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 DECEMBER 31, 1996
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 December 31, 1996 was: Class A--16,941,218, Class B--
6,490,370; Class C--241,098.
INDEX
AMERISOURCE HEALTH CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--December 31, 1996 and September 30, 1996
Consolidated statements of operations--Three months ended December
31, 1996 and December 31, 1995
Consolidated statements of cash flows--Three months ended December
31, 1996 and December 31, 1995
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
PART 1. FINANCIAL INFORMATION
ITEM 1. AMERISOURCE HEALTH CORPORATION FINANCIAL STATEMENTS (UNAUDITED)
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 38,732 $ 65,575
Restricted cash.................................... 7,805 5,626
Accounts receivable less allowance for doubtful
accounts: 12/96--$16,803, 9/96--$14,638........... 470,574 390,331
Merchandise inventories............................ 763,061 650,296
Prepaid expenses and other......................... 3,587 3,236
---------- ----------
Total current assets............................. 1,283,759 1,115,064
Property and Equipment, at cost...................... 92,048 91,508
Less accumulated depreciation...................... 40,723 39,842
---------- ----------
51,325 51,666
Other assets, less accumulated amortization:
12/96--$6,129; 9/96--$5,478......................... 20,313 21,230
---------- ----------
$1,355,397 $1,187,960
========== ==========
See notes to consolidated financial statements.
3
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 688,657 $ 714,984
Accrued expenses and other......................... 25,638 29,446
Accrued income taxes............................... 10,950 6,002
Deferred income taxes.............................. 36,913 35,350
---------- ----------
Total current liabilities........................ 762,158 785,782
Long-Term Debt:
Revolving credit facility.......................... 325,238 205,047
Receivables securitization financing............... 284,886 226,878
Other debt......................................... 1,805 1,768
---------- ----------
611,929 433,693
Other Liabilities.................................... 6,301 5,293
Stockholders' Equity
Common Stock, $.01 par value:
Class A (Voting and convertible):
50,000,000 shares authorized;
issued 12/96--17,292,300 shares;
9/96--17,291,100 shares.......................... 173 173
Class B (Non-voting and convertible):
15,000,000 shares authorized;
issued 12/96--9,440,370 shares;
9/96--9,440,370 shares........................... 95 95
Class C (Non-voting and convertible):
2,000,000 shares authorized;
issued 12/96--241,098 shares;
9/96--242,298 shares............................. 2 2
Capital in excess of par value..................... 228,537 228,537
Retained earnings (deficit)........................ (247,578) (259,395)
Cost of common stock in treasury................... (6,220) (6,220)
---------- ----------
(24,991) (36,808)
---------- ----------
$1,355,397 $1,187,960
========== ==========
See notes to consolidated financial statements.
4
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1996 1995
---------- ----------
Revenues................................................. $1,746,935 $1,282,513
Cost of goods sold....................................... 1,660,783 1,212,788
---------- ----------
Gross Profit............................................. 86,152 69,725
Selling and administrative expenses...................... 54,756 43,338
Depreciation............................................. 2,406 1,996
---------- ----------
Operating income....................................... 28,990 24,391
Interest expense......................................... 9,295 9,132
---------- ----------
Income before taxes...................................... 19,695 15,259
Taxes on income.......................................... 7,878 6,409
---------- ----------
Net income............................................. $ 11,817 $ 8,850
========== ==========
Net income per share (fully diluted)..................... $ .49 $ .39
========== ==========
See notes to consolidated financial statements.
5
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31
-------------------
1996 1995
-------- ---------
OPERATING ACTIVITIES
Net income............................................... $ 11,817 $ 8,850
Adjustments to reconcile net income to net cash (used in)
operating activities:
Depreciation............................................ 2,406 1,996
Amortization............................................ 662 693
Provision for losses on accounts receivable............. 2,090 (145)
(Gain) loss on disposal of property and equipment....... (124) 5
Deferred income taxes................................... 2,344 2,673
Changes in operating assets and liabilities:
Restricted cash........................................ (2,179) 7,060
Accounts receivable.................................... (82,024) (21,252)
Merchandise inventories................................ (112,765) (143,315)
Prepaid expenses....................................... (351) 6
Accounts payable, accrued expenses and income taxes.... (25,568) 91,237
Miscellaneous........................................... (36) (224)
-------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES............... (203,728) (52,416)
INVESTING ACTIVITIES
Capital expenditures..................................... (2,852) (3,309)
Proceeds from sales of property and equipment............ 1,510 46
-------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES............... (1,342) (3,263)
FINANCING ACTIVITIES
Long-term debt borrowings................................ 484,473 424,457
Long-term debt repayments................................ (306,246) (351,109)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 178,227 73,348
-------- ---------
(Decrease) increase in cash and cash equivalents.......... (26,843) 17,669
Cash and cash equivalents at beginning of period.......... 65,575 32,171
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 38,732 $ 49,840
======== =========
See notes to consolidated financial statements.
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of AmeriSource Health
Corporation and its wholly-owned subsidiaries (the "Company") as of the dates
and for the periods indicated. All material intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to present
fairly the financial position as of December 31, 1996, the results of
operations for the three months ended December 31, 1996 and 1995 and the cash
flows for the three months ended December 31, 1996 and 1995 have been
included. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been omitted. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
NOTE 2--LEGAL MATTERS AND CONTINGENCIES
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings and governmental investigations,
including antitrust, environmental, product liability and regulatory agency
and other matters. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts and the matters may remain
unresolved for several years. On the basis of information furnished by counsel
and others, the Company does not believe that these matters, individually or
in the aggregate, will have a material adverse effect on its business or
financial condition.
The Company is subject to contingencies pursuant to environmental laws and
regulations at one of its former distribution centers that may require the
Company to take remediation efforts. In fiscal 1994, the Company accrued $4.1
million to cover future consulting, legal, and remediation and ongoing
monitoring costs. The accrued liability, which is reflected in other long-term
liabilities on the accompanying consolidated balance sheet ($3.9 million at
December 31, 1996), is based on an engineering analysis prepared by outside
consultants and represents an estimate of the extent of contamination and
choice of remedy, existing technology and presently enacted laws and
regulations. However, changes in remediation standards, improvements in
cleanup technology and discovery of additional information concerning the site
could affect the estimated liability in the future. The Company is
investigating the possibility of asserting claims against responsible parties
for recovery of these costs. Whether or not any recovery may be forthcoming is
unknown at this time, although the Company intends to vigorously enforce its
rights and remedies.
In November 1993, the Company, along with six other wholesale distributors
and twenty-four pharmaceutical manufacturers, was named as a defendant in the
United States District Court for the Southern District of New York, in a
series of purported class action antitrust lawsuits alleging violations of
various antitrust laws associated with the chargeback pricing system. In
addition, the Company is a party to parallel suits filed in state courts in
Minnesota and Alabama. Plaintiffs seek injunctive relief, treble damages,
attorneys' fees, and costs. In October 1994, the Company entered into a
Judgement Sharing Agreement with other wholesaler and pharmaceutical
manufacturer defendants. Under the Judgement Sharing Agreement (a) the
manufacturer defendants agreed to reimburse the wholesaler defendants for
litigation costs incurred, up to an aggregate of $9 million; and (b) if a
judgement is entered into against both manufacturers and wholesalers, the
total exposure for joint and several liability of the Company is limited to
the lesser of 1% of such judgement or $1 million. Pursuant to the Judgement
Sharing Agreement, the Company has released any claims that it might have had
7
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
against the manufacturers for the claims presented by the plaintiffs in these
lawsuits. The Judgement Sharing Agreement covers the federal court litigation
as well as the cases which have been filed in various state courts. On April
4, 1996, the federal court granted the wholesaler's motion for summary
judgement. The plaintiffs are appealing the grant of summary judgement in
favor of the wholesalers to the United States Court of Appeals for the Seventh
Circuit.
NOTE 3--EARNINGS PER SHARE
Earnings per share is computed on the basis of its weighted average number
of shares outstanding during the periods presented (23,672,686 and 22,170,686
for the three months ended December 31, 1996 and December 31, 1995,
respectively) plus the dilutive effect of stock options (625,013 and 326,364
for the three months ended December 31, 1996 and December 31, 1995,
respectively, on a fully diluted basis).
NOTE 4--SUBSEQUENT EVENT
In January 1997, the Company entered into a new revolving credit agreement
(the "Credit Agreement") with a syndicate of senior lenders providing a senior
secured facility of $500 million. Among other things, the Credit Agreement (1)
is for a term of five years, expiring in January, 2002; (2) provides for
interest rate step downs upon the attainment of certain financial ratios; (3)
provides for the release of security upon the attainment of certain financial
ratios or once the Company achieves investment grade senior, unsecured debt
ratings from both Moody's and Standard & Poors; (4) increases the borrowing
base availability to 70% of eligible inventory; and (5) increases the
Company's ability to make acquisitions. An extraordinary loss of $3.2 million
(less a $1.1 million tax benefit) will be recorded in the second quarter of
fiscal 1997, representing the write-off of the unamortized financing fees
related to the retirement of the former $380 million revolving credit
facility.
In January 1997, the Company entered into an agreement to acquire all of the
equity interests of Walker Drug Company, L.L.C. in a cash transaction. Walker
Drug Company, L.L.C. is a Pelham, Alabama based wholesale pharmaceutical
distributor with annualized revenues of approximately $800 million. The
purchase price is expected to be approximately $130 to $140 million and the
transaction will be accounted for by the purchase method. The purchase is
expected to close by the end of March 1997.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues in the first quarter of fiscal 1997 increased 36% to $1.7 billion
from $1.3 billion in fiscal 1996. The year-to-year revenue gains reflect
increases across all customer groups and the Company's continued growth in its
newer geographic markets, primarily the western and northeastern United States
and Florida. The acquisition of Gulf Distribution Inc. in February 1996
accounted for 4% of the increase. In addition, approximately 8% of the
Company's revenue increase resulted from new opportunities related to the
consolidation of two of its major competitors which may be non-recurring.
During the three months ended December 31, 1996, sales to hospitals increased
37%, sales to independent drug store customers increased 44%, and sales to the
chain drug store customer group increased 22%, as compared with the prior
fiscal year. Approximately 40% of the hospital increase is due to the addition
of one large mail order pharmacy customer. During the three months ended
December 31, 1996 sales to hospitals accounted for 49% of total revenues,
while sales to independent drug stores accounted for 33% and sales to chain
drug stores, 18% of the total.
Gross profit of $86.2 million in the first quarter of fiscal 1997 increased
by 24% over 1996 due to the increase in revenues. As a percentage of revenues,
the gross profit in the first quarter was 4.93% as compared to 5.44% in the
prior year. Approximately half of the decline in gross profit percentage from
the prior year was due to the addition of a large ($400 million in annualized
revenues) mail order pharmacy customer at a gross profit percentage
significantly lower than normal percentages. However, this account is expected
to provide the Company with its normal return on committed capital due to a
low cost to service and a relatively low working capital requirement. A
reduction in selling margin percentage due to continuing price competition
throughout the industry also contributed to the decline. The Company intends
to increase its gross profit percentage by increasing sales of higher margin
generic products and specialty programs to its expanding customer base. Gross
profit may continue to be impacted by price competition and changes in
customer and product mix.
Operating expenses increased by $11.8 million or 26%, in the first quarter
of fiscal 1997 compared with the prior year, and as a percentage of revenues,
represent 3.27% in 1997 and 3.54% in 1996. The increase is due to increased
delivery, warehouse and other new account start-up costs associated with the
significant revenue increase. The decrease as a percentage of revenues is due
to continued economies of scale at the Company's established locations, a
reduction in new facility integration costs which were significant in fiscal
1996, and the new mail order pharmacy customer described above.
Operating income of $29.0 million in the first quarter of fiscal 1997
increased by 19% over the prior year. As a percentage of revenues, the
Company's operating margin declined to 1.66% in 1997 from 1.90% in 1996. The
decline in the operating margin percentage is due to the decline in gross
profit percentage described above, offset in part by reduced operating
expenses as a percentage of revenues.
Interest expense of $9.3 million in the first quarter of fiscal 1997
represents a slight increase of $0.2 million or 2% compared to the prior year.
Increases in borrowings due to the 36% revenue increase were offset by reduced
borrowing rates compared to the prior year due to the redemption of the
remaining $74.3 million of 11 1/4% senior debentures in the third quarter of
fiscal 1996 and market rate reductions under the Company's revolving credit
facility and receivables securitization financing (Receivables Program).
Average borrowings during the quarter ended December 31, 1996 were $536
million as compared to $451 million in the prior year.
The income tax provision for the quarter ended December 31, 1996 was
computed based on an estimate of the full year effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended December 31, 1996, the Company's
operating activities used $203.7 million in cash. The increase of $112.8
million in merchandise inventories, $82.0 million in accounts receivable,
9
and $25.6 million in accounts payables, accrued expenses and income taxes
accounted for most of the use of funds. The increase in inventories and
accounts receivable reflects the Company's internal growth as well as
increased purchases in anticipation of manufacturer price increases. In
addition, the Company increased inventories to service the temporary and
potential new customers resulting from the consolidation of two of its major
competitors. Operating cash uses during the three-month period ended December
31, 1996 included $8.3 million in interest payments and $0.6 million in income
tax payments.
Capital expenditures for the three months ended December 31, 1996 were $2.9
million and relate principally to investments in management information
systems and warehouse improvements which are expected to continue throughout
the year.
Cash provided by financing activities during the first quarter of fiscal
1997 represents borrowings under the Company's revolving credit facility and
its Receivable Program primarily to fund its working capital requirements. At
December 31, 1996, borrowings under the Company's $380 million revolving
credit facility were $325 million (at an average interest rate of 7.0%) and
borrowings under the $285 million Receivables Program were $285 million (at an
average interest rate of 6.1%). In January 1997, the Company entered into a
new revolving credit agreement (the "Credit Agreement") with a syndicate of
senior lenders providing a senior secured facility of $500 million. Proceeds
from borrowings under this Credit Agreement were used to retire the $380
million revolving credit facility. Among other things, the Credit Agreement
(1) is for a term of five years; (2) provides for interest rate step downs
upon the attainment of certain financial ratios; (3) provides for the release
of security upon the attainment of certain financial ratios or once the
Company achieves investment grade senior, unsecured debt ratings from both
Moody's and Standard & Poors; (4) increases the borrowing base availability to
70% of eligible inventory; and (5) increases the ability to make acquisitions.
An extraordinary loss of $3.2 million (less a tax benefit of $1.1 million)
will be recorded in the second quarter of fiscal 1997, representing the write-
off of previously unamortized deferred financing fees related to the
retirement of the former $380 million revolving credit facility. The initial
interest rate for borrowings under the Credit Agreement is LIBOR plus 1.25%.
An increase in interest rates would adversely affect the Company's operating
results and the cash flow available after debt service to fund operations and
expansion and, if permitted to do so under its revolving credit facility, to
pay dividends on its capital stock.
The Company's operating results have generated sufficient cash flow which,
together with borrowings under its debt agreements and credit terms from
suppliers, have provided sufficient capital resources to finance working
capital and cash operating requirements, fund capital expenditures, and
interest currently payable on outstanding debt. The Company's primary ongoing
cash requirements will be to fund payment of interest on indebtedness, finance
working capital, and fund capital expenditures and routine growth and
expansion. Future cash flows from operations and borrowings are expected to be
sufficient to fund the Company's ongoing cash requirements.
In January 1997, the Company entered into an agreement to purchase all of
the equity interests of Walker Drug Company, L.L.C. ("Walker") in a cash
transaction. The transaction is expected to close by the end of March 1997.
Walker is a Pelham, Alabama based wholesale pharmaceutical distributor with
annualized revenues of approximately $800 million. The purchase price is
expected to be approximately $130 to $140 million. The Company expects to fund
the transaction from borrowings under its new Credit Agreement. In addition,
the Company is currently considering various capital raising alternatives
including refinancing its receivable securitization financing and raising
additional equity.
The Company is subject to certain contingencies pursuant to environmental
laws and regulations at one of its former distribution centers that may
require remediation efforts. In fiscal 1994, the Company accrued a liability
of $4.1 million to cover future consulting, legal and remediation, and ongoing
monitoring costs. The accrued liability, 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
10
enacted laws and regulation, however, changes in remediation standards,
improvements in cleanup technology, and discovery of additional information
concerning the site could affect the estimated liability in the future. The
Company is investigating the possibility of asserting claims against
responsible parties for recovery of these costs. Whether or not any recovery
may be forthcoming is unknown at this time.
Certain information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements as such term is defined in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Certain factors such as changes in interest
rates, competitive pressures, customer and product mix, inventory investment
buying opportunities, and capital markets could cause actual results to differ
materially from those in the forward-looking statements.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 4.14--Credit Agreement dated as of January 8, 1997 among
AmeriSource Corporation as Borrower, AmeriSource Health Corporation and
Certain Subsidiaries and Affiliates, as Guarantors and NationsBank, N.A. as
Administrative Agent.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended December 31, 1996.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Amerisource Health Corporation
/s/ Kurt J. Hilzinger
_____________________________________
KURT J. HILZINGER VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
OFFICER)
/s/ Michael D. DiCandilo
_____________________________________
MICHAEL D. DICANDILO VICE
PRESIDENT, CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
Date: February 7, 1997
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