,500 642
---------- ---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES.. (8,026) (6,071) (7,655)
FINANCING ACTIVITIES
Long-term debt borrowings................. 854,661 902,364 882,000
Long-term debt repayments................. (931,857) (975,169) (873,197)
Deferred financing costs.................. (534) (8,520) (3,131)
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.............................. (77,730) (81,325) 5,672
---------- ---------- ----------
(DECREASE) INCREASE IN CASH................ (1,825) 13,330 (19,990)
Cash at beginning of year.................. 27,098 13,768 33,758
---------- ---------- ----------
CASH AT END OF YEAR........................ $ 25,273 $ 27,098 $ 13,768
========== ========== ==========
See notes to consolidated financial statements.
30
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of AmeriSource Corporation
(formerly Alco Health Services Corporation) ("AmeriSource" or the "Company").
All material intercompany accounts and transactions of AmeriSource have been
eliminated in consolidation. AmeriSource is a wholly-owned subsidiary of
AmeriSource Distribution Corporation (formerly Alco Health Distribution
Corporation) ("Distribution").
Business
The Company is a wholesale distributor of pharmaceuticals and related health
care products.
Concentrations of Credit Risk
The Company sells its merchandise inventories to a large number of customers
in the health care industry including independent drug stores, chain drug
stores, hospitals, mass merchandisers, clinics and nursing homes. The Company's
trade accounts receivable are exposed to credit risk, however, the risk is
limited due to the diversity of the customer base and the customer base's wide
geographic dispersion. The Company performs ongoing credit evaluations of its
customers' financial conditions. The Company maintains reserves for potential
bad debt losses and such bad debt losses have been historically within the
Company's expectations.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, which results in a matching of
current costs and revenues. On a supplemental basis, if the first-in, first-out
(FIFO) method of valuation had been used for determining costs, inventories
would have been approximately $88,327,000 and $83,022,000 higher than the
amounts reported at September 30, 1994 and 1993, respectively.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets by the straight-line method.
Deferred Financing Costs
Deferred financing fees and related expenses are being amortized over 3 to 10
years.
Pension Plans
Pension costs, which are primarily computed using the projected unit credit
cost method, are funded based on the minimum required contribution under the
Employee Retirement Income Security Act of 1974.
Revenue Recognition
The Company recognizes revenues at the point at which product is shipped.
Earnings Per Share
Earnings (loss) per share are not presented, as all of the Company's issued
and outstanding common stock is owned by Distribution.
31
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 5.47% in fiscal 1994, resulting in:
operating results which are substantially below the projections made at the
time of the Acquisition; an increase in the Company'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. 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 large 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 concluded that the projected
operating results (the "Projection") 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
approximated the remaining amortization period of the goodwill balance at June
30, 1994. The Company then evaluated the recoverability of goodwill on the
basis of the Projection.
The Projection reflects significant cumulative losses indicating that the
carrying value of goodwill is not recoverable. 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 assumptions 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
could not 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 1995 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.
32
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--TAXES ON INCOME
AmeriSource is included in the consolidated federal income tax return of
Distribution. The income tax provision for the years ended September 30, 1994,
1993 and 1992, computed on a separate entity basis, is as follows (in
thousands):
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
1994 1993 1992
---------- ---------- ----------
Current provision
Federal....................................... $20,337 $ 11,207 $6,574
State and local............................... 853 1,746 75
---------- ---------- ---------
21,190 12,953 6,649
---------- ---------- ---------
Deferred provision
Federal....................................... 1,451
State and local............................... 439
---------- ---------- ---------
1,890 -- --
---------- ---------- ---------
Provision for income taxes...................... $23,080 $ 12,953 $6,649
========== ========== =========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Statutory federal income tax rate........... 35.0% 34.8% 34.0%
State and local income tax rate, net of
federal tax benefit........................ (.4) 5.8 .7
Effect of change in prior year loss
carryback.................................. 11.7
Amortization of difference in book and tax
bases of net assets acquired............... (43.1) 9.4 29.0
Alternative minimum tax..................... 10.4
Net effect of timing differences not
recognized................................. (2.7) 10.2
Other....................................... (4.3) 6.1 7.7
---------- --------- ---------
Effective income tax rate................... (15.5)% 66.3% 93.5%
========== ========= =========
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109),
which requires a change in the method of accounting for income taxes from the
deferred method to the liability method. In accordance with Statement 109, the
Company recorded an adjustment of $33.8 million for the cumulative effect of
adopting Statement 109 as of October 1, 1993. As permitted under Statement 109,
prior period financial statements have not been restated. The cumulative effect
adjustment relates principally 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.
33
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--TAXES ON INCOME--(CONTINUED)
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Significant components of the Company's deferred tax liabilities
(assets) as of September 30, 1994 are as follows (in thousands):
Inventory.............................................................. $35,712
Fixed assets........................................................... 4,654
Other.................................................................. 351
-------
Gross deferred tax liabilities....................................... 40,717
-------
Net operating losses................................................... (1,994)
Allowance for doubtful accounts........................................ (3,748)
Accrued expenses....................................................... (3,524)
Other postretirement benefits.......................................... (497)
Other.................................................................. (3,173)
-------
Gross deferred tax assets............................................ (12,936)
-------
Valuation allowance for deferred tax assets............................ 7,931
-------
Net deferred tax liabilities......................................... $35,712
=======
The valuation allowance for deferred tax assets was $5.5 million at October
1, 1993. For the fiscal years ended September 30, 1993 and 1992, the deferred
income tax provision (benefit) resulted from timing differences in the
recognition of certain expenses for tax and financial reporting purposes. Due
to limitations on the utilization of tax losses, the Company did not recognize
any deferred income tax (benefit) in 1993 or 1992. The principal components of
deferred taxes are as follows (in thousands):
FISCAL YEAR ENDED
SEPTEMBER 30
-------------------
1993 1992
--------- --------
Bad debts.................................................. $ (254) $ 360
Deferred compensation...................................... (15) (31)
Inventory.................................................. (725) (492)
Insurance.................................................. 113 (207)
Fixed assets............................................... (970) (108)
Other...................................................... (138) (41)
Amount not recognized...................................... 1,989 519
--------- --------
$ -- $ --
========= ========
The Company was subject to the alternative minimum tax for the fiscal year
ended September 30, 1992. The alternative minimum tax is imposed at a 20% rate
on the Company's alternative minimum taxable income which is determined by
making statutory adjustments to the Company's regular taxable income. Net
operating loss carryforwards were used to offset 90% of the Company's 1992
alternative minimum taxable income, the effect of which is represented for
financial reporting purposes as an extraordinary credit.
Income tax refunds net of payments amounted to $3,457,000, $4,732,000 and
$1,089,000 in the years ended September 30, 1994, 1993 and 1992, respectively.
Refunds include $7,348,000, $5,127,000 and $1,839,000 in the years ended
September 30, 1994, 1993 and 1992, respectively, attributed to losses generated
by Distribution, which were contributed to the capital of the Company.
34
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT
Substantially all of AmeriSource's indebtedness was incurred in connection
with its acquisition by Distribution. Distribution incurred additional
indebtedness, the proceeds of which were contributed to AmeriSource's capital
in fiscal 1989 and 1990. Because Distribution is a holding company and its
operations will be conducted entirely through its subsidiaries, the ability of
Distribution to satisfy its obligations will be dependent upon the future
performance of AmeriSource and its subsidiaries, which will be subject to
financial, business and other factors affecting the operations of AmeriSource
and its subsidiaries, including factors beyond the control of Distribution or
AmeriSource as well as prevailing economic conditions. In addition, the ability
of Distribution to service its indebtedness will be dependent upon its ability
to receive funds from AmeriSource. AmeriSource's indebtedness, described
herein, will significantly restrict the ability to make cash distributions to
Distribution.
On March 30, 1993, the Company entered into a credit agreement (the "Credit
Agreement") with a syndicate of financial institutions providing senior secured
facilities of up to $425 million. The Credit Agreement provides for initial
borrowings based on commitments of $380 million, consisting of a term loan of
$20 million and a revolving credit loan of up to $360 million. The maximum
amount that may be borrowed under the Credit Agreement is limited to the extent
of a sufficient borrowing base, which is essentially 85% of eligible accounts
receivable and 60% of eligible inventory. Under the terms of the Credit
Agreement, the Company has pledged substantially all its assets to secure its
borrowings under the Credit Agreement and the Company's parent, Distribution,
has pledged the common stock of the Company. The term loan matures, and the
commitment of the syndicate to make revolving credit loans expires, on April 1,
1996.
The term loan and the revolving credit loan bear interest at a rate per annum
equal to, at the Company's option, LIBOR plus 3% or the prime rate plus 1 1/2%.
The Company has entered into a two-year interest rate cap of 12% with respect
to $100 million in borrowings under the revolving credit loan for the purpose
of limiting the Company's exposure to an increase in interest rates. In
addition, the Company is required to pay a fee of 1/2% per annum on the average
unused portion of the revolving credit loan commitment plus a $200,000 annual
administration fee. The Credit Agreement, as amended, contains certain
restrictive covenants and requires the Company, among other things, to maintain
minimum defined net worth levels, satisfy certain financial ratios and places
certain limitations on investments, capital expenditures, additional debts,
changes in capital structure and dividend payments.
At September 30, 1994, the $20 million outstanding under the term loan and
the $156 million outstanding under the revolving credit loan bore interest at
the rate of 8.10% per annum. Initial borrowings under the Credit Agreement were
used to extinguish the obligations outstanding under the Company's former
revolving credit facility, which was due to expire in December 1993. An
extraordinary loss of $3.3 million, net of a tax benefit of $1.3 million, was
recorded during the fiscal year ended September 30, 1993 representing the
write-off of the unamortized financing fees relating to the former revolving
credit facility. In connection with the Credit Agreement, the Company incurred
approximately $7.7 million in financing fees which have been deferred and are
being amortized on a straight-line basis over the three year term of the
indebtedness.
The 14 1/2% Senior Subordinated Notes (the "Notes") were sold on September
15, 1989 in a public offering and are due September 15, 1999. The Notes are
unsecured obligations and are subordinated to the Credit Agreement and certain
other indebtedness, and may be redeemed at the option of the Company at a
premium, together with accrued and unpaid interest to the redemption date, at
any time on or after September 15, 1994. If, for the twelve-month period ending
on each of August 31, 1996 and 1997, the Company's consolidated fixed charge
ratio (as defined) exceeds 1.5 to 1, the Company shall be required to redeem or
otherwise repurchase in the open market and retire 5% and 10%, respectively, of
the principal amount of the Notes. The Company shall not be required to make
such redemption or repurchase until such time, and
35
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT--(CONTINUED)
to the extent, funds become available under the Credit Agreement or any
successor or replacement facility. In addition, the Company is required to
redeem on August 31, 1998, 50% of the aggregate principal amount of the Notes
originally issued, reduced by any prior redemptions or repurchases. During the
fiscal year ended September 30, 1993, the Company purchased and retired $4.4
million of the Notes. Premiums on the fiscal 1993 purchases resulted in an
extraordinary loss of $549,000, net of a tax benefit of $222,000. During the
fiscal year ended September 30, 1994, the Company purchased and retired an
additional $4.4 million of Notes, resulting in an extraordinary charge of
$679,000, net of a tax benefit of $237,000, consisting of the write-off of
related unamortized financing fees and premiums paid on redemption.
During the fiscal year ended September 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 Notes. The only material difference between the terms
of the New Notes and the terms of the 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 Notes. The indenture of the 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 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 Notes equal
to 20% of the principal amount of 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 Notes cash consideration of
$520,000 in exchange for each holder's agreement not to tender any of the 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 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 fiscal year ended September 30, 1994.
The indentures governing the Credit Agreement, the Notes, the New Notes and
the indebtedness of Distribution contain restrictions and covenants, as
amended, which include limitations on incurrence of additional indebtedness,
prohibition of indebtedness senior to the Notes and New Notes and junior to the
Credit Agreement, restrictions on distributions and dividends to stockholders,
including Distribution, transactions with affiliates and certain corporate acts
such as mergers, consolidations and the sale of substantially all assets.
Additional covenants require compliance with financial tests, including current
ratio, leverage, interest coverage ratio, fixed charge coverage and maintenance
of minimum net worth.
Interest paid on the above indebtedness during the fiscal years ended
September 30, 1994, 1993 and 1992 amounted to $46.1 million, $39.7 million and
$52.2 million, respectively.
Financing fees and expenses incurred with respect to the above indebtedness
have been capitalized and are being amortized over the terms of the related
indebtedness. Total amortization of these fees and expenses (included in
interest expense) for the fiscal years ended September 30, 1994, 1993 and 1992
was $3.5 million, $3.9 million and $4.0 million, respectively.
36
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT--(CONTINUED)
On July 26, 1993, Distribution issued $126.5 million principal amount of 11
1/4% Senior Debentures ("Senior Debentures") due 2005 in a public offering.
Interest on the Senior Debentures will be payable semi-annually on January 15
and July 15 of each year, commencing January 15, 1994. Through and including
the semi-annual interest payment due July 15, 1998, Distribution may elect, at
its option, to issue additional Senior Debentures in satisfaction of its
interest payment obligations. The Senior Debentures are senior unsecured
obligations of Distribution and rank pari passu in right of payment with all
senior borrowings of Distribution and senior in right of payment to all
subordinated indebtedness of Distribution. As indebtedness of Distribution, the
Senior Debentures are structurally subordinated to all indebtedness and other
obligations of AmeriSource. Substantially all the net proceeds of the offering
(approximately $122 million) were applied to redeem the 18% Senior Subordinated
Debentures, 18 1/2% Merger Debentures and 19 1/2% Junior Subordinated
Debentures of Distribution at a redemption price of 100% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
redemption. The indenture relating to the Senior Debentures contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments, the
incurrence of additional indebtedness and issuance of preferred stock, the
creation of certain liens, certain asset sales, transactions with subsidiaries
and other affiliates, dividends and other payment restrictions affecting
subsidiaries, and mergers and consolidations. The debt refinancing resulted in
an extraordinary charge to AmeriSource of $6.0 million during the fiscal year
ended September 30, 1993 relating to the write-off of deferred financing costs,
net of a tax benefit of $2.4 million.
The carrying amount of the Company's revolving credit facility approximates
fair value. The combined fair value of the Notes and New Notes is approximately
$176 million and is based on quoted market prices. It was not practicable to
estimate the fair value of the other debt or convertible subordinated
debentures.
NOTE 5--PENSION AND OTHER BENEFIT PLANS
The Company provides a benefit for the majority of its employees under
noncontributory defined benefit pension plans. For each employee, the benefits
are based on years of service and average compensation.
A summary of the components of net periodic pension cost charged to expense
for the company-sponsored defined benefit pension plans together with
contributions charged to expense for a multi-employer union administered
defined benefit pension plan the Company participates in follows (in
thousands):
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Service cost............................... $ 2,198 $ 1,912 $ 1,669
Interest cost on projected benefit
obligation................................ 2,165 2,034 1,879
Actual return on plan assets............... (13) (2,842) (3,090)
Net amortization and deferral.............. (2,038) 979 1,490
---------- ---------- ----------
Net pension cost of defined benefit plans.. 2,312 2,083 1,948
Net pension cost of multi-employer plan.... 142 110 91
---------- ---------- ----------
Total pension expense...................... $ 2,454 $ 2,193 $ 2,039
========== ========== ==========
37
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PENSION AND OTHER BENEFIT PLANS--(CONTINUED)
The following table sets forth (in thousands) the funded status and amount
recognized in the consolidated balance sheets for the company-sponsored defined
benefit pension plans:
1994 1993
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
Plan assets at fair value...... $24,457 $ 333 $24,155 $ 280
Actuarial present value of
benefit obligations:
Vested....................... 22,420 1,168 20,898 603
Accumulated, not vested...... 421 210 576 171
------- ------- ------- -----
Accumulated benefit
obligations................... 22,841 1,378 21,474 774
Effect of future pay
increases................... 8,559 17 7,987 113
------- ------- ------- -----
Projected benefit obligation... 31,400 1,395 29,461 887
------- ------- ------- -----
Plan assets (less than)
projected benefit obligation.. (6,943) (1,062) (5,306) (607)
Unrecognized net transition
asset......................... (996) (1,167)
Unrecognized prior service
cost.......................... 3,380 733 3,680 357
Adjustment to recognize minimum
liability..................... (813) (372)
Unrecognized net loss related
to assumptions................ 4,013 149 2,117 128
------- ------- ------- -----
Pension (liability) recognized
in balance sheet.............. $ (546) $ (993) $ (676) $(494)
======= ======= ======= =====
Assumptions used in computing the funded status of the plans were as follows:
1994 1993 1992
------ ------ -----
Discount rate.......................................... 7.75% 7.25% 8.0%
Rate of increase in compensation levels................ 6.25% 5.75% 6.5%
Expected long-term rate of return on assets............ 10.00% 10.00% 10.0%
Plan assets at September 30, 1994 are invested principally in listed stocks,
corporate and government bonds and cash equivalents.
Additionally, the Company sponsors the Employee Investment Plan, a defined
contribution 401(k) plan, which covers salaried and certain hourly employees.
Eligible participants may contribute to the plan up to 2% to 6% of their
regular compensation before taxes. The Company matches the employee
contributions in an amount equal to 50% of the participants' contributions. An
additional discretionary Company contribution in an amount not to exceed 50% of
the participants' contributions may also be made depending upon the Company's
performance. All contributions are invested at the direction of the employee in
one or more funds. Employer contributions vest over a five-year period
depending upon an employee's years of service. Costs of the plan charged to
expense for the fiscal years ended September 30, 1994, 1993 and 1992 amounted
to $1,093,000, $792,000 and $926,000, respectively.
Distribution adopted the AmeriSource Distribution Corporation and
Subsidiaries Employee Stock Purchase Plan (the "Distribution Plan") to enable
key members of management of the Company to participate in the equity ownership
of Distribution. As of September 30, 1994, there were options outstanding to
acquire 519,187 1/2 shares of Distribution Class A common stock at an exercise
price of $1.00 per share under the Distribution Plan.
38
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PENSION AND OTHER BENEFIT PLANS--(CONTINUED)
Distribution adopted the AmeriSource Distribution Corporation Partners Stock
Option Plan (the "Partners Plan") to enable other employees of the Company to
participate in the equity ownership of Distribution. As of September 30, 1994,
there were options outstanding to acquire 115,200 shares of Distribution Class
A common stock at an exercise price of $1.00 per share under the Partners Plan.
Distribution adopted the AmeriSource Distribution Corporation 1991 Stock
Option Plan (the "1991 Option Plan") for the granting of non-qualified stock
options to acquire up to an aggregate of 362,500 shares of Distribution Class A
common stock. The options granted to certain members of the Company's
management under the 1991 Stock Option Plan represented the shares unallocated
under the Distribution Plan and options never granted under a performance stock
option plan originally announced by Distribution in 1989 and reflect
achievement in the Company's operating performance through fiscal year ended
September 30, 1991. As of September 30, 1994, there were 352,500 options
outstanding at an exercise price of $1.00 per share under the 1991 Option Plan.
As a result of special termination benefit packages previously offered, the
Company provides medical, dental and life insurance benefits to certain
retirees and their dependents. These benefit plans are unfunded. Prior to
October 1, 1993, the Company recognized the expenses for these plans on the
cash basis. Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (Statement 106), which requires
that the cost of postretirement health care benefits be recognized on the
accrual basis as employees render service to earn the benefit instead of on the
cash basis when the benefits are paid. As of October 1, 1993, the Company
adopted Statement 106 by recognizing the accumulated obligation related to
these benefits. The cumulative effect of this change in accounting principle
resulted in a non-cash charge to net income of $1.2 million. In addition to the
cumulative effect adjustment, the expense for postretirement benefits other
than pensions for the fiscal year ended September 30, 1994, was $80,000,
approximately equal to the cash payments. The cash payments for such benefit in
fiscal years 1993 and 1992, respectively, were approximately the same as fiscal
1994. Since the plans are unfunded and relate only to certain retirees, the
fiscal 1994 expense accrual for these benefits consisted solely of an interest
cost component. The accumulated postretirement benefit obligation was $1.1
million as of September 30, 1994. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25% and
7.75% at October 1, 1993 and September 30, 1994, respectively. A health care
cost trend rate of 11.4% was assumed for fiscal 1995, gradually declining to an
ultimate level of 5.5% over 15 years. Increasing the assumed health care cost
trend rates by 1% in each year and holding all other assumptions constant,
would increase the accumulated postretirement benefit obligation as of
September 30, 1994 by $77,500 and increase the postretirement benefit cost in
fiscal 1994 by $7,000.
NOTE 6--LEASES
The costs of capital leases are included in property and equipment and the
obligations therefor in other debt. Related amortization is included in
depreciation. At September 30, 1994, future minimum payments totaling
$21,346,000 under noncancelable operating leases with remaining terms of more
than one year were due as follows: 1995--$6,214,000; 1996--$5,197,000; 1997--
$3,390,000; 1998--$1,885,000; 1999--$1,281,000; thereafter (through 2004)--
$3,379,000. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
Total rental expense was $6,168,000 in 1994, $6,034,000 in 1993 and
$5,647,000 in 1992.
39
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--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 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.
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. Effective October 26, 1994, the Company entered into a Judgment
Sharing Agreement with other wholesaler and pharmaceutical manufacturer
defendants. Under the Judgment 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 judgment 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
judgment or one million dollars. In addition, the Company has released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. The Judgment Sharing Agreement
covers the federal court litigation as well as the cases which have been filed
in various state courts. 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 soil 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
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 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.
40
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--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 products containing L-Tryptophan from 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.
The Company has received Notices of Proposed Adjustment from the Internal
Revenue Service in connection with an audit of the Company's federal income tax
returns for the taxable years 1987 through 1991. The proposed adjustments
indicate a net increase to taxable income for these years of approximately $23
million and relate principally to the deductibility of costs incurred with
respect to the Acquisition. The Company has analyzed these matters with tax
counsel, believes it has meritorious defenses to the adjustments proposed by
the Internal Revenue Service and any amounts assessed will not have a material
effect on the financial condition of the Company.
At September 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.
On December 3, 1991, AmeriSource entered into a settlement agreement with
Bear Stearns & Co., Inc. ("Bear Stearns") resolving a civil action that had
been filed on August 14, 1989 and Bear Stearns' interest in an appraisal action
arising from the acquisition of the Company. The Company paid Bear Stearns
$7,235,000 in 1992 and will pay $2,500,000 in November 2001, without interest
and subject in certain circumstances to earlier payment. The present value of
the payments to Bear Stearns reduced Distribution's investment in the Company
and was recorded as a reduction in capital in excess of par value. The Delaware
Chancery Court approved the settlement of Bear Stearns' interest in the
appraisal action and the settlement of the remaining claims (representing less
than 5% of the shares in the original action) on similar terms. Payments of
$600,000 were made during fiscal 1992 in settlement of a portion of the
remaining claims and were recorded as a reduction in capital in excess of par
value.
NOTE 8--NON-RECURRING CHARGES
The non-recurring charges in 1993 consisted of $1,254,000 in losses on the
disposal of three warehouses and charges of $969,000 for the write-down to net
realizable value of two additional warehouses no longer in operation which were
designated for sale. The non-recurring charges in 1992 consisted of a loss of
$287,000 incurred on the sale of a warehouse no longer in operation and the
write off of $1,957,000 in professional fees incurred in connection with a
public offering attempted during 1992 which was later abandoned due to market
conditions.
NOTE 9--RELATED PARTY TRANSACTIONS
On October 21, 1991, an involuntary bankruptcy petition under Chapter 7 of
the United States Bankruptcy Code was filed against RDS Acquisition Corp.
("RDS"), which was a customer of the Company. Affiliates of 399 Venture
Partners Inc. ("VPI," the primary stockholder of Distribution) had substantial
equity and debt interests in RDS and related entities. VPI indemnified the
Company for $5,800,000 of the amounts owed by RDS to the Company on October 25,
1991, for which the Company did not otherwise recover the amount owed.
41
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--SUBSEQUENT EVENTS
In December 1994, the Company sold substantially all of its trade accounts
and notes receivable (the "Receivables") to AmeriSource Receivables Corporation
("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade
receivables securitization program (the "Receivables Program"). As contemplated
by the Receivables Program, the Company formed and capitalized ARC through a
contribution of $40 million. Contemporaneously, the Company entered into a
Receivables Purchase Agreement with ARC, whereby ARC agreed to purchase on a
continuous basis Receivables originated by the Company. Pursuant to the
Receivables Program, ARC will transfer such Receivables to a master trust in
exchange for, among other things, certain trade receivables-backed certificates
(the "Certificates") representing a right to receive a variable principal
amount. Contemporaneously, Certificates in an aggregate principal amount of up
to $230 million face amount were sold to investors. During the five year term
of the Receivables Program, the cash generated by collections on the
Receivables will be used to purchase, among other things, additional
Receivables originated by the Company. The Certificates bear interest at a rate
selected by the Company equal to (i) the higher of (a) the prime lending rate
and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis
points. In addition, during the first seventy five days of the Receivables
Program, the Company may select an interest rate equal to the federal funds
rate plus 125 basis points. The interest rates for the Certificates are subject
to step-ups to a maximum amount of an additional 100 basis points over the
otherwise applicable rate.
At the same time that it entered into the Receivables Program, the Company
and its senior lenders amended its existing Credit Agreement. Among other
things, the Amended and Restated Credit Agreement: (i) extended the term of the
Credit Agreement until January 3, 2000; (ii) established the amount the Company
may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR
plus 225 basis points and provided for further interest rate stepdowns upon the
occurrence of certain events; (iv) modified the borrowing base availability
from inventory and receivable based to inventory based; and (v) increased the
Company's ability to make acquisitions and pay dividends.
Contemporaneously with the consummation of the Receivables Program and the
execution of the Amended and Restated Credit Agreement, the Company called for
optional redemption all of the outstanding Notes and New Notes at a redemption
price of 106% of the principal amount plus accrued interest through the
redemption date of January 12, 1995.
42
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--OTHER INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS)
THREE MONTHS ENDED(1)
--------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1993 1994 1994 1994
------------ ---------- ---------- -------------
Revenues.................... $1,045,776 $1,067,112 $1,079,302 $1,109,642
Gross Profit................ 53,999 58,480 57,455 65,257
Income (Loss) Before
Extraordinary Item and
Cumulative Effects of
Accounting Changes......... 3,622 4,438 (177,953) (2,348)
Extraordinary Item.......... (442)
Cumulative Effects of
Accounting Changes......... (35,045)
Net Income (Loss)........... (31,865) 4,438 (177,953) (2,348)
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1992 1993 1993 1993
------------ ---------- ---------- -------------
Revenues.................... $ 917,681 $ 920,195 $ 918,499 $ 962,585
Gross Profit................ 51,378 53,385 50,302 54,308
Income Before Extraordinary
Items...................... 969 2,726 1,771 1,124
Extraordinary Items......... (2,635) (2,765)
Net Income (Loss)........... 969 91 1,771 (1,641)
- - - --------
(1) December 31, 1993 amounts reflect the cumulative effect of the accounting
changes for postretirement benefits other than pensions and income taxes.
June 30, 1994 amounts reflect the write-off of goodwill discussed in Note
2.
43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
AmeriSource Distribution Corporation
We have audited the accompanying consolidated balance sheets of AmeriSource
Distribution Corporation (formerly Alco Health Distribution Corporation) and
subsidiaries as of September 30, 1994 and 1993 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedules presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AmeriSource Distribution Corporation and subsidiaries at September 30, 1994
and 1993, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in the notes to the consolidated financial statements (Notes 3
and 6), in 1994 the Company changed its methods of accounting for
postretirement benefits other than pensions and income taxes.
Ernst & Young LLP
Philadelphia, Pennsylvania
November 2, 1994, except for Note
11, as to which the date is
December 13, 1994
44
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------- -------------
Current Assets
Cash............................................. $ 25,311 $ 27,136
Accounts receivable less allowance for doubtful
accounts: 1994-$9,370; 1993-$7,681.............. 272,281 251,999
Merchandise inventories.......................... 351,676 346,371
Prepaid expenses................................. 2,442 1,977
-------- --------
Total current assets........................... 651,710 627,483
Property and Equipment, at cost.................... 67,598 57,282
Less accumulated depreciation.................... 26,416 21,176
-------- --------
41,182 36,106
Other Assets
Excess of cost over net assets acquired.......... 183,810
Deferred financing costs and other, less
accumulated amortization: 1994-$7,239; 1993-
$3,781.......................................... 18,752 20,545
-------- --------
18,752 204,355
-------- --------
$711,644 $867,944
======== ========
45
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------- -------------
Current Liabilities
Current portion of other debt.................... $ 133 $ 122
Accounts payable................................. 449,991 379,826
Accrued expenses................................. 27,485 29,771
Accrued income taxes............................. 11,488 604
Deferred income taxes............................ 29,258
-------- --------
Total current liabilities...................... 518,355 410,323
Long-Term Debt
Revolving credit facility........................ 175,897 248,000
Senior subordinated notes........................ 166,134 170,562
Other debt....................................... 1,293 1,311
Convertible subordinated debentures.............. 238 238
Senior debentures................................ 144,013 129,109
-------- --------
487,575 549,220
Other Liabilities
Deferred compensation............................ 522 701
Other............................................ 5,918 740
-------- --------
6,440 1,441
Stockholders' Equity
Preferred stock, $.01 par value: 5,000,000 shares
authorized; none issued
Common stock, $.01 par value:
Class A (Voting and convertible): 30,000,000
shares authorized; 180,387 1/2 shares issued.. 2 2
Class B (Non-voting and convertible):
30,000,000 shares authorized; 4,400,300 shares
issued........................................ 44 44
Class C (Non-voting and convertible): 2,000,000
shares authorized; 500,000 shares issued...... 5 5
Capital in excess of par value................... 4,775 4,775
Retained earnings (deficit)...................... (304,984) (97,313)
Cost of common stock in treasury................. (568) (553)
-------- --------
(300,726) (93,040)
-------- --------
$711,644 $867,944
======== ========
See notes to consolidated financial statements.
46
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Revenues................................... $4,301,832 $3,719,025 $3,329,909
Costs and Expenses
Cost of goods sold....................... 4,066,641 3,509,587 3,130,186
Selling and administrative............... 146,644 135,805 131,245
Environmental remediation................ 4,075
Depreciation............................. 6,640 5,809 5,384
Write-off of excess of cost over net
assets acquired......................... 179,824
Interest................................. 62,611 66,696 71,025
Non-recurring charges.................... 2,223 2,244
---------- ---------- ----------
4,466,435 3,720,120 3,340,084
---------- ---------- ----------
(Loss) Before Taxes, Extraordinary Items
and Cumulative Effects of Accounting
Changes................................... (164,603) (1,095) (10,175)
Taxes on Income ........................... 7,814 6,379 2,649
---------- ---------- ----------
(Loss) Before Extraordinary Items and
Cumulative Effects of Accounting
Changes................................. (172,417) (7,474) (12,824)
Extraordinary Charge--early retirement of
debt, net of income tax benefit......... (656) (11,890)
Extraordinary Credits:
Settlement of litigation................. 4,486
Reduction of income tax provision from
carryforward of prior year operating
losses.................................. 746 1,862
Cumulative effect of change in accounting
for postretirement benefits other than
pensions.................................. (1,199)
Cumulative effect of change in accounting
for income taxes.......................... (33,399)
---------- ---------- ----------
Net (Loss)............................. $ (207,671) $ (18,618) $ (6,476)
========== ========== ==========
(Loss) per share
(Loss) Before Extraordinary Items and
Cumulative Effects of Accounting
Changes............................... $ (34.48) $ (1.49) $ (2.56)
Extraordinary Items.................... (.13) (2.23) 1.26
Cumulative effect of change in
accounting for postretirement benefits
other than pensions................... (.24)
Cumulative effect of change in
accounting for
income taxes.......................... (6.68)
---------- ---------- ----------
Net (Loss)........................... $ (41.53) $ (3.72) $ (1.30)
========== ========== ==========
See notes to consolidated financial statements.
47
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK CAPITAL IN RETAINED COMMON
----------------------- EXCESS OF EARNINGS STOCK IN
CLASS A CLASS B CLASS C PAR VALUE (DEFICIT) TREASURY TOTAL
------- ------- ------- ---------- --------- -------- ---------
September 30, 1991...... $2 $44 $5 $4,447 $ (72,219) $(550) $ (68,271)
Net (loss)............. (6,476) (6,476)
--- --- --- ------ --------- ----- ---------
September 30, 1992...... 2 44 5 4,447 (78,695) (550) (74,747)
Net (loss)............. (18,618) (18,618)
Repurchase of stock
options............... (18) (18)
Purchase of 1,187 1/2
shares of Class A
Common Stock.......... (3) (3)
Capital contribution... 346 346
--- --- --- ------ --------- ----- ---------
September 30, 1993...... 2 44 5 4,775 (97,313) (553) (93,040)
Net (loss)............. (207,671) (207,671)
Purchase of 15,000
shares of Class A
Common Stock.......... (15) (15)
--- --- --- ------ --------- ----- ---------
September 30, 1994...... $2 $44 $5 $4,775 $(304,984) $(568) $(300,726)
=== === === ====== ========= ===== =========
See notes to consolidated financial statements.
48
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30
---------------------------------
1994 1993 1992
--------- ----------- ---------
OPERATING ACTIVITIES
Net (loss)................................. $(207,671) $ (18,618) $ (6,476)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities:
Depreciation.............................. 6,640 5,809 5,384
Amortization.............................. 8,120 9,407 11,510
Provision for losses on accounts
receivable............................... 4,612 3,186 3,443
Loss on disposal of property and
equipment................................ 185 2,267 332
Write-off of excess of cost over net
assets acquired.......................... 179,824
Provision for deferred income taxes....... (5,055)
Loss on early retirement of debt.......... 679 16,658
Gain on settlement of litigation.......... (4,486)
Cumulative effects of accounting changes.. 34,598
Changes in operating assets and
liabilities:
Accounts receivable...................... (24,894) (6,115) (31,130)
Merchandise inventories.................. (5,305) (10,346) (65,048)
Prepaid expenses......................... (465) (33) 377
Accounts payable, accrued expenses and
income taxes............................ 76,847 77,102 57,080
Payments to settle litigation............ (5,250)
Debentures issued in lieu of payment of
interest................................ 14,904 20,378 17,231
Other long-term liabilities.............. 4,075
Miscellaneous.............................. (3,083) (520) (974)
--------- ----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... 84,011 99,175 (18,007)
INVESTING ACTIVITIES
Capital expenditures....................... (8,483) (7,571) (8,297)
Proceeds from sales of property and
equipment................................. 457 1,500 642
--------- ----------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES... (8,026) (6,071) (7,655)
FINANCING ACTIVITIES
Long-term debt borrowings.................. 854,661 993,864 882,000
Long-term debt repayments.................. (931,857) (1,060,303) (873,197)
Deferred financing costs................... (589) (13,660) (3,131)
Capital contribution....................... 346
Repurchase of stock options................ (10) (18)
Purchases of treasury stock................ (15) (3)
--------- ----------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES............................... (77,810) (79,774) 5,672
--------- ----------- ---------
(DECREASE) INCREASE IN CASH................. (1,825) 13,330 (19,990)
Cash at beginning of year................... 27,136 13,806 33,796
--------- ----------- ---------
CASH AT END OF YEAR......................... $ 25,311 $ 27,136 $ 13,806
========= =========== =========
See notes to consolidated financial statements.
49
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
AmeriSource Distribution Corporation (formerly Alco Health Distribution
Corporation) ("Distribution") is a Delaware corporation organized by an
affiliate of 399 Venture Partners Inc. ("VPI"), and other investors, including
members of management of AmeriSource Corporation ("AmeriSource") (formerly Alco
Health Services Corporation). Distribution was formed in November 1988 to
acquire AmeriSource in a leveraged buyout transaction (the "Acquisition"). The
accompanying financial statements present the consolidated financial position,
results of operations and cash flows of Distribution and its wholly-owned
subsidiary, AmeriSource Corporation (collectively, the "Company") as of the
dates and for the periods indicated. All material intercompany accounts and
transactions have been eliminated in consolidation.
Business
The Company is a wholesale distributor of pharmaceuticals and related health
care products.
Concentrations of Credit Risk
The Company sells its merchandise inventories to a large number of customers
in the health care industry including independent drug stores, chain drug
stores, hospitals, mass merchandisers, clinics and nursing homes. The Company's
trade accounts receivable are exposed to credit risk, however, the risk is
limited due to the diversity of the customer base and the customer base's wide
geographic dispersion. The Company performs ongoing credit evaluations of its
customers' financial conditions. The Company maintains reserves for potential
bad debt losses and such bad debt losses have been historically within the
Company's expectations.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, which results in a matching of
current costs and revenues. On a supplemental basis, if the first-in, first-out
(FIFO) method of valuation had been used for determining costs, inventories
would have been approximately $88,327,000 and $83,022,000 higher than the
amounts reported at September 30, 1994 and 1993, respectively.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets by the straight-line method.
Deferred Financing Costs
Deferred financing fees and related expenses are being amortized over 3 to 12
years.
Pension Plans
Pension costs, which are primarily computed using the projected unit credit
cost method, are funded based on the minimum required contribution under the
Employee Retirement Income Security Act of 1974.
Revenue Recognition
The Company recognizes revenues at the point at which product is shipped.
Earnings Per Share
Earnings per share are based on 5,000,000 shares, representing the weighted
average shares outstanding during the periods presented including the effect of
the Distribution Plan and the 1991 Option Plan stock options (Note 6), since
all of the options outstanding under these plans will be satisfied with shares
purchased or to be purchased from VPI at $1.00 per share, pursuant to a prior
agreement.
50
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 5.47% in fiscal 1994, resulting in: operating results
which are substantially below the projections made at the time of the
Acquisition; an increase in the Company's indebtedness; and an accumulated
deficit in 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. 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 concluded that the projected
operating results (the "Projection") 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
approximated the remaining amortization period of the goodwill balance at June
30, 1994. The Company then evaluated the recoverability of goodwill on the
basis of the Projection.
The Projection reflects significant cumulative losses indicating that the
carrying value of goodwill is not recoverable. 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 assumptions 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
could not 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 1995 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.
51
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--TAXES ON INCOME
The income tax provision (benefit) is as follows (in thousands):
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
1994 1993 1992
---------- --------------------
Current provision
Federal...................................... $12,147 $4,633 $ 2,574
State and local.............................. 853 1,746 75
---------- --------- ---------
13,000 6,379 2,649
---------- --------- ---------
Deferred provision (benefit)
Federal...................................... (5,625)
State and local.............................. 439
---------- --------- ---------
(5,186) -- --
---------- --------- ---------
Provision for income taxes..................... $ 7,814 $6,379 $ 2,649
========== ========= =========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Statutory federal income tax rate.......... 35.0% 34.8% 34.0%
State and local income tax rate, net of
federal tax benefit....................... (.3) (104.1) (.5)
Tax effect of operating loss carryover..... 6.1 (13.5)
Amortization of difference in book and tax
bases of net assets acquired.............. (39.2) (168.6) (20.3)
Alternative minimum tax.................... (274.2) (20.3)
Other...................................... (6.3) (70.5) (5.4)
--------- ---------- ---------
Effective income tax rate.................. (4.7)% (582.6)% (26.0)%
========= ========== =========
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109),
which requires a change in the method of accounting for income taxes from the
deferred method to the liability method. In accordance with Statement 109, the
Company recorded an adjustment of $33.4 million for the cumulative effect of
adopting Statement 109 as of October 1, 1993. As permitted under Statement 109,
prior period financial statements have not been restated. The cumulative effect
adjustment relates principally 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.
52
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--TAXES ON INCOME--(CONTINUED)
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Significant components of the Company's deferred tax liabilities
(assets) as of September 30, 1994 are as follows (in thousands):
Inventory............................................................. $ 35,712
Fixed assets.......................................................... 4,654
Other................................................................. 351
--------
Gross deferred tax liabilities...................................... 40,717
--------
Net operating losses and tax credit carryovers........................ (11,554)
Allowance for doubtful accounts....................................... (3,748)
Accrued expenses...................................................... (3,524)
Other postretirement benefits......................................... (497)
Other................................................................. (3,173)
--------
Gross deferred tax assets........................................... (22,496)
--------
Valuation allowance for deferred tax assets........................... 10,350
--------
Net deferred tax liabilities........................................ $ 28,571
========
The valuation allowance for deferred tax assets was $17.6 million at October
1, 1993. For the fiscal years ended September 30, 1993 and 1992, the deferred
income tax provision (benefit) resulted from timing differences in the
recognition of certain expenses for tax and financial reporting purposes. Due
to limitations on the utilization of tax losses, the Company did not recognize
any deferred income tax (benefit) in 1993 or 1992. The principal components of
deferred taxes are as follows (in thousands):
FISCAL YEAR
ENDED
SEPTEMBER 30
--------------
1993 1992
------ ------
Bad debts....................................................... $ (254) $ 360
Deferred compensation........................................... 164 (31)
Interest........................................................ (491)
Inventory....................................................... (725) (492)
Insurance....................................................... 113 (207)
Fixed assets.................................................... (970)
Other........................................................... (138) (149)
Amount not recognized........................................... 1,810 1,010
------ ------
$ -- $ --
====== ======
An unused tax net operating loss carry-over of $6,910,000 expiring in 2008,
is available to offset future taxable income.
The Company was subject to the alternative minimum tax for the fiscal years
ended September 30, 1994 and September 30, 1992. The alternative minimum tax is
imposed at a 20% rate on the Company's alternative minimum taxable income which
is determined by making statutory adjustments to the Company's regular taxable
income. Net operating loss carryforwards were used to offset up to 90% of the
Company's alternative minimum taxable income. For 1992, the effect of utilizing
the net operating loss carryforward is represented for financial reporting
purposes as an extraordinary credit. The alternative minimum tax paid is
allowed as an indefinite credit carryover against the Company's regular tax
liability in the future when the Company's
53
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--TAXES ON INCOME--(CONTINUED)
regular tax liability exceeds the alternative minimum tax liability. As of
September 30, 1994, the Company has a $7,142,000 alternative minimum tax credit
carryforward.
Income tax payments (refunds) amounted to $3,891,000, $395,000 and
$(1,089,000) in the years ended September 30, 1994, 1993 and 1992,
respectively.
NOTE 4--LONG-TERM DEBT
On March 30, 1993, AmeriSource entered into a credit agreement (the "Credit
Agreement") with a syndicate of financial institutions providing senior secured
facilities of up to $425 million. The Credit Agreement provides for initial
borrowings based on commitments of $380 million, consisting of a term loan of
$20 million and a revolving credit loan of up to $360 million. The maximum
amount that may be borrowed under the Credit Agreement is limited to the extent
of a sufficient borrowing base, which is essentially 85% of eligible accounts
receivable and 60% of eligible inventory. Under the terms of the Credit
Agreement, AmeriSource has pledged substantially all its assets to secure its
borrowings under the Credit Agreement and AmeriSource's parent, Distribution,
has pledged the common stock of AmeriSource. The term loan matures, and the
commitment of the syndicate to make revolving credit loans expires, on April 1,
1996.
The term loan and the revolving credit loan bear interest at a rate per annum
equal to, at AmeriSource's option, LIBOR plus 3% or the prime rate plus 1 1/2%.
AmeriSource has entered into a two-year interest rate cap of 12% with respect
to $100 million in borrowings under the revolving credit loan for the purpose
of limiting AmeriSource's exposure to an increase in interest rates. In
addition, AmeriSource is required to pay a fee of 1/2% per annum on the average
unused portion of the revolving credit loan commitment plus a $200,000 annual
administration fee. The Credit Agreement, as amended, contains certain
restrictive covenants and requires AmeriSource, among other things, to maintain
minimum defined net worth levels, satisfy certain financial ratios and places
certain limitations on investments, capital expenditures, additional debts,
changes in capital structure and dividend payments.
At September 30, 1994, the $20 million outstanding under the term loan and
the $156 million outstanding under the revolving credit loan bore interest at
the rate of 8.10% per annum. Initial borrowings under the Credit Agreement were
used to extinguish the obligations outstanding under AmeriSource's former
revolving credit facility, which was due to expire in December, 1993. An
extraordinary loss of $3.3 million, net of a tax benefit of $1.3 million, was
recorded during the fiscal year ended September 30, 1993 representing the
write-off of the unamortized financing fees relating to the former revolving
credit facility. In connection with the Credit Agreement, the Company incurred
approximately $7.7 million in financing fees which have been deferred and are
being amortized on a straight-line basis over the three year term of the
indebtedness.
The 14 1/2% Senior Subordinated Notes (the "Notes") were sold on September
15, 1989 in a public offering and are due September 15, 1999. The Notes are
unsecured obligations and are subordinated to the Credit Agreement and certain
other indebtedness, and may be redeemed at the option of the Company at a
premium, together with accrued and unpaid interest to the redemption date, at
any time on or after September 15, 1994. If, for the twelve-month period ending
on each of August 31, 1996 and 1997, the Company's consolidated fixed charge
ratio (as defined) exceeds 1.5 to 1, the Company shall be required to redeem or
otherwise repurchase in the open market and retire 5% and 10%, respectively, of
the principal amount of the Notes. The Company shall not be required to make
such redemption or repurchase until such time, and to the extent, funds become
available under the Credit Agreement or any successor or replacement facility.
In addition, the Company is required to redeem on August 31, 1998, 50% of the
aggregate principal amount of the Notes originally issued, reduced by any prior
redemptions or repurchases. During the fiscal year ended
54
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT--(CONTINUED)
September 30, 1993, the Company purchased and retired $4.4 million of the
Notes. Premiums on the fiscal 1993 purchases resulted in an extraordinary loss
of $549,000, net of a tax benefit of $222,000. During the fiscal year ended
September 30, 1994, the Company purchased and retired an additional $4.4
million of Notes, resulting in an extraordinary charge of $679,000, net of a
tax benefit of $23,000, consisting of the write-off of related unamortized
financing fees and premiums paid on redemption.
During the fiscal year ended September 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 Notes. The only material difference between the terms
of the New Notes and the terms of the 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 Notes. The indenture of the 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 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 Notes equal
to 20% of the principal amount of 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 Notes cash consideration of
$520,000 in exchange for each holder's agreement not to tender any of the 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 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 fiscal year ended September 30, 1994.
On July 26, 1993, Distribution issued $126.5 million principal amount of 11
1/4% Senior Debentures ("Senior Debentures") due 2005 in a public offering.
Interest on the Senior Debentures will be payable semi-annually on January 15
and July 15 of each year, commencing January 15, 1994. Through and including
the semi-annual interest payment due July 15, 1998, Distribution may elect, at
its option, to issue additional Senior Debentures in satisfaction of its
interest payment obligations. The Senior Debentures are senior unsecured
obligations of Distribution and rank pari passu in right of payment with all
senior borrowings of Distribution and senior in right of payment to all
subordinated indebtedness of Distribution. As indebtedness of Distribution, the
Senior Debentures are structurally subordinated to all indebtedness and other
obligations of AmeriSource. Substantially all the net proceeds of the offering
(approximately $122 million) were applied to redeem the 18% Senior Subordinated
Debentures, 18 1/2% Merger Debentures and 19 1/2% Junior Subordinated
Debentures of Distribution at a redemption price of 100% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
redemption. The indenture relating to the Senior Debentures contains
restrictions relating to, among other things, the payment of dividends, the
repurchase of stock and the making of certain other restricted payments, the
incurrence of additional indebtedness and the issuance of preferred stock, the
creation of certain liens, certain asset sales, transactions with subsidiaries
and other affiliates, dividends and other payment restrictions affecting
subsidiaries, and mergers and consolidations. The debt refinancing resulted in
an extraordinary charge of $12.8 million during the fiscal year ended September
30, 1993 relating to the redemption of the Merger Debentures and the write-off
of
55
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT--(CONTINUED)
deferred financing costs, net of a tax benefit of $3.2 million. In connection
with the Senior Debentures, the Company incurred approximately $5.1 million in
financing fees which have been deferred and are being amortized on a straight-
line basis over the twelve year life of the indebtedness.
The indentures governing the Credit Agreement, the Notes, the New Notes and
the Senior Debentures contain restrictions and covenants, as amended, which
include limitations on incurrence of additional indebtedness, prohibition of
indebtedness senior to the Notes and New Notes and junior to the Credit
Agreement, restrictions on distributions and dividends to stockholders,
including Distribution, transactions with affiliates and certain corporate acts
such as mergers, consolidations and the sale of substantially all assets.
Additional covenants require compliance with financial tests, including current
ratio, leverage, interest coverage ratio, fixed charge coverage and maintenance
of minimum net worth.
Interest paid on the above indebtedness during the fiscal years ended
September 30, 1994, 1993 and 1992 amounted to $46.1 million, $39.7 million and
$52.2 million, respectively.
Financing fees and expenses incurred with respect to the above indebtedness
have been capitalized and are being amortized over the terms of the related
indebtedness. Total amortization of these fees and expenses (included in
interest expense) for the fiscal years ended September 30, 1994, 1993 and 1992
was $4.0 million, $3.9 million and $4.0 million, respectively.
The carrying amount of the Company's revolving credit facility approximates
fair value. The combined fair value of the Notes and New Notes is approximately
$176 million and is based on quoted market prices. The fair value of the Senior
Debentures is approximately $145 million and is based on quotes from brokers.
It was not practicable to estimate the fair value of the other debt or
convertible subordinated debentures.
NOTE 5--COMMON STOCK
The holders of the Class A common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders of Distribution. Except as
otherwise required by law, holders of the Class B common stock and Class C
common stock generally do not possess the right to vote on any matters to be
voted upon by the stockholders of Distribution.
The holders of the Class A common stock may elect at any time to convert any
or all such shares into the Class B common stock on a share-for-share basis.
Holders of the Class B common stock may elect at any time to convert any or all
of such shares into the Class A common stock, on a share-for-share basis, to
the extent the holder thereof is not prohibited from owning additional voting
securities by virtue of regulatory restrictions.
The Class C common stock is subject to substantial restrictions on transfer
and has certain registration and "take-along" rights. A share of Class C common
stock will automatically be converted into a share of Class A common stock (a)
immediately prior to its sale in a subsequent public offering or (b) at such
time as such share of Class C common stock has been sold publicly after a
subsequent public offering in a transaction that complies with any maximum
quantity limitations applicable to such sale. Once a share of Class C common
stock has been converted into Class A common stock it will no longer be subject
to any restrictions on transfer nor will it be entitled to the benefits of
registration and take-along rights.
During fiscal 1992, the Company increased the number of shares of Class A
common stock and Class B common stock authorized to be issued from 10,000,000
each to 30,000,000 each and increased the number of shares of Class C common
stock authorized to be issued from 500,000 to 2,000,000. During fiscal 1993,
1,187 1/2 shares of Class A common stock were purchased as treasury stock.
During fiscal 1994, 15,000 shares of Class A common stock were purchased as
treasury stock.
56
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PENSION AND OTHER BENEFIT PLANS
AmeriSource provides a benefit for the majority of its employees under
noncontributory defined benefit pension plans. For each employee, the benefits
are based on years of service and average compensation.
A summary of the components of net periodic pension cost charged to expense
for the company-sponsored defined benefit pension plans together with
contributions charged to expense for a multi-employer union administered
defined benefit pension plan the Company participates in follows (in
thousands):
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
Service cost............................... $ 2,198 $ 1,912 $ 1,669
Interest cost on projected benefit
obligation................................ 2,165 2,034 1,879
Actual return on plan assets............... (13) (2,842) (3,090)
Net amortization and deferral.............. (2,038) 979 1,490
---------- ---------- ----------
Net pension cost of defined benefit plans.. 2,312 2,083 1,948
Net pension cost of multi-employer plan.... 142 110 91
---------- ---------- ----------
Total pension expense...................... $ 2,454 $ 2,193 $ 2,039
========== ========== ==========
The following table sets forth (in thousands) the funded status and amount
recognized in the consolidated balance sheets for the company-sponsored defined
benefit pension plans:
1994 1993
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
Plan assets at fair value...... $24,457 $ 333 $24,155 $ 280
Actuarial present value of
benefit obligations:
Vested....................... 22,420 1,168 20,898 603
Accumulated, not vested...... 421 210 576 171
------- ------- ------- -----
Accumulated benefit
obligations................... 22,841 1,378 21,474 774
Effect of future pay
increases................... 8,559 17 7,987 113
------- ------- ------- -----
Projected benefit obligation... 31,400 1,395 29,461 887
------- ------- ------- -----
Plan assets (less than)
projected benefit obligation.. (6,943) (1,062) (5,306) (607)
Unrecognized net transition
asset......................... (996) (1,167)
Unrecognized prior service
cost.......................... 3,380 733 3,680 357
Adjustment to recognize minimum
liability..................... (813) (372)
Unrecognized net loss related
to assumptions................ 4,013 149 2,117 128
------- ------- ------- -----
Pension (liability) recognized
in balance sheet.............. $ (546) $ (993) $ (676) $(494)
======= ======= ======= =====
Assumptions used in computing the funded status of the plans were as follows:
1994 1993 1992
------ ------ -----
Discount rate............................................ 7.75% 7.25% 8.0%
Rate of increase in compensation levels.................. 6.25% 5.75% 6.5%
Expected long-term rate of return on assets.............. 10.00% 10.00% 10.0%
57
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PENSION AND OTHER BENEFIT PLANS--(CONTINUED)
Plan assets at September 30, 1994 are invested principally in listed stocks,
corporate and government bonds and cash equivalents.
Additionally, the Company sponsors the Employee Investment Plan, a defined
contribution 401(k) plan, which covers salaried and certain hourly employees.
Eligible participants may contribute to the plan up to 2% to 6% of their
regular compensation before taxes. The Company matches the employee
contributions in an amount equal to 50% of the participants' contributions. An
additional discretionary Company contribution in an amount not to exceed 50% of
the participants' contributions may also be made depending upon the Company's
performance. All contributions are invested at the direction of the employee in
one or more funds. Employer contributions vest over a five-year period
depending upon an employee's years of service. Costs of the plan charged to
expense for the fiscal years ended September 30, 1994, 1993 and 1992 amounted
to $1,093,000, $792,000 and $926,000, respectively.
Distribution adopted the AmeriSource Distribution Corporation and
Subsidiaries Employee Stock Purchase Plan (the "Distribution Plan") to enable
key members of management of AmeriSource to participate in the equity ownership
of Distribution. The securities subject to the Distribution Plan are
Distribution's Class A common stock. The purchase price for shares of
Distribution was $1.00 per share. Eligible management participants with prior
AmeriSource options were required to defer the purchase of some or all of the
Distribution Class A common stock allocated to them. Pursuant to the
Distribution Plan, management investors, on November 3, 1989, purchased options
on 581,812 1/2 shares of Distribution's Class A common stock which became
exercisable in 20% annual increments commencing on January 1, 1990 and expire
five years after the date of grant, or if Distribution has not gone public or
been sold within that five-year period, at the earlier of (i) 10 years from the
date of grant, (ii) the date Distribution is sold or (iii) 90 days after the
date Distribution goes public. During fiscal 1991 and 1993, respectively,
21,312 1/2 and 41,312 1/2 options purchased by management investors in fiscal
1990 were extinguished. No options were exercised during fiscal 1994 or 1993
and no additional options will be issued under the Distribution Plan. As of
September 30, 1994, there were 519,187 1/2 options outstanding under the
Distribution Plan, all of which were exercisable.
Distribution adopted the AmeriSource Distribution Corporation Partners Stock
Option Plan (the "Partners Plan") to enable other employees of AmeriSource to
participate in the equity ownership of Distribution. On March 2, 1991, options
to acquire 124,800 shares of Distribution Class A common stock were granted at
an exercise price of $1.00 per share. The options under the Partners Plan
became exercisable when they vested on September 30, 1994 and expire on
December 31, 1994. If an option terminates or expires without having been
exercised, no new options may be granted covering the shares subject to such
option, and such shares shall cease to be reserved for future issuance under
the Partners Plan. No additional options will be granted under the Partners
Plan. During fiscal 1991, 3,200 options were canceled and during fiscal 1992 an
additional 6,400 options were canceled, leaving 115,200 options outstanding
under the Partners Plan as of September 30, 1994.
Distribution adopted the AmeriSource Distribution Corporation 1991 Stock
Option Plan (the "1991 Option Plan") for the granting of non-qualified stock
options to acquire up to an aggregate of 362,500 shares of Distribution Class A
common stock. The options granted to certain members of the Company's
management under the 1991 Stock Option Plan represented the shares unallocated
under the Distribution Plan and options never granted under a performance stock
option plan originally announced by Distribution in 1989 and reflect
achievement in the Company's operating performance through fiscal year ended
September 30, 1991. The options granted under the 1991 Option Plan are not
subject to forfeiture, exercisable at the rate of 50% per year on each of
January 1, 1993 and January 1, 1994 and expire on November 3, 1994, or if prior
to November 3,1994, Distribution has not gone public or been sold, then at the
earlier of (i) November
58
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PENSION AND OTHER BENEFIT PLANS--(CONTINUED)
3, 1999, (ii) the date Distribution is sold or (iii) 90 days after the date
Distribution goes public. During fiscal 1994, 10,000 options were extinguished,
leaving 352,500 options outstanding at an exercise price of $1.00 per share
under the 1991 Option Plan as of September 30, 1994.
The Company's 1992 Stock Option Plan (the "1992 Option Plan"), which was
adopted by the Board of Directors on March 31, 1992 and approved by the
stockholders on April 7, 1992, provides for the granting over time of non-
qualified stock options to acquire up to approximately 1.7 million shares of
Distribution Class A common stock to employees of the Company. Such options
will be granted based upon performance and with vesting schedules to be
determined at the time of grant. Under the 1992 Option Plan, the exercise price
of options will not be less than the fair market value of the Class A common
stock on the date of the grant. Options granted to employees will not be
exercisable after the expiration of six years from the date of the grant or
such sooner date as determined. No options have been granted under the 1992
Option Plan.
As a result of special termination benefit packages previously offered, the
Company provides medical, dental and life insurance benefits to certain
retirees and their dependents. These benefit plans are unfunded. Prior to
October 1, 1993, the Company recognized the expenses for these plans on the
cash basis. Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (Statement 106), which requires
that the cost of postretirement health care benefits be recognized on the
accrual basis as employees render service to earn the benefit instead of on the
cash basis when the benefits are paid. As of October 1, 1993, the Company
adopted Statement 106 by recognizing the accumulated obligation related to
these benefits. The cumulative effect of this change in accounting principle
resulted in a non-cash charge to net income of $1.2 million. In addition to the
cumulative effect adjustment, the expense for postretirement benefits other
than pensions for the fiscal year ended September 30, 1994, was $80,000,
approximately equal to the cash payments. The cash payments for such benefits
in fiscal years 1993 and 1992, respectively, were approximately the same as
fiscal 1994. Since the plans are unfunded and relate only to certain retirees,
the fiscal 1994 expense accrual for these benefits consisted solely of an
interest cost component. The accumulated postretirement benefit obligation was
$1.1 million as of September 30, 1994. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 7.25% and
7.75% at October 1, 1993 and September 30, 1994, respectively. A health care
cost trend rate of 11.4% was assumed for fiscal 1995, gradually declining to an
ultimate level of 5.5% over 15 years. Increasing the assumed health care cost
trend rates by 1% in each year and holding all other assumptions constant,
would increase the accumulated postretirement benefit obligation as of
September 30, 1994 by $77,500 and increase the postretirement benefit cost in
fiscal 1994 by $7,000.
NOTE 7--LEASES
The costs of capital leases are included in property and equipment and the
obligations therefor in other debt. Related amortization is included in
depreciation. At September 30, 1994, future minimum payments totaling
$21,346,000 under noncancelable operating leases with remaining terms of more
than one year were due as follows: 1995--$6,214,000; 1996--$5,197,000; 1997--
$3,390,000; 1998--$1,885,000; 1999--$1,281,000; thereafter (through 2004) --
$3,379,000. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
Total rental expense was $6,168,000 in 1994, $6,034,000 in 1993 and
$5,647,000 in 1992.
59
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--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 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.
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. Effective October 26, 1994, the Company entered into a Judgment
Sharing Agreement with other wholesaler and pharmaceutical manufacturer
defendants. Under the Judgment 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 judgment 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
judgment or one million dollars. In addition, the Company has released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. The Judgment Sharing Agreement
covers the federal court litigation as well as the cases which have been filed
in various state courts. 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 soil 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
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 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.
60
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--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 products containing L-Tryptophan from 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.
The Company has received Notices of Proposed Adjustment from the Internal
Revenue Service in connection with an audit of the Company's federal income tax
returns for the taxable years 1987 through 1991. The proposed adjustments
indicate a net increase to taxable income for these years of approximately $23
million and relate principally to the deductibility of costs incurred with
respect to the Acquisition. The Company has analyzed these matters with tax
counsel, believes it has meritorious defenses to the adjustments proposed by
the Internal Revenue Service and any amounts assessed will not have a material
effect on the financial condition of the Company.
At September 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.
On December 3, 1991, AmeriSource entered into a settlement agreement with
Bear Stearns & Co., Inc. ("Bear Stearns") resolving a civil action that had
been filed on August 14, 1989 and Bear Stearns' interest in an appraisal action
arising from the Acquisition. AmeriSource paid Bear Stearns $7,235,000 in 1992
and will pay $2,500,000 in November 2001, without interest and subject in
certain circumstances to earlier payment. The Delaware Chancery Court approved
the settlement of Bear Stearns' interest in the appraisal action and the
settlement of the remaining claims (representing less than 5% of the shares in
the original action) on similar terms. Payments of $600,000 were made during
fiscal 1992 in settlement of a portion of the remaining claims. These
settlements with Bear Stearns and the other dissenters resulted in an
extraordinary gain in 1992 of $4,486,000 from the extinguishment of the
associated debt.
NOTE 9--NON-RECURRING CHARGES
The non-recurring charges in 1993 consisted of $1,254,000 in losses on the
disposal of three warehouses and charges of $969,000 for the write-down to net
realizable value of two additional warehouses no longer in operation which were
designated for sale. The non-recurring charges in 1992 consisted of a loss of
$287,000 incurred on the sale of a warehouse no longer in operation and the
write off of $1,957,000 in professional fees incurred in connection with a
public offering attempted during 1992 which was later abandoned due to market
conditions.
NOTE 10--RELATED PARTY TRANSACTIONS
On October 21, 1991, an involuntary bankruptcy petition under Chapter 7 of
the United States Bankruptcy Code was filed against RDS Acquisition Corp.
("RDS"), which was a customer of the Company. Affiliates of VPI had substantial
equity and debt interests in RDS and related entities. VPI indemnified
AmeriSource for $5,800,000 of the amounts owed by RDS to AmeriSource on October
25, 1991, for which AmeriSource did not otherwise recover the amount owed.
61
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--SUBSEQUENT EVENTS
In December 1994, the Company sold substantially all of its trade accounts
and notes receivable (the "Receivables") to AmeriSource Receivables Corporation
("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade
receivables securitization program (the "Receivables Program"). As contemplated
by the Receivables Program, the Company formed and capitalized ARC through a
contribution of $40 million. Contemporaneously, the Company entered into a
Receivables Purchase Agreement with ARC, whereby ARC agreed to purchase on a
continuous basis Receivables originated by the Company. Pursuant to the
Receivables Program, ARC will transfer such Receivables to a master trust in
exchange for, among other things, certain trade receivables-backed certificates
(the "Certificates") representing a right to receive a variable principal
amount. Contemporaneously, Certificates in an aggregate principal amount of up
to $230 million face amount were sold to investors. During the five year term
of the Receivables Program, the cash generated by collections on the
Receivables will be used to purchase, among other things, additional
Receivables originated by the Company. The Certificates bear interest at a rate
selected by the Company equal to (i) the higher of (a) the prime lending rate
and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis
points. In addition, during the first seventy five days of the Receivables
Program, the Company may select an interest rate equal to the federal funds
rate plus 125 basis points. The interest rates for the Certificates are subject
to step-ups to a maximum amount of an additional 100 basis points over the
otherwise applicable rate.
At the same time that it entered into the Receivables Program, the Company
and its senior lenders amended its existing Credit Agreement. Among other
things, the Amended and Restated Credit Agreement: (i) extended the term of the
Credit Agreement until January 3, 2000; (ii) established the amount the Company
may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR
plus 225 basis points and provided for further interest rate stepdowns upon the
occurrence of certain events; (iv) modified the borrowing base availability
from inventory and receivable based to inventory based; and (v) increased the
Company's ability to make acquisitions and pay dividends.
Contemporaneously with the consummation of the Receivables Program and the
execution of the Amended and Restated Credit Agreement, the Company called for
optional redemption all of the outstanding Notes and New Notes at a redemption
price of 106% of the principal amount plus accrued interest through the
redemption date of January 12, 1995.
62
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--OTHER INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED(1)
--------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1993 1994 1994 1994
------------ ---------- ---------- -------------
Revenues.................... $1,045,776 $1,067,112 $1,079,302 $1,109,642
Gross Profit................ 53,999 58,480 57,455 65,257
Income (Loss) Before
Extraordinary Items and
Cumulative Effects of
Accounting Changes......... 2,579 3,822 (180,057) 1,239
Extraordinary Charge-Early
Retirement of Debt......... (656)
Cumulative Effects of
Accounting Changes......... (34,598)
Net Income (Loss)........... (32,675) 3,822 (180,057) 1,239
Per Share:
Income (Loss) Before
Extraordinary Items and
Cumulative Effects of
Accounting Changes......... .51 .77 (36.01) .25
Extraordinary Items......... (.13)
Cumulative Effects of
Accounting Changes......... (6.92)
Net Income (Loss)........... (6.54) .77 (36.01) .25
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1992 1993 1993 1993
------------ ---------- ---------- -------------
Revenues.................... $917,681 $920,195 $918,499 $962,650
Gross Profit................ 51,378 53,385 50,302 54,373
(Loss) Before Extraordinary
Items...................... (2,895) (1,308) (2,257) (1,014)
Extraordinary Charge-Early
Retirement of Debt......... (2,635) (9,255)
Extraordinary Credit-Income
Taxes...................... 100 150 60 436
Net (Loss).................. (2,795) (3,793) (2,197) (9,833)
Per Share:
(Loss) Before Extraordinary
Items...................... (.58) (.26) (.45) (.20)
Extraordinary Items......... .02 (.50) .01 (1.76)
Net (Loss).................. (.56) (.76) (.44) (1.96)
- - - --------
(1) December 31, 1993 amounts reflect the cumulative effect of the accounting
changes for postretirement benefits other than pensions and income taxes.
June 30, 1994 amounts reflect the write-off of goodwill discussed in Note
2.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(No response to this Item is required.)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
The following table sets forth information concerning the directors,
executive officers and officers of Distribution and AmeriSource and key
employees of AmeriSource.
NAME AGE TITLE
---- --- -----
DIRECTORS AND EXECUTIVE OFFICERS
- - - --------------------------------
John F. McNamara(1)(2)............ 59 Chairman, President and Chief Executive
Officer
David M. Flowers.................. 47 Group President--Eastern Region
R. David Yost..................... 47 Group President--Central Region
OFFICERS
- - - --------
Teresa T. Ciccotelli.............. 43 Vice President, Legal Counsel and Secretary
Robert D. Gregory................. 65 Vice President, Human Resources and
Assistant Secretary
Kurt J. Hilzinger................. 34 Vice President, Finance and Treasurer
42 Vice President, Controller and Assistant
John A. Kurcik.................... Treasurer
Robert E. McHugh.................. 53 Vice President, Marketing
J. Michael McNamara............... 38 Senior Vice President, Sales
KEY EMPLOYEES
- - - -------------
David C. Carter................... 57 President--Rita Ann Distributors division
of AmeriSource
Gary M. Davis..................... 56 Regional Vice President--South Central
Region of AmeriSource and General Manager,
Paducah Division of AmeriSource
W. Phil Gibson.................... 49 Regional Vice President--West Central
Region of AmeriSource
Robert W. Meyer................... 55 Regional Vice President--North Central
Region of AmeriSource
Greg Zurlage...................... 47 Regional Vice President--Mid Central Region
of AmeriSource and General Manager,
Columbus Division of AmeriSource
OTHER DIRECTORS
- - - ---------------
Bruce C. Bruckmann(1)............. 41 Director
Richard C. Gozon(3)............... 56 Director
Lawrence C. Karlson(2)............ 51 Director
Harold O. Rosser(2)............... 46 Director
George H. Strong(3)............... 68 Director
Barton J. Winokur(1).............. 54 Director
- - - --------
(1) Member of Compensation Committee.
(2) Member of Acquisition Committee.
(3) Member of Audit Committee.
John F. McNamara. Mr. McNamara has been Chairman, President and Chief
Executive Officer of the Company and AmeriSource since 1989 and has been
President of AmeriSource since 1987. Prior to holding these positions, he was
Chief Operating Officer of AmeriSource from 1986 to 1989 and Executive Vice
President of AmeriSource from 1985 to 1987. He also served as Chairman, from
1986 to 1990, and President, from 1981 to 1986, of the Kauffman-Lattimer
division of AmeriSource.
64
David M. Flowers. Mr. Flowers has been Group President of the Eastern Region
since 1989. Prior to that he was President of the AmeriSource Southeast Region
from 1988 to 1989 and President of the Duff Brothers Division of AmeriSource
from 1984 to 1987.
R. David Yost. Mr. Yost has been Group President of the Central Region since
1989. Before serving in these positions he was President, from 1986 to 1989,
and Executive Vice President and General Manager, from 1984 to 1986, of the
Kauffman-Lattimer Division of AmeriSource.
Teresa T. Ciccotelli. Ms. Ciccotelli has served as Vice President, Legal
Counsel and Secretary since 1989. Prior to that, from 1985 to 1989, she was an
attorney with Alco Standard Corporation.
Robert D. Gregory. Mr. Gregory has been Vice President, Human Resources and
Assistant Secretary of the Company since 1989 and Vice President, Human
Resources of AmeriSource since 1986. Prior to that, from 1984 to 1986, he
served as Manager, Employee Relations for Alco Standard Corporation.
Kurt J. Hilzinger. Mr. Hilzinger has served as Vice President, Finance and
Treasurer since October 1993. Prior to that, since March 1991, he served as
Vice President, Financial Planning. Before joining the Company, he was a Vice
President in the Corporate Advisory Division of Citicorp, from 1986 to 1991.
John A. Kurcik. Mr. Kurcik has been Vice President, Controller and Assistant
Treasurer of the Company since 1989. Mr. Kurcik was Controller, from 1987, and
Director of Accounting, from 1985 to 1987, of AmeriSource.
Robert E. McHugh. Mr. McHugh joined the Company as Vice President, Marketing
in August 1991. Prior to that he was President of J.E. Goold from 1990 to 1991
and Vice President, Industry Affairs of the National Wholesale Druggists'
Association from 1983 to 1990.
David C. Carter. Mr. Carter has served as President of the Company's RitaAnn
Distributors specialty products division since 1992. Until 1994 he also served
as Senior Vice President, Industry and Corporate Affairs of AmeriSource. Prior
to 1989, he served as President of the Northeastern Region of AmeriSource
(formerly known as The Drug House) from 1979 to 1989.
Gary M. Davis. Mr. Davis has been Regional Vice President of the South
Central Region of AmeriSource and General Manager of AmeriSource's Paducah
Division since 1989. Prior to that he was Executive Vice President of the
Columbus Division of AmeriSource from 1988 to 1989, and Vice President General
Manager of Toledo Division of AmeriSource from 1984 to 1988.
W. Phil Gibson. Mr. Gibson has served as Regional Vice President, West
Central Region since 1994. Mr. Gibson served as Regional Vice President,
Atlantic Coast Region of AmeriSource between 1988 and 1994. Prior to that he
was Regional Vice President, Greensboro Division of AmeriSource from 1987 to
1989.
J. Michael McNamara. Mr. McNamara has served as Senior Vice President--Sales
of the Company since November, 1994. Previously he served as Regional Vice
President of the West Central Region of AmeriSource since April 1991. Prior to
that he was Vice President, Sales and Marketing of the Company from 1990 to
1991, Vice President and General Manager of the Toledo Division of AmeriSource
from 1988 to 1990, and Director of Marketing of the Columbus Division of
AmeriSource from 1984 to 1988.
Robert W. Meyer. Mr. Meyer has been Regional Vice President, North Central
Region of AmeriSource since 1990. Prior to that he served as President of the
Tiffin Division of AmeriSource (formerly known as Meyers & Son Co.) from 1985
to 1990.
Greg Zurlage. Mr. Zurlage has served as Regional Vice President of the Mid
Central Region of AmeriSource and General Manager of AmeriSource's Columbus
Division since 1989. Prior to that he served as Vice President and Division
Manager of the Louisville Division of AmeriSource from 1982 to 1989.
65
Bruce C. Bruckmann. Mr. Bruckmann has been a director since August 1992. Mr.
Bruckmann previously was a director of Distribution since 1989 and of
AmeriSource since 1988. Mr. Bruckmann resigned as a director of both companies
in December 1991. Mr. Bruckmann is a Managing Director of Citicorp Venture
Capital Ltd. and of Court Square Capital Limited and serves as a director of
Cort Furniture Rental Corporation, New Cort Holdings Corporation, Mohawk
Industries, Inc., Hancor Holding Corp., Fair Markets, Inc., FF Holdings
Corporation and Farm Fresh, Inc.
Harold O. Rosser. Mr. Rosser has been a director since December 1992. Mr.
Rosser previously was a director of both companies since 1988. Mr. Rosser
resigned as a director in June 1990. Mr. Rosser is a Managing Director of
Citicorp Venture Capital Ltd. and of Court Square Capital Limited and serves
as a director of Corral America Holdings, Davco Restaurants, Inc., FF Holdings
Corporation, Farm Fresh, Inc. and Rax Restaurants, Inc.
Barton J. Winokur. Mr. Winokur has been a director since 1990. Mr. Winokur
is a partner of Dechert Price & Rhoads and serves as a director of CDI
Corporation, FF Holdings Corporation, Farm Fresh, Inc., Davco Restaurants,
Inc. and The Bibb Company.
George H. Strong. Mr. Strong was elected to the board of directors in 1994.
Mr. Strong is a private investor and serves as a director of Corefunds, Health
South Corp. and Integrated HealthCorp.
Richard C. Gozon. Mr. Gozon was elected to the board of directors in 1994.
Mr. Gozon is Executive Vice President of Weyerhaeuser Company and serves as a
director of UGI Corp. and Nocopi Technologies.
Lawrence C. Karlson. Mr. Karlson was elected to the board of directors in
1994. Mr. Karlson is Chairman of Karlson Corporation and serves as a director
of Meridian Bank Corp. and CDI Corporation.
The directors were appointed to the boards of Distribution and AmeriSource
to serve until their successors are elected and qualified. Each director is a
citizen of the United States. Officers are elected annually by the Board of
Directors to serve for the ensuing year and until their respective successors
are elected. There are no arrangements or understandings between any of the
officers and any other person pursuant to which he or she was elected an
officer. J. Michael McNamara, Senior Vice President--Sales is the son of John
F. McNamara, Chairman, President and Chief Executive Officer of the Company
and AmeriSource.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for fiscal years ending September 30, 1992,
1993 and 1994, certain information regarding the cash compensation paid by the
Company, as well as certain other compensation paid or accrued for those
years, to each of the executive officers of the Company, in all capacities in
which they served:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------
(E) (I)
(A) (B) (C) (D) OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION COMPENSATION(2)
--------------------------- ---- ------- -------- ------------ ---------------
[$] [$] [$] [$]
JOHN F. MCNAMARA 1994 396,609 200,000 8,468(/3/)
Chairman, President and 1993 380,340 150,000 110 7,434(/3/)
Chief Executive Officer 1992 340,340 185,000 -- --
DAVID M. FLOWERS 1994 169,430 100,000 8,822(/4/)
Group President--Eastern
Region 1993 159,980 75,000 -- 8,428(/4/)
1992 149,480 65,000 -- --
R. DAVID YOST 1994 179,790 100,000 8,704(/5/)
Group President--Central
Region 1993 170,340 75,000 -- 9,079(/5/)
1992 156,840 75,000 -- --
66
- - - --------
(1) The amounts shown consist of cash bonuses earned in the fiscal year
identified but paid in the subsequent fiscal year.
(2) In accordance with SEC provisions, amounts of All Other Compensation are
excluded for the Company's 1992 fiscal year.
(3) "All Other Compensation" for Mr. McNamara in 1994 and 1993 respectively
includes the following: (i) $966 and $782 in club dues, (ii) $1,450 and
$1,200 in tax return preparation fees, (iii) $4,497 and $5,237 in
contributions under AmeriSource's Employee Investment Plan, (iv) for fiscal
1994, $1,554 for spousal travel expenses and (v) for fiscal 1993, $215 in
miscellaneous items.
(4) "All Other Compensation" for Mr. Flowers in 1994 and 1993 respectively
includes the following: (i) $4,175 and $3,191 in club dues, (ii) for fiscal
1994, $150 for spousal travel expenses, and (iii) $4,497 and $5,237 in
contributions under AmeriSource's Employee Investment Plan.
(5) "All Other Compensation" for Mr. Yost in 1994 and 1993 respectively
includes the following: (i) $2,311 and $1,692 in club dues, (ii) $1,850 and
$2,150 in tax return preparation fees, (iii) for fiscal 1994, $45.85 for
spousal travel expenses, and (iv) $4,497 and $5,237 in contributions under
AmeriSource's Employee Investment Plan.
STOCK OPTIONS
Distribution Stock Purchase Plan. As of October 31, 1989, the Company adopted
the AmeriSource Distribution Corporation and Subsidiaries Employee Stock
Purchase Plan (the "Distribution Plan") to enable certain management level
employees (the "Management Investors") to participate in the equity ownership
of the Company. The Management Investors include Messrs. Flowers, John McNamara
and Yost, other current officers of the Company and additional members of
management of the Company and its subsidiaries. The securities of the Company
subject to the Distribution Plan originally included (a) up to 750,000 shares
of the Company's Class A Common Stock and (b) $750,000 aggregate principal
amount of the Company's 19.5% Junior Subordinated Debentures due 2001 (the
"Junior Subordinated Debentures").
The Management Investors have been subject to restrictions on the sale or
transfer of their Class A Common Stock. Before January 1, 1994, a Management
Investor could not transfer his or her securities except with the consent of
the Company or in connection with specified events, such as the sale of the
Company. If a Management Investor's employment with the Company was terminated,
the Company had the right to repurchase the Class A Common Stock owned or
subject to options. VPI is required, under certain circumstances, to allow the
Management Investors to participate if it proposes to sell shares of the
Company's Class A Common Stock or Class B Common Stock.
As of September 30, 1994, Management Investors had purchased 77,000 shares of
the Company's Class A Common Stock, held options to purchase 519,187.5 shares
of the Company's Class A Common Stock. Of the 519,187.5 shares subject to
options, 116,362.5 shares will be repurchased from VPI by the Company for $1.00
per share before being issued pursuant to such options. No further awards will
be granted under the Distribution Plan.
1991 Stock Option Plan. The Company's 1991 Stock Option Plan (the "1991
Option Plan"), which was adopted by the Board of Directors on February 19, 1992
and approved by the stockholders on April 7, 1992, provides for the granting of
non-qualified stock options to acquire up to an aggregate of 362,500 shares of
Class A Common Stock to the Management Investors and certain other members of
the Company's management.
The options once granted to the recipient are not subject to forfeiture and
have an exercise price of $1.00 per share and were exercisable at a rate of 50%
per year on each of January 1, 1993 and January 1, 1994. The options granted,
which represent the shares unallocated under the Distribution Plan and options
never granted under a performance stock option plan originally announced by the
Company in 1989, reflect achievements in operating performance through fiscal
1991. Of the shares subject to options, 337,500 shares will be repurchased from
VPI by the Company for $1.00 per share pursuant to a prior agreement.
67
Options granted to employees must be exercised by November 3, 1994, or, if
the Company has not had a public offering or been sold by that date, then by
the earlier of November 3, 1999, the date the Company is sold or 90 days after
the date of a public offering. Employees whose employment terminates for
reasons other than death, disability or retirement must hold the shares
acquired upon exercise for a period of three years. The 1991 Option Plan
permits, with the consent of the administering committee and if permitted by
the restrictions in the Company's and AmeriSource's financing agreements, the
exercise of options by delivery of shares of Class A Common Stock owned by the
optionee, by withholding of such shares of Class A Common Stock upon exercise
of the option in lieu of or in addition to cash or by financing made available
by the Company.
The 1991 Option Plan will continue to be administered by the Board of
Directors of the Company until the Company registers the Class A Common Stock
under Section 12 of the Exchange Act, whereupon, the 1991 Option Plan will be
administered by a committee of Disinterested Persons as defined in the 1991
Option Plan. The Committee will have the power and authority to determine the
extent to which exceptions to the exercisability of options may be granted, to
determine the effect of certain dispositions or a change in control of the
Company on outstanding options, to establish procedures, loans or financing
arrangements to assist in the exercise of options and the satisfaction of tax
withholding obligations, to adopt regulations to carry out the 1991 Option
Plan and to amend options granted under the plan to carry out the purpose of
the 1991 Option Plan.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the "1992
Option Plan"), which was adopted by the Board of Directors on March 31, 1992
and approved by the stockholders on April 7, 1992, provides for the granting
over time of non-qualified stock options to acquire up to approximately 1.7
million shares of Class A Common Stock to employees of the Company. Such
options will be granted based upon performance and with vesting schedules to
be determined at the time of grant.
The 1992 Option Plan will be administered by a committee of Disinterested
Persons as defined in the 1992 Option Plan, which will have the power and
authority to determine the employees to whom awards are granted, the number of
shares of Class A Common Stock with respect to such awards, and the terms of
such awards, including the exercise price of the stock options and any vesting
periods.
Under the 1992 Option Plan, the exercise price of options will not be less
than the fair market value of the Class A Common Stock on the date of the
grant. Options granted to employees will not be exercisable after the
expiration of six years from the date of the grant or such sooner date
determined by the committee. The 1992 Option Plan permits, with the consent of
the committee and if permitted by the restrictions in the Company's and
AmeriSource's financing agreements, the exercise of options by delivery of
shares of Class A Common Stock owned by the optionee, by withholding of such
shares of Class A Common Stock upon exercise of the option in lieu of or in
addition to cash or by financing made available by the Company. The 1992
Option Plan permits the committee to accelerate vesting upon a change of
control and to adjust the number and kind of shares subject to options in the
event of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split, stock dividend or combination of shares. As of
December 1, 1994, no options had been granted under the 1992 Option Plan.
Partners Plan. On December 11, 1990, the Company adopted the AmeriSource
Health Distribution Corporation Partners Stock Option Plan (the "Partners
Plan") to enable employees of AmeriSource other than the Management Investors
to participate in the equity ownership of the Company. An aggregate of 263,158
shares of the Company's Class A Common Stock was originally available under
the Partners Plan. On March 2, 1991, options ("Partners Options") for an
aggregate of 124,800 shares of Class A Common Stock were granted to 39
optionees, each of whom received options for 3,200 shares. There are currently
115,200 shares subject to options under the Partners Plan held by 36
optionees. Each Partners Option became 100% exercisable on September 30, 1994
at an exercise price of $1.00 per share and must be exercised by December 31,
1994. If a holder of a Partners Option exercises, then he or she must hold the
Class A Common Stock so acquired for two years. Certain exceptions to the
limits on exercisability and the holding period may
68
be granted in the event of the sale of the Company, the death of the optionee,
or a public offering. No further awards will be granted under the Partners
Plan. Upon exercise of the Partners Plan options, the holders are subject to
tax liability based upon the difference between the exercise price and the
estimated $35 per share market value of Distribution Class A Common Stock. To
assist holders of Partner Plan options with such tax liability, Distribution
has offered to repurchase from such option holders up to 35% of their shares of
Class A Common Stock obtained through exercise of their options.
VALUE OF UNEXERCISED OPTIONS AS OF SEPTEMBER 30, 1994
The following table sets forth information regarding the number and value of
unexercised options held by the named executive officers of the Company as of
September 30, 1994. None of the named executive officers were granted or
exercised any stock options in fiscal 1994.
NUMBER OF SHARES COVERED BY
OUTSTANDING OPTIONS AND OPTION
VALUES AS OF SEPTEMBER 30, 1994
(C)
(B) VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
------------------------- -------------------------
(A)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
[#] [$]
John F. McNamara
Chairman, President and
Chief Executive Officer.... 246,000 0 * *
David M. Flowers
Group President--Eastern
Region.................... 72,000 0 * *
R. David Yost
Group President--Central
Region.................... 81,000 0 * *
- - - --------
* As of September 30, 1994, there were less than 65 holders of record of
Distribution's common stock. The stock is not actively traded. As a result,
there are not any reliable indications of value for the common stock.
Although there is no reliable independent indicator of value of the common
stock, assuming a $35 per share value of the common stock, Messrs. McNamara,
Flowers and Yost would have in-the-money options of $8,580,000, $2,510,000
and $2,825,000, respectively, as of September 30, 1994.
PENSION PLANS
AmeriSource Corporation Participating Companies Pension Plan. AmeriSource has
a pension plan providing for continuation of pension benefit coverage for
salaried sales and office employees of AmeriSource previously covered under
Alco Standard's Participating Companies Pension Plan. The pension plan also
covers other salaried, sales, and office employees of AmeriSource who meet the
plan's eligibility requirements. Under AmeriSource's pension plan, the
executive officers compensated by AmeriSource are entitled to annual pension
benefits at age 65 equal to the number of years of credited service multiplied
by 1% of average annual compensation earned during the consecutive three years
within the last ten years of participation in the pension plan which yield the
highest average.
All pension plan costs are paid by AmeriSource and the pension plan, and
benefits are funded on an actuarial basis. Compensation earned by executive
officers for purposes of the plan includes salaries and bonuses set forth in
the cash compensation table under "Executive Compensation" above, except that
compensation recognized under the plan may not exceed $200,000, with
adjustments for inflation, as required by the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code, as
amended (the "Code"). For 1993, the compensation limit was $235,840.
69
The years of credited service (with AmeriSource, predecessor companies or
Alco Standard) as of October 1, 1994 for each of the current officers of the
Company were John F. McNamara--13 years; Robert D. Gregory--14 years; David M.
Flowers--18.75 years; R. David Yost--20.08 years; Teresa T. Ciccotelli--9.25
years; John A. Kurcik--16 years; J. Michael McNamara--10 years; Robert E.
McHugh--3.25 years; and Kurt J. Hilzinger--3.58 years.
As required by ERISA and the Code, the pension plan limits the maximum
annual benefits payable at Social Security retirement age as a single life
annuity to the lesser of $90,000, with cost-of-living adjustments, or 100% of
a plan participant's average total taxable earnings during his highest three
consecutive calendar years of participation, subject to certain exceptions for
benefits which accrued prior to September 30, 1988. For 1993, the annual
benefit limit was $115,641.
Supplemental Retirement Plan. AmeriSource also has a Supplemental Retirement
Plan (the "Supplemental Plan"). Coverage under the Supplemental Plan is
limited to participants in AmeriSource's pension plan whose benefits under the
pension plan are limited due to (a) restrictions imposed by the Code on the
amount of benefits to be paid from a tax-qualified plan, (b) restrictions
imposed by the Code on the amount of an employee's compensation that may be
taken into account in calculating benefits to be paid from a tax-qualified
plan, or (c) any reductions in the amount of compensation taken into account
under the pension plan due to an employee's participation in certain deferred
compensation plans sponsored by AmeriSource or one of its subsidiaries. The
Supplemental Plan provides for a supplement to the annual pension paid under
AmeriSource's pension plan to participants who attain early or normal
retirement under such pension plan or who suffer a total and permanent
disability while employed by AmeriSource or one of its subsidiaries and to the
pre-retirement death benefits payable under the pension plan on behalf of such
participants who die with a vested interest in AmeriSource's pension plan. The
amount of the supplement will be the difference, if any, between the pension
or pre-retirement death benefit paid under AmeriSource's pension plan and that
which would otherwise have been payable but for the restrictions imposed by
the Code and any reduction in the participant's compensation for purposes of
AmeriSource's pension plan due to his participation in certain deferred
compensation plans of AmeriSource or one of its subsidiaries.
The following table shows estimated annual retirement benefits that would be
payable to participants under AmeriSource's pension plan and, if applicable,
the Supplemental Plan, upon normal retirement at age 65 under various
assumptions as to final average annual compensation and years of credited
service and on the assumption that benefits will be paid in the form of a
single life annuity. The benefit amounts listed are not subject to any
deduction for Social Security benefits.
ESTIMATED ANNUAL RETIREMENT BENEFITS
YEARS OF CREDITED SERVICE
-------------------------------
FINAL AVERAGE
COMPENSATION 10 20 30 35
------------- ------- ------- ------- -------
$ 50,000........................................ $ 5,000 $10,000 $15,000 $17,500
100,000........................................ 10,000 20,000 30,000 35,000
150,000........................................ 15,000 30,000 45,000 52,500
200,000........................................ 20,000 40,000 60,000 70,000
250,000........................................ 25,000 50,000 75,000 87,500
300,000........................................ 30,000 60,000 90,000 105,000
500,000........................................ 50,000 100,000 150,000 175,000
600,000........................................ 60,000 120,000 180,000 210,000
700,000........................................ 70,000 140,000 210,000 245,000
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee of the Board of Directors during fiscal
1994 was composed of John F. McNamara, Bruce C. Bruckmann and Barton J.
Winokur. Mr. McNamara is Chairman, President
70
and Chief Executive Officer of the Company and AmeriSource. Mr. Winokur is a
partner of Dechert Price & Rhoads which performed legal services for the
Company and AmeriSource during fiscal 1994.
OTHER FORMS OF COMPENSATION
Employee Investment Plan. In fiscal year 1986, AmeriSource adopted a stock
participation plan pursuant to Section 401(k) of the Code, which plan was
amended and restated as a 401(k) Employee Investment Plan (the "EIP") effective
January 1, 1989. Participation in the EIP is generally available to salaried,
office, sales and certain hourly employees of AmeriSource. As of December 31,
1993, participation in the EIP was available to approximately 1,922 employees,
of whom approximately 1,360 were participants. A participant may contribute to
the EIP between 2% and 6% of his or her salary on a "before-tax" basis,
entitling the participant to contributions by his or her employer in an amount
equal to one-half of the participant's contributions. Highly compensated
employees, as defined by the Code, may receive matching employer contributions
of less than one-half of their participant contributions made after April 1,
1993. An additional employer matching contribution, in an amount to be
determined by AmeriSource but not to exceed one-half of the participant's
contributions, may be made to the EIP. The combined amount of employer matching
contributions for the plan year ending December 31, 1993 was 50% of each
participant's contribution. For calendar years 1992 and 1993, a participant's
contributions could not exceed $8,728 and $8,994 per year, respectively. The
cost of the matching employer contributions is ultimately charged to the
division or subsidiary of AmeriSource employing the participant. Matching
employer contributions to the EIP are held in trust and vest to the benefit of
the participant over a period of five years, measured from the date the
participant's employment commenced (as long as the participant continues as an
employee). The EIP is administered by trustees who have selected six mutual
funds managed by Fidelity Investments among which participants may direct the
investment of their entire account balances.
Deferred Compensation Plan. In September 1985, AmeriSource adopted a deferred
compensation plan (the "1985 Deferred Compensation Plan") which permitted
eligible employees of AmeriSource to defer a portion of their compensation
during a period of up to 48 months after October 1, 1985 and, in return, to
receive retirement or survivor benefits, and in certain circumstances,
disability insurability. The amount of the benefits the participant will be
entitled to receive is based on the total number of years the participant
remains employed by AmeriSource or an affiliated company. A participant's
interest in the benefits vests over a period of five years. Mr. McNamara is a
participant in the 1985 Deferred Compensation Plan. Assuming Mr. McNamara
retired from employment with AmeriSource at or after age 65, his monthly
retirement benefits under the 1985 Deferred Compensation Plan would be $2,901,
payable over a 15-year period.
71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of the shares of common stock of AmeriSource are owned by the Company.
The following table sets forth as of December 15, 1994 certain information
regarding the ownership of the Company's voting stock (assuming exercise of
options exercisable currently or within 60 days of December 15, 1994, all of
the Company's common stock (assuming exercise of options exercisable currently
or within 60 days of December 15, 1994), and all of the Company's common stock
(assuming exercise of all options), by each of the Company's directors, all
directors and officers as a group, all members of management as a group and
each person who is known by the Company to beneficially own five percent or
more of the Company's voting stock (assuming the exercise of options
exercisable currently or within 60 days of December 15, 1994).
NUMBER OF
VOTING PERCENT NUMBER OF PERCENT
SHARES OF SHARES OF
BENEFICIALLY VOTING BENEFICIALLY ALL
OWNED SHARES OWNED SHARES
------------ ------- ------------ -------
DIRECTORS AND EXECUTIVE OFFICERS:
David M. Flowers(1).................. 72,000 6.3% 72,000 1.4%
John F. McNamara(1).................. 246,000 21.4 246,000 4.9
Barton J. Winokur.................... 5,000 * 5,000 *
R. David Yost(1)..................... 81,000 7.1 81,000 1.6
Bruce C. Bruckmann(2)................ 570 * 23,496 *
Harold O. Rosser, II(2).............. 267 * 11,013 *
All directors and executive officers
as a group
(6 persons)(3)...................... 404,837 35.3 438,509 8.7
Management Investors(4).............. 1,006,600 87.7 1,006,600 19.9
OTHER VOTING 5% STOCKHOLDERS:
399 Venture Partners Inc. ("VPI")(5). 79,636 6.7% 3,396,974 67.3%
- - - --------
* Less than 1%.
(1) Pursuant to the AmeriSource Distribution Corporation and Subsidiaries
Employee Stock Purchase Plan ("Distribution Plan"), Messrs. Flowers,
McNamara and Yost received options, with limitations on exercise, to
acquire 50,000, 150,000 and 50,000 shares, respectively, of the Company's
voting stock. Pursuant to the AmeriSource Distribution Corporation 1991
Stock Option Plan ("1991 Option Plan"), Messrs. Flowers, McNamara and Yost
received options, with limitations on exercise, to acquire 22,000, 96,000
and 31,000 shares, respectively, of the Company's voting stock. Of these
amounts, Messrs. Flowers, McNamara and Yost have the right to exercise,
currently or within 60 days of December 15, 1994, options to acquire
72,000, 246,000 and 81,000 shares, respectively.
(2) Messrs. Bruckmann and Rosser disclaim beneficial ownership relating to the
79,636 shares of voting stock and 3,396,974 shares of non-voting stock held
by VPI.
(3) These figures include 5,837 shares of Company's voting stock and 33,672
shares of Company's non-voting stock owned currently by directors and
officers. Pursuant to the Distribution Plan and the 1991 Option Plan,
officers received options, with limitations on exercise, to acquire 250,000
shares and 149,000 shares, respectively, of Company's voting stock, all of
which are exercisable currently.
(4) These figures include 60,812.5 shares of the Company's voting stock owned
currently by Management Investors. Pursuant to the Distribution Plan, the
1991 Option Plan, and the AmeriSource Distribution Corporation Partners
Stock Option Plan ("Partners Plan"), Management Investors received options,
with limitations on exercise, to acquire 511,687.5 shares, 328,500 shares
and 105,600 shares, respectively, of the Company's voting stock. Of these
amounts, Management Investors have the right to exercise, currently or
within 60 days of December 15, 1994, options to acquire 511,687.5 shares,
328,500 shares and 105,600 shares pursuant to the Distribution Plan, the
1991 Option Plan and the Partners Plan, respectively.
72
(5) VPI disclaims beneficial ownership as to 2,064 shares of voting stock and
82,962 shares of non-voting stock held by investors currently or previously
affiliated with VPI. VPI's address is 1209 Orange Street, Wilmington,
Delaware 19801. VPI is a wholly-owned, indirect subsidiary of Citicorp.
Pursuant to a prior agreement, the Company will repurchase for $1.00 per
share, 116,362.5 shares and 337,500 shares from VPI upon exercise of
options pursuant to the Distribution Plan and the 1991 Option Plan,
respectively, for reissuance to management investors in connection with
their exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 26, 1993, Distribution issued $126.5 million principal amount of 11
1/4% Senior Debentures due 2005 (the "Senior Debentures") in a public offering.
Substantially all the net proceeds of the offering (approximately $122 million)
were applied to redeem debt of Distribution issued in connection with the
acquisition of AmeriSource by Distribution in 1988 at a redemption price of
100% of the principal amount thereof, plus accrued and unpaid interest thereon
through the date of redemption.
On July 26, 1993, Distribution redeemed the Senior Subordinated Debentures
and the Junior Subordinated Dentures. As of July 26, 1993, the Company had
outstanding $21.7 million principal amount of Senior Subordinated Debentures
and $39.2 million principal amount of Junior Subordinated Debentures. On the
date of redemption, VPI owned approximately $21.3 million principal amount of
Senior Subordinated Debentures and $37.9 million principal amount of Junior
Subordinated Debentures, certain investors currently or previously affiliated
with VPI owned $0.4 million principal amount of Senior Subordinated Debentures
and $0.8 million principal amount of Junior Subordinated Debentures and the
Management Investors owned $0.5 million principal amount of Junior Subordinated
Debentures. All the amounts set forth above include accrued and unpaid
interest. As a result of the redemption of the Senior Subordinated Debentures
and the Junior Subordinated Debentures, VPI, certain investors currently or
previously affiliated with VPI and the Management Investors were paid $59.2
million, $1.2 million and $0.5 milliion, respectively.
In the first quarter of fiscal 1995, the Company sold substantially all of
its trade accounts and notes receivable (the "Receivables") to AmeriSource
Receivables Corporation ("ARC"), a special purpose wholly-owned subsidiary,
pursuant to a trade receivables securitization program (the "Receivables
Program"). As contemplated by the Receivables Program, the Company formed and
capitalized ARC through a contribution of $40 million. Contemporaneously, the
Company entered into a Receivables Purchase Agreement with ARC, whereby ARC
agreed to purchase on a continuous basis Receivables originated by the Company.
Pursuant to the Receivables Program, ARC will transfer such Receivables to a
master trust in exchange for, among other things, certain trade receivables-
backed certificates (the "Certificates") representing a right to receive a
variable principal amount. Contemporaneously, Certificates in an aggregate
principal amount of up to $230 million face amount were sold to investors.
During the five year term of the Trade Receivables Program, the cash generated
by collections on the Receivables will be used to purchase, among other things,
additional Receivables originated by the Company. The Certificates bear
interest at a rate selected by the Company equal to (i) the higher of (a) the
prime lending rate of Bankers Trust Company and (b) the federal funds rate plus
50 basis points or (ii) LIBOR plus 50 basis points. In addition, during the
first seventy five days of the Receivables Program, the Company may select an
interest rate equal to the federal funds rate plus 125 basis points. The
interest rates for the Certificates are subject to step-ups to a maximum amount
of an additional 100 basis points over the otherwise applicable rate.
At the same time that it entered into the Trade Receivables Transaction, the
Company and its senior lenders amended its existing Revolving Credit Agreement.
Among other things, the Amended and Restated Credit Agreement: (i) extended the
term of the Credit Agreement until January 3, 2000; (ii) established the amount
the Company may borrow at $380 million; (iii) reduced the initial borrowing
rate to LIBOR plus 225 basis points and provided interest rate stepdowns upon
the occurrence of certain events; (iv) modified the borrowing base availability
from inventory and receivable based to inventory based; and (v) increased the
Company's and Distribution's ability to make acquisitions and pay dividends.
73
Contemporaneously with the consummation of the Trade Receivables Transaction
and the execution of the Amended and Restated Credit Agreement, the Company
called for optional redemption all of the outstanding Notes at a redemption
price of 106% of the principal amount plus accrued interest through the
redemption date of January 12, 1995.
During fiscal years 1992, 1993 and 1994, Dechert Price & Rhoads performed,
and currently does perform, legal services for the Company and AmeriSource.
Barton J. Winokur, a partner of Dechert Price & Rhoads and a director of the
Company and AmeriSource, owns 5,000 shares of the Class A Common Stock of the
Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND SCHEDULES.
Financial Statements: The following consolidated financial statements are
submitted in response to Item 14(a)(1):
PAGE
----
Amerisource Corporation and Subsidiaries
Report of Ernst & Young LLP, independent auditors......................... 25
Consolidated Balance Sheets as of September 30, 1994 and 1993............. 26
Consolidated Statements of Operations for the fiscal years ended September
30, 1994, 1993 and 1992.................................................. 28
Consolidated Statements of Changes in Stockholder's Equity for the fiscal
years ended September 30, 1994, 1993 and 1992............................ 29
Consolidated Statements of Cash Flows for the fiscal years ended September
30, 1994, 1993 and 1992.................................................. 30
Notes to Consolidated Financial Statements................................ 31
AmeriSource Distribution Corporation and Subsidiaries (parent of
AmeriSource Corporation) Report of Ernst & Young LLP, independent
auditors.................................................................. 44
Consolidated Balance Sheets as of September 30, 1994 and 1993............. 45
Consolidated Statements of Operations for the fiscal years ended September
30, 1994, 1993 and 1992.................................................. 47
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended September 30, 1994, 1993 and 1992............................ 48
Consolidated Statements of Cash Flows for the fiscal years ended September
30, 1994, 1993 and 1992.................................................. 49
Notes to Consolidated Financial Statements................................ 50
Financial Statement Schedules: The following financial statement schedules
are submitted in response to Item 14(a)(2) and Item 14(d):
AmeriSource Corporation and Subsidiaries
Schedule VIII--Valuation and Qualifying Accounts.......................... S-1
AmeriSource Distribution Corporation and Subsidiaries (parent of
AmeriSource Corporation)
Schedule III--Condensed Financial Information of Distribution as of and
for the fiscal years ended September 30, 1994 and 1993....... S-2
Schedule VIII--Valuation and Qualifying Accounts.......................... S-4
74
All other schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(a)(3) List of Exhibits.*
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of Distribution, as amended.
3.2 By-Laws of Distribution (incorporated by reference to Exhibit 3.2 to
Distribution's Registration Statement on Form S-1, Amendment No. 1,
Registration No. 33-44244).
3.3 Certificate of Incorporation of AmeriSource, as amended.
3.4 By-laws of AmeriSource (incorporated by reference to Exhibit 3.4 to
Distribution's and AmeriSource's Annual Report on Form 10-K for the
fiscal year ended September 30, 1989).
4.1 Form of Indenture, dated as of September 25, 1989, between the former
AmeriSource Distribution Corporation, previously known as AHSC
Acquisition Corp. ("Acquisition") and Mellon Bank, N.A., as trustee
relating to the Senior Subordinated Notes due 1999 of Acquisition (the
"Senior Subordinated Notes") including the form of Senior Subordinated
Note (incorporated by reference to Exhibit 4.6 to Amendment No. 4,
filed September 15, 1989, to the Registration Statement on Form S-1,
Registration No. 33-27835).
4.2 Indenture, dated as of May 30, 1986, between AmeriSource and Bankers
Trust Company, as trustee relating to the 6 1/4% Convertible
Subordinated Debentures due 2001 of AmeriSource (the "Convertible
Debentures") including the form of Convertible Debenture (incorporated
by reference to Exhibit 4 to AmeriSource's Current Report, dated July
1, 1986, on Form 8-K).
4.3 First Supplemental Indenture, dated as of October 30, 1989, to
Indenture, dated as of September 25, 1989 (incorporated by reference
to Exhibit 4.21 to Distribution's and AmeriSource's Annual Report on
Form 10-K for the fiscal year ended September 30, 1989).
4.4 Second Supplemental Indenture, dated as of October 31, 1989, to
Indenture, dated as of September 25, 1989 (incorporated by reference
to Exhibit 4.22 to Distribution's and AmeriSource's Annual Report on
Form 10-K for the fiscal year ended September 30, 1989).
4.5 First Supplemental Indenture, dated as of October 31, 1989, to
Indenture, dated as of May 30, 1986 (incorporated by reference to
Exhibit 4.23 to Distribution's and AmeriSource's Annual Report on Form
10-K for the fiscal year ended September 30, 1989).
4.6 Second Supplemental Indenture, dated as of October 31, 1989, to
Indenture, dated as of May 30, 1986 (incorporated by reference to
Exhibit 4.24 to Distribution's and AmeriSource's Annual Report on Form
10-K for the fiscal year ended September 30, 1989).
4.7 Indenture dated July 15, 1993 between Distribution and Security Trust
Company, N.A., as trustee relating to the 11 1/4% Senior Debentures
due 2005 (the "Senior Debentures") of Distribution including the form
of the Senior Debentures (incorporated by reference to Exhibit 4 to
Distribution's and AmeriSource's Form 10-Q for the quarter ended June
30, 1993).
4.8 Indenture, dated as of March 31, 1994, between AmeriSource and Bankers
Trust Company, as Trustee relating to the 41 1/2% Senior Subordinated
Notes due 1999, Series A (incorporated by reference to Exhibit 4 to
Distribution's and AmeriSource's Form 10-Q for the quarter ended March
31, 1994).
4.9 Agreement, dated as of April 28, 1994 by and among AmeriSource W. R.
Huff Asset Management Co., L.P. and certain holders of AmeriSource's
14 1/2% Senior Subordinated Notes due 1999 (incorporated by reference
to Exhibit 4 to Distribution's and AmeriSource's Form 10-Q for the
quarter ended March 31, 1994).
4.10 Amended and Restated Credit Agreement, dated as of December 13, 1994
among AmeriSource, General Electric Capital Corporation individually
and as agent, Bankers Trust Company, as co-agent, and the banks and
other financial institutions named therein.
4.11 Receivables Purchase Agreement, dated as of December 13, 1994 between
AmeriSource Corporation, as Seller and AmeriSource Receivables
Corporation, as Purchaser.
75
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.12 AmeriSource Receivables Master Trust Pooling and Servicing Agreement,
dated as of December 13, 1994 among AmeriSource Receivables
Corporation, as transferor, AmeriSource Corporation, as the initial
Servicer, and Manufacturers and Traders Trust Company, as Trustee.
4.13 Revolving Certificate Purchase Agreement, dated as of December 13,
1994 among AmeriSource Receivables Corporation, AmeriSource
Corporation, The Revolving Purchasers and Bankers Trust Company, as
Agent and Revolving Purchaser.
4.14 Series 1994-1 Supplement to Pooling and Servicing Agreement, dated as
of December 13, 1994 among AmeriSource Receivables Corporation, as
transferor, AmeriSource Corporation, as initial Servicer, and
Manufacturers and Traders Trust Company, as Trustee.
10.1 Stock Purchase and Stockholders' Agreement, dated December 29, 1988,
among Drexel Burnham Lambert Incorporated, the other purchasers named
therein, Distribution and Citicorp Venture Capital Ltd. (incorporated
by reference to Exhibit 10.3 to the Registration Statement on Form S-
1, Registration No. 33-27835, filed March 29, 1989).
10.2 Stock Purchase Agreement, dated as of December 29, 1988, among
Distribution, Anthony C. Howkins, The NTC Group, Inc., Barton J.
Winokur and Citicorp Venture Capital Ltd. (incorporated by reference
to Exhibit 10.4 to the Registration Statement on Form S-1,
Registration No. 33-27835, filed March 29, 1989).
10.3 AmeriSource Master Pension Plan (incorporated by reference to Exhibit
10.9 to the Registration Statement on Form S-1, Registration No. 33-
27835, filed March 29, 1989).
10.4 AmeriSource 1988 Supplemental Retirement Plan (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1,
Registration No. 33-27835, filed March 29, 1989).
10.5 AmeriSource 1985 Deferred Compensation Plan (incorporated by reference
to Exhibit 10.1 to AmeriSource's Annual Report on Form 10-K for the
fiscal year ended September 30, 1985).
10.6 Distribution and Subsidiaries Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.13 to Amendment No. 1, filed
August 15, 1989, to the Registration Statement on Form S-1,
Registration No. 33-27835).
10.7 Form of Securities Purchase and Holders Agreement among Distribution,
Citicorp Venture Capital Ltd. and a Management Investor (incorporated
by reference to Exhibit 10.14 to Amendment No. 1, filed August 15,
1989, to the Registration Statement on Form S-1, Registration No. 33-
27835).
10.8 Form of Subordinated Debt Purchase Agreement between Distribution and
a Management Investor (incorporated by reference to Exhibit (c)(5) to
Amendment No. 1, filed August 15, 1989, to the Schedule 13E-3).
10.9 Form of Non-qualified Stock Option Plan Agreement between Distribution
and a Management Investor (incorporated by reference to Exhibit (c)(4)
to Amendment No. 1, filed August 15, 1989, to the Schedule 13E-3).
10.10 Form of Take-Along and Registration Rights Agreement between
Distribution and Citicorp Venture Capital Ltd. (incorporated by
reference to Exhibit 4.19 to Amendment No. 2, filed September 7, 1989,
to the Registration Statement on Form S-1, Registration No. 33-27835).
10.11 Distribution 1991 Stock Option Plan (incorporated by reference to
Exhibit 10.33 to Distribution's Registration Statement on Form S-1,
Amendment No. 1, Registration No. 33-44244).
10.12 Distribution 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.34 to Distribution's Registration Statement on Form S-1,
Amendment No. 1, Registration No. 33-44244).
10.13 Agreement, dated October 14, 1994, among certain manufacturers and
wholesalers of prescription products, including AmeriSource
Corporation.
11 Not Applicable.
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
19 Not Applicable.
76
EXHIBIT
NUMBER DESCRIPTION
------- -----------
21 Subsidiaries of AmeriSource and Distribution.
23 Not Applicable.
24 Not Applicable.
28 Not Applicable.
29 Not Applicable.
- - - --------
* Copies of the exhibits will be furnished to any security holder of
AmeriSource or Distribution upon payment of the reasonable cost of
reproduction.
(b) Reports on Form 8-K.
Neither AmeriSource nor Distribution filed a Current Report on Form 8-K
during the fiscal quarter ended September 30, 1994.
77
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
Date: December 22, 1994 By: /s/ John A. Kurcik
---------------------------------
(JOHN A. KURCIK)
VICE PRESIDENT
(PRINCIPAL ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON DECEMBER 22, 1994 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ John F. McNamara Chairman, President
- - - ------------------------------------- and Chief Executive
(JOHN F. MCNAMARA) Officer (Principal
Executive Officer
and Principal
Financial Officer)
Director
- - - -------------------------------------
(BRUCE C. BRUCKMANN)
/s/ Richard C. Gozon Director
- - - -------------------------------------
(RICHARD C. GOZON)
/s/ Lawrence C. Karlson Director
- - - -------------------------------------
(LAWRENCE C. KARLSON)
/s/ Harold O. Rosser Director
- - - -------------------------------------
(HAROLD O. ROSSER)
/s/ George Strong Director
- - - -------------------------------------
(GEORGE STRONG)
/s/ Barton J. Winokur Director
- - - -------------------------------------
(BARTON J. WINOKUR)
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 Distribution Corporation
Date: December 22, 1994 By: /s/ John A. Kurcik
---------------------------------
(JOHN A. KURCIK)
VICE PRESIDENT
(PRINCIPAL ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON DECEMBER 22, 1994 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ John F. McNamara Chairman, President
- - - ------------------------------------- and Chief Executive
(JOHN F. MCNAMARA) Officer (Principal
Executive Officer
and Principal
Financial Officer)
Director
- - - -------------------------------------
(BRUCE C. BRUCKMANN)
/s/ Richard C. Gozon Director
- - - -------------------------------------
(RICHARD C. GOZON)
/s/ Lawrence C. Karlson Director
- - - -------------------------------------
(LAWRENCE C. KARLSON)
/s/ Harold O. Rosser Director
- - - -------------------------------------
(HAROLD O. ROSSER)
/s/ George Strong Director
- - - -------------------------------------
(GEORGE STRONG)
/s/ Barton J. Winokur Director
- - - -------------------------------------
(BARTON J. WINOKUR)
AMERISOURCE CORPORATION AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
- - - -------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - - -------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE DESCRIBE(1) PERIOD
- - - -------------------------------------------------------------------------------------
AMERISOURCE CORPORATION
AND SUBSIDIARIES
- - - ------------------------
YEAR ENDED SEPTEMBER 30,
1994
Allowance for doubtful
accounts.............. $7,681,000 $4,612,000 $2,923,000 $9,370,000
========== ========== ========== ==========
YEAR ENDED SEPTEMBER 30,
1993
Allowance for doubtful
accounts.............. $6,952,000 $3,186,000 $2,457,000 $7,681,000
========== ========== ========== ==========
YEAR ENDED SEPTEMBER 30,
1992
Allowance for doubtful
accounts.............. $7,627,000 $3,443,000 $4,118,000 $6,952,000
========== ========== ========== ==========
- - - --------
(1) Accounts written off during year, net of recoveries.
S-1
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AMERISOURCE DISTRIBUTION CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------ ------------------
ASSETS
Cash..................................... $ 38 $ 38
Receivable from AmeriSource Corporation.. 15,300 7,373
Deferred financing costs and other....... 4,964 5,343
Investment at equity in AmeriSource Cor-
poration (accumulated losses of
AmeriSource in excess of investment).... (171,472) 28,908
--------- --------
$(151,170) $ 41,662
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Expenses......................... $ 5,543 $ 5,593
Long-Term Debt
Senior debentures...................... 144,013 129,109
Stockholders' Equity
Common Stock, $.01 par value
Class A (Voting and convertible):
30,000,000 shares authorized;
180,387 1/2 shares issued........... 2 2
Class B (Non-voting and convertible):
30,000,000 shares authorized;
4,400,300 shares issued............. 44 44
Class C (Non-voting and convertible):
2,000,000 shares authorized; 500,000
shares issued....................... 5 5
Capital in excess of par value......... 4,775 4,775
Retained earnings (deficit)............ (304,984) (97,313)
Cost of common stock in treasury....... (568) (553)
--------- --------
(300,726) (93,040)
--------- --------
$(151,170) $ 41,662
========= ========
S-2
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AMERISOURCE DISTRIBUTION CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FISCAL FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------ ------------------
Revenues................................. $ $ 65
Administrative expenses.................. 104 430
Interest expense......................... 15,338 20,273
--------- --------
(Loss) Before Taxes, Extraordinary Items,
Cumulative Effects of Accounting Changes
and Equity in Net Income (Loss) of
Subsidiary.............................. (15,442) (20,638)
Equity in net income (loss) of subsidiary
before extraordinary items and
cumulative effects of accounting
changes................................. (172,241) 6,590
Income tax (benefit)..................... (15,266) (6,574)
--------- --------
(Loss) Before Extraordinary Items and
Cumulative Effects of Accounting
Changes................................. (172,417) (7,474)
Extraordinary Charge--early retirement of
debt, net of income tax benefit......... (656) (11,890)
Extraordinary Credits:
Reduction of income tax provision of
subsidiary from carryforward of prior
year operating losses.................. 484
Reduction of income tax provision of
Distribution from carryforward of
prior year operating losses............ 262
Cumulative effect of change in accounting
for postretirement benefits other than
pensions................................ (1,199)
Cumulative effect of change in accounting
for income taxes........................ (33,399)
--------- --------
Net (Loss)............................ $(207,671) $(18,618)
========= ========
(Loss) Per Share
(Loss) Before Extraordinary Items and
Cumulative Effects of Accounting
Changes................................ $ (34.48) $ (1.49)
Extraordinary Items..................... (.13) (2.23)
Cumulative Effect of Change in
Accounting for Postretirement Benefits
Other Than Pensions.................... (.24)
Cumulative Effect of Change in
Accounting for Income Taxes............ (6.68)
--------- --------
Net (Loss)............................ $ (41.53) $ (3.72)
========= ========
----------------
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------ ------------------
OPERATING ACTIVITIES
Net (loss).............................. $(207,671) $ (18,618)
Adjustments to reconcile net (loss) to
net cash provided by (used in)
operating activities:
Amortization.......................... 434 78
Equity in net (income) loss of
subsidiary........................... 207,728 (1,190)
Loss on early retirement of debt...... 6,787
Debentures issued in lieu of payment
of interest.......................... 14,904 20,378
Income tax benefit invested in
AmeriSource Corporation.............. (7,348) (5,127)
Changes in operating assets and
liabilities:
Receivable from AmeriSource
Corporation........................ (7,927) (3,083)
Accrued expenses.................... (50) 63
Deferred compensation............... (539)
Miscellaneous....................... 10 (300)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............... 80 (1,551)
FINANCING ACTIVITIES
Long-term debt borrowings............... 126,500
Long-term debt repayments............... (120,134)
Deferred financing costs................ (55) (5,140)
Capital contribution.................... 346
Repurchase of stock options............. (10) (18)
Purchases of treasury stock............. (15) (3)
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES............... (80) 1,551
INCREASE IN CASH......................... -0- -0-
Cash at beginning of year................ 38 38
--------- ---------
CASH AT END OF YEAR...................... $ 38 $ 38
========= =========
S-3
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
- - - -------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - - -------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE DESCRIBE(1) PERIOD
- - - -------------------------------------------------------------------------------------
AMERISOURCE DISTRIBUTION
CORPORATION AND
SUBSIDIARIES (PARENT OF
AMERISOURCE CORPORATION)
- - - ------------------------
YEAR ENDED SEPTEMBER 30,
1994
Allowance for doubtful
accounts.............. $7,681,000 $4,612,000 $2,923,000 $9,370,000
========== ========== ========== ==========
YEAR ENDED SEPTEMBER 30,
1993
Allowance for doubtful
accounts.............. $6,952,000 $3,186,000 $2,457,000 $7,681,000
========== ========== ========== ==========
YEAR ENDED SEPTEMBER 30,
1992
Allowance for doubtful
accounts.............. $7,627,000 $3,443,000 $4,118,000 $6,952,000
========== ========== ========== ==========
- - - --------
(1) Accounts written off during year, net of recoveries.
S-4
(ART)
AMERISOURCE CORPORATION
AmeriSource Distribution Corporation
P.O. Box 959 Valley Forge, PA 19482
610.296.4480
Cover Printed on Recycled Paper