<PAGE>
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, 1993
<TABLE>
<CAPTION>
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
- -------------- ---------------------------------- ------------------
<S> <C> <C>
0-13813 Alco Health Services Corporation 23-2353106
(a Delaware Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(215) 296-4480
</TABLE>
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 Alco Health Services Corporation
outstanding as of December 31, 1993 was 1,000.
<PAGE>
INDEX
ALCO HEALTH SERVICES CORPORATION
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- December 31, 1993 and
September 30, 1993
Consolidated statements of operations -- Three months
ended December 31, 1993 and December 31, 1992
Consolidated statements of cash flows -- Three months
ended December 31, 1993 and December 31, 1992
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Alco Health Services Corporation Financial Statements (Unaudited)
-----------------------------------------------------
ALCO HEALTH SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1993 1993
- ------ ----------- ------------
<S> <C> <C>
Current Assets
Cash $ 18,484 $ 27,098
Accounts receivable less
allowance for doubtful
accounts: 12/93 - $8,577
9/93 - $7,681 285,118 251,999
Merchandise inventories 397,475 346,371
Prepaid expenses 1,548 1,977
--------- ---------
Total current assets 702,625 627,445
Property and Equipment, at cost 64,199 57,282
Less accumulated depreciation 23,928 21,176
--------- ---------
40,271 36,106
Other Assets
Excess of cost over net assets
acquired, less accumulated
amortization: 12/93 - $26,389
9/93 - $25,053 182,474 183,810
Deferred financing costs and other,
less accumulated amortization:
12/93 - $4,487; 9/93 - $3,703 13,167 15,453
--------- ---------
195,641 199,263
--------- ---------
$ 938,537 $ 862,814
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ALCO HEALTH SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 September 30
LIABILITIES AND STOCKHOLDER'S EQUITY 1993 1993
- --------------------------------------- ------------ -------------
<S> <C> <C>
Current Liabilities
Current portion of other debt $ 131 $ 122
Accounts payable 407,817 379,826
Accrued expenses 25,567 24,507
Accrued income taxes 12,383 7,899
Deferred income taxes 31,650
--------- ---------
Total current liabilities 477,548 412,354
Long-Term Debt
Revolving credit facility 291,500 248,000
Senior subordinated notes 166,134 170,562
Other debt 1,307 1,311
Convertible subordinated debentures 238 238
--------- ---------
459,179 420,111
Other Liabilities
Deferred compensation 631 701
Other 4,136 740
--------- ---------
4,767 1,441
Stockholder's Equity
Common stock, $.01 par value:
1,000 shares authorized and issued 1 1
Capital in excess of par value 78,050 78,050
Retained earnings (deficit) (81,008) (49,143)
--------- ---------
(2,957) 28,908
--------- ---------
$ 938,537 $ 862,814
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ALCO HEALTH SERVICES CORPORATION AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
-----------------------
1993 1992
----------- ----------
<S> <C> <C>
Revenues $1,045,776 $ 917,681
Costs and expenses
Cost of goods sold 991,777 866,303
Selling and administrative 34,386 33,728
Depreciation 1,589 1,424
Interest 11,567 11,996
Non-recurring charges 1,161
---------- ----------
1,039,319 914,612
Income before taxes, extraordinary item and
cumulative effects of accounting 6,457 3,069
changes
Taxes on income 2,835 2,100
---------- ----------
Income before extraordinary item and
cumulative effects of accounting changes 3,622 969
Extraordinary charge - early retirement of
debt, net of income tax benefit (442)
Cumulative effect of change in accounting
for postretirement benefits other than
pensions (1,199)
Cumulative effect of change in accounting
for income taxes (33,846)
---------- ----------
Net income (loss) $ (31,865) $ 969
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ALCO HEALTH SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
December 31
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (31,865) $ 969
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation 1,589 1,424
Amortization 2,134 2,411
Provision for losses on accounts receivable 961 675
(Gain) loss on disposal of property and
equipment (8) 1,180
Loss on early retirement of debt 679
Cumulative effects of changes in accounting
principles 35,045
Changes in operating assets and liabilities:
Accounts receivable (34,080) (29,551)
Merchandise inventories (51,104) (37,872)
Prepaid expenses 429 321
Accounts payable, accrued expenses and
income taxes 31,609 72,773
Miscellaneous (637) 176
--------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (45,248) 12,506
INVESTING ACTIVITIES
Capital expenditures (1,946) (1,918)
Proceeds from sales of property and equipment 73 674
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (1,873) (1,244)
FINANCING ACTIVITIES
Long-term debt borrowings 244,400 216,281
Long-term debt repayments (205,893) (221,015)
Deferred financing costs (654)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 38,507 (5,388)
--------- ---------
(Decrease) Increase in cash (8,614) 5,874
Cash at beginning of period 27,098 13,768
--------- ---------
CASH AT END OF PERIOD $ 18,484 $ 19,642
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ALCO HEALTH SERVICES 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 Alco Health Services
Corporation ("Alco" or the "Company"). All material intercompany accounts and
transactions of Alco have been eliminated in consolidation. Alco is a
wholly-owned subsidiary of Alco Health Distribution Corporation
("Distribution").
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, 1993, the results of operations for the three months
ended December 31, 1993 and 1992 and the cash flows for the three months ended
December 31, 1993 and 1992 have been included. Earnings (loss) per share are
not presented, as all of Alco's issued and outstanding common stock is owned by
Distribution. 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, 1993.
NOTE 2 - LONG-TERM DEBT
In October, 1993, the Company redeemed an aggregate principal amount of
$4,428,000 of senior subordinated notes. The extraordinary charge of $442,000
from the early retirement of this debt relates to the write-off of unamortized
financing fees and premiums paid on redemption, net of a tax benefit.
NOTE 3 - POSTRETIREMENT BENEFITS
As a result of special termination benefit packages previously offered, the
Company provides medical, dental and life insurance benefits to certain retirees
and their dependents. These benefit plans are unfunded. Prior to October 1,
1993, the Company recognized the expenses for these plans on the cash basis.
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement 106), which requires that the cost of postretirement health
<PAGE>
ALCO HEALTH SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 - POSTRETIREMENT BENEFITS - (CONTINUED)
care benefits be recognized on the accrual basis as employees render service to
earn the benefit instead of on the cash basis when the benefits are paid. As of
October 1, 1993, the Company adopted Statement 106 by recognizing the
accumulated obligation related to these benefits. The cumulative effect of this
change in accounting principle resulted in a non-cash charge to net income of
$1.2 million. The application of the new rules will not result in an increase in
fiscal 1994 postretirement benefit cost, which will be approximately $150,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%. A health care cost trend rate of
13% was assumed for fiscal 1994, gradually declining to an ultimate level of
5.50% over 15 years. A 1% increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation as of October 1, 1993
by $77,500.
NOTE 4 - TAXES ON INCOME
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement 109), which requires
a change in the method of accounting for income taxes from the deferred method
to the liability method. In accordance with Statement 109, the Company recorded
an adjustment of $33.8 million for the cumulative effect of adopting Statement
109 as of October 1, 1993. As permitted under Statement 109, prior period
financial statements have not been restated. The cumulative effect adjustment
relates principally to the provision of deferred income taxes to reflect the tax
consequences on future years of the difference between the tax and financial
reporting basis of merchandise inventories. Significant components of the
Company's deferred tax liabilities (assets) as of October 1, 1993 are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Inventory $ 35,748
Fixed assets 4,996
Other 376
--------
Gross deferred tax liabilities 41,120
--------
Net operating losses and tax credit carryovers (5,646)
Allowance for doubtful accounts (3,072)
Accrued expenses (2,488)
Other postretirement benefits (480)
Other (1,064)
--------
Gross deferred tax assets (12,750)
--------
Valuation allowance for deferred tax assets 5,452
--------
Net deferred tax liabilities $ 33,822
========
</TABLE>
<PAGE>
ALCO HEALTH SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 - LEGAL MATTERS AND CONTINGENCIES
In November 1993, the Company was informed that it is a defendant, along with
six other wholesale distributors and twenty-four pharmaceutical manufacturers,
in fourteen civil actions filed in United States District Court for the Southern
District of New York by independent pharmacies. Plaintiffs seek to establish
these lawsuits and over thirty-four others (to which the Company is not a party)
filed by similarly situated pharmacies as a class action. Plaintiffs allege
that defendants have engaged in illegal price discrimination in the pricing of
pharmaceuticals and seek remedies in the form of injunctive relief, monetary
damages (trebled as provided by law), attorneys' fees and costs. The Company
believes it has meritorious defenses to the allegations made against it and
intends to vigorously defend itself in all of these cases filed against it.
The Company has become aware that its former Charleston, South Carolina
distribution center, was previously owned by a fertilizer manufacturer and that
there is evidence of residual soil contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and expects to
initiate a groundwater study during fiscal year 1994. At the present time, it
is not possible to ascertain the cost, if any, of remediation or whether the
Company will be able to obtain reimbursement for such costs from any third party
that caused the contamination or any insurance carrier. Accordingly, the
Company has not recorded any provision for this matter.
Alco has been named as a defendant in several lawsuits based upon alleged
injuries and deaths attributable to the product L-Tryptophan. Alco did not
manufacture L-Tryptophan; however, prior to an FDA recall, Alco did distribute
the L-Tryptophan products of several of its vendors. Alco believes that it is
entitled to full indemnification by its suppliers and the manufacturer of
L-Tryptophan with respect to these lawsuits and any other lawsuits involving
L-Tryptophan in which Alco may be named in the future. To date, the indemnity
to Alco in such suits has not been in dispute and, although the Company believes
it is unlikely it will incur any loss as a result of such lawsuits, the Company
believes that its insurance coverage and supplier endorsements are adequate to
cover any losses should they occur.
At December 31, 1993, there were contingent liabilities with respect to taxes,
guarantees of borrowings by certain customers, lawsuits and environmental and
other matters occurring in the ordinary course of business. On the basis of
information furnished by counsel and others, management believes that none of
these contingencies will materially affect the Company.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
---------------------
THREE MONTHS ENDED DECEMBER 31, 1993 COMPARED WITH THREE MONTHS ENDED
- ---------------------------------------------------------------------
DECEMBER 31, 1992.
- ------------------
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
December 31, December 31,
1993 1992
----------- -----------
<S> <C> <C>
Revenues $1,045,776 $ 917,681
Cost of goods sold 991,777 866,303
--------- --------
Gross profit 53,999 51,378
Operating expenses:
Selling and administrative 33,010 32,361
Depreciation 1,589 1,424
Amortization of intangibles 1,376 1,367
--------- --------
Operating income 18,024 16,226
Interest expense - in cash 10,809 10,952
Amortization of deferred financing costs 758 1,044
Non-recurring charges 1,161
--------- --------
Income before taxes, extraordinary
item and cumulative effects of
accounting changes 6,457 3,069
Taxes on income 2,835 2,100
--------- --------
Income before extraordinary item
and cumulative effects of
accounting changes 3,622 969
Extraordinary charge - early
retirement of debt, net of income
tax benefit (442)
Cumulative effect of change in
accounting for postretirement
benefits other than pensions (1,199)
Cumulative effect of change in
accounting for income taxes (33,846)
--------- --------
Net income (loss) $ (31,865) $ 969
========= ========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Revenues for the three months ended December 31, 1993 exceeded $1.0 billion, an
increase of $128.1 million (14%) versus the three months ended December 31,
1992. Higher selling prices accounted for approximately one-fifth of this
revenue increase. A majority of the revenue increase was attributable to the
hospital customer group, where revenues were 27% above the level of the prior
year, due mainly to new accounts and increased sales to existing accounts.
Excluding brokerage business, sales to chain drug stores increased by 11%, while
sales to independent drug store customers declined slightly during the three
months ended December 31, 1993 as compared with the first three months of the
prior fiscal year. During the first quarter of fiscal 1994, sales to hospitals
accounted for 44% of total revenues, while sales to independent drug stores
represented 34% and sales to chain drug stores, 22% of the total.
The decline in the gross profit margin as a percentage of revenues from 5.6% in
1992 to 5.2% in 1993 was the result of industrywide competitive pressures,
increased sales with lower margin and lower-cost-to-service customers,
especially hospitals, and reduced profits from forward inventory purchasing
which is reflective of a lower rate of manufacturer price increases.
Selling and administrative expenses for 1993 were $33.0 million compared to
$32.4 million for the same three-month period in 1992, an increase of 2.0%. As
a percentage to revenues, selling and administrative expenses improved to 3.2%
in 1993 from 3.5% in 1992. This improvement reflects the Company's continued
progress in its ongoing efforts to manage expense growth relative to revenue
growth in connection with continued pressure on gross profit margin as a
percentage of revenues. Operating expense improvements in the first quarter of
fiscal 1994 reflect cost-reduction benefits associated with several facility
consolidations implemented in the first half of fiscal 1993.
Operating income in the first quarter of fiscal 1994 increased 11.1% to $18.0
million in comparison to the prior year. Operating income as a percentage of
revenues was 1.72% for the current quarter versus 1.77% for the prior year
quarter.
Interest expense payable currently decreased $143,000 in 1993 to $10.8 million
due to lower average borrowings offset by slightly higher overall borrowing
costs. During the three-month period ended December 31, 1993, average borrowings
were $446 million at an average interest rate of 9.6%, compared to an average
borrowing level of $480 million at an average interest rate of 9.0% for the
prior year. Interest expense in 1993 includes $758,000 in amortization of
financing fees as compared with $1,044,000 in 1992.
As noted below, the Company changed its method of accounting for income taxes
effective October 1, 1993. Income taxes for the first quarter of fiscal 1994
were computed on a regular tax basis and based on an estimate of the full year
effective tax rate. The extraordinary charge of $679,000, net of a tax benefit
of $237,000, relates to the purchase and retirement of an aggregate principal
amount of $4,428,000 of senior subordinated notes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (Statement 106) and Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (Statement 109). The Company recorded, as of
October 1, 1993, a total of $35.0 million in non-cash charges to net income for
the effects of transition to these two new standards. Statement 106 requires
that the expected cost of providing postretirement medical benefits be accrued
during employees' working years rather than on a pay-as-you-go basis as was
previously permitted. The cumulative effect of this change in accounting
principle resulted in a non-cash charge to net income of $1.2 million as of
October 1, 1993. Statement 109 requires a change in the method of accounting for
income taxes from the deferred method to the liability method. Under the
liability method, deferred taxes result from differences between the tax and
financial reporting bases of assets and liabilities and are adjusted for changes
in tax rates and tax laws when changes are enacted. The cumulative effect of
this change in accounting principle resulted in a non-cash charge to net income
of $33.8 million as of October 1, 1993, principally related to the provision of
deferred income taxes to reflect the tax consequences on future years of the
difference between the tax and financial reporting basis of merchandise
inventories.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and met its capital
requirements through a combination of cash generated from operations, borrowings
under revolving credit facilities and credit terms from suppliers. For the
three month period ended December 31, 1993, the Company's operating activities
used $45.2 million in cash, as a result of increased accounts receivable and
inventory levels, funded in part by an increase in accounts payable. A portion
of the increase in inventories was the result of the opening of the Dallas,
Texas distribution facility, which occurred in the early part of the quarter.
The increase in inventories also reflects purchases made in anticipation of
seasonal manufacturer supply interruptions and price increases as well as
requirements to service the increase in sales volume. As a result of the higher
working capital levels, borrowings under the revolving credit facility increased
to $291.5 million (at an average interest rate of 6.4%) at December 31, 1993 as
compared to the $248.0 million (at an average interest rate of 6.4%) outstanding
at September 30, 1993. Operating cash uses during the three months ended
December 31, 1993 included $3.9 million in interest payments and $39,000 in
income tax payments.
Capital expenditures for the three months ended December 31, 1993 were $1.9
million and relate principally to improvements in warehouse distribution and
management information systems. Capital expenditures for the fiscal year ended
September 30, 1994 are projected to approximate $8.0 million. Cash used in
investing activities during the three months ended December 31, 1993 included
$5.0 million in payments associated with the redemption of an aggregate
principal amount of $4.4 million of senior subordinated notes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
The Company has become aware that its former Charleston, South Carolina
distribution center, was previously owned by a fertilizer manufacturer and that
there is evidence of residual soil contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and expects to
initiate a groundwater study during fiscal year 1994. At the present time, it
is not possible to ascertain the cost, if any, of remediation or whether the
Company will be able to obtain reimbursement for such costs from any third party
that caused the contamination or any insurance carrier. Accordingly, the
Company has not recorded any provision for this matter.
The Company's primary ongoing cash requirements will be to fund payment of
principal and interest on indebtedness, finance working capital and fund capital
expenditures. An increase in interest rates would adversely affect the
Company's operating results and the cash flow available after debt service to
fund operations and any expansion and, if permitted to do so under its revolving
credit facility and the indenture for the senior subordinated notes, to pay
dividends on its capital stock.
The Company believes that future operating results will generate sufficient cash
flows which, together with borrowings under the revolving credit facility and
credit terms from suppliers, will provide sufficient capital resources to
finance working capital and operating requirements, fund capital expenditures
and interest currently payable on outstanding debt.
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: No exhibits are filed as part of this report.
--------
(b) Reports on Form 8-K: No reports on Form 8-K were filed
-------------------
during the quarter ended December 31, 1993.
<PAGE>
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.
ALCO HEALTH SERVICES CORPORATION
/s/ John F. McNamara
----------------------------
John F. McNamara
Chairman, President and
Chief Executive Officer
(Principal Financial Officer)
Date: February 8, 1994 /s/ John A. Kurcik
----------------- ----------------------------
John A. Kurcik
Vice President, Controller
(Principal Accounting Officer)
