<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, 1994
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
33-27835-01 AmeriSource Distribution Corporation 23-2546940
(a Delaware 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 Distribution Corporation
outstanding as of December 31, 1994 was: Class A - 238,262 1/2; Class B -
3,854,162 1/2; Class C - 500,000.
<PAGE>
INDEX
AMERISOURCE DISTRIBUTION 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 Distribution Corporation Financial Statements (Unaudited)
---------------------------------------------------------
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1994 1994
- ------ ------------ -------------
<S> <C> <C>
Current Assets
Cash $ 3,702 $ 25,311
Accounts receivable less
allowance for doubtful
accounts: 9/94 - $9,370 272,281
Merchandise inventories 514,480 351,676
Prepaid expenses and other 4,122 2,442
------------ -------------
Total current assets 522,304 651,710
Property and Equipment, at cost 68,832 67,598
Less accumulated depreciation 27,618 26,416
------------ -------------
41,214 41,182
Other Assets
Residual interest in master trust 135,028
Deferred financing costs and other,
less accumulated amortization:
12/94 - $1,434; 9/94 - $7,239 14,429 18,752
------------ -------------
149,457 18,752
------------ -------------
$ 712,975 $ 711,644
============ =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
- ------------------------------------ ----------- ------------
<S> <C> <C>
Current Liabilities
Current portion of other debt $ 116 $ 133
Accounts payable 473,757 449,991
Accrued expenses 43,180 27,485
Accrued income taxes 10,305 11,488
Deferred income taxes 29,258 29,258
----------- ------------
Total current liabilities 556,616 518,355
Long-Term Debt
Revolving credit facility 147,041 175,897
Senior subordinated notes 166,134 166,134
Other debt 1,308 1,293
Convertible subordinated debentures 238 238
Senior debentures 147,970 144,013
----------- ------------
462,691 487,575
Other Liabilities
Deferred compensation 528 522
Other 5,885 5,918
----------- ------------
6,413 6,440
Stockholders' Equity
Preferred stock, $.01 par value:
5,000,000 shares authorized;
none issued
Common Stock, $.01 par value:
Class A (Voting and convertible):
30,000,000 shares authorized;
issued 12/94 - 294,437 1/2 shares;
9/94 - 180,387 1/2 shares 3 2
Class B (Non-voting and convertible):
30,000,000 shares authorized;
4,400,300 shares issued 44 44
Class C (Non-voting and convertible):
2,000,000 shares authorized;
500,000 shares issued 5 5
Capital in excess of par value 4,888 4,775
Retained earnings (deficit) (315,847) (304,984)
Cost of common stock in treasury (1,838) (568)
----------- ------------
(312,745) (300,726)
----------- ------------
$ 712,975 $ 711,644
=========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------
(dollars in thousands, except per share data)
<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 39,598 34,410
Depreciation 1,700 1,589
Interest and cost of Receivables Program 17,323 15,233
---------- ----------
1,152,484 1,043,009
Income before taxes, extraordinary items
and cumulative effects of accounting
changes 4,616 2,767
Taxes on income 3,730 188
Income before extraordinary items ---------- ----------
and cumulative effects of
accounting changes 886 2,579
Extraordinary charges - early retirement of
debt, net of income tax benefits (11,749) (656)
Cumulative effect of change in accounting
for postretirement benefits other than
pensions (1,199)
Cumulative effect of change in accounting
for income taxes (33,399)
---------- ----------
Net (loss) $ (10,863) $ (32,675)
========== ==========
Earnings (loss) per share
Income before extraordinary items
and cumulative effects of
accounting changes $ .18 .51
Extraordinary items (2.35) (.13)
Cumulative effect of change in accounting
for postretirement benefits other than
pensions (.24)
Cumulative effect of change in accounting
for income taxes (6.68)
---------- ----------
Net (loss) $ (2.17) $ (6.54)
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE DISTRIBUTION 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) $ (10,863) $ (32,675)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 1,700 1,589
Amortization 812 2,242
Provision for losses on accounts receivable 2,737 961
(Gain) on disposal of property
and equipment (26) (8)
Deferred income taxes (184) (782)
Loss on early retirement of debt 15,426 679
Cumulative effects of accounting changes 34,598
Changes in operating assets and liabilities:
Accounts receivable (29,673) (34,080)
Merchandise inventories (162,804) (51,104)
Prepaid expenses (107) 429
Residual interest in master trust (31,471)
Accounts payable, accrued expenses and
income taxes 28,310 30,037
Debentures issued in lieu of payment of
interest 3,957 3,558
Miscellaneous (2,389) (637)
--------- ---------
NET CASH (USED IN)
OPERATING ACTIVITIES (184,575) (45,193)
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 391,505 244,400
Long-term debt repayments (420,393) (205,893)
Proceeds from sale of accounts receivable 201,000
Deferred financing costs (6,253) (55)
Exercise of stock options 114
Purchases of treasury stock (1,270)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 164,703 38,452
--------- ---------
(Decrease) in cash (21,609) (8,614)
Cash at beginning of period 25,311 27,136
--------- ---------
CASH AT END OF PERIOD $ 3,702 $ 18,522
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
AmeriSource Distribution Corporation ("Distribution"), is a Delaware corporation
organized by an affiliate of 399 Venture Partners, Inc. ("VPI"), and other
investors, including members of management of AmeriSource Corporation
("AmeriSource"). Distribution was formed in November, 1988 to acquire
AmeriSource in a leveraged buyout transaction (the "Acquisition"). The
accompanying financial statements present the consolidated financial position,
results of operations and cash flows of Distribution and its wholly-owned
subsidiary AmeriSource Corporation (collectively, 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, 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. 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") representing
a right to receive a variable principal amount. 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 DISTRIBUTION 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 step-ups to a maximum amount
of an additional 100 basis points over the otherwise applicable rate. Pursuant
to the Receivables Program, on December 13, 1994, the Company sold $305 million
in Receivables in exchange for cash of $201 million and a residual interest in
the master trust. The sale has been reflected as a reduction of accounts
receivable in the accompanying December 31, 1994 balance sheet. Since the
Company will retain substantially the same risk of credit loss as if the
Receivables had not been sold pursuant to the Receivables Program, the Company
has established a valuation allowance of $12.0 million on the residual interest
in the master trust. The costs of $763,000 associated with the Receivables
Program are reported together with interest expense on indebtedness in the
accompanying statement of operations for the three months ended December 31,
1994. The sale of the Receivables and the application of the proceeds of the
sale to reduce borrowings have been reflected as financing activities in the
accompanying statement of cash flows for the three months ended December 31,
1994.
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.
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.
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 pharmaceutical manufacturer
defendants. Under the Judgement Sharing Agreement: (a) the manufacturer
defendants agreed to reimburse the wholesaler defendants for litigation costs
incurred, up to an aggregate of $9 million; and (b) if a judgement is entered
into against both manufacturers and wholesalers, the total exposure for joint
and several liability of the Company is limited to the lesser of 1% of such
judgement or one million dollars. In addition, the Company has released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. The Judgement Sharing Agreement
covers the federal court litigation as well as the cases which have been filed
in various state courts. 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.
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (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 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. 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-Tryptophan 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 endorsements are adequate to cover any losses should they
occur.
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
<PAGE>
AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Legal Matters and Contingencies (continued)
deductibility of costs incurred with respect to the Acquisition. 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 condition 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 - Earnings Per Share
For the three months ended December 31, 1994 and December 31, 1993, earnings
(loss) per share are based on 5,000,000 shares, representing the weighted
average number of shares of all classes of Distribution's common stock
outstanding during those periods including the effect of stock options.
Substantially all of the options outstanding will be satisfied with shares
purchased or to be purchased from VPI at $1.00 per share, pursuant to a prior
agreement.
Note 6 - Subsequent Equity Transactions
In January 1995, the Company filed a registration statement with respect to a
proposed public offering by the Company 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 to the Company will be applied to fund the redemption of one-half
of the 11 1/4% senior debentures outstanding for 110% of the principal amount
plus accrued interest through date of redemption which will result in an
estimated extraordinary charge of $9.8 million. 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
intends to amend its certificate of incorporation to change its corporate name
to AmeriSource Health Corporation.
In conjunction with the sale of common stock, the Company intends to authorize a
2.95-for-1 stock split. In conjunction with the proposed public offering
described above, the Company anticipates that the Company will issue 871,687 1/2
pre-split shares of common stock upon the exercise of the options issued under
the Distribution Plan and the 1991 Option Plan which expire 90 days after the
closing of the offering. Also pursuant to a prior agreement, the Company
expects to repurchase 453,862 1/2 pre-split shares of common stock from VPI upon
the exercise of the Distribution Plan and the 1991 Option Plan at a price of
$1.00 per share. The Company expects to adopt the 1995 Option Plan and the
Directors Plan which will provide for the granting over time of stock options to
acquire shares of Class A Common Stock. In conjunction with the offering, the
Company intends to eliminate all authorized shares of preferred stock and to
reduce the authorized number of shares of Class A Common Stock and Class B
Common Stock.
<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 39,598 33,034
Depreciation 1,700 1,589
Amortization of intangibles 1,376
---------- ----------
Operating income 21,939 18,000
Interest expense-in cash,
and cost of Receivables Program 12,593 10,809
Interest expense-pay-in-kind 3,957 3,558
Amortization of deferred
financing costs 773 866
---------- ----------
Income before taxes,
extraordinary items and
cumulative effects of
accounting changes 4,616 2,767
Taxes on income 3,730 188
---------- ----------
Income before extraordinary
items and cumulative
effects of accounting changes 886 2,579
Extraordinary charges -
early retirement of debt,
net of income tax benefits (11,749) (656)
Cumulative effect of change in
accounting for postretirement
benefits other than pensions (1,199)
Cumulative effect of change in
accounting for income taxes (33,399)
---------- ----------
Net (loss) $ (10,863) $ (32,675)
========== ==========
</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. This 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.
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 increased to 3.4% in the three months ended December 31,
1994 from 3.2% in the 1993 period.
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.
Excluding costs of $763,000 associated with the Receivables Program, interest
expense payable currently for the three months ended December 31, 1994 of $11.8
million increased $1.0 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. 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 lower average debt levels in the three months ended December 31, 1994
were due in part to the implementation of the Receivables Program, which reduced
borrowings in mid-December 1994 by $201 million. Interest expense which is not
payable currently (pay-in-kind interest) was $4.0 million for the three months
ended December 31, 1994 as compared to $3.6 million for 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 of the 14 1/2% senior subordinated notes and the
consequent write-off of unamortized financing fees and premiums to be paid on
the redemption of the 14 1/2% senior subordinated notes.
<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.
During the three-month period ended December 31, 1994, the Company's operating
activities consumed $184.6 million in cash. 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 increase in merchandise inventories
and accounts payable reflect the timing of seasonal purchases and related
payments as well as increased purchases in anticipation of manufacturer price
increases. A portion of the increase in merchandise inventories 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 improvements 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 sale of receivables under the Receivables Program 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.
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 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
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 retained
earnings at June 30, 1994 before the goodwill write-off of $126.4 million.
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
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 approximates 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 to 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 had 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 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 from operations would not be sufficient
to satisfy maturities of the Company'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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Liquidity and Capital Resources (continued)
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 DISTRIBUTION CORPORATION
/s/ Kurt J. Hilzinger
-----------------------------
Kurt J. Hilzinger
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Date: February 13, 1995 /s/ John A. Kurcik
-----------------------------
John A. Kurcik
Vice President, Controller
and Assistant Treasurer
(Principal Accounting Officer)
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