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 MARCH 31, 2001
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)
1300 Morris Drive, Suite 100
Chesterbrook, PA 19087
(610) 727-7000
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
March 31, 2001 was: Class A--52,655,648, Class B--8,446; Class C--159,768.
INDEX
AMERISOURCE HEALTH CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--March 31, 2001 and September 30, 2000
Consolidated statements of operations--Three months ended March 31, 2001 and March 31, 2000
Consolidated statements of operations--Six months ended March 31, 2001 and March 31, 2000
Consolidated statements of cash flows--Six months ended March 31, 2001 and March 31, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and qualitative disclosures about market risk
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
(in thousands)
ASSETS
March 31, September 30,
2001 2000
---------- ----------
(unaudited)
Current assets:
Cash and cash equivalents ........................... $ 126,268 $ 120,818
Accounts receivable, less allowance for doubtful
accounts: 3/01--$37,142; 9/00--$34,506 ............ 676,654 623,961
Merchandise inventories ............................. 1,820,202 1,570,504
Prepaid expenses and other .......................... 4,341 5,336
---------- ----------
Total current assets .............................. 2,627,465 2,320,619
Property and equipment, at cost:
Land ............................................... 3,832 3,832
Buildings and improvements ......................... 39,118 37,478
Machinery, equipment and other................. 106,853 99,456
---------- ----------
149,803 140,766
Less accumulated depreciation ...................... 80,649 75,804
---------- ----------
69,154 64,962
Other assets, less accumulated amortization:
---------- ----------
3/01--$7,492; 9/00--$11,747 ......................... 87,791 72,986
---------- ----------
$2,784,410 $2,458,567
========== ==========
See notes to consolidated financial statements.
3
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
2001 2000
---------- ----------
(unaudited)
Current liabilities:
Accounts payable ...................................... $1,756,364 $1,584,133
Accrued expenses and other ............................ 51,733 49,398
Accrued income taxes .................................. 11,257 12,284
Deferred income taxes ................................. 118,472 105,654
---------- ----------
Total current liabilities .......................... 1,937,826 1,751,469
Long-term debt:
Revolving credit facility ............................. - 20,000
Receivables securitization financing .................. 171,181 385,000
Convertible subordinated notes.......................... 300,000 -
Other debt ............................................ 2,432 8,217
---------- ----------
473,613 413,217
Other liabilities ....................................... 7,534 11,587
Stockholders' equity:
Common stock, $.01 par value:
Class A (voting and convertible):
100,000,000 shares authorized;
issued 3/01--53,361,565 shares;
9/00--52,660,813 shares ............................ 533 527
Class B (non-voting and convertible):
15,000,000 shares authorized;
issued 5,908,445 shares ............................ 59 59
Class C (non-voting and convertible):
2,000,000 shares authorized;
issued 3/01--159,768 shares;
9/00--161,978 shares ............................... 2 2
Capital in excess of par value ........................ 308,974 283,544
Retained earnings ................................... 62,089 4,382
Cost of common stock in treasury ...................... (6,220) (6,220)
---------- ----------
365,437 282,294
---------- ----------
$2,784,410 $2,458,567
========== ==========
See notes to consolidated financial statements.
4
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended
March 31,
----------------------------------
(unaudited)
2001 2000
---------- ----------
Operating revenue...................................................... $3,480,685 $2,832,041
Bulk deliveries to customer warehouses................................. 313 10,162
---------- ----------
Total revenue.......................................................... 3,480,998 2,842,203
Operating cost of goods sold........................................... 3,329,516 2,700,635
Cost of goods sold - bulk deliveries................................... 313 10,162
---------- ----------
Total cost of goods sold............................................... 3,329,829 2,710,797
---------- ----------
Gross profit........................................................... 151,169 131,406
Selling and administrative expenses.................................... 82,462 76,323
Depreciation........................................................... 3,680 3,577
Amortization........................................................... 601 392
---------- ----------
Operating income....................................................... 64,426 51,114
Equity in net loss of unconsolidated affiliate......................... 1,801
Interest expense....................................................... 11,793 11,922
---------- ----------
Income before taxes.................................................... 50,832 39,192
Taxes on income........................................................ 19,316 14,893
---------- ----------
Net income............................................................. $ 31,516 $ 24,299
========== ==========
Earnings per share..................................................... $.60 $.47
========== ==========
Earnings per share - assuming dilution................................. $.57 $.47
========== ==========
See notes to consolidated financial statements.
5
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six months ended
March 31,
----------------------------------
(unaudited)
2001 2000
---------- ----------
Operating revenue...................................................... $6,787,436 $5,660,795
Bulk deliveries to customer warehouses................................. 757 20,790
---------- ----------
Total revenue.......................................................... 6,788,193 5,681,585
Operating cost of goods sold........................................... 6,498,834 5,409,462
Cost of goods sold - bulk deliveries................................... 757 20,790
---------- ----------
Total cost of goods sold............................................... 6,499,591 5,430,252
---------- ----------
Gross profit........................................................... 288,602 251,333
Selling and administrative expenses.................................... 162,107 146,568
Depreciation........................................................... 6,978 6,976
Amortization........................................................... 1,197 940
---------- ----------
Operating income....................................................... 118,320 96,849
Equity in net loss of unconsolidated affiliate......................... 2,575 -
Interest expense....................................................... 22,669 22,820
---------- ----------
Income before taxes.................................................... 93,076 74,029
Taxes on income........................................................ 35,369 28,131
---------- ----------
Net income............................................................. $ 57,707 $ 45,898
========== ==========
Earnings per share..................................................... $1.10 $.89
========== ==========
Earnings per share - assuming dilution................................. $1.07 $.89
========== ==========
See notes to consolidated financial statements.
6
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
March 31,
-----------------------------------
(unaudited)
2001 2000
--------------- ---------------
OPERATING ACTIVITIES
Net income .................................................................... $ 57,707 $ 45,898
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation ................................................................. 6,978 6,976
Amortization, including deferred financing costs ............................. 2,846 1,807
Provision for losses on accounts receivable .................................. 7,363 2,615
Equity in net loss of unconsolidated affiliate ................................ 2,575 -
(Gain) loss on disposal of property and equipment ............................ (163) 71
Gain on sale of a business .................................................... (454) -
Deferred income taxes ........................................................ 7,365 10,938
Changes in operating assets and liabilities:
Accounts receivable ........................................................ (67,656) (31,421)
Merchandise inventories .................................................... (256,384) (29,642)
Prepaid expenses and other ................................................. (250) (537)
Accounts payable, accrued expenses and income taxes ........................ 180,728 78,970
Miscellaneous................................................................ (1,078) (788)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........................ (60,423) 84,887
INVESTING ACTIVITIES
Capital expenditures .......................................................... (12,245) (7,685)
Equity investment in a business................................................. (3,282)
Collections on ESOP note receivable............................................. - 186
Proceeds from sales of property and equipment ................................. 310 1,256
Proceeds from sale of a business................................................ 12,993 -
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES ...................................... (2,224) (6,243)
FINANCING ACTIVITIES
Long-term debt borrowings ..................................................... 1,245,068 714,167
Long-term debt repayments ..................................................... (1,185,130) (803,457)
Deferred financing costs and other........................................... (9,350) (115)
Exercise of stock options ..................................................... 17,509 504
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ 68,097 (88,901)
--------------- ---------------
Increase (decrease) in cash and cash equivalents ............................... 5,450 (10,257)
Cash and cash equivalents at beginning of period ............................... 120,818 59,497
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 126,268 $ 49,240
=============== ===============
See notes to consolidated financial statements.
7
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 consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 March 31, 2001, the results of
operations for the three and six months ended March 31, 2001 and 2000 and the
cash flows for the six months ended March 31, 2001 and 2000 have been included.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally accepted
in the United States, but which are not required for interim reporting purposes,
have been omitted. The accompanying unaudited 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, 2000.
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, 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.
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in a series
of purported class action antitrust lawsuits brought by retail pharmacies
alleging violations of various antitrust laws stemming from the use of
chargeback agreements. In addition, the Company and four other wholesale
distributors were added as defendants in a series of related antitrust lawsuits
brought by independent pharmacies and chain drugstores, both of which opted out
of the class cases. The Company also was named a defendant in parallel suits
filed in state courts in Minnesota, Alabama, Tennessee and Mississippi. The
federal class actions were originally filed in the United States District Court
for the Southern District of New York, but were transferred along with the
individual and chain drugstore cases to the United States District Court for the
Northern District of Illinois. Plaintiffs sought injunctive relief, treble
damages, attorneys' fees and costs. In October 1994, the Company entered into a
Judgment Sharing Agreement with the 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 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 released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. Subsequent amendments to the
Judgment Sharing Agreement provided additional protection to the Company from
litigation expenses in exchange for updated releases. The Judgment Sharing
Agreement covers the federal court litigation as well as the cases which have
been filed in various state courts.
8
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 2 - LEGAL MATTERS AND CONTINGENCIES - CONTINUED
After a ten-week trial in the federal class action case, the Court granted all
of the defendants' motions for a judgment as a matter of law and dismissed the
claims the class plaintiffs had asserted against the Company and the other
defendants. Plaintiffs in the class case then appealed the District Court's
judgment to the Seventh Circuit Court of Appeals. On June 9, 1999, the Seventh
Circuit affirmed the judgment the District Court entered in favor of the Company
in the class case. Plaintiffs' petition for a writ of certiorari to the United
States Supreme Court was denied.
The state cases are proceeding. The Minnesota case settled without any
payment or admission of liability by the Company. On November 29, 1999, the
trial court in Alabama dismissed all of the claims asserted against the Company
and the other wholesaler and manufacturer defendants in accordance with a ruling
from the Alabama Supreme Court. The Mississippi and Tennessee cases remain
pending, but are inactive.
On or about October 2, 1997, a group of retail chain drugstores and individual
pharmacies that had opted out of the class cases filed a motion with the United
States District Court for the Northern District of Illinois seeking to add the
Company and the other wholesale distributors as defendants in their cases
against the manufacturer defendants, which cases are consolidated before the
same judge who presides over the class cases. This motion was granted and the
Company and the other wholesale distributors have been added as defendants in
those cases as well. As a result, the Company was served with approximately 120
additional complaints on behalf of approximately 4,000 pharmacies and chain
retailers. Following fact and expert discovery, the Company and the other
wholesale distributors filed a joint motion for summary judgment. On November
6, 2000 the District Court granted the Company's motion for summary judgment as
to the chain and individual pharmacies' claims. Plaintiffs have appealed that
decision to the Seventh Circuit. The Company believes it has meritorious
defenses to the claims asserted in these lawsuits and intends to defend itself
vigorously in all of these cases.
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 make 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
liabilities in the accompanying consolidated balance sheet ($3.8 million at
March 31, 2001), is based on an engineering analysis prepared by outside
consultants and represents an estimate of the extent of contamination and choice
of remedy based on existing technology and presently 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.
9
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 3--EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the periods presented. Earnings per
share--assuming dilution is computed on the basis of the weighted average number
of shares of common stock outstanding during the period plus the dilutive effect
of stock options. Additionally, the fiscal 2001 calculations consider the
convertible subordinated notes as if converted and, therefore, the effect of
interest expense related to these notes is added back to net income in
determining income available to common stockholders.
Three months ended Six months ended
March 31, March 31,
--------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands)
Net income.............................................................. $31,516 $24,299 $57,707 $45,898
Interest expense - convertible subordinated notes,
net of income taxes .................................................. 2,528 - 3,086 -
------- ------- ------- -------
Income available to common stockholders................................. $34,044 $24,299 $60,793 $45,898
======= ======= ======= =======
Weighted average number of shares
of common stock outstanding........................................... 52,701 51,370 52,528 51,329
Effect of dilutive securities:
Stock options...................................................... 984 362 988 283
Convertible subordinated notes..................................... 5,664 - 3,423 -
------- ------- ------- -------
Weighted average number of shares of common stock and
dilutive potential common stock.................................... 59,349 51,732 56,939 51,612
======= ======= ======= =======
NOTE 4 - LONG-TERM DEBT
In December 2000, the Company issued $300.0 million of Convertible
Subordinated Notes due December 1, 2007. The notes have an annual interest rate
of 5%, payable semiannually, and are convertible into Class A Common Stock of
the Company at $52.97 per share at any time before their maturity or their prior
redemption or repurchase by the Company. On or after December 3, 2004, the
Company has the option to redeem all or a portion of the notes that have not
been previously converted. Net proceeds from the notes of approximately $290.7
million were used to repay existing borrowings, and for working capital and
other general corporate purposes. In connection with the issuance of the notes,
the Company incurred approximately $9.3 million of financing fees which were
deferred and are being amortized over the term of the notes.
NOTE 5 - STOCK OPTION PLANS
During fiscal 2001, the Company adopted the AmeriSource Health
Corporation 2001 Stock Option Plan (the "2001 Option Plan") and the AmeriSource
Health Corporation 2001 Non-Employee Directors Stock Option Plan (the "2001
Directors Plan"). The 2001 Option Plan and the 2001 Directors Plan provide for
the granting of nonqualified stock options to acquire up to 3,200,000 and
225,000 shares of common stock, respectively, at a price not less than the fair
market value of the common stock on the date the option is granted. The option
terms and vesting periods are determined at the date of grant by a committee of
the Board of Directors. The number of options to be granted annually under the
2001 Directors Plan is fixed by the plan and such options vest immediately.
Options expire ten years after the date of grant.
10
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 6 - PROPOSED BERGEN BRUNSWIG CORPORATION MERGER
The Company and Bergen Brunswig Corporation ("Bergen") have signed a
definitive merger agreement dated as of March 16, 2001, providing for the
Company to merge with Bergen. The stock-for-stock transaction will create a new
company, called AmeriSource-Bergen Corporation ("AmeriSource-Bergen") with
approximately $35 billion in annual revenue. Under the terms of the agreement,
each share of Bergen common stock will be converted into .37 of a share of
AmeriSource-Bergen common stock while each share of AmeriSource common stock
will be converted into one share of AmeriSource-Bergen common stock. The new
company will have approximately 103 million shares of common stock outstanding,
with current AmeriSource shareholders owning approximately 51% of the combined
company and current Bergen shareholders owning approximately 49%. The merger of
the two companies has been structured as a tax-free transaction and is expected
to be accounted for as a purchase transaction under the new guidelines for
business combinations proposed by the Financial Accounting Standards Board. The
new company will have its headquarters in Valley Forge, Pennsylvania and its
west coast management center will be located in Orange, California. Under
certain circumstances, in the event that the merger agreement is terminated as
a result of either company entering into a competing transaction, the other
company would be entitled to a termination fee of $75 million and reimbursement
of expenses up to $15 million.
The merger is expected to close during the summer of 2001. The transaction
is subject to Hart-Scott-Rodino review, approval by shareholders of both
companies, promulgation of the new FASB purchase accounting rules, and other
customary closing conditions. There can be no assurance that the merger will be
completed, or that it will be completed as contemplated.
Concurrently with the execution of the merger agreement, the Company and Bergen
entered into Stock Option Agreements ("Option Agreements"). Pursuant to the
Option Agreements, AmeriSource granted Bergen an irrevocable option to purchase
up to 10,472,304 shares of AmeriSource common stock at an exercise price of
$48.48 and Bergen granted AmeriSource an irrevocable option to purchase up to
26,961,420 shares of Bergen common stock at an exercise price of $17.9376, under
certain circumstances in which the merger agreement is terminated. The Option
Agreements may have the effect of discouraging persons who may be interested in
acquiring an interest in, or otherwise effecting a business combination with,
AmeriSource or Bergen from considering or proposing such a transaction.
NOTE 7 - SHAREHOLDER RIGHTS PLAN
During fiscal 2001, the Company's Board of Directors adopted a Shareholder
Rights Plan. The Plan provides for one right to be distributed as a dividend
for each share of AmeriSource common stock outstanding on March 30, 2001. In
general, if a person acquires 15 percent or more of AmeriSource's common stock,
each right will entitle the holder thereof to purchase one-tenth of a share of
AmeriSource common stock (or the common stock of the surviving company in the
case of a merger) at a 50 percent discount to market value. The rights are
redeemable by the Company under certain circumstances. The rights will not be
exercisable in connection with the proposed AmeriSource-Bergen merger (Note 6)
and will expire on the earlier of March 16, 2002 or the consummation of the
merger.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Operating revenue for the three months ended March 31, 2001 increased 23% from
the prior-year quarter to $3.5 billion from $2.8 billion. For the six months
ended March 31, 2001, operating revenue increased 20% to $6.8 billion compared
to $5.7 billion in the prior-year period. During the three and six months ended
March 31, 2001, respectively, sales to health systems increased 23% and 18%,
sales to alternate site facilities increased 69% and 71%, sales to independent
drugstore customers increased 9% and 6% and sales to the chain drugstore
customer group increased 35% and 37%, in each case compared to the respective
prior-year periods. The increase in health systems revenue was primarily due to
revenue growth with the Veterans Administration and the Novation group
purchasing organization ("GPO"). Revenue from the Veterans Administration for
the six months ended March 31, 2001 grew 21% over the prior-year period and
accounted for approximately 19% of total operating revenue in the six-month
period ended March 31, 2001. During calendar 2000 members of the Novation GPO
went through a distributor selection process and as a result of this process
AmeriSource obtained a net gain of approximately $500 million in annualized
revenue. During the first quarter of fiscal 2001, the Company realized
approximately 70% to 80% of the estimated revenue impact and by the end of the
second fiscal quarter realized 100% of the impact. Alternate site revenue
increased significantly due to the effect of a large mail-order customer added
in the third fiscal quarter of last year and the addition of a number of new
customers since the prior-year quarter. The increase in chain revenue was
primarily due to the addition of three new customers, one in the fourth quarter
of fiscal 2000 and the remaining two during the first half of fiscal 2001.
During the six months ended March 31, 2001, 53% of total operating revenue was
from sales to institutional customers which include health systems (42%) and
alternate site facilities (11%), and the remaining 47% was from retail
customers, including independent community pharmacies (33%) and chain drugstores
(14%). In the same period last year, the customer mix was 50% institutional and
50% retail.
The Company reports as revenue bulk shipments to customer warehouses, whereby
the Company acts as an intermediary in the ordering and subsequent delivery of
pharmaceutical products. After ceasing to do business with the Company's
largest bulk customer, revenue from bulk deliveries decreased to $0.3 million in
the second quarter and $0.8 million in the first six months of fiscal 2001
compared to $10.2 million and $20.8 million in the prior-year quarter and six-
month period, respectively. Due to the insignificant service fees generated from
these bulk shipments, fluctuations in volume have no significant impact on
operating margins.
Gross profit of $151.2 million in the second quarter of fiscal 2001 increased by
15% as compared to the prior year quarter due to the increase in operating
revenue. As a percentage of operating revenue, the gross profit in the second
quarter of fiscal 2001 was 4.34% as compared to 4.64% in the prior-year quarter.
For the six months ended March 31, 2001, the gross profit percentage was 4.25%
as compared to 4.44% in the prior-year period. The declines in gross profit
percentages in the quarter and for the six-month period reflect the net impact
of a number of factors, including the change in customer mix to a higher level
of institutional and other large customers and the continuing competitive
pricing environment, offset in part by higher buy-side margins than in the
prior-year periods. Downward pressures on sell-side gross profit margin are
expected to continue and there can be no assurance that increases in the buy-
side component of the gross margin, including manufacturer price increases and
negotiated deals, will be available in the future to fully or partially offset
the anticipated decline. In addition, the Company's cost of goods sold for
interim periods includes a LIFO provision that is based on the Company's
estimated full-year provision. This provision is subject to changes in inventory
quantities, product mix, and manufacturer pricing practices, which may be
impacted by market and other external influences.
12
Selling and administrative expenses and depreciation increased by $6.2 million
or 8% in the second quarter of fiscal 2001 compared with the prior year quarter
and, as a percentage of operating revenue, were 2.47% in fiscal 2001 and 2.82%
in fiscal 2000. For the first six months of fiscal 2001, selling and
administrative expenses and depreciation as a percentage of operating revenue
were 2.49% as compared to 2.71% in the prior-year period. This improvement
reflects the changing customer mix to more institutional business, which is
lower gross margin business, but requires lower operating expense as a
percentage of revenue to service. The improvements also reflect warehouse
efficiencies and cost reductions related to the Company's centralization
initiatives completed last year. These factors were offset in part by an
increase in the bad debt provision to $7.4 million for the first six months of
fiscal 2001 compared to a $2.6 million provision in the prior-year period. The
bad debt increase was primarily due to three customers in bankruptcy. There can
be no assurance that similar events will not occur and result in additional bad
debt expense in the future.
Operating income of $64.4 million in the quarter ended March 31, 2001 increased
by 26% from the prior-year period. The Company's operating margin for the
quarter increased to 1.85% in fiscal 2001 from 1.80% in fiscal 2000. The five
basis point increase represents the net effect of a 35 basis point reduction in
operating expenses partially offset by a 30 basis point reduction in gross
margin. For the six months ended March 31, 2001, the operating margin was 1.74%
compared to 1.71% in the prior-year period. The three basis point increase
represents the net effect of a 22 basis point reduction in operating expenses
partially offset by a 19 basis point reduction in gross margin. While
management has been historically able to lower expense ratios and expects to
continue to do so, there can be no assurance that reductions will occur in the
future, or that expense ratio reductions will exceed possible declines in gross
margins.
Interest expense of $11.8 million in the second quarter of fiscal 2001
represents a decrease of 1% compared to the prior-year quarter. The decrease
reflects the net impact of higher average levels of debt, lower borrowing
spreads and interest rates and includes the impact of $300.0 million of 5%
fixed-rate convertible notes issued by the Company in December of 2000. Average
borrowings during the quarter ended March 31, 2001 were $760 million as compared
to average borrowings of $706 million in the prior-year quarter. Average
borrowing rates under the Company's variable-rate debt facilities decreased
approximately 30 basis points from the prior-year quarter due to lower market
interest rates and lower borrowing spreads which reflect the Company's improved
financial structure. Interest expense for the six months ended March 31, 2001
decreased modestly to $22.7 million from $22.8 million in the prior-year period.
The decrease reflects the positive impact of the convertible notes, which more
than offset an increase of $15 million in average borrowings and an 18 basis
point increase in borrowing rates under the Company's variable-rate debt
facilities for the six-month period.
The income tax provision for the three and six months ended March 31, 2001 of
38% was computed based on an estimate of the full year effective tax rate.
Net income in the second quarter of fiscal 2001 increased 30% to $31.5 million
from $24.3 million in the prior-year quarter and earnings per share -- assuming
dilution increased 21% to $0.57 per share as compared to $0.47 per share in the
prior-year quarter. Net income of $57.7 million for the six months ended March
31, 2001 represents a 26% increase compared to the prior-year period. For
fiscal 2001 the calculations of earnings per share - assuming dilution include
the dilutive effect of the convertible subordinated notes issued by the Company
in December 2000. The convertible subordinated notes are treated as if
converted and, therefore, the weighted average number of common shares is
increased and the effect of interest expense related to these notes is added
back to net income in determining income available to common stockholders.
13
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2001, the Company's operating activities
used $60.4 million in cash as compared to $84.9 million generated in the prior-
year period. Cash use from operations during the first six months of fiscal
2001 resulted from an increase in merchandise inventories of $256.4 million and
an increase in accounts receivable of $67.7 million offset in part by an
increase in accounts payable, accrued expenses and income taxes of $180.7
million. Merchandise inventories were increased to support the 20% operating
revenue increase, including the new Novation business. The proportionate
increase in accounts receivable was less than the increase in operating revenue
as the number of days sales outstanding during the period improved by more than
two days over the prior-year period reflecting the change in the customer mix.
Centralization of accounts payable processing and timing of vendor payments
accounted for a one day increase in days payables outstanding over the prior-
year period. Operating cash uses during the six months ended March 31, 2001
included $19.4 million in interest payments and $22.4 million in income tax
payments.
Capital expenditures for the six months ended March 31, 2001 were $12.2 million
and related principally to investments in information technology, warehouse
improvements, and warehouse automation equipment. Similar expenditures of
approximately $10 million to $13 million are expected to occur in the next two
quarters of fiscal 2001.
During the six months ended March 31, 2001, the Company sold the net assets of
one of its specialty products distribution facilities for approximately $13.0
million and recognized a gain of approximately $0.5 million.
Cash provided by financing activities during the first six months of fiscal 2001
was $68.1 million. In December 2000 the Company issued $300.0 million of
Convertible Subordinated Notes due December 1, 2007. The notes have an annual
interest rate of 5%, payable semiannually, and are convertible into Class A
Common Stock of the Company at $52.97 per share at any time before their
maturity or their prior redemption or repurchase by the Company. Net proceeds
from the notes of approximately $290.7 million were used to repay existing
borrowings, and for working capital and other general corporate purposes. At
March 31, 2001, there were no borrowings under the Company's $500 million
revolving credit facility and borrowings under the $400 million receivables
program were $171.2 million. The revolving credit facility provides for interest
rates ranging from LIBOR plus 25 basis points to LIBOR plus 125 basis points
based upon certain financial ratios. This facility expires in January 2002 and
the Company is currently discussing refinancing strategies with lenders. The
receivables securitization facility was entered into in May 1999 and has a term
of three years. Interest rates are based on prevailing market rates for short-
term commercial paper plus a program fee of 38.5 basis points. The receivables
securitization facility represents a financing vehicle utilized by the Company
because of the availability of lower interest rates relative to other financing
sources. The Company securitizes its trade account and note receivables, which
are generally non-interest bearing, in transactions that do not qualify as sales
transactions under SFAS No. 125.
The Company's primary exposure to market risk consists of changes in interest
rates on borrowings. 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 enters into
interest rate protection agreements from time to time to hedge the exposure to
increasing interest rates with respect to its long-term debt agreements. The
Company provides protection to meet actual exposures and does not speculate in
derivatives. There were no such agreements outstanding at March 31, 2001. For
every $100 million of unhedged variable rate debt, a 75 basis point increase in
interest rates would increase the Company's annual interest expense by $0.75
million.
The Company's operating results, 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 and to fund
capital expenditures and to pay interest on outstanding debt. The Company's
primary ongoing cash requirements will be to pay interest on indebtedness,
finance working capital, and fund capital expenditures and routine growth and
expansion through new business opportunities. Future cash flows from operations
and borrowings are expected to be sufficient to fund the Company's ongoing cash
requirements.
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 ($3.8 million at March 31, 2001),
14
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.
OTHER - MERGER AGREEMENT
The Company and Bergen Brunswig Corporation ("Bergen") have signed a definitive
merger agreement dated as of March 16, 2001 providing for the Company to
merge with Bergen. The stock-for-stock transaction will create a new company,
called AmeriSource-Bergen Corporation ("AmeriSource-Bergen") with approximately
$35 billion in annual revenue. Under the terms of the agreement, each share of
Bergen common stock will be converted into .37 of a share of AmeriSource-Bergen
common stock while each share of AmeriSource common stock will be converted into
one share of AmeriSource-Bergen common stock. The new company will have
approximately 103 million shares of common stock outstanding, with current
AmeriSource shareholders owning approximately 51% of the combined company and
current Bergen shareholders owning approximately 49%. The merger of the two
companies has been structured as a tax-free transaction and is expected to be
accounted for as a purchase transaction under the new guidelines for business
combinations proposed by the Financial Accounting Standards Board. The new
company will have its headquarters in Valley Forge, Pennsylvania and its west
coast management center will be located in Orange, California. Under certain
circumstances, in the event that the merger agreement is terminated as a result
of either company entering into a competing transaction, the other company would
be entitled to a termination fee of $75 million and reimbursement of expenses up
to $15 million.
The combination is expected to close during the summer of 2001. The transaction
is subject to Hart-Scott-Rodino review, approval by shareholders of both
companies, promulgation of the new FASB purchase accounting rules, and other
customary closing conditions. There can be no assurance that the merger will be
completed, or that it will be completed as contemplated.
Concurrently with the execution of the merger agreement, the Company and Bergen
entered into Stock Option Agreements ("Option Agreements"). Pursuant to the
Option Agreements, AmeriSource granted Bergen an irrevocable option to purchase
up to 10,472,304 shares of AmeriSource common stock at an exercise price of
$48.48 and Bergen granted AmeriSource an irrevocable option to purchase up to
26,961,420 shares of Bergen common stock at an exercise price of $17.9376, under
certain circumstances in which the merger agreement is terminated. The Option
Agreements may have the effect of discouraging persons who may be interested in
acquiring an interest in, or otherwise effecting a business combination with,
AmeriSource or Bergen from considering or proposing such a transaction.
FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations includes forward-looking
statements (as defined in Section 27A of the Securities Act and Section 21E of
the Exchange Act) that reflect the Company's current views with respect to
future events and financial performance. Certain factors such as competitive
pressures, success of restructuring or systems initiatives, market interest
rates, regulatory changes, changes in customer mix, changes in pharmaceutical
manufacturers' pricing and distribution policies, changes in U.S. Government
policies, customer insolvencies, or the loss of one or more key customer or
supplier relationships could cause actual results to differ materially from
those in forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See discussion in Item 2. above.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
Current Report on Form 8-K filed March 19, 2001, attaching Agreement and
Plan of Merger dated March 16, 2001, by and among AmeriSource Health
Corporation, Bergen Brunswig Corporation, AABB Corporation, A-Sub
Acquisition Corp. and B-Sub Acquisition Corp. Also attached is the joint
press release of AmeriSource Health Corporation and Bergen Brunswig
Corporation dated March 19, 2001, and the press release of AmeriSource
Health Corporation dated March 19, 2001.
Current Report on Form 8-K filed March 27, 2001, attaching Rights
Agreement, dated as of March 16, 2001, between AmeriSource Health
Corporation and Mellon Investor Services LLC and press release announcing
shareholder rights plan.
16
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/ George L. James III
---------------------------------------------
George L. James III
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael D. DiCandilo
---------------------------------------------
Michael D. DiCandilo
Vice President, Controller
(Principal Accounting Officer)
Date: May 14, 2001
17