UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED JUNE 30, 1995 Commission Registrant, State of Incorporation IRS Employer File Number Address and Telephone Number Identification No. ----------- ---------------------------------- ------------------ 33-27835-01 AmeriSource Health Corporation 23-2546940 (a Delaware Corporation) (formerly AmeriSource Distribution Corporation) P.O. Box 959, Valley Forge, Pennsylvania 19482 (610) 296-4480 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of shares of common stock of AmeriSource Health Corporation outstanding as of June 30, 1995 was: Class A - 10,634,271; Class B - 10,030,880; Class C - 1,474,985. INDEX AMERISOURCE HEALTH CORPORATION PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- June 30, 1995 and September 30, 1994 Consolidated statements of operations -- Three months ended June 30, 1995 and June 30, 1994 Consolidated statements of operations -- Nine months ended June 30, 1995 and June 30, 1994 Consolidated statements of cash flows -- Nine months ended June 30, 1995 and June 30, 1994 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K PART I. FINANCIAL INFORMATION ------------------------------ Item 1. AmeriSource Health Corporation Financial Statements (Unaudited) --------------------------------------------------- AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ----------------------------------------------- (dollars in thousands) June 30, September 30, ASSETS 1995 1994 ------ ------------ ------------- Current Assets Cash and cash equivalents $ 23,983 $ 25,311 Restricted cash 35,118 Accounts receivable less allowance for doubtful accounts: 6/95 - $12,491; 9/94 - $9,370 276,122 272,281 Merchandise inventories 438,664 351,676 Prepaid expenses and other 4,493 2,442 ------------ ------------- Total current assets 778,380 651,710 Property and Equipment, at cost 73,061 67,598 Less accumulated depreciation 30,301 26,416 ------------ ------------- 42,760 41,182 Deferred financing costs and other, less accumulated amortization: 6/95 - $2,150; 9/94 - $7,239 23,054 18,752 ------------ ------------- $ 844,194 $ 711,644 ============ ============= See notes to consolidated financial statements. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ----------------------------------------------- (dollars in thousands) June 30, September 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ------------------------------------ ----------- ------------ Current Liabilities Current portion of other debt $ 64 $ 133 Accounts payable 507,493 449,991 Accrued expenses 24,779 27,485 Accrued income taxes 8,189 11,488 Deferred income taxes 29,258 29,258 ----------- ------------ Total current liabilities 569,783 518,355 Long-Term Debt Revolving credit facility 130,000 175,897 Receivables securitization financing 209,834 Senior subordinated notes 166,134 Other debt 1,358 1,293 Convertible subordinated debentures 238 238 Senior debentures 74,293 144,013 ----------- ------------ 415,723 487,575 Other Liabilities Deferred compensation 534 522 Other 5,844 5,918 ----------- ------------ 6,378 6,440 Stockholders' Equity Common Stock, $.01 par value: Class A (Voting and convertible): 50,000,000 shares authorized; issued 6/95 - 10,968,108 shares; 9/94 - 532,143 shares 109 5 Class B (Non-voting and convertible): 15,000,000 shares authorized; 12,980,885 shares issued 130 130 Class C (Non-voting and convertible): 2,000,000 shares authorized; issued 6/95 - 1,474,985 shares; 9/94 - 1,475,000 shares 15 15 Capital in excess of par value 163,461 4,676 Retained earnings (deficit) (305,582) (304,984) Cost of common stock in treasury (5,823) (568) ----------- ------------ (147,690) (300,726) ----------- ------------ $ 844,194 $ 711,644 =========== ============ See notes to consolidated financial statements. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (dollars in thousands, except per share data) Three Months Ended June 30, ------------------------ 1995 1994 ----------- ----------- Revenues $1,186,697 $1,079,302 Costs and expenses Cost of goods sold 1,121,188 1,021,847 Selling and administrative 40,014 36,032 Environmental remediation 4,075 Depreciation 1,811 1,620 Write-off of excess of cost over net assets acquired 179,824 Interest 10,581 15,465 ---------- ---------- 1,173,594 1,258,863 Income (loss) before taxes and extraordinary item 13,103 (179,561) Taxes on income 3,223 496 ---------- ---------- Income (loss) before extraordinary item 9,880 (180,057) Extraordinary charge - early retirement of debt, net of income tax benefit (6,162) - ---------- ---------- Net income (loss) $ 3,718 $ (180,057) ========== ========== Earnings (loss) per share Income (loss) before extraordinary item $ .46 $ (12.21) Extraordinary item (.29) - ---------- ---------- Net income (loss) $ .17 $ (12.21) ========== ========== See notes to consolidated financial statements. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (dollars in thousands, except per share data) Nine Months Ended June 30, ------------------------ 1995 1994 ----------- ----------- Revenues $3,550,057 $3,192,190 Costs and expenses Cost of goods sold 3,355,673 3,022,256 Selling and administrative 118,148 106,499 Environmental remediation 4,075 Depreciation 5,247 4,698 Write-off of excess of cost over net assets acquired 179,824 Interest 42,570 47,531 ---------- ---------- 3,521,638 3,364,883 Income (loss) before taxes, extraordinary items and cumulative effects of accounting changes 28,419 (172,693) Taxes on income 10,980 963 Income (loss) before extraordinary items ---------- ---------- and cumulative effects of accounting changes 17,439 (173,656) Extraordinary charges - early retirement of debt, net of income tax benefits (18,037) (656) 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) $ (598) $ (208,910) ========== ========== Earnings (loss) per share Income (loss) before extraordinary items and cumulative effects of accounting changes $ 1.02 $ (11.77) Extraordinary items (1.06) (.04) Cumulative effect of change in accounting for postretirement benefits other than pensions (.08) Cumulative effect of change in accounting for income taxes (2.27) ---------- ---------- Net (loss) $ (.04) $ (14.16) ========== ========== See notes to consolidated financial statements. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (dollars in thousands) Nine Months Ended June 30, ---------------------- 1995 1994 ---------- ---------- OPERATING ACTIVITIES Net (loss) $ (598) $(208,910) Adjustments to reconcile net (loss) to net cash (used in) provided by operating activities: Depreciation 5,247 4,698 Amortization 1,967 7,304 Write-off of excess of cost over net assets acquired 179,824 Provision for losses on accounts receivable 4,098 2,207 (Gain) loss on disposal of property and equipment (61) 151 Deferred income taxes (1,009) (3,641) Loss on early retirement of debt 25,190 679 Cumulative effects of accounting changes 34,598 Changes in operating assets and liabilities: Restricted cash (35,118) Accounts receivable (7,858) (33,218) Merchandise inventories (86,947) (15,705) Prepaid expenses (2,051) (141) Accounts payable, accrued expenses and income taxes 61,643 37,617 Debentures issued in lieu of payment of interest 4,572 10,981 Other long-term liabilities 4,075 Miscellaneous (1,973) (2,873) ---------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (32,898) 17,646 INVESTING ACTIVITIES Capital expenditures (9,064) (5,886) Proceeds from sales of property and equipment 1,806 380 Cost of companies acquired (500) ---------- --------- NET CASH (USED IN) INVESTING ACTIVITIES (7,758) (5,506) FINANCING ACTIVITIES Long-term debt borrowings 1,511,354 662,075 Long-term debt repayments (1,605,474) (677,057) Net proceeds from initial public offering 148,194 Deferred financing costs (10,040) (659) Exercise of stock options 549 Repurchase of stock options (10) Purchases of treasury stock (5,255) (15) ---------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 39,328 (15,666) ---------- --------- (Decrease) in cash and cash equivalents (1,328) (3,526) Cash and cash equivalents at beginning of period 25,311 27,136 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,983 $ 23,610 ========== ========= See notes to consolidated financial statements. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The accompanying financial statements present the consolidated financial position, results of operations and cash flows of AmeriSource Health Corporation ("Health"), formerly AmeriSource Distribution Corporation, 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position as of June 30, 1995, the results of operations for the three and nine months ended June 30, 1995 and 1994 and the cash flows for the nine months ended June 30, 1995 and 1994 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. The Company's (loss) per share and share data in the financial statements have been retroactively restated to reflect the effect of the 2.95-for-1 stock split declared in connection with the public offering by the Company of its Common Stock discussed in Note 6. Note 2 - Indebtedness and Financial Arrangements 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"). 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"). Contemporaneously, Certificates in an aggregate principal amount of up to $230 million face amount were sold to investors. During the 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. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 2 - Indebtedness and Financial Arrangements (continued) Pursuant to the Receivables Program, on December 13, 1994, the Company sold $305 million in Receivables to ARC in exchange for cash of $201 million and a subordinated note. ARC in turn transferred the Receivables to the master trust for the Certificates and a residual interest in the master trust. The Company has accounted for the transactions pursuant to the terms of the Receivables Purchase Agreement as a sale of Receivables from AmeriSource to ARC and as a financing transaction by ARC on the Company's consolidated financial statements. The assets and liabilities of the master trust have been consolidated with the Company at June 30, 1995. In April 1995 the Company refinanced the Receivables Program through the issuance of (i) $175 million of Floating Rate Class A Trade Receivables Participation Certificates ("Class A Certificates") and (ii) $35 million of Floating Rate Class B Trade Receivables Participation Certificates ("Class B Certificates"), which represent fractional undivided interests in the Receivables and other assets of the master trust. The Class A Certificates bear interest at one month LIBOR plus .35% and the Class B Certificates, which are subordinated to the Class A Certificates, bear interest at one month LIBOR plus .70%. The Company has entered into two-year interest rate cap agreements, expiring in May, 1997 which specify that the one month LIBOR base rate will not be greater than 7.50% with respect to $175 million of Class A Certificate borrowings under the Receivables Program. In addition, the Company issued Floating Rate Revolving Principal Trade Receivables Participation Certificates ("Revolving Certificates"), pursuant to which investors may purchase up to $75 million of interests in the master trust, which Certificates will bear interest, at the Company's option, at either LIBOR plus .35% or the federal funds rate plus 1.00%. The Revolving Certificates will rank pari passu in right of payment with the Class A Certificates. The expected final payment date of amounts outstanding under the Receivables Program will be March 15, 2000, but earlier termination could occur upon the occurrence of certain defined events. In the event of a liquidation, losses on Receivables will first be absorbed by the residual certificate held by ARC and collections on Receivables will first be allocated to make payments of outstanding principal of the Certificates in accordance with their ratable interests in the assets of the master trust, after giving effect to the allocation of losses to the residual interest. Fees of $4.5 million incurred through June 30, 1995 in connection with establishing the Receivables Program have been deferred and are being amortized on a straight- line basis over five years. Interest expense on the Certificates during the nine months ended June 30, 1995 was $8.2 million. Class A Certificates of $175 million principal amount (at an interest rate of 6.4%) and Class B Certificates of $35 million principal amount (at an interest rate of 6.8%) were outstanding under the Receivable Program at June 30, 1995. Restricted cash of $35,118,000 at June 30, 1995, represents amounts temporarily deposited in the master trust from collections on the Receivables, which are designated for specific purposes pursuant to the Receivables Program. 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 from LIBOR plus 300 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 redeemed all of the outstanding 14 1/2% senior subordinated notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date of January 12, 1995. In connection with the amendment of the Credit Agreement and the redemption of the 14 1/2% senior subordinated notes, the Company recorded an extraordinary charge of $11.9 million during the nine months ended June 30, 1995 relating to the write-off of unamortized financing fees and premiums paid on the redemption of the 14 1/2% senior subordinated notes, net of tax benefits. In conjunction with the initial public offering (see Note 6), the Company, in May, 1995, redeemed one-half of the 11 1/4% senior debentures outstanding for 110% of the principal amount plus accrued interest through the date of redemption (approximately $84.4 million), which resulted in an extraordinary charge, net of tax benefits, of $6.2 million. The balance of the net proceeds from the public offering were used to pay down the Company's revolving credit facility. As a result of the public offering, the borrowing rate under the Credit Agreement was reduced by 50 basis points to LIBOR plus 175 basis points beginning in May, 1995. Note 3 - Excess of Cost over Net Assets Acquired During the third quarter of the fiscal year ended September 30, 1994, the Company concluded that the carrying value of its excess of cost over net assets acquired ("goodwill") could not be recovered from expected future operations and accordingly wrote off its remaining goodwill balance of $179.8 million. See Management's Discussion and Analysis of Financial Condition and Results of Operations. AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 4 - Legal Matters and Contingencies In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust, environmental, 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, and in all cases plaintiffs have established these lawsuits, along with several other suits to which the Company is not a party, as a class action. In essence, these lawsuits 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 allegedly were 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. In March 1995, the Company was named as a defendant, along with several other wholesale distributors and pharmaceutical manufacturers, in an additional civil action filed by independent retail pharmacies in the United States District Court for the Eastern District of Arkansas. 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 $1 million. In addition, the Company has released any claims that 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. Plaintiffs filed a motion to declare the Judgment Sharing Agreement unenforceable. The Company, together with the other parties to Judgment Sharing Agreement, filed a memorandum against the plaintiffs' motion. On April 10, 1995, the Judgment Sharing Agreement was upheld by the court. 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 HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 4 - Legal Matters and Contingencies (continued) 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 has been named as a defendant in a lawsuit 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 obtained 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 this lawsuit 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 similar suits has not been in dispute and, the Company believes it is unlikely it will incur any loss as a result of such lawsuits. The Company further believes that its insurance coverage and supplier indemnification are adequate to cover any losses should they occur. The Company has recently been informed that this matter has been settled, without cost to the Company. The Company has received notices from the Internal Revenue Service asserting deficiencies in federal corporate income taxes for the Company's taxable years 1987 through 1991. The notices indicate an aggregate increase in net taxable income for these years of approximately $24 million and relate principally to the AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 4 - Legal Matters and Contingencies (continued) deductibility of costs incurred with respect to the leveraged buyout transaction which occurred in 1988. The Company has analyzed these matters with tax counsel and believes it has meritorious defenses to the deficiencies asserted by the Internal Revenue Service. The Company will contest the asserted deficiencies through the administrative appeals process and, if necessary, litigation. The Company believes that any amounts assessed will not have a material effect on the financial statements of the Company. At June 30, 1995, 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. Note 5 - Earnings Per Share For the three months ended June 30, 1995 and June 30, 1994, earnings (loss) per share are based on 21,510,479 and 14,750,000 shares, respectively, and for the nine months ended June 30, 1995 and June 30, 1994, 17,013,461 and 14,750,000 shares, respectively (share data prior to April 1995 are adjusted for the 2.95-for-1 stock split as discussed in Note 6), representing the weighted average number of shares of all classes of Health's common stock outstanding during those periods including the effect of stock options. Note 6 - Common Stock Offering In April 1995, the Company completed an initial public offering with the issuance of 7,590,000 common shares at $21.00 per share. The Company's shares are traded on the NASDAQ National Market System under the stock symbol "ASHC." The net cash proceeds to the Company were $148.2 million and were used to reduce the Company's outstanding indebtedness (see Note 2). On a pro forma basis, income before extraordinary items for the three months and nine months ended June 30, 1995 was $10.4 million and $24.4 million, respectively. Pro forma earnings per share before extraordinary items were $.47 for the three months ended June 30, 1995 and $1.10 for the nine months ended June 30, 1995. The pro forma information represents the historical data as adjusted to reflect the reduction in interest expense from the debt refinancings which occurred in December 1994 and the initial public offering in April 1995, as if these transactions had occurred at the beginning of fiscal 1995. Prior to the sale of common stock in the public offering, AmeriSource Distribution Corporation amended its certificate of incorporation to change its corporate name to AmeriSource Health Corporation. In conjunction with the sale of common stock, the Company authorized a 2.95-for- 1 stock split. All references to earnings per share and share data in the financial statements have been restated to give effect to the stock split. In conjunction with the public offering described above, the Company issued 2,509,524 shares of common stock upon the exercise of the options outstanding under the Distribution Plan and the 1991 Option Plan. Also pursuant to a prior agreement, the Company repurchased 1,338,894 shares of common stock from VPI upon the exercise of the Distribution Plan and the 1991 Option Plan options at a price of $.34 per share. The Company adopted the 1995 Option Plan and the Directors Plan which will provide for the granting over time of stock options to acquire shares of Class A Common Stock. In conjunction with the offering, the Company eliminated all authorized shares of preferred stock, increased the authorized number of shares of Class A Common Stock and decreased the authorized number of shares of Class B Common Stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations --------------------- (dollars in thousands) 3 Months 3 Months 9 Months 9 Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1995 1994 1995 1994 ------------- ------------- ------------- ------------- Revenues $1,186,697 $1,079,302 $3,550,057 $3,192,190 Cost of goods sold 1,121,188 1,021,847 3,355,673 3,022,256 ---------- ---------- ---------- ---------- Gross profit 65,509 57,455 194,384 169,934 Operating expenses: Selling and administrative 40,014 34,667 118,148 102,393 Environmental remediation 4,075 4,075 Depreciation 1,811 1,620 5,247 4,698 Amortization of intangibles 1,365 4,106 Write-off of excess of cost over net assets acquired 179,824 179,824 ---------- ---------- ---------- ---------- Operating income 23,684 (164,096) 70,989 (125,162) Interest expense 9,964 14,598 40,735 44,333 Amortization of deferred financing costs 617 867 1,835 3,198 ---------- ---------- ---------- ---------- Income (loss) before taxes, extraordinary items and cumulative effects of accounting changes 13,103 (179,561) 28,419 (172,693) Taxes on income 3,223 496 10,980 963 ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effects of accounting changes 9,880 (180,057) 17,439 (173,656) Extraordinary charges - early retirement of debt, net of income tax benefits (6,162) (18,037) (656) 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 income (loss) $ 3,718 $ (180,057) $ (598) $ (208,910) ========== ========== ========== ========== MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (Continued) Revenues in the third quarter of fiscal 1995 increased 10% to $1.2 billion from $1.1 billion in fiscal 1994. For the nine months ended June 30, 1995, revenues were $3.6 billion, an increase of 11% over the $3.2 billion reported for the nine months ended June 30, 1994. The year-to-year revenue gains reflect increases across all customer groups and the impact of the Company's expansion into new geographic markets, especially in the northeastern and western United States. During the nine months ended June 30, 1995, sales to hospitals increased 12%, sales to independent drug store customers increased 12% and sales to the chain drug store customer group increased 8%, as compared with the prior fiscal year. During the nine months ended June 30, 1995, 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 $65.5 million in the third quarter of fiscal 1995 increased by 14.0% over 1994, due to the increase in revenues. As a percentage of revenues, the gross profit margin for the third quarter was 5.52% as compared to 5.32% in the prior year. For the nine months ended June 30, 1995, the gross profit margin percentage was 5.48% versus 5.32% in 1994. The improvement in the margin on a year to date comparative basis was due primarily to increased purchase discounts and a greater level of price increases from manufacturers resulting in greater opportunities for forward purchasing as well as increased sales of generic products with higher than average gross profit margins. The Company is not able to predict whether such opportunities and the resulting favorable impact on the results of operations will continue in the future. Selling and administrative expenses increased by $5.3 million, or 15%, in the third quarter of fiscal 1995 compared with the prior year, and as a percentage of revenues, represent 3.37% in 1995 versus 3.21% in 1994. The increase in 1995 is due primarily to increases in warehouse and delivery expenses relating to the volume increases, expenses associated with new distribution facilities opened in Springfield, Massachusetts, Portland, Oregon and Sacramento, California and development expenses of value-added programs. For the nine months ended June 30, 1995, selling and administrative expenses were $118.1 million, an increase of 15% over the prior year. As a percentage to revenues, selling and administrative expenses increased to 3.32% in the nine months ended June 30, 1995 from 3.21% in the 1994 period. The decrease in amortization of intangibles in the third quarter and nine months of fiscal 1995 was as a result of the write-off of the value of the excess of cost over net assets acquired ("goodwill") which the Company recorded in the quarter ended June 30, 1994. Interest expense (excluding the amortization of deferred financing costs) for the three months ended June 30, 1995 was $10.0 million, a decrease of $4.6 million, or 32%, as compared with the three months ended June 30, 1994. The decrease was due to the redemption, in January 1995, of the $166.1 million of 14 1/2% senior subordinated notes, the redemption, in May 1995, of $74.3 million of 11 1/4% senior debentures and the lower average interest rates due to the implementation of the Receivables Program. Average borrowings were $463 million during the three months ended June 30, 1995 versus $553 million in 1994. Interest expense (excluding the amortization of deferred financing costs) during the nine months ended June 30, 1995 was $40.7 million on average borrowings of $566 million, as compared to $44.3 million on average borrowings of $576 million in 1994. The income tax provision for the nine months ended June 30, 1995 was computed based on an estimate of the full year effective tax rate. The extraordinary charge of $25.2 million, net of a tax benefit of $7.2 million, relates to the amendment of the Credit Agreement, the redemption premium on the 14 1/2% senior subordinated notes, the redemption premium on the 11 1/4% senior debentures and the consequent write-off of unamortized financing fees. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (Continued) Liquidity and Capital Resources Historically, the Company's operating results have generated sufficient cash flows which, together with borrowings under the revolving credit facility and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures and interest currently payable on outstanding debt. Future cash flows are expected to be sufficient to fund capital expenditures and interest currently payable over the near term. The primary sources of the Company's working capital and cash operating requirements are cash flows from operations and borrowings under the Receivables Program and the Credit Agreement. During the nine month period ended June 30, 1995, the Company's operating activities consumed $32.9 million in cash. The increases of $35.1 million in restricted cash, $7.9 million in accounts receivable and $86.9 million in merchandise inventories, offset by the $57.5 million increase in accounts payable accounted for most of the use of funds. A portion of the increase in merchandise inventories was the result of the opening of the Springfield, Massachusetts, Portland, Oregon and Sacramento, California distribution facilities. Operating cash uses during the nine month period ended June 30, 1995 included $33.0 million in interest payments and $2.9 million in income tax payments. Capital expenditures required for the Company's business historically have not been substantial. Capital expenditures for the nine months ended June 30, 1995 were $9.1 million and relate principally to the opening of the three new distribution centers, additional investments in management information systems and warehouse improvements. On April 28, 1995 the Company acquired substantially all of the assets of LDS Liberty Drug Systems for $500,000 in cash. Liberty Drug Systems provides pharmacy dispensing hardware and software systems to retail pharmacies. Cash used in financing activities during the nine months ended June 30, 1995 included $176.2 million in payments associated with the redemption of the 14 1/2% senior subordinated notes in January 1995, $10.0 million in fees connected with the refinancing of the revolving credit facility and the Receivables Program financing and $81.7 million in payments associated with the redemption in May, 1995 of one-half of the 11 1/4% senior debentures. Net proceeds of $148.2 million were raised on completion of the Company's initial public offering in April, 1995. At June 30, 1995, borrowings under the Company's $380 million revolving credit facility were $130 million (at an average interest rate of 9.5%) and borrowings under the Receivables Program financing were $210.0 million (at an average interest rate of 6.5%). 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (Continued) Liquidity and Capital Resources (continued) 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 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, to pay dividends on its capital stock. The Company wrote off its goodwill balance of $179.8 million in the third fiscal quarter of 1994. 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, and the Company's expectation that such factors would continue to negatively impact operating results into the foreseeable future, the Company initiated a detailed evaluation of MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (Continued) Liquidity and Capital Resources (continued) 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 industry trends, interest rate trends and the health care reform environment, in the third quarter of fiscal 1994, the Company revised its operating projections and 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 assumed that, based on industry conditions and competitive pressures, future revenue growth would approximate 12.6% in the near-term gradually declining to approximately 5% over the longer-term. These assumptions reflected expected benefits in the near-term from continued industry consolidation, and an expectation that manufacturers would 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 was expected to moderate as the industry consolidation trend was completed, and over the long-term (next twenty years), stable growth of 5% was assumed. The gross profit percentage was projected to gradually decline over the projected period from the then current rate to 3.60% in the fiscal year 2000 and to 2.68% in the longer term. The short-term gross profit declines reflected 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 reflected the Company's belief that continued industry wide competitive pricing pressures would drive margins down, as the consolidated industry attempts to maintain market share. Operating expenses were 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) were projected to improve as the Company aggressively managed its investment in receivables and inventory over the projected period. For purposes of the Projection, the Company had assumed that it would be able to refinance its current revolving credit facility when it expired in 1996. For purposes of the Projection, the Company had assumed that it would 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 would 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 then current expectations of future short-term borrowing rates. The Projection also indicated that cash from operations would not be sufficient to satisfy maturities of the Company's fixed rate debt obligations, which consisted 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 assumed that these fixed rate debt obligations would be refinanced at the MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (Continued) Liquidity and Capital Resources (continued) time of the scheduled maturities at identical interest rates. The Company determined that unless it was able to develop successful strategic, operating or financing initiatives which would change these assumptions, the projected future operating results based on these assumptions represented the best estimate of the Company's projected performance given the Company's existing high leverage and industry trends. The Projection reflected significant cumulative losses indicating that the carrying value of goodwill was 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 believed the reliability of any projection over such an extended period is highly uncertain, the Projection also indicated that the Company's long-term viability would require modification of its then current capital structure to reduce its indebtedness and increase its equity in the near to mid-term future. While the Projection indicated that in fiscal 1998 cash flow from operations would not be sufficient to satisfy required interest and principal payments on its current debt obligations, the Company believed and the Projection indicated, that cash flow generated from operations in the near-term (fiscal years 1995 through 1997) would be sufficient to service its then current debt obligations. The Company was unable to provide any assurance that the Company would 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 Receivables to ARC, pursuant to the Receivables Program. Pursuant to the Receivables Program, ARC will continuously transfer Receivables to a master trust in exchange for, among other things, Certificates representing a right to receive a variable principal amount. The debt outstanding pursuant to the Receivable Program was refinanced in April 1995 at lower interest rates. Contemporaneous with the consummation of the Receivables Program, the Company amended its existing Credit Agreement with its senior lenders and redeemed in January 1995 all of the outstanding 14 1/2% senior subordinated notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date. In April 1995, the Company completed an initial public offering with the issuance of 7,590,000 common shares at $21.00 per share, the net proceeds of which (approximately $148.2 million) were used to redeem in May, 1995 one-half of the 11 1/4% senior debentures outstanding for 110% of the principal amount plus accrued interest through the date of redemption (approximately $84.4 million) and to pay down the Company's revolving credit facility. As a result of the public offering, the borrowing rate under the Credit Agreement was reduced by 50 basis points to LIBOR plus 175 basis points beginning in May, 1995. PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: No exhibits are filed as part of this report. -------- (b) Reports on Form 8-K: No reports on Form 8-K were filed during ------------------- the quarter ended June 30, 1995. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERISOURCE HEALTH CORPORATION /s/ Kurt J. Hilzinger ----------------------------- Kurt J. Hilzinger Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: August 9, 1995 /s/ John A. Kurcik ----------------------------- John A. Kurcik Vice President, Controller and Assistant Treasurer (Principal Accounting Officer)