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)