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, 1998
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, 1998 was: Class A--21,368,448, Class B--
2,750,783; Class C--127,801.
INDEX
AMERISOURCE HEALTH CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--December 31, 1998 and September 30, 1998
Consolidated statements of operations--Three months ended December
31, 1998 and December 31, 1997
Consolidated statements of cash flows--Three months ended December
31, 1998 and December 31, 1997
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, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 44,406 $ 48,461
Restricted cash.................................... 31,526 37,044
Accounts receivable less allowance for doubtful
accounts: 12/98--$24,997, 9/98--$26,477........... 522,044 458,238
Merchandise inventories............................ 1,066,567 870,223
Prepaid expenses and other......................... 3,150 4,356
---------- ----------
Total current assets............................. 1,667,693 1,418,322
Property and equipment, at cost:
Land............................................... 3,907 3,907
Buildings and improvements......................... 33,710 33,339
Machinery, equipment and other..................... 81,000 81,267
---------- ----------
118,617 118,513
Less accumulated depreciation...................... 58,766 57,724
---------- ----------
59,851 60,789
Other assets, less accumulated amortization:
12/98--$9,634; 9/98--$8,847......................... 79,374 73,171
---------- ----------
$1,806,918 $1,552,282
========== ==========
See notes to consolidated financial statements.
3
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 908,529 $ 873,181
Accrued expenses and other......................... 42,158 48,532
Accrued income taxes............................... 11,629 78
Deferred income taxes.............................. 97,430 93,385
---------- ----------
Total current liabilities........................ 1,059,746 1,015,176
Long-term debt:
Revolving credit facility.......................... 331,660 145,000
Receivables securitization financing............... 299,956 299,948
Other debt......................................... 8,654 8,813
---------- ----------
640,270 453,761
Other liabilities.................................... 8,730 8,036
Stockholders' equity
Common stock, $.01 par value:
Class A (voting and convertible):
50,000,000 shares authorized;
issued 12/98--21,719,571 shares;
9/98--21,592,010 shares.......................... 217 216
Class B (non-voting and convertible):
15,000,000 shares authorized;
issued 12/98--5,700,783 shares;
9/98--5,700,783 shares........................... 57 57
Class C (non-voting and convertible):
2,000,000 shares authorized;
issued 12/98--127,801 shares;
9/98--129,237 shares............................. 1 1
Capital in excess of par value..................... 249,681 244,664
Retained earnings (deficit)........................ (145,564) (163,409)
Cost of common stock in treasury................... (6,220) (6,220)
---------- ----------
98,172 75,309
---------- ----------
$1,806,918 $1,552,282
========== ==========
See notes to consolidated financial statements.
4
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
(UNAUDITED)
1998 1997
---------- ----------
Operating revenue........................................ $2,160,904 $2,254,560
Bulk deliveries to customer warehouses................... 8,762 24,998
---------- ----------
Total revenue............................................ 2,169,666 2,279,558
Operating cost of goods sold............................. 2,059,211 2,148,954
Cost of goods sold--bulk deliveries...................... 8,762 24,998
---------- ----------
Total cost of goods sold................................. 2,067,973 2,173,952
---------- ----------
Gross profit............................................. 101,693 105,606
Selling and administrative expenses...................... 61,013 65,765
Depreciation............................................. 3,500 3,155
Amortization............................................. 256 282
---------- ----------
Operating income......................................... 36,924 36,404
Interest expense......................................... 8,141 12,662
---------- ----------
Income before taxes...................................... 28,783 23,742
Taxes on income.......................................... 10,938 9,259
---------- ----------
Net income............................................... $ 17,845 $ 14,483
========== ==========
Net income per share..................................... $ .74 $ .61
========== ==========
Net income per share--assuming dilution.................. $ .73 $ .60
========== ==========
See notes to consolidated financial statements.
5
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31
--------------------
(UNAUDITED)
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net income.............................................. $ 17,845 $ 14,483
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation........................................... 3,500 3,155
Amortization........................................... 712 711
Provision for losses on accounts receivable............ 595 3,066
Gain on disposal of property and equipment............. (2) (131)
Deferred income taxes.................................. 4,045 997
Changes in operating assets and liabilities:
Restricted cash....................................... 5,518 (23)
Accounts receivable................................... (66,525) (27,609)
Merchandise inventories............................... (196,344) (16,282)
Prepaid expenses...................................... (100) 245
Accounts payable, accrued expenses and income taxes... 43,143 (172,023)
Miscellaneous.......................................... 9 77
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES................ (187,604) (193,334)
INVESTING ACTIVITIES
Capital expenditures.................................... (2,612) (2,552)
Purchase of equity interest in a business............... (3,551) --
Proceeds from sales of property and equipment........... 33 1,291
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (6,130) (1,261)
FINANCING ACTIVITIES
Long-term debt borrowings............................... 470,281 774,312
Long-term debt repayments............................... (283,775) (583,105)
Exercise of stock options............................... 3,173 465
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 189,679 191,672
--------- ---------
Decrease in cash and cash equivalents.................... (4,055) (2,923)
Cash and cash equivalents at beginning of period......... 48,461 60,045
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 44,406 $ 57,122
========= =========
See notes to consolidated financial statements.
6
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, 1998, the results of
operations for the three months ended December 31, 1998 and 1997 and the cash
flows for the three months ended December 31, 1998 and 1997 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, 1998.
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.
A former customer of the Company has alleged that the Company failed to
fulfill its obligations under the service contract between the Company and the
former customer. In connection with this claim, the former customer withheld
payment on $22 million of invoices. In response, the Company filed suit to
collect the outstanding amount. The former customer has countersued the
Company for an unspecified amount. The Company believes there is no merit to
this counterclaim and intends to aggressively pursue collection of the
outstanding amount. Because the Company is unable at this time to determine
the outcome of this matter, no provision for loss has been made.
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 and 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 drug stores,
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 drug store cases to the
United States District Court for the Northern District of Illinois. Plaintiffs
seek 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 has released any claims which
it might have had against
7
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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.
On April 4, 1996, the District Court granted the Company's motion for
summary judgment in the class case. Plaintiffs subsequently appealed the
Company's grant of summary judgment to the United States Court of Appeals for
the Seventh Circuit. On August 15, 1997, the Court of Appeals reversed the
District Court's order granting summary judgment in favor of the Company and
the other wholesalers. The Court of Appeals also denied the Company's petition
for rehearing. The Company and the other wholesalers filed a petition for a
writ of certiorari to the United States Supreme Court; the petition was
denied. Trial in the class case commenced in the United States District Court
for the Northern District of Illinois on September 23, 1998. After a ten-week
trial, the Court granted all of the defendants motions for a directed verdict
and dismissed the claims the class plaintiffs had asserted against the Company
and the other defendants.
On or about October 2, 1997, a group of retail chain drug stores and
individual pharmacies, both of which 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 is presently presiding over the class
case. 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 has been served with approximately 120 additional
complaints on behalf of approximately 4,000 pharmacies and chain retailers.
Discovery and motion practice is presently underway in all of these opt-out
cases. The Company believes it has meritorious defenses to the claims asserted
in these lawsuits and intends to vigorously defend itself in all of these
cases.
The Company 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 ($3.8 million at
December 31, 1998), 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
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.
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 (24,184,010 and 23,856,067
for the three months ended December 31, 1998 and December 31, 1997,
respectively). Earnings per share--assuming dilution is computed on the basis
of the weighted average number of shares outstanding during the period plus
the dilutive effect of stock options (249,762 and 367,514 for the three months
ended December 31, 1998 and December 31, 1997, respectively).
NOTE 4-STOCK OPTION PLANS
On December 8, 1998, the Company's Board of Directors approved the
AmeriSource Health Corporation 1999 Stock Option Plan (the "1999 Option Plan")
and the AmeriSource Health Corporation 1999 Non-Employee Directors Stock
Option Plan (the "1999 Directors Plan"). The 1999 Option Plan and the 1999
Directors Plan are subject to shareholder approval and provide for the
granting of nonqualified stock options to
8
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
acquire up to 1,600,000 and 175,000 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. Generally, the option term is ten years and the options
vest at the rate of 25% per year, commencing one year following the grant. The
number of options to be granted annually under the 1999 Directors Plan is
fixed by the plan and such options vest one year from the grant date. Options
expire ten years after the date of grant.
NOTE 5--SUBSEQUENT EVENT
On January 26, 1999 the Company's Board of Directors approved a two-for-one
stock split, subject to shareholders authorizing additional shares.
Shareholders will receive one additional share for each share held on the
anticipated record date of March 3, 1999. As of December 31, 1998, AmeriSource
had approximately 24.4 million diluted shares outstanding and that number will
increase to approximately 48.9 million. This stock split has not been
reflected in the accompanying financial statements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating revenue for the fiscal quarter ended December 31, 1998 decreased
4% to $2.2 billion from $2.3 billion in the first quarter of fiscal 1998. The
decline from the prior year was due to the termination of service contracts
with two major warehousing chains and one large mail order customer in the
prior year that accounted for approximately $300 million of revenues in the
prior year quarter. During the quarter ended December 31, 1998, sales to
hospitals and managed care facilities increased 7%, sales to independent drug
store customers increased 5%, and sales to the chain drug store customer group
decreased 39%, as compared with the prior year quarter. Future revenues may
also be impacted by the continuing consolidation of customers and price
competition in the industry. During the quarter ended December 31, 1998 sales
to hospitals and managed care facilities accounted for 50% of total revenues,
while sales to independent drug stores accounted for 36% and sales to chain
drug stores accounted for 14% of the total.
Gross profit of $101.7 million in the first fiscal quarter of 1999 decreased
by 4% from fiscal 1998 due to the decrease in revenue. As a percentage of
operating revenue, the gross profit in the first quarter of fiscal 1999 was
4.71% as compared to 4.68% in the prior year period. The increase in gross
profit percentage was due to the change in customer mix described above. Gross
profit may continue to be impacted by price competition, changes in customer
and product mix, and distribution center performance.
In the fourth quarter of fiscal 1998, the Company began to centralize its
data processing, accounting, contract administration and purchasing functions,
reorganize its pharmaceutical distribution facilities into five regions, and
consolidate one pharmaceutical distribution facility into another facility.
These initiatives are expected to be completed by the end of 1999 and a charge
of $8.3 million was recognized in the fourth quarter of fiscal 1998 related to
this effort. The charge included severance of $3.3 million for approximately
350 administrative and warehouse personnel and asset write-downs and lease
cancellation costs of $5.0 million. As of December 31, 1998, approximately 30
employees have been terminated and severance costs of $0.2 million were paid
during the quarter ended December 31, 1998. In addition, $0.4 million of lease
cancellation costs were expended during the quarter and remaining severance
and lease obligations of $4.9 million are included in accrued expenses and
other.
Selling and administrative and depreciation expenses decreased by $4.4
million or 6% in the first quarter of fiscal 1999 compared with the prior year
period, and as a percentage of operating revenue, were 2.99% in fiscal 1999
and 3.06% in fiscal 1998. The decrease in expenses was due to a lower
provision for bad debts and a reduction in delivery and warehouse expense
related to the termination of service contracts with the two warehousing
chains.
Operating income of $36.9 million in the quarter ended December 31, 1998
increased by 1% from the prior year period. The Company's operating margin
increased to 1.71% in fiscal 1999 from 1.61% in fiscal 1998. The increase is
due to the increase in gross profit percentage discussed above, as well as the
reduction in operating expenses as a percentage of operating revenues.
Interest expense of $8.1 million in the first quarter of fiscal 1999
represents a decrease of 36% compared to the prior year period. The decrease
over the prior year was primarily due to decreased borrowings from the prior
year in which borrowings increased to fund the Thorofare, NJ expansion and the
purchase of Walker Drug Company. Average borrowings during the quarter ended
December 31, 1998 were $517 million as compared to average borrowings of $719
million in the prior fiscal year.
The income tax provision for the quarter ended December 31, 1998 was
computed based on an estimate of the full year effective tax rate.
Net income in the first quarter of fiscal 1999 increased to $17.8 million
from $14.5 million in the prior year quarter and net income per share--
assuming dilution was $0.73, a 22% increase over the prior year.
10
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended December 31, 1998, the Company's operating
activities used $187.6 million in cash due to increases in merchandise
inventories of $196.3 million and accounts receivable of $66.5 million offset
in part by increases in accounts payable and accrued expenses of $43.1
million. Merchandise inventories increased due to seasonal purchases to
increase safety stock in anticipation of manufacturer shut-downs and in
anticipation of manufacturer price increases. Operating cash uses during the
fiscal quarter ended December 31, 1998 included $7.5 million in interest
payments and $6.1 million of operating cash was provided by net income tax
refunds.
Capital expenditures for the quarter ended December 31, 1998 were $2.6
million and relate principally to investments in warehouse automation,
warehouse improvements, and information technology. Similar expenditures of
approximately $15 to $17 million are expected to occur later in fiscal 1999.
Cash provided by financing activities during fiscal 1999 represents
borrowings under the Company's revolving credit facility and its Receivables
Program primarily to fund its working capital requirements. At December 31,
1998, borrowings under the Company's $500 million revolving credit facility
were $331.7 million (at an average interest rate of 6.5%) and borrowings under
the $375 million receivables securitization financing were $300.0 million (at
an average interest rate of 5.9%). The revolving credit facility expires in
January 2002 and provides for interest rates ranging from LIBOR plus 25 basis
points to LIBOR plus 125 basis points based upon certain financial ratios. The
receivables securitization facility represents a financing vehicle utilized by
the Company because of the availability of attractive interest rates relative
to other financing sources. The Company securitizes its trade accounts and
notes receivable, which are generally non-interest bearing, in transactions
that do not qualify as sales transactions under SFAS No.125. In December 1998,
the Company entered into a short-term supplemental $100 million revolving
credit agreement with the same terms as its Credit Agreement. This agreement
expires March 31, 1999 and is intended to fund seasonal inventory purchases.
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 to hedge the exposure to
increasing interest rates with respect to its long-term debt agreements. The
Company provides protection to meet actual exposure and does not speculate in
derivatives. The Company is required by its Credit Agreement to maintain
interest rate cap protection on a minimum of $112.5 million through January
1999 and has interest rate cap agreements expiring in May 1999, which provide
protection on $115 million of its long-term borrowings. 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 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 through new business opportunities. Future cash flows from
operations and borrowings are expected to be sufficient to fund the Company's
ongoing cash requirements.
A former customer of the Company has alleged that the Company failed to
fulfill its obligations under the service contract between the Company and the
former customer. In connection with this claim, the former customer withheld
payment on $22 million of invoices. In response, the Company filed suit to
collect the outstanding amount. The former customer has countersued the
Company for an unspecified amount. The Company believes there is no merit to
this counterclaim and intends to aggressively pursue collection of the
outstanding amount. Because the Company is unable at this time to determine
the outcome of this matter, no provision for loss has been made.
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
11
liability of $4.1 million to cover future consulting, legal and remediation,
and ongoing monitoring costs. The accrued liability ($3.8 million at December
31, 1998), 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.
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business practices.
The Company began addressing the Year 2000 Issue in 1995 on a decentralized
basis at each of its regional data processing centers. In 1997, the Company
began monitoring progress on a corporate level and a formal Year 2000
committee, reporting to senior management, was established in early 1998 to
coordinate and monitor the Year 2000 Issue on an enterprise-wide basis. Based
on assessments made since 1995, the Company determined that modifications to
or in limited cases replacement of computer software and hardware was
necessary to enable those systems to operate properly after December 31, 1999.
The Company presently believes that with modifications to and replacement of
existing software and hardware, the Year 2000 Issue can be mitigated. However,
if such modifications and replacements are not made, or are not completed
timely, the Year 2000 Issue can have a material impact on the operations of
the Company.
In the fourth quarter of fiscal 1998, the Company announced plans to
consolidate its data processing from its regional facilities to one corporate
facility by the end of 1999. However, the Company's plan to resolve the Year
2000 Issue described below is not dependent on the timely completion of the
Company's consolidation efforts.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date,
the Company has completed its assessment of all systems that could be
significantly affected by the Year 2000. The assessment indicated that most of
the Company's significant information technology systems could be affected,
particularly the Company's warehouse and distribution operating and accounting
systems. The assessment also indicated that software and hardware (embedded
chips) used in warehouse automation, scanning, and ordering as well as other
equipment used in the distribution process (operating equipment) are also at
risk. Because the Company is a distributor of pharmaceuticals, the Company's
products are not at risk.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
The following estimates of completion percentages and dates are based on the
Company's best estimates. However, there can be no guarantee that these dates
can be achieved and actual results may differ. For its information technology
exposures, to date the Company is approximately 95% complete on the
remediation phase and expects to be completed with its software reprogramming
and replacement no later than March 31, 1999. Once software is reprogrammed or
replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed 90% of its testing and has implemented 85% of its remediated
systems. Completion of the testing phase for all significant operating
12
systems is expected by March 31, 1999, with all remediated systems fully
tested and implemented by June 30, 1999.
The remediation of operating equipment with embedded chips or software is
approximately 95% complete and is expected to be completed by March 31, 1999.
Testing of the affected equipment is approximately 90% complete and
implementation of affected equipment is 85% complete. Testing is expected to
be complete by March 31, 1999, and implementation by June 30, 1999.
Nature and Level of Importance of Third Parties and their Exposure to the
Year 2000
Many of the Company's customers order products from the Company using
ECHO(R), the Company's proprietary software system. ECHO(R) was developed in-
house and has been Year 2000 compliant from its inception. The Company also
issues the majority of its purchase orders to vendors through the use of
Electronic Data Interchange ("EDI"). The Company is approximately 50% complete
with its remediation efforts relating to EDI software and expects to be
complete by March 31, 1999. Testing and implementation of this software is
expected to be completed by June 30, 1999.
The Company is planning to survey its significant customers and vendors as
to their Year 2000 compliance in February and March, 1999. Based on the nature
of their responses, the Company will develop contingency plans as appropriate.
However, the Company has no means of assuring that external customers and
vendors will be Year 2000 compliant. The inability of these third parties to
complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
Costs
The Company has utilized and will continue to utilize both internal and
external resources to reprogram, or replace, test, and implement the software
and operating equipment for Year 2000 modifications. Many of the program fixes
were completed in conjunction with other projects and had little incremental
cost. The Company estimates that incremental costs relating to Year 2000
projects to date approximate $2 million. These costs have been expensed as
incurred. The Company expects to spend less than $1 million on Year 2000
projects in fiscal 1999. Year 2000 costs are difficult to estimate accurately
and the projected cost could change due to unanticipated technical
difficulties, project delays, and third party non-compliance, among other
things.
Risks
Management of the Company believes that it has an effective program in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of its Year 2000 plan. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company or
its trading partners not properly complete their Year 2000 plans and become
Year 2000 compliant. Such costs and any failure of compliance efforts could
have a material adverse effect on the Company. The Company believes that the
most likely risks of serious Year 2000 business disruption are external in
nature, including continuity of utility, telecommunication and transportation
services, and the potential failure of the Company's customers due to their
own non-compliance or the non-compliance of their business partners. In
addition, the Company may be affected by disruptions in the supply channel due
to excess demand for inventory by customers in anticipation of Year 2000
problems. In the event the Company does not properly complete its Year 2000
efforts or is affected by the disruption of outside services, the Company
could be unable to take orders, distribute goods, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting from
Year 2000 could have a material adverse effect on the Company. The Company
could be subject to litigation for computer systems failure. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans
The Company is currently in process of developing contingency plans to
address the above Year 2000 risks as necessary. The Company plans to evaluate
the status of completion of its Year 2000 efforts by March 31,
13
1999 and to determine what contingency plans are necessary at that time. In
the normal course of business, the Company has contingency plans for
disruption of business events and intends to augment those plans with specific
Year 2000 considerations.
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, regulatory changes, the Year 2000 Issue and capital
markets could cause actual results to differ materially from those in forward-
looking statements.
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27--Financial Data Schedule
10.19--Underwriting Agreement, dated February 4, 1999, among the Registrant,
the Selling Stockholders--399 Venture Partners, Inc. and Citigroup
Foundation--and Donaldson, Lufkin & Jenrette Securities Corporation and the
other underwriters named therein.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended December 31, 1998.
15
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 SENIOR VICE
PRESIDENT, CHIEF OPERATING OFFICER
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
/s/ Michael D. DiCandilo
_____________________________________
MICHAEL D. DICANDILO VICE
PRESIDENT, CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
Date: February 12, 1999
16