<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
- ------------- ---------------------------------- ------------------
<S> <C> <C>
0-13813 AmeriSource Corporation 23-2353106
(a Delaware Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 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 AmeriSource Corporation outstanding as
of December 31, 1994 was 1,000.
<PAGE>
INDEX
AMERISOURCE CORPORATION
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- December 31, 1994 and
September 30, 1994
Consolidated statements of operations -- Three months
ended December 31, 1994 and December 31, 1993
Consolidated statements of cash flows -- Three months
ended December 31, 1994 and December 31, 1993
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. AmeriSource Corporation Financial Statements (Unaudited)
--------------------------------------------
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1994 1994
- ------ ------------ -------------
<S> <C> <C>
Current Assets
Cash $ 29,287 $ 25,273
Restricted cash 6,748
Accounts receivable less
allowance for doubtful
accounts: 12/94 - $11,986;
9/94 - $9,370 302,765 272,281
Merchandise inventories 514,480 351,676
Prepaid expenses and other 2,549 2,442
-------- --------
Total current assets 855,829 651,672
Property and Equipment, at cost 68,832 67,598
Less accumulated depreciation 27,618 26,416
-------- --------
41,214 41,182
Deferred financing costs and other,
less accumulated amortization:
12/94 - $814; 9/94 - $6,727 12,919 13,101
-------- --------
$909,962 $705,955
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1994
- ------------------------------------ ------------- --------------
<S> <C> <C>
Current Liabilities
Current portion of other debt $ 116 $ 133
Accounts payable 473,757 449,991
Accrued expenses 37,311 22,047
Accrued income taxes 19,254 19,542
Deferred income taxes 32,366 32,366
--------- ---------
Total current liabilities 562,804 524,079
Long-Term Debt
Revolving credit facility 147,041 175,897
Receivables securitization financing 202,000
Senior subordinated notes 166,134 166,134
Other debt 1,308 1,293
Convertible subordinated debentures 238 238
--------- ---------
516,721 343,562
Other Liabilities
Deferred compensation 528 522
Other 9,231 9,264
--------- ---------
9,759 9,786
Stockholder's Equity
Common stock, $.01 par value:
1,000 shares authorized and issued 1 1
Capital in excess of par value 85,398 85,398
Retained earnings (deficit) (264,721) (256,871)
--------- ---------
(179,322) (171,472)
--------- ---------
$ 909,962 $ 705,955
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Revenues $1,157,100 $1,045,776
Costs and expenses
Cost of goods sold 1,093,863 991,777
Selling and administrative 39,571 34,386
Depreciation 1,700 1,589
Interest 13,258 11,567
---------- ----------
1,148,392 1,039,319
Income before taxes, extraordinary items
and cumulative effects of accounting
changes 8,708 6,457
Taxes on income 4,809 2,835
---------- ----------
Income before extraordinary items and
cumulative effects of accounting
changes 3,899 3,622
Extraordinary charges - early retirement
of debt, net of income tax benefits (11,749) (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 (loss) $ (7,850) $ (31,865)
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
1994 1993
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ (7,850) $ (31,865)
Adjustments to reconcile
net (loss) to net cash
(used in) operating activities:
Depreciation 1,700 1,589
Amortization 704 2,134
Provision for losses on
accounts receivable 2,737 961
(Gain) on disposal of
property and equipment (26) (8)
Loss on early retirement
of debt 15,426 679
Cumulative effects of
accounting changes 35,045
Changes in operating
assets and liabilities:
Restricted cash (6,748)
Accounts receivable (33,221) (34,080)
Merchandise inventories (162,804) (51,104)
Prepaid expenses (107) 429
Accounts payable,
accrued expenses and
income taxes 28,774 31,609
Miscellaneous 307 (637)
--------- ---------
NET CASH (USED IN)
OPERATING ACTIVITIES (161,108) (45,248)
INVESTING ACTIVITIES
Capital expenditures (3,364) (1,946)
Proceeds from sales of
property and equipment 1,627 73
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (1,737) (1,873)
FINANCING ACTIVITIES
Long-term debt borrowings 593,505 244,400
Long-term debt repayments (420,393) (205,893)
Deferred financing costs (6,253)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 166,859 38,507
--------- ---------
Increase (decrease) in cash 4,014 (8,614)
Cash at beginning of period 25,273 27,098
--------- ---------
CASH AT END OF PERIOD $ 29,287 $ 18,484
========= =========
</TABLE>
See notes to consolidated financial statement.
<PAGE>
AMERISOURCE 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 Corporation (the
"Company"). All material intercompany accounts and transactions of the Company
have been eliminated in consolidation. The Company is a wholly-owned subsidiary
of AmeriSource Health Corporation ("AmeriSource"), formerly AmeriSource
Distribution Corporation.
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, 1994, the results of operations for the three months
ended December 31, 1994 and 1993 and the cash flows for the three months ended
December 31, 1994 and 1993 have been included. Earnings (loss) per share are not
presented, as all of the Company's issued and outstanding common stock is owned
by AmeriSource. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been omitted. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
Note 2 - Indebtedness and Financial Arrangements
In December 1994, the Company sold substantially all of its trade accounts and
notes receivable (the "Receivables") to AmeriSource Receivables Corporation
("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade
receivables securitization program (the "Receivables Program").
Contemporaneously, the Company entered into a Receivables Purchase Agreement
with ARC, whereby ARC agreed to purchase on a continuous basis Receivables
originated by the Company. Pursuant to the Receivables Program, ARC will
transfer such Receivables to a master trust in exchange for, among other things,
certain trade receivables-backed certificates ("the Certificates").
Contemporaneously, Certificates in an aggregate principal amount of up to $230
million face amount were sold to investors. During the five year term of the
Receivables Program, the cash generated by collections on the Receivables will
be used to purchase, among other things, additional Receivables originated by
the Company. The Certificates bear interest at a rate selected by the Company
equal to (i) the higher of (a) the prime lending rate and (b) the federal funds
rate plus 50 basis points or (ii) LIBOR plus 50 basis points. In addition,
during the first seventy five days of
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Indebtedness and Financial Arrangements (continued)
the Receivables Program, the Company may select an interest rate equal to the
federal funds rate plus 125 basis points (7.05% at December 31, 1994). The
interest rates for the Certificates are subject to the following step-ups: (i)
with respect to the ABR tranche (based on the higher of the prime rate or
federal funds rate plus 50 basis points), an additional 50 basis points
beginning one year after the closing date (December 31, 1994) and (ii) with
respect to the LIBOR tranche, an additional 12 1/2 basis points beginning six
months after the closing date, an additional 12 1/2 basis points beginning nine
months after the closing date, and an additional 75 basis points beginning one
year after the closing date. Pursuant to the Receivables Program, on December
13, 1994, the Company sold $305 million in Receivables to ARC in exchange for
cash of $201 million and a subordinated note. ARC in turn transferred the
Receivables to the master trust for the Certificates and a residual interest in
the master trust. The Company has accounted for the transactions contemplated by
the terms of the Receivables Purchase Agreement as a sale of Receivables from
the Company to ARC and as a financing transaction by ARC on the Company's
consolidated financial statements. The Certificates represent fractional
undivided interests in the Receivables and other assets of the master trust, and
do not otherwise represent recourse obligations of the Company. The assets and
liabilities of the master trust have been consolidated with the Company at
December 31, 1994. According to its terms, the Receivables Program is expected
to liquidate beginning in October 1999, whereupon the payment of the then-
outstanding principal of the Certificates will commence. The Certificates are
also subject to early liquidation upon the occurence of certain events. In the
event of a liquidation, losses on Receivables will first be absorbed by the
residual certificate held by ARC and collections on Receivables will first be
allocated to make payments of outstanding principal of the Certificates in
accordance with their ratable interests in the assets of the master trust, after
giving effect to the allocation of losses to the residual interest. Fees of
$706,000 incurred through December 31, 1994 in connection with establishing the
Receivables Program have been deferred and are being amortized on a straight-
line basis over five years. Interest expense on the Certificates during the
three months ended December 31, 1994 was $752,000. The $202 million in
Certificates outstanding at December 31, 1994 bore interest at 7.05%. Restricted
cash of $6,748,000 at December 31, 1994, represents amounts deposited in the
master trust from collections on the Receivables, which are designated for
specific purposes pursuant to the Receivables Program.
At the same time that it entered into the Receivables Program, the Company and
its senior lenders amended its existing Credit Agreement. Among other things,
the Amended and Restated Credit Agreement: (i) extended the term of the Credit
Agreement until January 3, 2000; (ii) established the amount the Company may
borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR plus
225 basis points from LIBOR plus 300 basis points and provided for further
interest rate stepdowns upon the occurrence of certain events; (iv) modified the
borrowing base availability from inventory and receivable based to inventory
based; and (v) increased the Company's ability to make acquisitions and pay
dividends.
Contemporaneously with the consummation of the Receivables Program and the
execution of the Amended and Restated Credit Agreement, the Company called for
optional redemption all of the outstanding 14 1/2% senior subordinated notes
at a redemption price of 106% of the principal amount plus accrued interest
through the redemption date of January 12, 1995. In connection with the
amendment of the Credit Agreement and the redemption of the 14 1/2% senior
subordinated notes, the Company recorded an extraordinary charge of $11,749,000
during the three months ended December 31, 1994 relating to the write-off of
unamortized financing fees and premiums to be paid on the redemption of the
14 1/2% senior subordinated notes, net of tax benefits.
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Excess of Cost Over Net Assets Acquired
During the third quarter of the fiscal year ended September 30, 1994, the
Company concluded that the carrying value of its excess of cost over net assets
acquired ("goodwill") could not be recovered from expected future operations and
accordingly wrote off its remaining goodwill balance of $179.8 million. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Note 4 - Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings and governmental investigations, including
antitrust, environmental, product liability and regulatory agency matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years.
The Company does not believe that these matters, individually or in the
aggregate, will have a material adverse effect on its business or financial
condition.
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in fourteen
civil actions filed by independent retail pharmacies in the United States
District Court for the Southern District of New York. Plaintiffs seek to
establish these lawsuits and over thirty-four others (to which the Company is
not a party) filed by other pharmacies as class actions. In essence, these
lawsuits all claim that the manufacturer and wholesaler defendants have
combined, contracted and conspired to fix the prices charged to plaintiffs and
class members for prescription brand name pharmaceuticals. Specifically,
plaintiffs claim that the defendants use "chargeback agreements" to give some
institutional pharmacies discounts that are not made available to retail drug
stores. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and
costs. These actions have been transferred to the United States District Court
for the Northern District of Illinois for consolidated and coordinated pretrial
proceedings. Effective October 26, 1994, the Company entered into a Judgement
Sharing Agreement with other wholesaler and pharamceutical manufacturer
defendants. Under the Judgement Sharing Agreement: (a) the manufacturer
defendants agreed to reimburse the wholesaler defendants for litigation costs
incurred, up to an aggregate of $9 million; and (b) if a judgement is entered
into against both manufacturers and wholesalers, the total exposure for joint
and several liability of the Company is limited to the lesser of 1% of such
judgement or one million dollars. In addition, the Company has released any
claims which it might have had against the manufacturers for claims presented by
the plaintiffs in these lawsuits. The Judgement Sharing Agreement covers the
federal
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (continued)
court litigation as well as the cases which have been filed in various state
courts. 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 has become aware that its former Charleston, South Carolina
distribution center was previously owned by a fertilizer manufacturer and that
there is evidence of residual soil contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and initiated
a groundwater study during fiscal year 1994. The preliminary results of the
groundwater study indicate that there is lead in the groundwater at levels
requiring further investigation and response. A preliminary engineering analysis
was prepared by outside consultants during the third quarter of fiscal 1994, and
indicated that, if both soil and groundwater remediation are required, the most
likely cost of remediation efforts at the Charleston site is estimated to be
$4.1 million. Accordingly, a liability of $4.1 million was recorded during the
third quarter of fiscal 1994 to cover future consulting, legal and remediation
and ongoing monitoring costs. The Company has notified the appropriate state
regulatory agency from whom approval must be received before proceeding with any
further tests or with the actual site remediation. The approval process and
remediation could take several years to accomplish and the actual costs may
differ from the liability which has been recorded. The accrued liability, which
is reflected in other long-term liabilities on the accompanying consolidated
balance sheet, is based on an estimate of the extent of contamination and choice
of remedy, existing technology and presently enacted laws and regulations,
however, changes in remediation standards, improvements in cleanup technology
and discovery of additional information concerning the site could affect the
estimated liability in the future. The Company is investigating the possibility
of asserting claims against responsible parties for recovery of these costs.
Whether or not any recovery may be forthcoming is unknown at this time, although
the Company intends to vigorously enforce its rights and remedies.
The Company has been named as a defendant in a lawsuit based upon alleged
injuries and deaths attributable to the product L-Tryptophan. The Company did
not manufacture L-Tryptophan; however, prior to an FDA recall, the Company did
distribute products containing L-Trypotphan obtained from several of its
vendors. The Company believes that it is entitled to full indemnification by its
suppliers and the manufacturer of L-Tryptophan with respect to this lawsuit and
any other lawsuits involving L-Tryptophan in which the Company may be named in
the future. To date, the indemnity to the Company in similar suits has not been
in dispute and, the Company believes it is unlikely it will incur any loss as a
result of such lawsuits. The Company further believes that its insurance
coverage and supplier indemnification are adequate to cover any losses should
they occur. The Company has recently been informed that this matter has been
settled, without cost to the Company.
<PAGE>
AMERISOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (continued)
The Company has received notices from the Internal Revenue Service asserting
deficiencies in federal corporate income taxes for the Company's taxable years
1987 through 1991. The notices indicate an aggregate increase in net taxable
income for these years of approximately $24 million and relate principally to
the deductibility of costs incurred with respect to AmeriSource's acquisition
of the Company in 1988. The Company has analyzed these matters with tax counsel
and believes it has meritorious defenses to the deficiencies asserted by the
Internal Revenue Service. The Company will contest the asserted deficiencies
through the administrative appeals process and, if necessary, litigation. The
Company believes that any amounts assessed will not have a material effect on
the financial statements of the Company.
At December 31, 1994, there were contingent liabilities with respect to taxes,
guarantees of borrowings by certain customers, lawsuits and environmental and
other matters occurring in the ordinary course of business. On the basis of
information furnished by counsel and others, management believes that none of
these contingencies will materially affect the Company.
Note 5 - Subsequent Equity Transactions
On April 3, 1995, AmeriSource filed a registration statement with respect to a
public offering by AmeriSource of up to 7,590,000 shares of Class A common
stock, including an over-allotment option of up to 990,000 shares. The net
proceeds will be applied to fund the redemption of one-half of AmeriSource's 11
1/4% senior debentures outstanding for 110% of the principal amount plus accrued
interest through date of redemption. The balance of the net proceeds will be
used to fund internal growth and further expansion and for working capital and
other general corporate purposes. Prior to the sale of common stock contemplated
by the public offering, AmeriSource Distribution Corporation amended its
certificate of incorporation to change its corporate name to AmeriSource Health
Corporation.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
---------------------
(dollars in thousands)
----------------------
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
<S> <C> <C>
Revenues $1,157,100 $1,045,776
Cost of goods sold 1,093,863 991,777
---------- ----------
Gross profit 63,237 53,999
Operating expenses:
Selling and administrative 39,571 33,010
Depreciation 1,700 1,589
Amortization of intangibles 1,376
---------- ----------
Operating income 21,966 18,024
Interest expense - in cash 12,593 10,809
Amortization of deferred
financing costs 665 758
---------- ----------
Income before taxes,
extraordinary items and
cumulative effects of
accounting changes 8,708 6,457
Taxes on income 4,809 2,835
---------- ----------
Income before extraordinary items and
cumulative effects of accounting
changes 3,899 3,622
Extraordinary charges - early
retirement of debt, net of
income tax benefits (11,749) (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 (loss) $ (7,850) $ (31,865)
========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Revenues in the first quarter of fiscal 1995 increased 10.6% to $1.2 billion
from $1.0 billion in fiscal 1994. The increase reflects real volume growth, the
pass through to customers of price increases from manufacturers and the opening
of two new distribution facilities in November 1994. The most significant
revenue increase was in the hospital customer group, where revenues were
approximately 16% ahead of the comparable period of the prior year.
Gross profit in the three months ended December 31, 1994 increased to $63.2
million, an increase of 17.1% from the same quarter of fiscal 1994, due to
increased revenues, increased purchase discounts and a greater level of price
increases from manufacturers resulting in greater opportunities for forward
purchasing. As a percentage of revenues, the gross profit margin for the
quarter was 5.47% as compared to 5.16% in the prior year, due primarily to
increased purchase discounts and a greater level of price increases from
manufacturers resulting in greater opportunities for forward purchasing. The
Company is not able to predict whether such opportunities and the resulting
favorable impact on the results of operation will continue in the future.
Selling and administrative expenses for the first quarter of fiscal 1995 were
$39.6 million compared to $33.0 million for the first quarter of fiscal 1994, an
increase of 19.9%. The cost increases reflect inflationary increases and
increases in warehouse and delivery expenses which are variable with the level
of sales volume as well as start up expenses incurred to open the two new
distribution facilities. As a percentage to revenues, selling and administrative
expenses were 3.42% in the first quarter compared to 3.16% in the same quarter
last year.
The decrease in amortization of intangibles in the first quarter of fiscal 1995
was as a result of the write-off of the value of the excess of cost over net
assets acquired ("goodwill"), which the Company recorded in the third quarter of
fiscal 1994.
Interest expense payable currently for the three months ended December 31, 1994
of $12.6 million increased $1.8 million compared with interest expense payable
currently for the three months ended December 31, 1993. The increase is due
primarily to higher interest rates on the Company's variable rate borrowings,
partially offset by lower average borrowings. In connection with the Receivables
Program, the Company expects to enter into interest rate protection contracts
with respect to a majority of the variable rate receivable-based certificates.
The weighted average interest rate on the Company's variable rate borrowings
during the three months ended December 31, 1994 was 9.0% as compared to 6.7%
during the three months ended December 31, 1993.
The income tax provision for the three months ended December 31, 1994 was
computed on a regular tax basis and based on an estimate of the full year
effective tax rate. The extraordinary charge of $15,426,000, net of a tax
benefit of $3,677,000 relates to the amendment of the revolving credit facility
agreement and the redemption premium of the 14 1/2% senior subordinated notes
and the consequent write-off of unamortized financing fees.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources
Historically, the Company's operating results have generated sufficient cash
flows which, together with borrowings under the revolving credit facility and
credit terms from suppliers, have provided sufficient capital resources to
finance working capital and cash operating requirements, fund capital
expenditures and interest currently payable on outstanding debt. Future cash
flows are expected to be sufficient to fund capital expenditures and interest
currently payable over the near term. The primary sources of the Company's
working capital and cash operating requirements are cash flows from operations
and borrowings under the Receivables Program and the Credit Agreement.
During the three-month period ended December 31, 1994, the Company's operating
activities consumed $161.1 million in cash. The increase of $33.2 million in
accounts receivable and the increase of $162.8 million in merchandise
inventories offset by the $23.8 million increase in accounts payable accounted
for most of the use of funds. The increases in merchandise inventories and
accounts payable reflect the timing of seasonal purchases and related payments
as well as purchases in anticpation of manufacturer price increases. A portion
of the increase in merchandise inventories during the quarter was the result of
the opening of the Springfield, Massachusetts and Portland, Oregon distribution
facilities. Operating cash uses during the three-month period ended December 31,
1994 included $5.0 million in interest payments and $1.4 million in income tax
payments.
Capital expenditures required for the Company's business historically have not
been substantial. Capital expenditures for the three months ended December 31,
1994 were $3.4 million and relate principally to the opening of the two new
distribution centers and additional investment in management information
systems. Capital expenditures for the fiscal year ended September 30, 1995 are
projected to approximate $9.5 million.
As a result of the Receivables Program financing in December 1994, borrowings
under the Company's revolving credit facility were reduced to $147.0 million at
December 31, 1994 (at an average interest rate of 9.0%) from the $175.9 million
(at an average interest rate of 8.1%) outstanding at September 30, 1994.
Borrowing under the Receivables Program were $202.0 million at December 31, 1994
at an interest rate of 7.05%. In December, 1994, the Company called the senior
subordinated notes for redemption. The senior subordinated notes were redeemed
on January 12, 1995. At January 31, 1995 borrowings under the Credit Agreement
were $344.8 million.
The Company has become aware that its former Charleston, South Carolina
distribution center was previously owned by a fertilizer manufacturer and that
there is evidence of residual contamination remaining from the fertilizer
manufacturing process operated on that site over thirty years ago. The Company
engaged an environmental consulting firm to conduct a soil survey and initiated
a groundwater study during fiscal 1994. The preliminary results of the
groundwater study indicate that there is lead in the groundwater at levels
requiring further investigation and response. A preliminary engineering analysis
was prepared by outside consultants during the third quarter of fiscal 1994, and
indicated that, if both soil and groundwater remediation are required, the most
likely cost of remediation efforts at the Charleston site is estimated to be
$4.1 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
Accordingly a liability of $4.1 million was recorded during the third quarter of
fiscal 1994 to cover future consulting, legal and remediation and ongoing
monitoring costs. The Company has notified the appropriate state regulatory
agency from whom approval must be received before proceeding with any further
tests or with the actual site remediation. The approval process and remediation
could take several years to accomplish and the actual costs may differ from the
liability which has been recorded. The accrued liability, which is reflected in
other long-term liabilities on the accompanying consolidated balance sheet, is
based on an estimate of the extent of contamination and choice of remedy,
existing technology and presently enacted laws and regulations, however, changes
in remediation standards, improvements in cleanup technology and discovery of
additional information concerning the site could affect the estimated liability
in the future. The Company is investigating the possibility of asserting claims
against responsible parties for recovery of these costs. Whether or not any
recovery may be forthcoming is unknown at this time, although the Company
intends to vigorously enforce its rights and remedies.
The Company's primary ongoing cash requirements will be to fund payment of
interest on indebtedness, finance working capital and fund capital expenditures.
An increase in interest rates would adversely affect the Company's operating
results and the cash flow available after debt service to fund operations and
any expansion and, if permitted to do so under its revolving credit facility, to
pay dividends on its capital stock.
The Company wrote-off its goodwill balance of $179.8 million in the third fiscal
quarter of 1994. The goodwill was recorded at the time of the leveraged buyout
transaction ("Acquisition") in 1988. Since the Acquisition, the Company has
been unable to achieve the operating results projected at the time of the
Acquisition. The projections at the time of the Acquisition were developed
based on historical experience, industry trends and management's estimates of
future performance. These projections assumed significant growth rates in
revenues, stable gross profit margins and cash flow from operations to reduce
Acquisition indebtedness and did not anticipate long-term losses or indicate an
inability to recover the value of goodwill. Due to persistent competitive
pressures and a shift in the customer mix to larger volume, lower margin
customers, gross profit margins have declined from 7.10% in fiscal 1989 to 5.63%
in fiscal 1993 and 5.47% in fiscal 1994, resulting in: operating results which
are substantially below the projections made at the time of the Acquisition; an
increase in the Company's indebtedness; and an accumulated deficit in
AmeriSource's retained earnings at June 30, 1994 before the goodwill write-off
of $126.4 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
During the period since the Acquisition, the Company has been affected by price
competition for market share within the industry, health care industry
consolidation and the impact of group purchasing organizations, managed care and
health care reform on drug prices. As a result of the negative impact of these
factors and the Company's expectation that such factors would continue to
negatively impact operating results into the foreseeable future, the Company
initiated a detailed evaluation of the long-term expected effects of these
factors on the ability to recover the recorded value of goodwill over its
remaining estimated life. Based on industry trends, interest rate trends and
the health care reform environment, in the third quarter of fiscal 1994, the
Company revised its operating projections and concluded that the projected
operating results (the "Projection") would not support the future recovery of
the remaining goodwill balance.
The methodology employed to assess the recoverability of the Company's goodwill
was to project results of operations forward 36 years, which approximated the
remaining amortization period of the goodwill balance at June 30, 1994. The
Company then evaluated the recoverability of goodwill on the basis of the
Projection. The Company's Projection assumed that, based on industry conditions
and competitive pressures, future revenue growth would approximate 12.6% in the
near-term, gradually declining to approximately 5% over the longer-term. These
assumptions reflected expected benefits in the near-term from continued industry
consolidation, and an expectation that manufacturers would continue to increase
their reliance on wholesalers in their own cost control measures in the face of
healthcare reform. Over the next five to ten year period, growth in revenue was
expected to moderate as the industry consolidation trend was completed, and over
the long-term (next twenty years), stable growth of 5% was assumed. The gross
profit percentage was projected to gradually decline over the projected period
from the then current rate of 3.60% in the fiscal year 2000 and to 2.68% in the
longer term. The short-term gross profit declines reflected the impact of the
worsened trends in 1994 caused by consolidation of certain major competitors and
deteriorated gross profit margins from existing contracts with certain group
purchasing organizations. The long-term decline in gross profit reflected the
Company's belief that continued industry wide competitive pricing pressures
would drive margins down, as the consolidated industry attempts to maintain
market share. Operating expenses were projected to increase 6% per year in the
near-term and 5% per year in the longer-term principally reflecting the
Company's expectations regarding inflation. Working capital levels (as a
percentage of revenues) were projected to improve as the Company aggressively
managed its investment in receivables and inventory over the projected period.
For purposes of the Projection, the Company had assumed that it would be able to
refinance its current revolving credit facility when it expired in 1996. For
purposes of the Projection, the Company assumed that it would be able to
increase its variable rate borrowings to finance increasing working capital and
interest payment requirements. In order to meet the working capital and
interest payment requirements projected in fiscal year 2000, the revolving
credit facility would have to be increased to $460 million. Interest rates on
the variable rate
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
revolving credit facility were assumed to increase to 9.75% to reflect then
current expectations of future short-term borrowing rates. The Projection also
indicated that cash flow from operations would not be sufficient to satisfy
maturities of the Company's and AmeriSource's fixed rate debt obligations,
which consisted of the 14 1/2% senior subordinated notes due in fiscal 1998 and
fiscal 1999 and the 11 1/4% senior debentures due in fiscal 2005. The Projection
assumed that these fixed rate debt obligations would be refinanced at the time
of the scheduled maturities at identical interest rates. The Company determined
that unless it was able to develop successful strategic, operating or financing
initiatives which would change these assumptions, the projected future operating
results based on these assumptions represented the best estimate of the
Company's projected performance given the Company's existing high leverage and
industry trends. The Projection reflected significant cumulative losses
indicating that the carrying value of goodwill was not recoverable. Accordingly,
the Company wrote off its remaining goodwill balance of $179.8 million in the
third quarter of fiscal 1994. More importantly, while the Company believed the
reliability of any projection over such an extended period is highly uncertain,
the Projection also indicated that the Company's long-term viability would
require modification of its then current capital structure to reduce its
indebtedness and increase its equity in the near to mid-term future. While the
Projection indicated that in fiscal 1998 cash flow from operations would not be
sufficient to satisfy required interest and principal payments on its current
debt obligations, the Company believed and the Projection indicated, that cash
flow generated from operations in the near-term (fiscal years 1995 through 1997)
would be sufficient to service its then current debt obligations. The Company
was unable to provide any assurance that the Company would be successful in
efforts to restructure or recapitalize in order to be able to operate in a
profitable manner for the long-term.
In December 1994, the Company sold substantially all of its Receivables to ARC,
pursuant to the Receivables Program. Pursuant to the Receivables Program, ARC
will continuously transfer Receivables to a master trust in exchange for, among
other things, Certificates representing a right to receive a variable principal
amount. Contemporaneous with the consummation of the Receivables Program, the
Company amended its existing Credit Agreement with its senior lenders and
redeemed in January 1995 all of the outstanding 14 1/2% senior subordinated
notes at a redemption price of 106% of the principal amount plus accrued
interest through the redemption date.
<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, 1994.
<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.
AMERISOURCE CORPORATION
/s/ Kurt J. Hilzinger
----------------------------
Kurt J. Hilzinger
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Date: April 7, 1995
/s/ John A. Kurcik
----------------------------
John A. Kurcik
Vice President, Controller
and Assistant Treasurer
(Principal Accounting Officer)
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<PAGE>
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