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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
<TABLE>
<CAPTION>
COMMISSION REGISTRANT, STATE OF INCORPORATION IRS EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
----------- ---------------------------------- ------------------
<S> <C> <C>
33-27835-01 AmeriSource Health Corporation 23-2546940
(a Delaware Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 296-4480
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: AMERISOURCE
HEALTH CORPORATION:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: AMERISOURCE HEALTH
CORPORATION:
COMMON STOCK, $.01
PAR VALUE PER SHARE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Non-affiliates of AmeriSource Health Corporation, as of December 2, 1996, held
15,768,922 shares of voting stock. The registrant's voting stock is traded on
the New York Stock Exchange under the trading symbol "AAS". The aggregate
market value of the registrant's voting stock held by non-affiliates of the
registrant (based upon the closing price of such stock on the New York Stock
Exchange on December 2, 1996 and the assumption for this computation only that
399 Venture Partners, Inc. and all directors and executive officers of the
registrant are affiliates) was $634,699,110.50.
The number of shares of common stock of AmeriSource Health Corporation
outstanding as of December 2, 1996 was: Class A--16,941,218; Class B--
6,490,370; Class C--241,098.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in the Part
of this report indicated below:
Part III--Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held February 11, 1997.
<PAGE>
PART I
ITEM 1. BUSINESS
AmeriSource Health Corporation, through its direct wholly-owned subsidiary
AmeriSource Corporation (referred to interchangeably as "AmeriSource" and the
"Company"), is the fourth largest full-service wholesale distributor of
pharmaceutical products and related health care services in the United States.
The Company serves its customers nationwide through 19 drug distribution
facilities and two specialty products distribution facilities. AmeriSource is
typically the primary source of supply to its customers and offers a broad
range of services designed to enhance the operating efficiencies and
competitive position of its customers and suppliers. The Company benefits from
a diverse customer base that includes hospitals and managed care facilities
(48%), independent community pharmacies (33%), and chain drug stores including
pharmacy departments of supermarkets and mass merchandisers (19%).
Over the past five years, AmeriSource has achieved significant growth in
revenues and operating income before unusual items. The Company's revenues
have increased from $2.7 billion in fiscal 1991 to $5.6 billion in fiscal
1996, a compound annual growth rate of 15.1%, while operating income before
unusual items and amortization increased from $57.8 million in fiscal 1991 to
$109.1 million in fiscal 1996, a compound annual growth rate of 13.5%. The
Company's growth is primarily the result of market share gains in existing
markets, geographic expansion and overall industry growth.
AmeriSource Health Corporation was incorporated in Delaware in 1988. The
address of the principal executive office of the Company is P.O. Box 959,
Valley Forge, Pennsylvania 19482. The telephone number is (610) 296-4480.
BUSINESS STRATEGY
Over the past five years, AmeriSource has significantly expanded its
national presence as a leading, innovative wholesale distributor of
pharmaceutical products and related health care services. The Company believes
it is well-positioned to continue its revenue growth and increase operating
income through the execution of the following key elements of its business
strategy:
. Expanding into New Geographic Markets. The Company believes that there
are substantial opportunities to grow by expanding into new geographic
areas through opening new distribution facilities and making selective,
complementary acquisitions. Since October 1993, the Company has opened
six new distribution facilities. In October 1993, the Company opened a
facility in Dallas, Texas, and in November 1994, the Company opened two
additional facilities in Portland, Oregon and Springfield, Massachusetts.
In June 1995, the Company opened a new facility in Sacramento, California
and in October 1995, a new facility in Phoenix, Arizona was opened. In
December 1995, the Company opened its newest facility in Orlando,
Florida. Each of these new facilities began operations with an existing
customer base in its regional marketplace. In addition, in July 1995, the
Company acquired Newbro Drug Company, a regional wholesale pharmaceutical
distributor based in Idaho Falls, Idaho, and in February 1996, the
Company acquired Gulf Distribution Inc., a regional wholesale
pharmaceutical distributor based in Miami, Florida. The Company believes
that as industry consolidation pressures continue, additional
opportunities may arise to selectively acquire additional local and
regional drug wholesale companies facilitating expansion into new
geographic areas and enhancement of its competitive position in existing
markets.
. Increasing Market Share in Existing Markets. The Company believes that it
is well positioned to continue to grow in its existing markets by: (i)
providing superior distribution services coupled with advanced
information systems to reduce costs throughout the pharmaceutical supply
channel; (ii) continuing to develop or acquire specialty value added
services and programs to improve the competitiveness of its customers and
suppliers; (iii) maintaining its low cost operating structure to ensure
that the Company's services are priced competitively in the marketplace;
and (iv) maintaining its decentralized operating structure to respond to
customers' needs more quickly and efficiently and to ensure the continued
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development of local and regional management talent. These factors have
allowed AmeriSource to compete effectively in the marketplace and generate
above-average industry sales growth over the last three years.
. Continuing Growth of Specialty Services. The Company works closely with
both customers and suppliers to develop an extensive range of specialty
services. In addition to enhancing the Company's profitability, these
services increase customer loyalty and strengthen the Company's overall
role in the pharmaceutical supply channel. These services include:
--ECHO(TM), the Company's proprietary software system, provides
sophisticated ordering and inventory management assistance to its
hospital and retail customers. In addition to facilitating the primary
supply and communications between the Company and its customers,
ECHO(TM) enables the Company's customers to reduce their costs through
ordering more efficiently, selecting from best price alternatives and
maintaining formulary compliance. In fiscal 1995, the Company acquired
Liberty Drug Systems, a software developer based in Greensboro, North
Carolina. The technology acquired with this acquisition has been
combined with the ECHO(TM) system to provide customers with a complete
system for tracking usage, reordering products and managing records.
Since the introduction of ECHO(TM) in early fiscal 1991, the Company
has installed approximately 3,000 systems nationwide, and believes that
its installed base of systems is one of the largest and most
sophisticated in the wholesale drug industry.
--Family Pharmacy(R) enables small chain and independent community
pharmacies to compete more effectively through: (i) innovative
advertising, marketing and promotional campaigns; (ii) value-added
merchandising programs including private label product lines; (iii)
enhanced access to pharmaceutical benefit programs of large health care
groups, including third party payor programs; and (iv) access to
disease management and pharmaceutical care programs. Family Pharmacy(R)
has grown dramatically in recent years. With over 2,200 Family
Pharmacy(R) member-stores, Family Pharmacy(R) in effect constitutes one
of the largest drugstore chains in the United States.
--The Company's Income Rx(R) program provides an integral value-added
service to its hospital and retail pharmacist customers by continually
reviewing the marketplace for generic products that offer the best
price, quality and availability. With the increasing importance of
generic pharmaceuticals, this program represents a significant
opportunity for growth and profitability. In fiscal 1996, the Company
introduced its AmeriSource Select(TM) automated generic compliance
program. AmeriSource Select(TM) provides customers additional profit
opportunity by channeling generic purchasing to preferred products in
order to reduce product acquisition cost and decrease redundancies in
other generic products stocked by the Company. Revenues attributable to
AmeriSource's sale of generic and multi-source pharmaceuticals
(including the Income Rx(R) program) have increased to approximately
$550 million in fiscal 1996.
--American Health Packaging(TM) (AHP) is the Company's pharmaceutical
packaging division. In fiscal 1996, the Company expanded its packaging
business by opening a new state-of-the art facility in Columbus, OH in
order to provide customized packaging solutions to both customers and
suppliers. The facility is capable of packaging pharmaceuticals into
both unit of use and unit dose formats which provide higher
productivity, better controls, and improved profitability throughout
the pharmaceutical supply channel.
--Encara(TM) is the Company's innovative pharmacy practice system which
positions pharmacists to participate in drug therapy counseling and
disease management for their customers. Encara(TM), which includes
comprehensive training programs, proprietary software products,
management services and ongoing support, allows pharmacists to market
reimbursable care-based services to managed care organizations and
other third party payors.
--The Diabetes Shoppe(TM) program develops pharmacy-based diabetic care
centers to market specialized products and training for diabetics
through over 250 retail pharmacy members nationwide.
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--The Company's Health Services Plus(TM) business distributes vaccines,
injectables and oncology products to physicians and clinics on a
national basis. Rita Ann Distributors markets cosmetics and fragrances
to chain drugstores and independent retail customers.
. Maintain Low Cost Operating Structure. AmeriSource has the lowest
operating cost structure among its three major national competitors. Over
the past five years, the Company has significantly reduced operating
expenses and investment in net working capital as a percentage of
revenues. Specifically, the Company has reduced its selling and
administrative expenses and depreciation as a percentage of revenues from
4.41% in fiscal 1991 to 3.68% in fiscal 1996. In addition, the Company
continues to achieve productivity and operating income gains from
continued investments in advanced management information systems,
warehouse automation technology, and from operating leverage due to
increased volume per Rx distribution facility. The addition of new
facilities was accomplished with minimal incremental investment in
corporate overhead. As these facilities continue to expand in their
regional markets, the Company believes that its growth and profitability
will be further enhanced.
INDUSTRY OVERVIEW
The Company has benefited from the significant growth of the full-service
drug wholesale industry in the United States. Industry sales grew from $30
billion in 1990 to an estimated $57 billion in 1995. The factors contributing
to this growth, and the sources of future growth for the industry, include (i)
an aging population, (ii) the introduction of new pharmaceuticals, (iii) the
increased use of outpatient drug therapies, (iv) a higher concentration of
distribution through wholesalers by both manufacturers and customers, and (v)
rising pharmaceutical prices.
Aging Population. The number of individuals over age 65 in the United States
has grown 23% from approximately 26 million in 1980 to approximately 32
million in 1990 and is projected to increase an additional 9% to more than 35
million by the year 2000. This age group suffers from a greater incidence of
chronic illnesses and disabilities than the rest of the population and is
estimated to account for approximately two-thirds of total health care
expenditures in the United States.
Introduction of New Pharmaceuticals. Traditional research and development as
well as the advent of new research and production methods, such as
biotechnology, continue to generate new compounds that are more effective in
treating diseases. These compounds have been responsible for significant
increases in pharmaceutical sales. The Company believes that ongoing research
and development expenditures by the leading pharmaceutical manufacturers will
contribute to continued growth of the industry.
Cost Containment Efforts. In response to rising health care costs,
governmental and private payors have adopted cost containment measures that
encourage the use of efficient drug therapies to prevent or treat diseases.
While national attention has been focused on the overall increase in aggregate
health care costs, the Company believes drug therapy has had a beneficial
impact on overall health care costs by reducing expensive surgeries and
prolonged hospital stays. Pharmaceuticals currently account for less than 9%
of overall health care costs, and manufacturers' emphasis on research and
development is expected to continue the introduction of cost effective drug
therapies.
Higher Concentration of Distribution Through Wholesalers. Over the past
decade, manufacturers of pharmaceuticals have significantly increased the
distribution of their products through wholesalers as the cost and complexity
of maintaining inventories and arranging for delivery of pharmaceutical
products has risen. Drug wholesalers offer their customers and suppliers more
efficient distribution and inventory management. As a result, from 1980 to
1995, the percentage of pharmaceutical sales through wholesale drug
distributors increased from approximately 46% to approximately 61%. Order
processing, inventory management and product delivery by wholesale drug
distributors allow manufacturers to allocate their resources to research and
development, manufacturing and marketing their products. Customers benefit
from this shift by having a single source of supply for a full line of
pharmaceutical products as well as lower inventory costs, more timely and
efficient
3
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delivery, and improved purchasing and inventory information. In addition,
customers also benefit from the range of value-added programs developed by
wholesale drug distributors that are targeted to the specific needs of these
customers, which, in turn, reduce their costs and increase their operating
efficiencies.
Pharmaceutical Price Increases By Drug Manufacturers. The Company believes
that price increases by pharmaceutical manufacturers will continue to equal or
exceed the overall Consumer Price Index. The Company believes that this
increase will be due in large part to the relatively inelastic demand in the
face of higher prices charged for patented drugs as manufacturers have
attempted to recoup costs associated with the development, clinical testing
and Food and Drug Administration ("FDA") approval of new products.
At the same time that sales through the wholesale drug industry have grown,
the number of pharmaceutical wholesalers in the United States has decreased
from 139 at the end of 1980 to approximately 44 as of September 1996. Industry
analysts expect this consolidation trend to continue, with the industry's
largest companies increasing their percentage of total industry sales.
OPERATIONS
Decentralized Structure. The Company believes that operating economies of
scale exist principally at the distribution facility level. In order to reduce
costs and improve operating leverage, the Company began in fiscal 1989 an
extensive consolidation program, which closed 17 of the 31 facilities open in
October 1988. During the course of this consolidation program, the Company
continued to significantly increase its revenues in each fiscal year.
To expand into new geographic markets, AmeriSource has opened six new
facilities since October 1993, and currently operates 19 drug wholesale
distribution facilities and two specialty products distribution facilities,
organized into four regions across the United States. Several operating units
of the Company have over 100 years of history in the business and are among
the nation's first drug distribution businesses. Unlike its more centralized
competitors, the Company is structured as an organization of locally managed
profit centers. Management of each operating unit has fiscal responsibility
for its unit, and each operating unit has an established executive, sales and
operations staff. The operating unit's results, including earnings and asset
management goals, have a direct impact on management compensation. The
operating units utilize the Company's corporate staff for marketing,
financial, legal and executive management resources and corporate coordination
of asset and working capital management.
Sales and Marketing. The Company has an organization of over 250 sales
professionals. A specially trained group of telemarketing/customer service
representatives makes regular contact with customers regarding special offers.
Within the sales organization, there is also a field force of approximately 50
hospital representatives, including regional hospital directors. The Company's
corporate marketing department works with manufacturer suppliers to develop
national programs and promotions. Tailored to specific customer classes, these
programs can be further customized at the operating unit level to adapt to
local market conditions. The marketing department gathers and disseminates
information to each operating unit's purchasing and sales organization in
order to enhance their competitive effectiveness.
Facilities. Each of the Company's operating units carries an inventory line
necessary for its local market. The efficient distribution of small orders is
possible through the extensive use of computerization and modern warehouse
techniques. These include computerized warehouse product location, routing and
inventory replenishment systems, gravity-flow racking, mechanized order
selection and efficient truck loading and routing. The Company typically
delivers its products to its customers on a daily basis. It utilizes a fleet
of owned and leased vans and trucks and contract carriers. Night picking
operations in its distribution facilities have further reduced delivery time.
Orders are generally delivered in fewer than 24 hours.
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The Company's 19 full service Rx distribution facilities and two specialty
products facilities as of December, 1996, are organized into four regions
throughout the United States. The following table presents certain information
regarding the Company's operating units in the aggregate.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS; SQUARE FEET IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue........................... $3,237.7 $3,658.9 $4,182.2 $4,668.9 $5,551.7
Number of Rx distribution
facilities....................... 17 15 14 18 20
Average revenue/Rx distribution
facility......................... $ 189.7 $ 243.0 $ 297.1 $ 257.8 $ 275.6
Total square feet (Rx facilities). 1,414.0 1,372.3 1,322.1 1,446.9 1,817.5
Average revenue/square feet (Rx
facilities)...................... $2,281.0 $2,656.0 $3,146.0 $3,207.0 $3,033.0
</TABLE>
Customers and Markets. The Company has a diverse customer base that includes
hospitals and managed care facilities, independent community pharmacies, and
chain drug stores including pharmacy departments of supermarkets and mass
merchandisers. The Company offers a broad range of services designed to
enhance the operating efficiencies and competitive position of its customers
and suppliers. In addition, AmeriSource is typically the primary source of
supply for its customers. The table below summarizes how the Company's
customer sales mix has changed over the last five fiscal years. All years
presented have been restated in fiscal 1996 to reclass nursing homes and
clinics to the Hospital and Managed Care segment from the Independent segment.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hospitals and Managed
Care Facilities........ $1,387 43% $1,707 47% $2,126 51% $2,422 52% $2,673 48%
Independents............ 1,222 38% 1,244 34% 1,292 31% 1,396 30% 1,807 33%
Chains.................. 629 19% 708 19% 764 18% 851 18% 1,072 19%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total................ $3,238 100% $3,659 100% $4,182 100% $4,669 100% $5,552 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
No single customer represented more than 4% of the Company's total revenues
during fiscal 1996 other than the federal government which, in the aggregate,
accounted for approximately 17%. Excluding the federal government, the
Company's top ten customers represented approximately 15% of total revenues
during fiscal 1996. A profile of each customer segment follows:
. Hospitals and Managed Care Facilities. AmeriSource is one of the nation's
top three distributors in serving the hospital and managed care market
segment, which is currently the fastest growing customer segment in the
industry. Because hospitals and managed care facilities purchase large
volumes of high priced, easily handled pharmaceuticals, the Company
benefits from quick turnover of both inventory and receivables and lower
than average operating expenses. The Company intends to continue to focus
on the higher growth hospital and managed care market segment through the
use of dedicated facilities and advanced information systems such as
ECHO(TM). As a percentage of total revenues, sales to hospitals and
managed care facilities increased from 43% in fiscal 1992 to 48% in
fiscal 1996, and have grown at a compound rate of 17.8% over this period.
. Independents. Independent community pharmacy owners represent the largest
segment of the industry and provide the greatest opportunity for the
Company's value-added services. The Company's sales to independent
customers have risen at a compound rate of 10.2% from fiscal 1992 through
fiscal 1996 due to the general growth of this customer segment and to the
success of the Company's customized marketing and merchandising programs,
such as its Family Pharmacy(R) program.
. Chains. This category includes chain drug stores, including pharmacy
departments of supermarkets and mass merchandisers. The Company's sales
to chains have risen at a compound rate of 14.3% from fiscal 1992 through
fiscal 1996. This growth rate reflects the results from the Company
entering into new contracts with several drug store chains.
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Suppliers. AmeriSource obtains pharmaceutical and other products from a
number of manufacturers, none of which account for more than approximately 9%
of its net sales in fiscal 1996. The five largest suppliers in fiscal 1996
accounted for approximately 37% of net sales. Historically, the Company has
not experienced difficulty in purchasing desired products from suppliers. The
Company has agreements with many of its suppliers which generally require the
Company to maintain an adequate quantity of a supplier's products in
inventory. The majority of contracts with suppliers are terminable upon 30
days notice by either party. The loss of certain suppliers could adversely
affect the Company's business if alternative sources of supply were
unavailable. The Company believes that its relationships with its suppliers
are good.
Management Information Systems. The Company has continually invested in
advanced management information systems and automated warehouse technology. In
fiscal 1994, AmeriSource introduced its BOSS warehouse automation system, a
paperless warehouse production program customized to AmeriSource's unique
requirements. First installed at its Paducah, Kentucky distribution center,
the second BOSS system has been installed at the Company's newly opened
facility in Orlando, Florida. Under the BOSS system, merchandise is received,
placed in inventory, retrieved and shipped utilizing customized radio
frequency equipment. The Company's management information systems also provide
for, among other things, electronic order entry by customers, invoice
preparation and purchasing and inventory tracking. As a result of electronic
order entry, the cost of receiving and processing orders has not increased as
rapidly as sales volume. The Company's customized systems strengthen customer
relationships by allowing the customer to lower its operating costs and by
providing the basis for a number of the value-added services the Company
provides to its customers, including marketing data, inventory replenishment,
single-source billing, computer price updates and price labels. AmeriSource
believes that its management information systems are capable of serving its
needs for the foreseeable future.
COMPETITION
The Company engages in the wholesale distribution of pharmaceuticals, health
and beauty aids and other products in a highly competitive environment. The
Company competes with numerous national and regional distributors, some of
which are larger and have greater financial resources than the Company. The
Company's national competitors include McKesson Corporation, Bergen Brunswig
Corporation, and Cardinal Health, Inc. In addition, the Company competes with
local distributors, direct-selling manufacturers and other specialty
distributors. Competitive factors include value-added service programs,
breadth of product line, price, service and delivery, credit terms, and
customer support. There can be no assurance that the Company will not
encounter increased competition in the future that could adversely affect the
Company's business. The drug wholesale industry continues to undergo
significant consolidation, with the number of wholesalers in the continental
United States reduced from 139 at the end of 1980 to approximately 44 as of
September 1996.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 3,000 persons,
of which approximately 2,800 were full-time employees. Approximately 13% of
full and part-time employees are covered by collective bargaining agreements.
The Company believes that its relationship with its employees is good.
REGULATORY MATTERS
The United States Drug Enforcement Administration and the Food and Drug
Administration and various state boards of pharmacy regulate the distribution
of pharmaceutical products and controlled substances, requiring wholesale
distributors of these substances to register for permits and to meet various
security and operating standards. As a wholesale distributor of
pharmaceuticals and certain medical/surgical products, the Company is subject
to these regulations. The Company has received all necessary regulatory
approvals and believes that it is in substantial compliance with all
applicable wholesale distribution requirements.
The Company is aware that at its former Charleston, South Carolina
distribution center there is evidence of residual soil contamination remaining
from the fertilizer manufacturing process operated on that site by third
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parties over thirty years ago. The Company's environmental consulting firm
conducted a soil survey and a groundwater study during fiscal 1994 and 1995.
The results of the studies indicate that there is lead on-site at levels
requiring further investigation and potential remediation. 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 is estimated to be $4.1
million. Accordingly, a liability of $4.1 million was recorded during fiscal
1994 to cover future consulting, legal and remediation and ongoing monitoring
costs. The Company is working with the appropriate state regulatory agency
regarding further tests and potential site remediation. That negotiation,
investigation and remediation could take several years and the actual costs
may differ from the liability that has been recorded. The accrued liability
($3.9 million at September 30, 1996), which is reflected in other long-term
liabilities on the Company's consolidated balance sheet, is based on the
present estimate of the extent of contamination, choice of remedy, and enacted
laws and regulations, including remedial standards; however, changes in any of
these could affect the estimated liability. The Company is investigating the
possibility of asserting claims against responsible third 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.
ACQUISITIONS
During fiscal 1996, the Company acquired all of the stock of Gulf
Distribution Inc., a Miami, Florida-based wholesale pharmaceutical distributor
with annualized revenues of approximately $180 million. In addition, the
Company acquired substantially all of the assets of the Diabetic Shoppe, Inc.,
a Wisconsin-based provider of diabetic disease management programs to retail
pharmacies.
ITEM 2. PROPERTIES
As of September 1996, the Company conducted its business from office and
operating unit facilities at 38 locations throughout the United States. In the
aggregate, the Company's operating units occupy approximately two million
square feet of office and warehouse space, of which approximately 739,000
square feet is owned and the balance is leased under lease agreements with
expiration dates ranging from 1996 to 2009. The Company's 19 drug distribution
facilities range in size from approximately 20,000 square feet to 213,300
square feet. Leased facilities are located in the following states: Arizona,
California, Florida, Idaho, Kentucky, Massachusetts, Minnesota, New Jersey,
North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas and Wisconsin.
Owned facilities are located in the following states: Indiana, Kentucky,
Maryland, Missouri, Ohio, Pennsylvania, Tennessee and Virginia. The Company
utilizes a fleet of owned and leased vans and trucks, as well as contract
carriers to deliver its products. The Company believes that its properties are
adequate to serve the Company's current and anticipated needs without making
capital expenditures materially higher than historical levels.
ITEM 3. LEGAL PROCEEDINGS
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in a
series of purported class action antitrust lawsuits alleging violations of
various antitrust laws associated with the chargeback pricing system. In
addition, the Company is a party to parallel suits filed in state courts in
Minnesota and Alabama. The actions were originally filed in the United States
District Court for the Southern District of New York, and have been
transferred to the United States District Court for the Northern District of
Illinois for consolidated and coordinated pretrial proceedings. In essence,
these lawsuits all claim that the manufacturer and wholesaler defendants have
combined, contracted and conspired to fix the prices charged to plaintiff
independent retail pharmacies 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. In October, 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
7
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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 $1 million. 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.
On April 4, 1996, the federal court granted the wholesalers' motion for
summary judgment. The plaintiffs are appealing the grant of summary judgment
in favor of the wholesalers to the United States Court of Appeals for the
Seventh Circuit.
The Company is a party to various lawsuits arising in the ordinary course of
business. The Company, however, does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(No response to this Item is required.)
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages and
their positions, as of December 2, 1996. Each executive officer serves at the
pleasure of the Company's Board of Directors.
<TABLE>
<CAPTION>
CURRENT POSITION WITH THE COMPANY AND OTHER POSITION HELD IN THE LAST
NAME AGE PERIOD OF SERVICE FIVE YEARS
---- --- ------------------------------------- ----------------------------------
<S> <C> <C> <C>
John F. McNamara........ 61 Chairman, President and Chief --
Executive Officer (1989-Present)
David M. Flowers........ 49 Executive Vice President-- Group President--Eastern Region
Marketing (1995-Present) (1989-1995)
Kurt J. Hilzinger....... 36 Vice President, Chief Financial Vice President, Finance and
Officer and Treasurer (1995-Present) Treasurer
(1993-1995); Vice President,
Financial Planning (1991-1993).
R. David Yost........... 49 Executive Vice President-- Group President--Central Region
Operations (1995-Present) (1989-1995)
</TABLE>
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since May 27, 1996, the Company's Class A Common Stock has been traded on
the New York Stock Exchange under the trading symbol "AAS". From April 4, 1995
to May 26, 1996, the Company's Class A Common Stock was traded over-the-
counter in the National Market System of the National Association of
Securities Dealers, Inc. (Nasdaq symbol ASHC). Prior to that date, there was
no established public trading market for the Company's Class A Common Stock.
As of December 2, 1996, there were 320 record holders of the Company's Class A
Common Stock. The following table sets forth the high and low closing sale
prices of the Class A Common Stock for the periods indicated.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED 9/30/95
First Quarter (not pub-
licly traded)
Second Quarter (not pub-
licly traded)
Third Quarter (4/4-
6/30).................. $24 1/4 $20 7/8
Fourth Quarter.......... 27 3/4 20
YEAR ENDED 9/30/96
First Quarter........... $33 1/2 $25 1/4
Second Quarter.......... 33 3/4 28
Third Quarter........... 37 1/2 32 1/8
Fourth Quarter.......... 44 1/2 28
</TABLE>
There is no established public trading market for the Company's Class B
Common Stock. As of December 2, 1996, there were 3 record holders of the
Company's Class B Common Stock.
The Company's Class C Common Stock was held by 7 holders of record as of
December 2, 1996. The Class C Common Stock trades on a limited basis in the
over-the-counter market, and information concerning the historical trading
prices for the Class C Common Stock is not published by nationally-recognized
independent sources.
The Company has not paid any cash dividends to its stockholders on any class
of its Common Stock, and anticipates that for the foreseeable future its
earnings will be retained for use in its business. Payment of dividends is
within the discretion of the Company's Board of Directors and will depend,
among other factors, upon the Company's earnings, financial condition and
capital requirements and the terms of the Company's financing agreements. A
credit agreement between the Company and a syndicate of senior lenders
provides a secured credit facility of $380 million, and restricts the
Company's ability to make dividend payments unless certain financial tests are
met.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table should be read in conjunction with the Consolidated
Financial Statements, including
the notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994(A) 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $5,551,671 $4,668,948 $4,182,193 $3,658,871 $3,237,708 $2,743,828
Gross profit............ 302,433 266,355 235,191 209,438 199,723 178,769
Operating expenses (b).. 204,244 168,343 149,137 136,147 131,080 120,921
Operating income (loss). 97,889 97,835 (101,992) 65,601 60,850 45,887
Operating income,
excluding unusual items
and amortization (c)... 109,088 98,012 86,054 73,291 68,643 57,848
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes in
1994................... 42,650 28,218 (172,417) (7,474) (12,824) (23,319)
Net income (loss) ...... 35,408 10,181 (207,671) (18,618) (6,476) (23,319)
Earnings (loss) per
share (fully diluted):
Income (loss) before
extraordinary items
and cumulative effect
of accounting changes
in 1994............... 1.84 1.53 (11.69) (.51) (.87) (1.58)
Net income (loss) per
share................. 1.53 .55 (14.08) (1.26) (.44) (1.58)
Weighted average common
shares outstanding
(fully diluted)........ 23,217 18,396 14,750 14,750 14,750 14,750
Balance Sheet:
Cash and cash equiva-
lents and restricted
cash.................. $ 71,201 $ 46,809 $ 25,311 $ 27,136 $ 13,806 $ 33,796
Accounts receivable--
net................... 390,331 318,652 272,281 251,999 249,070 221,383
Merchandise invento-
ries.................. 650,296 404,522 351,676 346,371 336,025 270,977
Property and equip-
ment--net............. 51,666 45,244 41,182 36,106 38,105 36,203
Total assets........... $1,187,960 $ 838,673 $ 711,644 $ 867,944 $ 848,474 $ 783,145
Accounts payable....... $ 714,984 $ 462,804 $ 449,991 $ 379,826 $ 308,097 $ 254,013
Long-term debt......... 433,693 435,764 487,575 549,220 587,983 570,939
Stockholders' equity... (36,808) (135,724) (300,726) (93,040) (74,747) (68,271)
Total liabilities and
stockholders' equity.. $1,187,960 $ 838,673 $ 711,644 $ 867,944 $ 848,474 $ 783,145
</TABLE>
(a) Includes the effect of: the $179.8 million write-off of goodwill, the
cumulative effect of accounting changes for income taxes of $33.4 million
and postretirement benefits other than pensions of $1.2 million.
(b) Represents selling and administrative expenses and depreciation, and
excludes amortization and unusual items.
(c) Excludes the $10.9 million non-cash charge to cost of goods sold in fiscal
1996. See Note 11 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AMERISOURCE HEALTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements contained herein.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
Revenues of $5.6 billion for the fiscal year ended September 30, 1996
increased 18.9% over the prior fiscal year. The year-to-year revenue gains
reflect increases across all customer groups and the impact of the Company's
expansion into new geographic markets, especially in the western and
northeastern United States and Florida, and price increases. Revenues of the
Company's new geographic markets increased by 70% in fiscal 1996. The
acquisitions of Newbro Drug Company in July 1995, and Gulf Distribution, Inc.
in February 1996, accounted for 4% of the 19% increase in revenues for fiscal
1996. During the fiscal year ended September 30, 1996, sales to hospitals
increased 10%, sales to independent drug store customers increased 29%, and
sales to the chain drug store customer group increased 26%, as compared with
the prior fiscal year. During the fiscal year ended September 30, 1996, sales
to hospitals accounted for 48% of total revenues, while sales to independent
10
<PAGE>
drug stores accounted for 33% and sales to chain drug stores 19% of the total.
In fiscal 1996, the Company has reclassified nursing homes and clinics from
its independent drug store segment to its hospital segment for all periods
presented. The reclass added 5% of total revenues to hospitals in fiscal 1996.
Gross profit of $302.4 million for fiscal 1996 increased by 13.5% over
fiscal 1995 due to the increase in revenues. As a percentage of revenues, the
gross profit margin in fiscal 1996 was 5.45% as compared to 5.70% in the prior
year. The decrease in gross profit margin percentage from the prior fiscal
year was due to a decline in selling margin percentage due to continuing price
competition throughout the industry and a cumulative non-cash charge of $10.9
million described below. Selling margins may continue to be impacted by price
competition and changes in customer mix. Increased sales of higher-margin
generic drugs, the continued introduction of new marketing programs with
manufacturers, the growth of higher margin specialty businesses such as
pharmaceutical packaging, and an increase in inventory investment buying
activity, partly offset the selling margin decline.
In the fourth quarter of fiscal 1996, cost of goods sold has been impacted
by a one-time cumulative non-cash charge of $10.9 million arising from the
misconduct of a former employee. In December 1996, the Company discovered
erroneous entries were made over a number of years to improperly understate
cost of goods sold and liabilities in one of its regions. The Company
immediately commenced a thorough investigation including the use of outside
advisors. Based on the investigation, the Company has concluded that: the
individual acted alone and was not enriched; the Company did not suffer any
loss of cash or other assets; no other irregularities, illegal acts or
improper transactions were caused by the former employee; and similar
activities did not occur elsewhere in the Company. The Company has concluded
the estimated impact of the erroneous entries was not material to operations
or the financial position of the Company in any individual year. Although the
Company can not determine the actual impact of the erroneous entries on a
year-by-year basis, the Company believes over one-half of the amount of the
charge occurred prior to fiscal 1993.
Selling and administrative expenses and depreciation increased by 21.3% to
$204.2 million in fiscal 1996 from $168.3 million in fiscal 1995, and as a
percentage of revenues were 3.68% in 1996 and 3.61% in 1995. The increase as a
percentage of revenue in fiscal 1996 is primarily due to: the cost of opening
new distribution facilities in Orlando, Florida and Phoenix, Arizona and a new
pharmaceutical packaging facility in Columbus, Ohio; integration costs related
to the acquisitions of Newbro Drug Company and Gulf Distribution Inc.; above
average growth of the higher cost to service independent drug store segment;
and the cost of developing new value added marketing programs. These costs
have been somewhat offset by continued economies of scale at the Company's
established locations.
Operating income of $109.1 million in fiscal 1996, excluding the cumulative
non-cash charge of $10.9 million described above and amortization increased by
11.3% over the prior year. As a percentage of revenues, the Company's
operating margin, excluding the cumulative non-cash charge and amortization
declined to 1.96% in fiscal 1996 from 2.10% in fiscal 1995 due to the increase
in expenses and decline in gross margin discussed above.
Interest expense of $36.0 million in fiscal 1996 represents a decrease of
31.2% compared to fiscal 1995. The decrease was due to: the redemption in
January 1995 of the $166.1 million of 14 1/2% senior subordinated notes; the
redemption in May 1995 of $74.3 million of 11 1/4% senior debentures and the
repurchase and redemption in 1996 of the remaining $74.3 million of 11 1/4%
senior debentures; and lower average borrowing rates due to the implementation
of the receivables securitization financing in December 1994, and reductions
in the borrowing rates of the Company's revolving credit facility which was
amended in December 1994. Average borrowings during the year ended September
30, 1996 were $479 million as compared to average borrowings of $536 million
in the prior year.
Income tax expense of $19.3 million in fiscal 1996 was based on an annual
effective tax rate of 31.1% (38% in fiscal 1995). Income tax expense in fiscal
1996 was reduced by $7.1 million due to the favorable settlement of an
Internal Revenue Service audit of fiscal years 1987-1991. The extraordinary
charge in fiscal 1996 of $7.2 million (net of a tax benefit of $3.9 million)
relates to the purchase and redemption premiums and consequent
11
<PAGE>
write-off of unamortized deferred financing fees due to the purchase and
redemption of the remaining $74.3 million of 11 1/4% senior debentures. The
extraordinary charge in fiscal 1995 of $18.0 million (net of a tax benefit of
$7.2 million) relates to the amendment of the revolving credit facility, the
redemption of the 14 1/2% senior subordinated notes, the redemption of $74.3
million of 11 1/4% senior debentures, and the consequent write-off of
unamortized deferred financing fees.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1994
Revenues of $4.7 billion for the fiscal year ended September 30, 1995
represented an increase of 11.6% over revenues for the fiscal year ended
September 30, 1994. The year-to-year revenue gains reflect increases across all
customer groups, the impact of the Company's expansion into new geographic
markets, especially in the northeastern and western United States, and price
increases. During the fiscal year ended September 30, 1995, sales to hospitals
increased 14%, sales to independent drug store customers increased 8%, and
sales to the chain drug store customer group increased 11%, as compared with
the prior fiscal year. During the year ended September 30, 1995, sales to
hospitals accounted for 52% of total revenues, while sales to independent drug
stores represented 30% and sales to chain drug stores 18% of the total.
Gross profit of $266.4 million for fiscal 1995 increased by 13.3% over 1994,
primarily due to the increase in revenues. As a percentage of revenues, the
Company's gross profit margin expanded to 5.70% from 5.62% in 1994. The gross
profit margin improvement was a result of increased sales of higher margin
generic drugs, the continued introduction of new marketing programs with
manufacturers, and growth of higher margin specialty businesses, such as
pharmaceutical packaging. Increased purchase discounts and a greater level of
price increases from manufacturers resulting in greater inventory appreciation
also benefited the gross profit margin.
Selling and administrative expenses and depreciation for 1995 were $168.3
million compared to $149.1 million for 1994, an increase of 12.9%. The increase
in 1995 is due primarily to increases in warehouse and delivery expenses
relating to the volume increases, development expenses of value-added programs,
and one-time costs associated with the opening of new distribution facilities
in Springfield, Massachusetts, Portland, Oregon, Sacramento, California, and
Phoenix, Arizona. As a result of these factors, selling and administrative
expenses and depreciation increased slightly to 3.61% of revenues compared to
3.57% in fiscal 1994.
The decrease in amortization in 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.
Operating income, excluding unusual items and amortization, of $98.0 million
for fiscal 1995 increased 13.9% over fiscal 1994. As a percentage of revenues,
the Company's operating margin, excluding unusual items and amortization,
expanded to 2.10% in 1995 from 2.06% in 1994.
Interest expense for the year ended September 30, 1995 was $52.3 million, a
decrease of $10.3 million, or 16.5% as compared with the year ended September
30, 1994. The decrease was due to the redemption, in January 1995, of the
$166.1 million of 14 1/2% senior subordinated notes, the redemption, in May
1995, of $74.3 million of 11 1/4% senior debentures, and the lower average
rates due to the implementation of the Receivables Program and the new
revolving credit facility which has a lower interest rate than the previous
facility. Average borrowings were $536 million during fiscal 1995 versus $562
million in 1994.
Income taxes provided of $17.3 million in fiscal 1995 were based upon an
annual effective tax rate of 38%, which recognizes the utilization, for
financial reporting purposes, of operating loss carryforwards. The provision
for income taxes in fiscal 1994 represents the estimated taxes payable due to
the application of the alternative minimum tax. The extraordinary charge in
1995 of $18.0 million (net of a tax benefit of $7.2 million), relates to the
amendment of the revolving credit facility, the redemption premium on the 14
1/2% senior subordinated notes, the redemption premium on the 11 1/4% senior
debentures, and the consequent write-off of unamortized deferred financing
fees. The extraordinary charge of $679,000 in 1994, net of a tax benefit of
$23,000, relates to the purchase and retirement of an aggregate principal
amount of $4.4 million of 14 1/2% senior subordinated notes.
12
<PAGE>
Operating expenses in 1994 include a provision of $4.1 million to cover
expected environmental remediation costs at one of its former distribution
centers. In the third quarter of fiscal 1994, the Company completed a detailed
evaluation of the recovery of the recorded value of the excess of cost over
net assets acquired ("goodwill") and concluded that the projected operating
results would not support the future recovery of the remaining goodwill
balance. Accordingly, the Company wrote off the remaining goodwill balance of
$179.8 million in the third quarter of fiscal 1994.
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 $34.6 million in
noncash charges to net income for the effects of transition to these two new
standards. The cumulative effect of the change in accounting for
postretirement benefits other than pensions resulted in a noncash charge to
net income of $1.2 million as of October 1, 1993. The cumulative effect of the
change in accounting for income taxes resulted in a noncash charge to net
income of $33.4 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 bases of
merchandise inventories.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended September 30, 1996, the Company's operating activities
generated $40.0 million in cash as the increase of $213.1 million in
merchandise inventories was offset by the $216.4 million increase in accounts
payables, accrued expenses, and income taxes. The increase in merchandise
inventories reflects the Company's internal growth and new facility openings
as well as increased purchases in anticipation of manufacturer price increases
and other deal-buying opportunities. In addition the Company has increased
inventories to service temporary and potential new customers resulting from
the bankruptcy of FoxMeyer Corporation which was subsequently acquired by
McKesson Corporation. The increase in accounts receivable is directly related
to the revenue increase. Operating cash uses during the year ended September
30, 1996 included $36.2 million in interest payments and $6.9 in income tax
payments.
Capital expenditures for the year ended September 30, 1996 were $15.7
million and are primarily equipment purchases related to the expansion of the
Company's pharmaceutical packaging operation and the opening of the Orlando,
Florida and Phoenix, Arizona distribution centers, and additional investments
in information technology. Investments in information technology and warehouse
improvements account for the majority of the $17 million of capital
expenditures planned for fiscal 1997.
In February 1996, the Company purchased all of the stock of Gulf
Distribution Inc. in a cash transaction and in September 1996, it purchased
substantially all of the assets of The Diabetic Shoppe, Inc., a Wisconsin-
based provider of diabetic disease management programs to retail pharmacies.
Gulf Distribution Inc. is a Miami, Florida-based wholesaler with annualized
revenues of approximately $180 million. The cost of the acquisitions were
$29.5 million and were funded by borrowings under the revolving credit
facility.
In May 1996, the Company completed a public offering of 4.8 million shares
of its common stock. Of the 4.8 million shares sold, 1.5 million shares were
sold by the Company and 3.3 million shares were sold by certain stockholders
of the Company (the "Selling Stockholders"). The Company did not receive any
of the proceeds from the sale of the shares sold by the Selling Stockholders.
The $49.3 million net proceeds from the 1.5 million shares sold by the Company
were used along with borrowings on its revolving credit line to redeem its
remaining 11 1/4% senior debentures.
In April 1996, the Company purchased and retired $26.7 million of its 11
1/4% senior debentures through open market purchases for 111.25% of the
principal amount (including fees) plus accrued interest through the date of
purchase. In June 1996, the Company redeemed the remaining $47.6 million of
its senior debentures through a tender offer for 110.75% of the principal
amount (including fees) plus accrued interest through the
13
<PAGE>
date of redemption and a consent amount equal to 2.0% of the principal amount.
These transactions resulted in an extraordinary charge, net of tax benefits, of
$7.2 million relating to the open market and tender premiums, plus fees and the
write-off of related unamortized deferred financing fees. The redemptions were
funded by borrowings under the Company's revolving credit facility and proceeds
from the 1996 public offering.
Cash provided by financing activities during fiscal 1996 represents
borrowings under the Company's revolving credit facility and its receivable
securitization financing primarily to fund its working capital requirements. As
a result of the Company's initial public offering in April 1995, and its
financial results, the borrowing rate alternatives under its Credit Agreement
were reduced by 1.0% to LIBOR plus 1.25% and the prime rate plus zero beginning
in October 1995. At September 30, 1996, borrowings under the Company's $380
million revolving credit facility were $205 million (at an average interest
rate of 6.9%) and borrowings under the $285 million Receivables Program were
$227 million (at an average interest rate of 6.0%).
An increase in interest rates would adversely affect the Company's operating
results and the cash flow available after debt service to fund operations and
expansion and, if permitted to do so under its revolving credit facility, to
pay dividends on its capital stock.
The Company's operating results have generated sufficient cash flow which,
together with borrowings under its debt agreements and credit terms from
suppliers, have provided sufficient capital resources to finance working
capital and cash operating requirements, fund capital expenditures, and
interest currently payable on outstanding debt. The Company's primary ongoing
cash requirements will be to fund payment of interest on indebtedness, finance
working capital, and fund capital expenditures and routine growth and
expansion. Future cash flows from operations and borrowings are expected to be
sufficient to fund the Company's ongoing cash requirements. The Company is
currently considering various capital raising alternatives including
refinancing its existing debt facilities as well as raising additional equity.
If successful, the Company may use the additional funding to pursue new
business opportunities.
The Company is subject to certain contingencies pursuant to environmental
laws and regulations at one of its former distribution centers that may require
remediation efforts. In fiscal 1994, the Company accrued a liability of $4.1
million to cover future consulting, legal and remediation, and ongoing
monitoring costs. The accrued liability, 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.
Certain information in this annual report, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, contain forward-
looking statements as such term is defined in Section 27A of the Securities Act
and Section 21E of the Exchange Act. Certain factors such as changes in
interest rates, competitive pressures, customer mix, inventory investment
buying opportunities, and capital markets could cause actual results to differ
materially from those in the forward-looking statements.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
AmeriSource Health Corporation
We have audited the accompanying consolidated balance sheets of AmeriSource
Health Corporation and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 1996. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement and schedule presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AmeriSource Health Corporation and subsidiaries at September 30, 1996 and
1995 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in notes 4 and 7 to the consolidated financial statements, in
1994 the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions.
Ernst & Young LLP
Philadelphia, Pennsylvania
December 30, 1996
15
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1995
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 65,575 $ 32,171
Restricted cash.......................................... 5,626 14,638
Accounts receivable less allowance for doubtful accounts:
1996--$14,848;
1995--$12,941........................................... 390,331 318,652
Merchandise inventories.................................. 650,296 404,522
Prepaid expenses and other............................... 3,236 3,221
---------- --------
Total current assets................................... 1,115,064 773,204
Property and equipment, at cost............................ 91,508 76,826
Less accumulated depreciation............................ 39,842 31,582
---------- --------
51,666 45,244
Other assets, less accumulated amortization: 1996--$5,478;
1995--$2,842.............................................. 21,230 20,225
---------- --------
$1,187,960 $838,673
========== ========
</TABLE>
16
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 714,984 $ 462,804
Accrued expenses and other............................ 29,446 27,720
Accrued income taxes.................................. 6,002 13,596
Deferred income taxes................................. 35,350 25,892
---------- ---------
Total current liabilities........................... 785,782 530,012
Long-term debt:
Revolving credit facility............................. 205,047 150,000
Receivables securitization financing.................. 226,878 209,842
Senior debentures..................................... -- 74,293
Other debt............................................ 1,768 1,629
---------- ---------
433,693 435,764
Other liabilities....................................... 5,293 8,621
Stockholders' equity:
Common stock, $.01 par value:
Class A (voting and convertible):
50,000,000 shares authorized; issued 9/96--
17,291,100 shares;
9/95--12,062,560 shares............................ 173 121
Class B (nonvoting and convertible):
15,000,000 shares authorized; issued 9/96--9,440,370
shares;
9/95--12,969,050 shares............................ 95 130
Class C (nonvoting and convertible):
2,000,000 shares authorized; issued 9/96--242,298
shares;
9/95--440,158 shares............................... 2 4
Capital in excess of par value........................ 228,537 165,044
Retained earnings (deficit)........................... (259,395) (294,803)
Cost of common stock in treasury...................... (6,220) (6,220)
---------- ---------
(36,808) (135,724)
---------- ---------
$1,187,960 $ 838,673
========== =========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $5,551,671 $4,668,948 $4,182,193
Cost of goods sold......................... 5,249,238 4,402,593 3,947,002
---------- ---------- ----------
Gross profit............................... 302,433 266,355 235,191
Selling and administrative................. 195,350 160,887 142,497
Depreciation............................... 8,894 7,456 6,640
Amortization............................... 300 177 4,147
Unusual items:
Environmental remediation................ -- -- 4,075
Write-off of excess of cost over net
assets acquired......................... -- -- 179,824
---------- ---------- ----------
Operating income (loss).................... 97,889 97,835 (101,992)
Interest expense........................... 35,980 52,288 62,611
---------- ---------- ----------
Income (loss) before taxes, extraordinary
items, and cumulative effects of
accounting changes........................ 61,909 45,547 (164,603)
Taxes on income............................ 19,259 17,329 7,814
---------- ---------- ----------
Income (loss) before extraordinary items
and cumulative effects of accounting
changes................................... 42,650 28,218 (172,417)
Extraordinary charges--early retirement of
debt, net of income tax benefits.......... (7,242) (18,037) (656)
Cumulative effect of changes in accounting
for income taxes of $33,399 and
postretirement benefits other than
pensions of $1,199........................ -- -- (34,598)
---------- ---------- ----------
Net income (loss).......................... $ 35,408 $ 10,181 $ (207,671)
========== ========== ==========
Earnings (loss) per share:
Primary:
Income (loss) before extraordinary
items and cumulative effects of
accounting changes.................... $ 1.85 $ 1.54 $ (11.69)
Extraordinary items.................... (.31) (.98) (.04)
Cumulative effect of accounting
changes............................... -- -- (2.35)
---------- ---------- ----------
Primary net income (loss) per share.. $ 1.54 $ .56 $ (14.08)
========== ========== ==========
Weighted average number of common
shares outstanding (thousands)........ 23,031 18,333 14,750
Fully diluted:
Income (loss) before extraordinary
items and cumulative effects of
accounting changes.................... $ 1.84 $ 1.53 $ (11.69)
Extraordinary items.................... (.31) (.98) (.04)
Cumulative effect of accounting
changes............................... -- -- (2.35)
---------- ---------- ----------
Fully diluted net income (loss) per
share............................... $ 1.53 $ .55 $ (14.08)
========== ========== ==========
Weighted average number of common
shares outstanding (thousands)........ 23,217 18,396 14,750
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN RETAINED COMMON
----------------------- EXCESS OF EARNINGS STOCK IN
CLASS A CLASS B CLASS C PAR VALUE (DEFICIT) TREASURY TOTAL
------- ------- ------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1993...... $ 5 $130 $ 15 $ 4,676 $ (97,313) $ (553) $ (93,040)
Net loss............... (207,671) (207,671)
Purchase of 44,250
shares of Class A
Common Stock.......... (15) (15)
---- ---- ---- -------- --------- ------- ---------
September 30, 1994...... 5 130 15 4,676 (304,984) (568) (300,726)
Net income............. 10,181 10,181
Stock conversions...... 11 (11) --
Issuance of 7,590,000
shares in public
offering (net of
$1,293 of issuance
costs)................ 76 148,092 148,168
Exercise of stock
options............... 29 6,027 6,056
Purchase of 292,452
shares of Class A and
1,338,894 shares of
Class B common stock.. (5,652) (5,652)
Tax benefit from
exercise of stock
options............... 6,249 6,249
---- ---- ---- -------- --------- ------- ---------
September 30, 1995...... 121 130 4 165,044 (294,803) (6,220) (135,724)
Net income............. 35,408 35,408
Stock conversions...... 37 (35) (2) --
Issuance of 1,500,000
shares in public
offering (net of $980
of issuance costs).... 15 49,285 49,300
Exercise of stock
options............... 42 42
Tax benefit from 1995
exercise of stock
options............... 14,166 14,166
---- ---- ---- -------- --------- ------- ---------
September 30, 1996...... $173 $ 95 $ 2 $228,537 $(259,395) $(6,220) $ (36,808)
==== ==== ==== ======== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 35,408 $ 10,181 $(207,671)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation.............................. 8,894 7,456 6,640
Amortization, including deferred financing
costs.................................... 2,688 2,656 8,120
Provision for loss on accounts receivable. 2,074 5,449 4,612
(Gain) loss on disposal of property and
equipment................................ (2) (60) 185
Write-off of excess of cost of net assets
acquired................................. -- -- 179,824
Debentures issued in lieu of payment of
interest................................. -- 4,572 14,904
Provision for deferred income taxes....... 5,805 (1,400) (5,055)
Loss on early retirement of debt.......... 11,142 25,190 679
Cumulative effects of accounting changes.. -- -- 34,598
Non-cash charge to cost of goods sold..... 10,899 -- --
Changes in operating assets and
liabilities, excluding the effects of
acquisitions:
Restricted cash.......................... 9,012 (14,638) --
Accounts and notes receivable............ (48,953) (51,292) (27,772)
Merchandise inventories.................. (213,112) (49,266) (5,305)
Prepaid expenses......................... 374 (774) (465)
Accounts payable, accrued expenses, and
income taxes............................ 216,444 26,466 76,847
Other long-term liabilities.............. -- -- 4,075
Miscellaneous............................ (692) (179) (205)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. 39,981 (35,639) 84,011
INVESTING ACTIVITIES
Capital expenditures........................ (15,711) (13,664) (8,483)
Cost of companies acquired.................. (29,467) (4,872) --
Proceeds from sales of property and
equipment.................................. 533 2,229 457
---------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES....... (44,645) (16,307) (8,026)
FINANCING ACTIVITIES
Long-term debt borrowings................... 1,607,501 1,839,945 854,661
Long-term debt repayments................... (1,618,775) (1,914,099) (931,857)
Net proceeds from public offerings.......... 49,300 148,168 --
Deferred financing costs.................... -- (10,122) (589)
Exercise of stock options................... 42 566 --
Repurchase of stock options................. -- -- (10)
Purchases of treasury stock................. -- (5,652) (15)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 38,068 58,806 (77,810)
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 33,404 6,860 (1,825)
Cash and cash equivalents at beginning of
year....................................... 32,171 25,311 27,136
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.... $ 65,575 $ 32,171 $ 25,311
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
AmeriSource Health Corporation, and its wholly-owned subsidiaries (the
"Company") as of the dates and for the periods indicated. All intercompany
transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
Business
The Company is a wholesale distributor of pharmaceuticals and related health
care products.
Cash Equivalents
The Company classifies highly liquid investments with original maturities of
three months or less at date of purchase as cash equivalents.
Concentrations of Credit Risk
The Company sells its merchandise inventories to a large number of customers
in the health care industry including independent drug stores, chain drug
stores, hospitals, mass merchandisers, clinics, and nursing homes. The
Company's trade accounts receivable are exposed to credit risk, however, the
risk is limited due to the diversity of the customer base and the customer
base's wide geographic dispersion. The Company performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
reserves for potential bad debt losses and such bad debt losses have been
within the Company's expectations.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, which results in a matching of
current costs and revenues. On a supplemental basis, if the first-in, first-
out (FIFO) method of valuation had been used for determining costs,
inventories would have been approximately $97,970,000 and $93,803,000 higher
than the amounts reported at September 30, 1996 and 1995, respectively.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets by the straight-line method.
Revenue Recognition
The Company recognizes revenues when products are delivered to customers.
Additionally, the Company acts as an intermediary in the bulk shipment of
pharmaceuticals from manufacturers to customers' warehouses, which have been
excluded from revenues and totaled $111 million, $107 million, and $120
million in fiscal years 1996, 1995, and 1994, respectively. The service fees
earned related to these bulk shipments are included in revenues and were
insignificant.
Earnings Per Share and Share Data
Earnings (loss) per share is computed on the basis of the weighted average
number of shares of common stock outstanding during the periods presented
(22,689,000, 18,295,000 and 14,750,000 for fiscal years 1996,
21
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
1995, and 1994, respectively) plus the dilutive effect of stock options
(342,000 and 528,000 for the fiscal 1996 and 38,000 and 101,000 for the fiscal
1995 primary and fully diluted calculations, respectively). Share and per
share amounts prior to April 1995 have been adjusted for the 2.95-for-1 stock
split effected in conjunction with the Company's public offering (see Note 6).
Recently Issued Financial Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No.
121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 provides
companies with a choice to follow the provisions of SFAS No. 123 in
determining stock-based compensation expense or to continue with the
provisions of APB 25, "Accounting for Stock Issued to Employees." The Company
will continue to follow APB 25 and will provide the pro forma disclosures as
required by SFAS 123 in the September 30, 1997 notes to the consolidated
financial statements.
NOTE 2--ACQUISITIONS
During fiscal 1996, the Company acquired all of the stock of Gulf
Distribution, Inc., a Miami, Florida-based wholesale pharmaceutical
distributor with annualized revenues of approximately $180 million, and
substantially all of the assets of The Diabetic Shoppe, Inc., a Wisconsin-
based provider of diabetic disease management programs to retail pharmacies.
During fiscal 1995, the Company acquired substantially all of the assets of
Newbro Drug Company, a wholesale pharmaceutical distributor located in Idaho
Falls, Idaho and of Liberty Drug Systems, a North Carolina-based provider of
pharmacy software and hardware. The aggregate purchase price for these
acquisitions was approximately $29.5 million in fiscal 1996 and $4.9 million
in fiscal 1995, and were financed by borrowings under the Company's revolving
credit facility. These acquisitions were accounted for by the purchase method
and are included in the financial statements from their dates of acquisition.
The excess of purchase price over net assets acquired of $8.2 million has been
allocated to goodwill (which is included in other assets) and is being
amortized on a straight-line basis over 40 years. The pro forma effects on the
Company's results of operations had these acquisitions occurred at the
beginning of the periods presented are not material.
NOTE 3--EXCESS OF COST OVER NET ASSETS ACQUIRED
In fiscal 1994, the Company determined that the excess of cost over net
assets acquired ("goodwill") recorded in conjunction with the leveraged buyout
transaction in 1988 ("Acquisition") could not be recovered from future
operating results. Since the Acquisition, the Company has been affected by
price competition for market share within the industry, health care industry
consolidation, the impact of group purchasing organizations, managed care, and
health care reform of drug prices and its highly leveraged capital structure.
As a result, the Company had not been able to achieve the operating results
projected at the time of the Acquisition. The Company prepared a comprehensive
study to assess the recoverability of the remaining goodwill. The methodology
employed was to project and evaluate the best estimate of future results of
operations forward over the remaining useful life of the goodwill balance. As
a result, the Company concluded that the carrying value of the remaining
goodwill of $179.8 million could not be recovered and that the long term
viability of the Company required modification of its then-current capital
structure to reduce its indebtedness and increase its equity.
22
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--TAXES ON INCOME
The income tax provision (benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current provision:
Federal........................................ $10,181 $16,767 $12,147
State and local................................ 3,273 1,962 853
------- ------- -------
13,454 18,729 13,000
Deferred provision:
Federal........................................ 4,725 (1,120) (5,625)
State and local................................ 1,080 (280) 439
------- ------- -------
5,805 (1,400) (5,186)
------- ------- -------
Provision for income taxes....................... $19,259 $17,329 $ 7,814
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
SEPTEMBER 30,
-----------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate.................... 35.0% 35.0% 35.0%
State and local income tax rate, net of federal tax
benefit............................................. 3.9 2.8 (.3)
Tax effect of operating loss carryover (utilized)/not
recognized.......................................... -- (5.9) 6.1
Amortization of difference in book and tax bases of
net assets acquired................................. -- -- (39.2)
Other................................................ (7.8) 6.1 (6.3)
---- ---- -----
Effective income tax rate............................ 31.1% 38.0% (4.7)%
==== ==== =====
</TABLE>
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109),
which required 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 $33.4 million for the cumulative effect of
adopting Statement 109 as of October 1, 1993. 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.
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 proposed adjustments indicate a net increase to taxable
income for these years of approximately $24 million and relate principally to
the deductibility of costs incurred with respect to the leveraged buyout
transaction which occurred in 1988. Legislation enacted in August 1996,
eliminated approximately $20 million of the proposed adjustments relating to
the deductibility of costs incurred with respect to the leveraged buyout
transaction. In addition, the Company has reached a tentative settlement with
the Appeals Office of the Internal Revenue Service on all remaining audit
issues, resulting in an assessment of $2.1 million, including interest. This
settlement is subject to review by the Joint Committee on Taxation. As a
result of the settlement the Company reduced accrued income taxes and income
tax expense by $7.1 million in fiscal 1996.
23
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--TAXES ON INCOME--(CONTINUED)
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Significant components of the Company's deferred tax liabilities
(assets) are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Inventory............................................. $ 47,469 $ 35,678
Fixed assets.......................................... 4,996 4,942
Other................................................. 946 887
-------- --------
Gross deferred tax liabilities.................... 53,411 41,507
Net operating losses and tax credit carryovers........ (11,446) (23,000)
Allowance for doubtful accounts....................... (6,111) (5,176)
Accrued expenses...................................... (1,668) (1,509)
Other postretirement benefits......................... (527) (512)
Other................................................. (3,569) (3,513)
-------- --------
Gross deferred tax assets......................... (23,321) (33,710)
Valuation allowance for deferred tax assets........... 4,232 19,783
-------- --------
Net deferred tax liabilities.......................... $ 34,322 $ 27,580
======== ========
</TABLE>
In 1996 and 1995, tax benefits of $14.2 million and $6.2 million related to
the exercise of employee stock options in connection with the Company's April
1995 public offering of common stock described in Note 6, were recorded as
capital in excess of par value.
The Company was subject to the alternative minimum tax for the fiscal year
ended September 30, 1994. The alternative minimum tax is imposed at a 20% rate
on the Company's alternative minimum taxable income which is determined by
making statutory adjustments to the Company's regular taxable income. Net
operating loss carryforwards were used to offset up to 90% of the Company's
alternative minimum taxable income. The alternative minimum tax paid is
allowed as an indefinite credit carryover against the Company's regular tax
liability in the future when the Company's regular tax liability exceeds the
alternative minimum tax liability. As of September 30, 1996, the Company has a
$10.8 million alternative minimum tax credit carryforward.
Income tax payments amounted to $6.9 million, $2.8 million, and $3.9 million
in the fiscal years ended September 30, 1996, 1995, and 1994, respectively.
NOTE 5--LONG-TERM DEBT
Receivable Securitization Financing
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").
During the 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. Pursuant to the Receivables Program, on
December 13, 1994, the Company sold
24
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LONG-TERM DEBT--(CONTINUED)
$305 million in Receivables to ARC in exchange for cash 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 pursuant to the terms of the Receivables
Purchase Agreement as a sale of Receivables from AmeriSource to ARC and as a
financing transaction by ARC on the Company's consolidated financial
statements. The assets and liabilities of the master trust have been
consolidated with the Company at September 30, 1996.
Pursuant to the Receivables Program, the Company issued: (i) $175 million of
Floating Rate Class A Trade Receivables Participation Certificates ("Class A
Certificates") and (ii) $35 million of Floating Rate Class B Trade Receivables
Participation Certificates ("Class B Certificates"), which represent
fractional undivided interests in the Receivables and other assets of the
master trust. The Class A Certificates bear interest at one month LIBOR plus
.35% and the Class B Certificates, which are subordinated to the Class A
Certificates, bear interest at one month LIBOR plus .70%. The Company has
entered into two-year interest rate cap agreements, expiring in May 1997 which
specify that the one-month LIBOR base rate will not be greater than 7.50% with
respect to $175 million of Class A Certificate borrowings under the
Receivables Program. In addition, the Company issued Floating Rate Revolving
Principal Trade Receivables Participation Certificates ("Revolving
Certificates"), pursuant to which investors may purchase up to $75 million of
interests in the master trust, which Certificates will bear interest, at the
Company's option, at either LIBOR plus .35% or the federal funds rate plus
1.00%. The Revolving Certificates will rank pari passu in right of payment
with the Class A Certificates. There were $17 million and $0 of Revolving
Certificates outstanding at September 30, 1996 and 1995. The expected final
payment date of amounts outstanding under the Receivables Program will be
March 15, 2000, but earlier termination could occur upon the occurrence of
certain defined 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 $4.6 million incurred in fiscal 1995
in connection with establishing the Receivables Program and interest rate cap
agreements have been deferred and are being amortized on a straight-line basis
over a period of two to five years. Class A Certificates of $175 million
principal amount (at an interest rate of 5.9%) and Class B Certificates of $35
million principal amount (at an interest rate of 6.2%) were outstanding under
the Receivables Program at September 30, 1996 and 1995. The Company is
required to pay a commitment fee of 1/4 of 1% per annum on the average unused
portion of the Certificates. Restricted cash of $5.6 million and $14.6 million
at September 30, 1996 and 1995, represents amounts temporarily deposited in
the master trust from collections on the Receivables, which are designated for
specific purposes pursuant to the Receivables Program.
Revolving Credit Agreement
In December 1994, the Company amended its existing credit agreement with a
syndicate of senior lenders providing a senior secured facility of $380
million (the "Credit Agreement"). Among other things, the amendment (i)
extended the term of the original credit agreement until January 3, 2000; (ii)
provided interest rate stepdowns upon the occurrence of certain events; (iii)
modified the borrowing base availability from inventory- and receivable-based
to inventory-based; and (iv) increased the Company's ability to make
acquisitions and pay dividends. An extraordinary loss of $3.4 million (less a
$1.0 million tax benefit) was recorded during the fiscal year ended September
30, 1995 representing the write-off of the unamortized financing fees related
to the former revolving credit facility. In connection with the Credit
Agreement, the Company incurred approximately $5.5 million in financing fees
which have been deferred and are being amortized on a straight-line basis over
the five-year term of the Credit Agreement. The maximum amount that may be
borrowed under the Credit Agreement is limited to the extent of a sufficient
borrowing base (up to a maximum of $380
25
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LONG-TERM DEBT--(CONTINUED)
million), which is essentially 65% of eligible inventory in fiscal year 1995,
62.5% of eligible inventory in fiscal year 1996, and 60% of eligible inventory
thereafter.
The Credit Agreement may be prepaid during its term, although such
indebtedness may be subsequently reborrowed. The indebtedness under the Credit
Agreement may be permanently repaid in full or reduced in part at any time at
the option of the Company, without premium or penalty, upon prior written
notice.
At the Company's option, borrowings under the Credit Agreement bear interest
at a rate per annum determined as follows: (i) a LIBOR rate, plus an
applicable margin (1.25% at September 30, 1996); or (ii) the applicable prime
rate of interest plus an applicable margin (0% at September 30, 1996).
Interest on loans under the Credit Agreement is payable quarterly or, if
earlier, at the end of the applicable interest period loan intervals. A
portion of the net proceeds from the initial public offering (see Note 6) were
used to pay down the Company's revolving credit facility.
Under the terms of the Credit Agreement, the Company granted the senior
lenders a perfected first priority security interest in substantially all of
the Company's assets (except accounts receivable and certain related assets),
including, without limitation, real property, fixed assets, equipment,
inventory, stock of subsidiaries, trademarks, and intangible assets, to secure
its borrowings under the Credit Agreement. The Company is required to pay a
commitment fee of 1/4 of 1% per annum on the average unused portion of the
Credit Agreement plus an annual administration fee. At September 30, 1996, the
$205 million outstanding under the Credit Agreement bore interest at the rate
of 6.9% per annum.
Senior Subordinated Notes
Contemporaneously with the consummation of the Receivables Program and the
execution of the Credit Agreement in fiscal 1995, the Company redeemed 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. In connection with the redemption of the 14 1/2% senior subordinated
notes, the Company recorded an extraordinary charge of $12.1 million (less a
$3.4 million tax benefit) during the fiscal year ended September 30, 1995
related to the write-off of unamortized deferred financing fees and premiums
paid on the redemption.
Senior Debentures
On July 26, 1993, the Company issued $126.5 million principal amount of 11
1/4% Senior Debentures ("Senior Debentures") due 2005 in a public offering. In
conjunction with the initial public offering, the Company, in May 1995,
redeemed one-half of the Senior Debentures outstanding for 110% of the
principal amount plus accrued interest through the date of redemption
(approximately $84.4 million), which resulted in an extraordinary charge of
$9.6 million (less a $2.7 million tax benefit) related to the write-off of
unamortized deferred financing fees and premiums paid on the redemption. In
April 1996, the Company purchased and retired $26.7 million of the Senior
Debentures for 111.25% of the principal amount (including fees) plus accrued
interest. In June 1996, the Company redeemed the remaining $47.6 million of
the Senior Debentures via a tender offer and related consent solicitation for
110.75% of the principal amount (including fees) plus accrued interest and a
consent amount equal to 2.0% of the principal amount. The fiscal 1996
transactions were funded by proceeds from the Company's 1996 public offering
and borrowings under the Company's revolving credit agreement and resulted in
an extraordinary charge of $11.1 million (less a $3.9 million tax benefit),
related to the open market purchase and tender offer premiums, transaction
fees and the write-off of related unamortized deferred financing fees.
26
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LONG-TERM DEBT--(CONTINUED)
The indentures governing the Receivables Program and the Credit Agreement
contain restrictions and covenants, as amended, which include limitations on
incurrence of additional indebtedness, prohibition of indebtedness,
restrictions on distributions and dividends to stockholders, the repurchase of
stock and the making of certain other restricted payments, the issuance of
preferred stock, the creation of certain liens, transactions with subsidiaries
and other affiliates, and certain corporate acts such as mergers,
consolidations, and the sale of substantially all assets. Additional covenants
require compliance with financial tests, including current ratio, leverage,
interest coverage ratio, fixed charge coverage, and maintenance of minimum net
worth.
Interest paid on the above indebtedness during the fiscal years ended
September 30, 1996, 1995, and 1994 was $36.2 million, $43.6 million, and $46.1
million, respectively.
Total amortization of financing fees and expenses (included in interest
expense) for the fiscal years ended September 30, 1996, 1995, and 1994 was
$2.4 million, $2.5 million, and $4.0 million, respectively.
As of September 30, 1996, the Company's revolving credit facility and
receivables securitization financing had fair values that approximated their
carrying amounts.
NOTE 6--STOCKHOLDERS' EQUITY
In April 1995, the Company issued 7,590,000 shares of Class A common stock
in a public offering at $21.00 per share. The net proceeds from the offering
of $148.2 million were used to reduce the Company's outstanding indebtedness
(see Note 5). On a pro forma basis, income and earnings per share before
extraordinary items for fiscal 1995 would have been $35.0 million and $1.57,
respectively, if the public offering had occurred on October 1, 1994. The pro
forma information assumes reduced interest expense and applicable income tax
adjustments resulting from the application of the net proceeds from the
offering and it assumes 22,271,936 shares of common stock outstanding for the
year. The pro forma information does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results. In conjunction with the public offering, the Company's Board of
Directors authorized a 2.95-for-1 stock split and, accordingly all references
to earnings per share and share data in these financial statements have been
restated to give effect to the stock split. Also, the Company eliminated all
authorized shares of preferred stock, increased the authorized number of
shares of Class A common stock to 50,000,000 and decreased the authorized
number of shares of Class B common stock to 15,000,000.
In May 1996, the Company completed a public offering of 4,800,000 shares of
Class A common stock at a price of $35 per share. Of the 4,800,000 shares
sold, 1,500,000 were sold by the Company and 3,300,000 shares were sold by
certain stockholders of the Company (the "Selling Stockholders"). The Company
did not receive any of the proceeds from the shares sold by the Selling
Stockholders. The net proceeds of $49.3 million from the 1,500,000 shares sold
by the Company were used to repay long-term debt. On a pro forma basis,
assuming historical data is adjusted to reflect the public offering and
related pay-down of long-term debt as if they occurred on October 1, 1995,
earnings per share before extraordinary items for fiscal 1996 would not be
materially different from reported earnings per share.
The holders of the Class A common stock are entitled to one vote per share
on all matters on which holders of Class A common stock are entitled to vote.
The holders of the Class A common stock may elect at any time to convert any
or all such shares into the Class B common stock on a share-for-share basis
(but only to the extent that such record holder of Class A common stock shall
be deemed to be required to convert such Class A common stock into Class B
common stock pursuant to applicable law).
27
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY--(CONTINUED)
The rights of holders of Class B and Class C common stock and holders of
Class A common stock are substantially identical and entitle the holders
thereof to the same rights, privileges, benefits, and notices, except that
holders of Class B and Class C common stock generally do not possess the right
to vote on any matters to be voted upon by the stockholders of the Company,
except as provided by law. Holders of Class B and Class C common stock may
elect at any time to convert any and all of such shares into Class A common
stock, on a share-for-share basis, to the extent the holder thereof is not
prohibited from owning additional voting securities by virtue of regulatory
restrictions.
The Class C common stock is subject to substantial restrictions on transfer
and has certain registration and "take-along" rights. A share of Class C
common stock will automatically be converted into a share of Class A common
stock (a) immediately prior to its sale in a future public offering or (b) at
such time as such share of Class C common stock has been sold publicly.
During fiscal 1995, the Company issued 2,893,766 shares of Class A common
stock upon the exercise of stock options (see Note 8), purchased as treasury
stock 1,338,894 shares of Class B common stock from 399 Ventures Partners
Inc., a wholly-owned indirect subsidiary of Citicorp pursuant to a prior
agreement, and purchased as treasury stock 292,452 shares of Class A common
stock from option holders to enable the holders to satisfy certain minimum tax
withholding obligations. During fiscal 1994, 44,250 shares of Class A common
stock were purchased as treasury stock.
NOTE 7--PENSION AND OTHER BENEFIT PLANS
The Company provides a benefit for the majority of its employees under
noncontributory defined benefit pension plans. For each employee, the benefits
are based on years of service and average compensation. Pension costs, which
are computed using the projected unit credit cost method, are funded on at
least the minimum amount required by government regulations.
A summary of the components of net periodic pension cost charged to expense
for the Company-sponsored defined benefit pension plans together with
contributions charged to expense for a multi-employer union administered
defined benefit pension plan the Company participates in follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost......................................... $ 2,599 $ 2,267 $ 2,198
Interest cost on projected benefit obligation........ 2,835 2,495 2,165
Actual return on plan assets......................... (2,380) (2,876) (13)
Net amortization and deferral........................ (14) 519 (2,038)
------- ------- -------
Net pension cost of defined benefit plans............ 3,040 2,405 2,312
Net pension cost of multi-employer plan.............. 196 178 142
------- ------- -------
Total pension expense............................ $ 3,236 $ 2,583 $ 2,454
======= ======= =======
</TABLE>
28
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--PENSION AND OTHER BENEFIT PLANS--(CONTINUED)
The following table sets forth (in thousands) the funded status and amount
recognized in the consolidated balance sheets for the Company-sponsored
defined benefit pension plans:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Plan assets at fair
value.................. $30,883 $ 706 $27,997 $ 523
Actuarial present value
of benefit obligations:
Vested................ 28,650 1,231 26,873 1,622
Accumulated, not
vested............... 404 388 471 268
------- ------- ------- -------
Accumulated benefit
obligations............ 29,054 1,619 27,344 1,890
Effect of future pay
increases............ 10,948 576 10,082 23
------- ------- ------- -------
Projected benefit
obligation............. 40,002 2,195 37,426 1,913
------- ------- ------- -------
Plan assets less than
projected benefit
obligation............. (9,119) (1,489) (9,429) (1,390)
Unrecognized net
transition asset....... (655) -- (826) --
Unrecognized prior
service cost........... 2,777 626 3,080 679
Adjustment to recognize
minimum liability...... -- (400) -- (1,027)
Unrecognized net loss
related to assumptions. 6,950 350 7,255 371
------- ------- ------- -------
Pension (liability)
asset recognized....... $ (47) $ (913) $ 80 $(1,367)
======= ======= ======= =======
</TABLE>
Assumptions used in computing the funded status of the plans were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Discount rate.............................................. 7.75% 7.25% 7.75%
Rate of increase in compensation levels.................... 6.25% 5.75% 6.25%
Expected long-term rate of return on assets................ 10.00% 10.00% 10.00%
</TABLE>
Plan assets at September 30, 1996 are invested principally in listed stocks,
corporate and government bonds, and cash equivalents.
Additionally, the Company sponsors the Employee Investment Plan, a defined
contribution 401(k) plan, which covers salaried and certain hourly employees.
Eligible participants may contribute to the plan up to 2% to 6% of their
regular compensation before taxes. The Company matches the employee
contributions in an amount equal to 50% of the participants' contributions. An
additional discretionary Company contribution in an amount not to exceed 50%
of the participants' contributions may also be made depending upon the
Company's performance. All contributions are invested at the direction of the
employee in one or more funds. Employer contributions vest over a five-year
period depending upon an employee's years of service. Costs of the plan
charged to expense for the fiscal years ended September 30, 1996, 1995, and
1994 amounted to $1.8 million, $0.9 million, and $1.1 million, respectively.
As a result of special termination benefit packages previously offered, the
Company provides medical, dental, and life insurance benefits to only a
limited number of 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, pursuant to
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (Statement 106), the Company
recognized the accumulated obligation related to these benefits resulting in a
noncash charge to net income in 1994 of $1.2 million. The accumulated
postretirement benefit obligation was $1.0 million as of September 30, 1996.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 7.50% and 7.25% at September 30, 1996
and 1995, respectively. The annual expense for such benefits is not material.
29
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--STOCK OPTION PLANS
In fiscal 1989, the Company adopted the AmeriSource Health Corporation and
Subsidiaries Employee Stock Purchase Plan (the "Purchase Plan") to enable
certain members of management to participate in the equity ownership of the
Company. Pursuant to the Purchase Plan, management investors, on November 3,
1989, purchased options on 1,716,347 shares of the Company's Class A common
stock which were exercisable at $.34 per share. Through fiscal 1993, 184,744
options were extinguished. The remaining 1,531,603 options outstanding under
the Purchase Plan were exercised during fiscal 1995 in conjunction with the
Company's public offering. No further awards will be granted under the
Purchase Plan.
In fiscal 1990, the Company adopted the Partners Stock Option Plan (the
"Partners Plan") to enable other employees of the Company to participate in
the equity ownership of the Company. On March 2, 1991, options to acquire
368,160 shares of Class A common stock were granted at an exercise price of
$.34 per share. The options under the Partners Plan became exercisable when
they vested on September 30, 1994. Through fiscal 1993, 28,320 options were
canceled. During fiscal 1995, 3,392 options were canceled, and the remaining
336,448 options were exercised. No further awards will be granted under the
Partners Plan.
In fiscal 1992, the Company adopted the 1991 Stock Option Plan (the "1991
Option Plan") for the granting of nonqualified stock options to acquire up to
an aggregate of 1,069,375 shares of Class A common stock. The options were
granted to certain members of the Company's management at an exercise price of
$.34 per share on April 8, 1992. During fiscal 1994, 29,500 options were
extinguished. During fiscal 1995, 14,160 options were canceled and the
remaining 1,025,715 options outstanding under the 1991 Option Plan were
exercised in conjunction with the Company's public offering. No further awards
will be granted under the 1991 Option Plan.
During fiscal 1995, the Company adopted the AmeriSource Health Corporation
1995 Stock Option Plan (the "1995 Option Plan"), which provides for the
granting of nonqualified stock options to acquire up to approximately 1.2
million shares of common stock to employees of the Company at a price not less
than the fair market value of the common stock on the date the option is
granted. The option terms and vesting periods are determined at the date of
grant by a committee of the Board of Directors. Options expire six years after
the date of grant unless an earlier expiration date is set at the time of
grant.
During fiscal 1995, the Company also adopted the AmeriSource Health
Corporation Non-Employee Director Stock Option Plan (the "1995 Directors
Plan"), which provides for the grant of stock options to the Company's
nonemployee directors. Under the 1995 Directors Plan, stock options are
granted annually at the fair market value of the Company's common stock on the
date of grant. The number of options so granted annually is fixed by the plan.
Such options become fully exercisable on the first anniversary of their
respective grant, except for the options under the initial grant, which are
fully exercisable on the third anniversary of the grant. The total number of
shares to be issued under the 1995 Directors Plan may not exceed 50,000
shares.
In November 1996, the Company's Board of Directors approved the 1996
Employee Stock Option Plan (the "1996 Option Plan") and the 1996 Non-Employee
Directors Stock Option Plan (the "1996 Directors Plan"). The 1996 Option Plan
and the 1996 Directors Plan are subject to shareholder approval and provide
for the granting of nonqualified stock options to acquire up to 797,000 and
50,000 shares of common stock, respectively, at a price not less than the fair
market value of the common stock on the date the option is granted.
Additionally, grants of 344,000 stock options under the 1996 Stock Option and
the 1996 Directors Plans, were made subject to and effective upon shareholder
approval.
30
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--STOCK OPTION PLANS--(CONTINUED)
The following summarizes all stock option transactions under the 1995 Option
Plan and the 1995 Directors Plan (in thousands except per share amounts).
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICES
OF OPTIONS PER SHARE TOTAL
---------- ------------ -------
<S> <C> <C> <C>
Balance outstanding, September 30, 1994........ -- -- --
Granted...................................... 915 $ 21.00 $19,215
Exercised.................................... -- -- --
Cancelled.................................... (8) 21.00 (168)
----- -------
Balance outstanding September 30, 1995......... 907 -- 19,047
Granted...................................... 298 28.00-41.88 8,413
Exercised.................................... (2) 21.00 (42)
Cancelled.................................... (28) 21.00-28.00 (609)
----- -------
Balance outstanding, September 30, 1996........ 1,175 -- $26,809
===== =======
</TABLE>
All grants under the 1995 Option Plan included 4 year vesting provisions. At
September 30, 1996 approximately 214,000 shares under the plans were
exercisable. In addition, approximately 41,000 shares are reserved for
issuance under the plans.
NOTE 9--LEASES
The costs of capital leases are included in property and equipment and the
obligations therefor in other debt. Related amortization is included in
depreciation. At September 30, 1996, future minimum payments totaling $42.4
million under noncancelable operating leases with remaining terms of more than
one fiscal year were due as follows: 1997--$9.1 million; 1998--$7.5 million;
1999--$5.8 million; 2000--$4.1 million; 2001--$3.0 million; and thereafter
(through 2009)--$12.9 million. In the normal course of business, operating
leases are generally renewed or replaced by other leases.
Total rental expense was $9.7 million in fiscal 1996, $7.6 million in fiscal
1995, and $6.2 million in fiscal 1994.
NOTE 10--LEGAL MATTERS AND CONTINGENCIES
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, and governmental investigations,
including antitrust, environmental, product liability, and regulatory agency
and other matters. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts and the matters may remain
unresolved for several years. On the basis of information furnished by counsel
and others, the Company does not believe that these matters, individually or
in the aggregate, will have a material adverse effect on its business or
financial condition.
In November 1993, the Company, along with six other wholesale distributors
and twenty-four pharmaceutical manufacturers, was named as a defendant in the
United States District Court for the Southern District of New York, in a
series of purported class action antitrust lawsuits alleging violations of
various antitrust laws associated with the chargeback pricing system. In
addition, the Company is a party to parallel suits filed in state courts in
Minnesota and Alabama. Plaintiffs seek injunctive relief, treble damages,
attorneys' fees, and costs. In October 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
31
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LEGAL MATTERS AND CONTINGENCIES--(CONTINUED)
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 $1 million. Pursuant to
the Judgement Sharing Agreement, the Company has released any claims that 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 cases which have been or may be filed in
state courts.
On April 4, 1996, the federal court granted the wholesalers' motion for
summary judgement. The plaintiffs are appealing the grant of summary judgement
in favor of the wholesalers to the United States Court of Appeals for the
Seventh Circuit.
The Company is subject to contingencies pursuant to environmental laws and
regulations at one of its former distribution centers that may require the
Company to take remediation efforts. In fiscal 1994, the Company accrued $4.1
million to cover future consulting, legal, and remediation and ongoing
monitoring costs. The accrued liability, which is reflected in other long-term
liabilities on the accompanying consolidated balance sheet ($3.9 million at
September 30, 1996), is based on an engineering analysis prepared by outside
consultants and represents 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.
32
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues..................... $1,282,513 $1,362,056 $1,420,006 $1,487,096
Gross profit................. 69,725 78,158 80,531 74,019
Selling and administrative
expenses, depreciation and
amortization................ 45,334 50,875 53,807 54,528
Operating income............. 24,391 27,283 26,724 19,491
Income before extraordinary
items....................... 8,850 10,100 10,405 13,295
Extraordinary charge--Early
retirement of debt.......... -- -- (7,242) --
Net income................... 8,850 10,100 3,163 13,295
Per share (fully diluted):
Income before extraordinary
item...................... .39 .45 .45 .55
Extraordinary item......... -- -- (.31) --
Net income per share..... .39 .45 .14 .55
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues.................... $1,129,096 $1,178,035 $1,158,113 $1,203,704
Gross profit................ 63,237 65,638 65,509 71,971
Selling and administrative
expenses, depreciation and
amortization............... 41,298 40,272 41,825 45,125
Operating income............ 21,939 25,366 23,684 26,846
Income before extraordinary
items...................... 886 6,673 9,880 10,779
Extraordinary charges--Early
retirement of debt......... (11,749) (126) (6,162) --
Net income (loss)........... (10,863) 6,547 3,718 10,779
Per share (fully diluted):
Income before
extraordinary items...... .06 .45 .46 .48
Extraordinary items....... (.80) -- (.29) --
Net income (loss) per
share.................. (.74) .45 .17 .48
</TABLE>
In the fourth quarter of fiscal 1996, cost of goods sold has been impacted
by a one-time cumulative non-cash charge of $10.9 million arising from the
misconduct of a former employee. In December 1996, the Company discovered
erroneous entries were made over a number of years to improperly understate
cost of goods sold and liabilities in one of its regions. The Company has
concluded the estimated impact of the erroneous entries was not material to
operations or the financial position of the Company in any individual year.
Although the Company can not determine the actual impact of the erroneous
entries on a year-to-year basis, the Company believes that over one-half of
the amount of the charge occurred prior to fiscal 1993.
As a result of the settlement with the Internal Revenue Service the Company
reduced income tax expense by $7.1 million in the fourth quarter of fiscal
1996. (See Note 4.)
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(No response to this Item is required.)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information appearing under "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Notice
of Annual Meeting of Stockholders and Proxy Statement for the January 15, 1997
annual meeting of stockholders (the "1997 Proxy Statement") is incorporated
herein by reference. The Company will file the 1997 Proxy Statement with the
Commission pursuant to Regulation 14A within 120 days after the close of the
fiscal year. Information regarding executive officers is set forth in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation appearing under "Management,
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," "Report of the Compensation Committee of the Board of
Directors," and "Stockholder Return Performance" in the 1997 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management appearing under "Security Ownership of Certain Beneficial Owners and
Management" in the 1997 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under "Certain Relationships and Transactions" in the
1997 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND SCHEDULES.
Financial Statements: The following consolidated financial statements are
submitted in response to Item 14(a)(1):
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AmeriSource Health Corporation and Subsidiaries
Report of Ernst & Young LLP, Independent Auditors......................... 15
Consolidated Balance Sheets as of September 30, 1996 and 1995............. 16
Consolidated Statements of Operations for the fiscal years ended September
30, 1996, 1995 and 1994.................................................. 18
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended September 30, 1996, 1995 and 1994............................ 19
Consolidated Statements of Cash Flows for the fiscal years ended September
30, 1996, 1995 and 1994.................................................. 20
Notes to Consolidated Financial Statements................................ 21
</TABLE>
34
<PAGE>
Financial Statement Schedules: The following financial statement schedules
are submitted in response to Item 14(a)(2) and Item 14(d):
<TABLE>
<S> <C>
AmeriSource Health Corporation and Subsidiaries
Schedule I--Condensed Financial Information of AmeriSource Health
Corporation as of
September 30, 1996 and 1995 and for the fiscal years ended
September 30, 1996, 1995 and 1994................................ S-1
Schedule II--Valuation and Qualifying Accounts............................ S-4
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(A)(3) LIST OF EXHIBITS.*
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 Not Applicable.
3.1 Certificate of Incorporation of the Registrant, (incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended September 30, 1995).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1, Amendment No. 1,
Registration No. 33-44244).
4.1 Indenture, dated as of May 30, 1986, between AmeriSource Corporation
("AmeriSource") and Bankers Trust Company, as trustee relating to the
6 1/4% Convertible Subordinated Debentures due 2001 of AmeriSource
(the "Convertible Debentures") including the form of Convertible
Debenture (incorporated by reference to Exhibit 4 to AmeriSource's
Current Report, dated July 1, 1986, on Form 8-K).
4.2 First Supplemental Indenture, dated as of October 31, 1989, to
Indenture, dated as of May 30, 1986 (incorporated by reference to
Exhibit 4.23 to Registrant's and AmeriSource's Annual Report on Form
10-K for the fiscal year ended September 30, 1989).
4.3 Second Supplemental Indenture, dated as of October 31, 1989, to
Indenture, dated as of May 30, 1986 (incorporated by reference to
Exhibit 4.24 to Registrant's and AmeriSource's Annual Report on Form
10-K for the fiscal year ended September 30, 1989).
4.4 Indenture dated July 15, 1993 between Registrant and Security Trust
Company, N.A., as trustee relating to the 11 1/4% Senior Debentures
due 2005 (the "Senior Debentures") of Registrant including the form of
the Senior Debentures (incorporated by reference to Exhibit 4 to
Registrant's and AmeriSource's Form 10-Q for the quarter ended June
30, 1993).
4.5 Amended and Restated Credit Agreement, dated as of December 13, 1994
among AmeriSource, General Electric Capital Corporation individually
and as agent, Bankers Trust Company, as co-agent, and the banks and
other financial institutions named therein (incorporated by reference
to Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994).
4.6 First Amendment dated as of February 10, 1995 to the Amended and
Restated Credit Agreement (incorporated by reference to Exhibit 4.6 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995).
4.7 Second Amendment dated as of September 30, 1995 to the Amended and
Restated Credit Agreement (incorporated by reference to Exhibit 4.7 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995).
4.8 Third Amendment dated as of November 27, 1995 to the Amended and
Restated Credit Agreement (incorporated by reference to Exhibit 4.8 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.9 Fourth Amendment, dated as of April 26, 1996, to the Amended and
Restated Credit Agreement.
4.10 Receivables Purchase Agreement, dated as of December 13, 1994 between
AmeriSource, as Seller and AmeriSource Receivables Corporation, as
Purchaser (incorporated by reference to Exhibit 4.11 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994).
4.11 AmeriSource Receivables Master Trust Pooling and Servicing Agreement,
dated as of December 13, 1994 among AmeriSource Receivables
Corporation, as transferor, AmeriSource, as the initial Servicer, and
Manufacturers and Traders Trust Company, as Trustee (incorporated by
reference to Exhibit 4.12 to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1994).
4.12 Revolving Certificate Purchase Agreement, dated as of December 13,
1994 among AmeriSource Receivables Corporation, AmeriSource, The
Revolving Purchasers and Bankers Trust Company, as Agent and Revolving
Purchaser (incorporated by reference to Exhibit 4.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994).
4.13 Series 1994-1 Supplement to Pooling and Servicing Agreement, dated as
of December 13, 1994 among AmeriSource Receivables Corporation, as
transferor, AmeriSource, as initial Servicer, and Manufacturers and
Traders Trust Company, as Trustee (incorporated by reference to
Exhibit 4.14 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994).
9 Not Applicable.
10.1 Stock Purchase and Stockholders' Agreement, dated December 29, 1988,
among Drexel Burnham Lambert Incorporated, the other purchasers named
therein, Registrant and Citicorp Venture Capital Ltd. (incorporated by
reference to Exhibit 10.3 to the Registration Statement on Form S-1,
Registration No. 33-27835, filed March 29, 1989).
10.2 Stock Purchase Agreement, dated as of December 29, 1988, among
Registrant, Anthony C. Howkins, The NTC Group, Inc., Barton J. Winokur
and Citicorp Venture Capital Ltd. (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1, Registration
No. 33-27835, filed March 29, 1989).
10.3 AmeriSource Master Pension Plan (incorporated by reference to Exhibit
10.9 to the Registration Statement on Form S-1, Registration No. 33-
27835, filed March 29, 1989).
10.4 AmeriSource 1988 Supplemental Retirement Plan (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1,
Registration No. 33-27835, filed March 29, 1989).
10.5 AmeriSource 1985 Deferred Compensation Plan (incorporated by reference
to Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1985).
10.6 Form of Securities Purchase and Holders Agreement among Registrant,
Citicorp Venture Capital Ltd. and a Management Investor (incorporated
by reference to Exhibit 10.14 to Amendment No. 1, filed August 15,
1989, to the Registration Statement on Form S-1, Registration No. 33-
27835).
10.7 Form of Take-Along and Registration Rights Agreement between
Registrant and Citicorp Venture Capital Ltd. (incorporated by
reference to Exhibit 4.19 to Amendment No. 2, filed September 7, 1989,
to the Registration Statement on Form S-1, Registration No. 33-27835).
10.8 Agreement, dated October 14, 1994, among certain manufacturers and
wholesalers of prescription products, including AmeriSource
(incorporated by reference to Exhibit 10.13 to Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994).
10.9 Registrant's 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.16 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-2 dated April 3, 1995, Registration No. 33-57513).
10.10 Registrant's Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.17 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-2 dated April 3, 1995, Registration
No. 33-57513).
10.11 Registration Rights Agreement dated as of March 30, 1995 among
Registrant and 399 Venture Partners, Inc. (incorporated by reference
to Exhibit 10.18 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-2 dated April 3, 1995, Registration No. 33-57513).
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11 Not Applicable.
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
21 Subsidiaries of Registrant.
22 Not Applicable.
23 Consent of Independent Auditors.
24 Not Applicable.
27 Financial Data Schedule.
99 Not Applicable.
</TABLE>
- --------
* Copies of the exhibits will be furnished to any security holder of the
Registrant upon payment of the reasonable cost of reproduction.
(b) Reports on Form 8-K.
Registrant did not file a Current Report on Form 8-K during the fiscal
quarter ended September 30, 1996.
37
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AmeriSource Health Corporation
/s/ Kurt J. Hilzinger
Date: December 30, 1996 By: _________________________________
(KURT J. HILZINGER) VICE
PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON DECEMBER 30, 1996 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ John F. McNamara Chairman, President
- ------------------------------------- and Chief Executive
(JOHN F. MCNAMARA) Officer (Principal
Executive Officer)
/s/ Kurt J. Hilzinger Vice President,
- ------------------------------------- Chief Financial
(KURT J. HILZINGER) Officer and
Treasurer
(Principal
Financial Officer)
/s/ Michael D. DiCandilo Vice President,
- ------------------------------------- Controller
(MICHAEL D. DICANDILO) (Principal
Accounting Officer)
/s/ Bruce C. Bruckmann Director
- -------------------------------------
(BRUCE C. BRUCKMANN)
/s/ Michael A. Delaney Director
- -------------------------------------
(MICHAEL A. DELANEY)
/s/ Richard C. Gozon Director
- -------------------------------------
(RICHARD C. GOZON)
/s/ Lawrence C. Karlson Director
- -------------------------------------
(LAWRENCE C. KARLSON)
/s/ George Strong Director
- -------------------------------------
(GEORGE STRONG)
/s/ James A. Urry Director
- -------------------------------------
(JAMES A. URRY)
/s/ Barton J. Winokur Director
- -------------------------------------
(BARTON J. WINOKUR)
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AMERISOURCE HEALTH CORPORATION
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
ASSETS
<S> <C> <C>
Cash..................................................... $ 9 $ 22
Receivable from AmeriSource Corporation.................. 24,718 17,174
Deferred financing costs and other....................... 266 2,422
Investment at equity in AmeriSource Corporation (accumu-
lated losses of AmeriSource in excess of investment).... (61,457) (79,241)
--------- ---------
$ (36,464) $ (59,623)
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses......................................... $ 344 $ 1,808
Long-term debt:
Senior debentures...................................... -- 74,293
Stockholders' equity:
Common Stock, $.01 par value
Class A (Voting and convertible):
50,000,000 shares authorized; issued 9/96--
17,291,100 shares; 9/95-- 12,062,560 shares......... 173 121
Class B (Non-voting and convertible):
15,000,000 shares authorized; issued 9/96--9,440,370
shares; 9/95-- 12,969,050 shares.................... 95 130
Class C (Non-voting and convertible):
2,000,000 shares authorized; issued 9/96--242,298
shares; 9/95--440,158 shares........................ 2 4
Capital in excess of par value......................... 228,537 165,044
Retained earnings (deficit)............................ (259,395) (294,803)
Cost of common stock in treasury....................... (6,220) (6,220)
--------- ---------
(36,808) (135,724)
--------- ---------
$ (36,464) $ (59,623)
========= =========
</TABLE>
See notes to condensed financial statements.
S-1
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AMERISOURCE HEALTH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Revenues....................................... $ 7 $ 726 $
Administrative expenses........................ (55) 104
Interest expense............................... 5,669 13,573 15,338
-------- -------- ---------
(Loss) before taxes, extraordinary items,
cumulative effects of accounting changes and
equity in net income (loss) of subsidiary..... (5,662) (12,792) (15,442)
Equity in net income (loss) of subsidiary
before extraordinary items and cumulative
effects of accounting changes................. 47,246 33,937 (172,241)
Income tax (benefit)........................... (1,066) (7,073) (15,266)
-------- -------- ---------
Income (loss) before extraordinary items and
cumulative effects of accounting changes...... 42,650 28,218 (172,417)
Extraordinary charges--early retirement of
debt, net of income tax benefits.............. (7,242) (18,037) (656)
Cumulative effect of changes in accounting for
income taxes of $33,399 and postretirement
benefits other than pensions of $1,199........ (34,598)
-------- -------- ---------
Net income (loss)........................... $ 35,408 $ 10,181 $(207,671)
======== ======== =========
Earnings (loss) per share (fully diluted)
Income (loss) before extraordinary items and
cumulative effects of accounting changes..... $ 1.84 $ 1.53 $ (11.69)
Extraordinary items........................... (.31) (.98) (.04)
Cumulative effect of accounting changes....... -- -- (2.35)
-------- -------- ---------
Net income (loss) per share................. $ 1.53 $ .55 $ (14.08)
======== ======== =========
Weighted average number of common shares
outstanding (thousands)....................... 23,217 18,396 14,750
---------------
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 35,408 $ 10,181 $(207,671)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Amortization................................ 138 361 434
Equity in net (income) loss of subsidiary... (47,246) (22,062) 207,728
Loss on early retirement of debt............ 11,142 9,638
Debentures issued in lieu of payment of
interest................................... 4,572 14,904
Income tax benefit invested in AmeriSource
Corporation................................ (10,621) (8,498) (7,348)
Changes in operating assets and liabilities:
Receivable from AmeriSource Corporation... 6,622 (1,874) (7,927)
Accrued expenses.......................... (1,467) 1,755 (50)
Miscellaneous............................. 3 10
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES............................... (6,021) (5,927) 80
FINANCING ACTIVITIES
Long-term debt repayments..................... (83,460) (81,722)
Net proceeds from public offerings............ 49,300 148,168
Deferred financing costs and other............ 43 (28) (55)
Exercise of stock options..................... 42 566
Repurchase of stock options................... (10)
Purchases of treasury stock................... (5,652) (15)
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES............................... (34,075) 61,332 (80)
INVESTING ACTIVITIES
Capital contribution.......................... 40,083 (55,421)
-------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................... 40,083 (55,421)
-------- -------- ---------
DECREASE IN CASH............................... (13) (16) -0-
Cash at beginning of year...................... 22 38 38
-------- -------- ---------
CASH AT END OF YEAR............................ $ 9 $ 22 $ 38
======== ======== =========
</TABLE>
See notes to condensed financial statements.
S-2
<PAGE>
AMERISOURCE HEALTH CORPORATION
FOOTNOTES TO THE CONDENSED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements present the financial
position, results of operations and cash flows of AmeriSource Health
Corporation (the "Company") as of the dates and for the periods indicated in
accordance with Rule 12-04 of Regulation S-X of the Securities Exchange Act of
the Securities and Exchange Commission and, accordingly do not include the
accounts of its wholly-owned subsidiaries. The Company's primary asset is its
investment in and receivables from AmeriSource Corporation which is a wholly-
owned subsidiary of the Company. Substantially all of the Company's operations
are transacted by AmeriSource Corporation. The ability of the Company to pay
its obligations depends on the operations of AmeriSource Corporation and its
ability to pay dividends to the Company.
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements of AmeriSource Health Corporation and
Subsidiaries contained in Item 8 of this document for more information on
long-term debt, stockholders' equity and other disclosures.
NOTE 2--LONG-TERM DEBT
In July 1993, the Company issued $126.5 million principal amount of 11 1/4%
Senior Debentures due in 2005. In connection with the April 1995 initial
public offering described below, the Company redeemed one-half of the Senior
Debentures outstanding which resulted in an extraordinary charge of $9.6
million (less a $2.7 million tax benefit) related to the write-off of
unamortized deferred financing fees and premiums paid on redemption. In April
1996, the Company purchased and retired $26.7 million of the Senior Debentures
for 111.25% of the principal amount (including fees) plus accrued interest. In
June 1996, the Company redeemed the remaining $47.6 million of the Senior
Debentures via a tender offer and related consent solicitation for 110.75% of
the principal amount (including fees) plus accrued interest and a consent
amount equal to 2.0% of the principal amount. These transactions resulted in
an extraordinary charge in fiscal 1996 of $11.1 million (less a $3.9 million
tax benefit) related to the open market purchase and tender offer premiums,
transaction fees and the write-off of related unamortized deferred financing
fees.
NOTE 3--STOCKHOLDERS' EQUITY
In April 1995, the Company issued 7,590,000 shares of Class A common stock
in a public offering at $21.00 per share. The net proceeds from the offering
of $148.2 million (net of $1.3 million of issuance costs) were used to redeem
a portion of the Senior Debentures ($81.7 million) described above and the
remaining amounts were invested in AmeriSource Corporation, which were used to
reduce its indebtedness. In conjunction with the initial public offering, the
Company authorized a 2.95-for-1 stock split and, accordingly, all references
to earnings per share and share data in these condensed financial statements
have been restated to give effect to the stock split.
In May 1996, the Company completed a public offering of 4,800,000 shares of
Class A common stock at a price of $35 per share. Of the 4,800,000 shares
sold, 1,500,000 were sold by the Company and 3,300,000 were sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company did not
receive any of the proceeds from the shares sold by the selling stockholders.
The net proceeds of $49.3 million from the 1,500,000 shares sold by the
Company were invested in AmeriSource Corporation to reduce its indebtedness.
AmeriSource Corporation borrowings from its revolving credit facility were
used to retire and redeem the Senior Debentures as described in Note 2.
S-3
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE(1) DESCRIBE(2) PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AMERISOURCE HEALTH
CORPORATION AND
SUBSIDIARIES
- ------------------------
YEAR ENDED SEPTEMBER 30,
1996
Allowance for doubtful
accounts.............. $12,941,000 $2,074,000 $1,062,000 $1,229,000 $14,848,000
=========== ========== ========== ========== ===========
YEAR ENDED SEPTEMBER 30,
1995
Allowance for doubtful
accounts.............. $ 9,370,000 $5,449,000 $1,878,000 $12,941,000
=========== ========== ========== ===========
YEAR ENDED SEPTEMBER 30,
1994
Allowance for doubtful
accounts.............. $ 7,681,000 $4,612,000 $2,923,000 $ 9,370,000
=========== ========== ========== ===========
</TABLE>
- --------
(1) Reserves established in connection with the Gulf Distribution Inc.
acquisition.
(2) Accounts written off during year, net of recoveries.
S-4
<PAGE>
EXHIBIT 4.9
FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
---------------------------------------------------------
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
("Amendment") is entered into among AMERISOURCE CORPORATION, a Delaware
corporation ("Borrower"), GENERAL ELECTRIC CAPITAL CORPORATION, a corporation
organized under the banking laws of the State of New York ("GE Capital"),
Co-Agents (as defined in the Credit Agreement, as defined below), and each of
the other lenders thereunder (collectively, the "Lenders" and each, a "Lender"),
GE Capital and BANKERS TRUST COMPANY, a corporation organized under the banking
laws of the State of New York ("BTCo"), as managing agents, BTCo, as the issuing
lender, and GE Capital, as the administrative agent for Lenders (in such
capacity, "Agent"), as of April 26, 1996, with reference to the following facts:
RECITALS
--------
A. Borrower, GE Capital, individually and in its capacities as a managing
agent and Agent, BTCo, individually and in its capacities as a managing agent
and the issuing lender, Co-Agents, and each of the other Lenders, have entered
into that certain Amended and Restated Credit Agreement dated as of December 13,
1994, as amended by that certain First Amendment to Credit Agreement dated as of
February 10, 1995, that certain Second Amendment to Credit Agreement dated as of
September 30, 1995, and that certain Third Amendment to Credit Agreement dated
as of November 27, 1995 (as amended, the "Credit Agreement"), pursuant to which
Lenders agreed to make certain financial accommodations to or for the benefit of
Borrower upon the terms and conditions contained therein. Unless otherwise
defined in this Amendment, (i) capitalized terms used herein shall have the
meanings given to them in the Credit Agreement, and (ii) references to sections
and subsections shall refer to sections or subsections of the Credit Agreement.
B. Borrower has requested that Lenders make certain amendments to the
Credit Agreement, and Lenders are willing to do so subject to the terms and
conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the continued performance by
Borrower of its promises and obligations under the Credit Agreement and the
other Loan Documents, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower and Lenders hereby
agree as follows:
<PAGE>
A G R E E M E N T
- - - - - - - - -
1. Incorporation of Credit Agreement and Other Loan Documents. Except as
----------------------------------------------------------
expressly modified under this Amendment, all of the terms and conditions set
forth in the Credit Agreement and the other Loan Documents are incorporated
herein by this reference, and the obligations of Borrower under the Credit
Agreement and the other Loan Documents are hereby acknowledged, confirmed and
ratified by Borrower.
2. Amendments to Credit Agreement.
------------------------------
2.1 The following definition shall be added to the Credit Agreement:
"Subordinated Parent Notes Repurchase Amount" shall mean the
amount, which is identified in a written notice from Borrower to Agent,
of proceeds received by Parent in a Qualified Parent Public Offering
that Parent will contribute or advance to Borrower, the proceeds of
which will be used by Borrower to repay all or a portion of the Loan
and will subsequently be distributed in the form of advances, dividends
or repayments from Borrower to Parent for the sole purpose of
repurchasing all or a portion of the Subordinated Parent Notes,
including accrued and unpaid interest through the date of repurchase
and premiums thereon and penalties or other charges with respect
thereto.
2.2 Clause (a) of Section 7.14 of the Credit Agreement is hereby
deleted in its entirety, and the following is substituted therefor:
(a) to pay dividends or make advances to Parent (i) to enable Parent to
pay current cash interest to the holders of the Subordinated Parent
Notes, (ii) to allow Parent to redeem Subordinated Parent Notes or
repurchase Subordinated Parent Notes on the open market, and (iii) to
enable Parent to make distributions to its Stockholders; provided, that
--------
(x) except as described in clause (y) below, the Interest Coverage
Ratio (adjusted to include payment of the proposed dividend as if that
dividend were an interest expense), exceeds 1.25 to 1.00 for the
Testing Period, (y) with respect to those dividends or advances
described in clause (i) above, the Interest Coverage Ratio (adjusted to
include payment of the proposed dividend as if that dividend were an
interest expense), exceeds 2.50 to 1.00 for the Rolling Period (I)
ending on March 31 of any Fiscal Year, if such payment is to be made on
July 15 of such Fiscal Year, and (II) ending on September 30 of any
fiscal Year, if such payment is
2
<PAGE>
to be made on January 15 of the immediately succeeding Fiscal Year, and
(z) the amount of such dividends that is permitted shall be limited to
the then available Dividend/Acquisition Basket; and provided further,
--- -------- -------
that notwithstanding the foregoing, (I) Borrower shall not, in any
event, permit Parent to use such dividends to make distributions to
Parent's Stockholders unless a Qualified Borrower Public Offering or
Qualified Parent Public Offering has been completed, and (II) the
aggregate amount of the dividends to Parent's Stockholders shall not,
in any event, exceed 20% of the available amount under the
Dividend/Acquisition Basket;
2.3 Clause (c) of Section 7.14 of the Credit Agreement is hereby
deleted in its entirety, and the following is substituted therefor:
(c) to pay dividends, make advances or repay indebtedness to Parent of
(i) the Subordinated Parent Notes Redemption Amount solely for the
purpose of Parent's redemption of the Subordinated Parent Notes or (ii)
amounts, in the aggregate, not in excess of the Subordinated Parent
Notes Repurchase Amount solely for the purpose of Parent's repurchase
of the Subordinated Parent Notes;
3. Conditions of Effectiveness. This Amendment shall become effective
---------------------------
upon satisfaction of each of the following conditions:
(a) Agent shall have received copies of this Amendment that,
when taken together, bear the signatures of Borrower and Requisite Lenders;
and
(b) Agent shall have received a copy of the accompanying
Guarantor Consents executed by Parent, AmeriSource Health Services
Corporation (formerly known as Health Services Plus, Inc.) and Health
Services Capital Corporation.
4. Entire Agreement. This Amendment, together with the Credit Agreement
----------------
and the other Loan Documents, is the entire agreement between the parties hereto
with respect to the subject matter hereof. This Amendment supersedes all prior
and contemporaneous oral and written agreements and discussions with respect to
the subject matter hereof. Except as otherwise expressly modified herein, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect.
5. Representations and Warranties. Borrower hereby represents and
------------------------------
warrants that the representations and warranties contained in the Credit
Agreement were true and correct in all
3
<PAGE>
material respects when made and, except to the extent (a) that a particular
representation or warranty by its terms expressly applies only to an earlier
date, or (b) Borrower has previously advised Agent in writing as contemplated
under the Credit Agreement, are true and correct in all material respects as of
the date hereof.
6. Miscellaneous.
-------------
6.1 Counterparts. This Amendment may be executed in identical
------------
counterpart copies, each of which shall be an original, but all of which shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Amendment by facsimile transmission shall be effective
as delivery of a manually executed counterpart of this Amendment. Any Lender
delivering this Amendment by facsimile shall send the original manually executed
counterpart of this Amendment to Agent's counsel promptly after such facsimile
transmission.
6.2 Headings. Section headings used herein are for convenience of
--------
reference only, are not part of this Amendment, and are not to be taken into
consideration in interpreting this Amendment.
6.3 Recitals. The recitals set forth at the beginning of this
-------
Amendment are true and correct, and such recitals are incorporated into and are
a part of this Amendment.
6.4 Governing Law. This Amendment shall be governed by, and
-------------
construed and enforced in accordance with, the laws of the State of New York
applicable to contracts made and performed in such state, without regard to the
principles thereof regarding conflict of laws.
6.5 No Novation. Except as specifically set forth in section 2 of
-----------
this Amendment, the execution, delivery and effectiveness of this Amendment
shall not (a) limit, impair, constitute a waiver by, or otherwise affect any
right, power or remedy of, Agent or any Lender under the Credit Agreement or any
other Loan Document, (b) constitute a waiver of any provision in the Credit
Agreement or in any of the other Loan Documents, or (c) alter, modify, amend or
in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Credit Agreement, all of which are ratified and
affirmed in all respects and shall continue in full force and effect.
6.6 Conflict of Terms. In the event of any inconsistency between the
provisions of this Amendment and any provision of the Credit Agreement, the
terms and provisions of this Amendment shall govern and control.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first written above.
BORROWER:
--------
AMERISOURCE CORPORATION,
a Delaware corporation
By /s/ Kurt J. Hilzinger
------------------------------
Name Kurt J. Hilzinger
----------------------------
Title Vice President/Treasurer
---------------------------
LENDERS:
-------
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent, a Managing Agent and a Lender
By /s/ Charles D. Chiodo
------------------------------
Charles D. Chiodo
Duly Authorized Signatory
BANKERS TRUST COMPANY, as a Managing
Agent, Issuing Lender and a Lender
By /s/ Frederic W. Thomas Jr.
------------------------------
Name Frederic W. Thomas Jr.
----------------------------
Title Vice President
---------------------------
BANKAMERICA BUSINESS CREDIT, INC., as a
Co-Agent and a Lender
By /s/ Lisa Palmieri
------------------------------
Name Lisa Palmieri
----------------------------
Title Senior Account Executive
---------------------------
5
<PAGE>
HELLER FINANCIAL, INC., as a Co-Agent
and as a Lender
By /s/ Sylvester A. Schultz
-------------------------------
Name Sylvester A. Schultz
-----------------------------
Title AVP
----------------------------
BANK OF MONTREAL, as a Lender
By /s/ Irene M. Geller
-------------------------------
Name Irene M. Geller
-----------------------------
Title Director
----------------------------
BANK OF NEW YORK COMMERCIAL CORPORATION,
as a Lender
By /s/ Anthony Viola
-------------------------------
Name Anthony Viola
-----------------------------
Title Vice President
----------------------------
BOT FINANCIAL CORPORATION, as a Lender
By /s/ William R. Zork Jr.
-------------------------------
Name William R. Zork Jr.
-----------------------------
Title Vice President
----------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Lender
By /s/ Cyril A. Prince
-------------------------------
Name Cyril A. Prince
-----------------------------
Title Vice President
----------------------------
6
<PAGE>
CORESTATES BANK, N.A., as a Lender
By /s/ Sherri A. Williams
--------------------------------
Name Sherri A. Williams
------------------------------
Title Assistant Vice President
-----------------------------
THE FIRST NATIONAL BANK OF BOSTON,
as a Lender
By
--------------------------------
Name
------------------------------
Title
-----------------------------
FLEET CAPITAL CORPORATION,
formerly known as
Shawmut Capital Corporation,
as a Lender
By /s/ Brent P. Hazzard
--------------------------------
Name Brent P. Hazzard
------------------------------
Title Vice President
-----------------------------
GIROCREDIT BANK AKTIENGESELLSCHAFT
DER SPARKASSEN, GRAND CAYMAN ISLAND
BRANCH, as a Lender
By
--------------------------------
Name
------------------------------
Title
-----------------------------
7
<PAGE>
LASALLE NATIONAL BANK, as a Lender
By /s/ Christopher C. Clifford
-----------------------------------------
Name Christopher C. Clifford
---------------------------------------
Title Senior Vice President
--------------------------------------
MERIDIAN BANK, as a Lender
By /s/ John M. Fessich
-----------------------------------------
Name John M. Fessich
---------------------------------------
Title Vice President
--------------------------------------
NATIONSBANK OF GEORGIA, N.A.,
as a Lender
By /s/ David J. Sapp
-----------------------------------------
Name David J. Sapp
---------------------------------------
Title Vice President
--------------------------------------
SANWA BUSINESS CREDIT CORPORATION,
as a Lender
By /s/ Peter L. Skavla
-----------------------------------------
Name Peter L. Skavla
---------------------------------------
Title Vice President
--------------------------------------
8
<PAGE>
GUARANTOR CONSENTS
------------------
AmeriSource Health Corporation, a Delaware corporation, formerly known
as AmeriSource Distribution Corporation, hereby (i) ratifies and reaffirms, as
of the date hereof, all of the provisions of that certain Amended and Restated
Guaranty and Pledge Agreement dated as of December 13, 1994 in favor of Agent,
(ii) acknowledges receipt of a copy of the Fourth Amendment to Amended and
Restated Credit Agreement dated as of April 26, 1996 (the "Fourth Amendment"),
and (iii) consents to all of the provisions of the Fourth Amendment.
Dated: April 26, 1996 AMERISOURCE HEALTH CORPORATION,
formerly known as AmeriSource
Distribution Corporation
By: /s/ Kurt J. Hilzinger
------------------------------
Title: Vice President/Treasurer
---------------------------
AmeriSource Health Services Corporation, a Delaware corporation,
formerly known as Health Service Plus, Inc., hereby (i) ratifies and reaffirms,
as of the date hereof, all of the provisions of that certain Amended and
Restated Continuing Guaranty dated as of December 13, 1994 in favor of Agent,
(ii) acknowledges receipt of a copy of the Fourth Amendment to Amended and
Restated Credit Agreement dated as of April 26, 1996 ("the "Fourth Amendment"),
and (iii) consents to all of the provisions of the Fourth Amendment.
Dated: April 26, 1996 AMERISOURCE HEALTH SERVICES
CORPORATION, formerly known as
Health Services Plus, Inc.
By: /s/ Kurt J. Hilzinger
------------------------------
Title: Treasurer
---------------------------
9
<PAGE>
Health Services Capital Corporation, a Delaware corporation, hereby (i)
ratifies and reaffirms, as of the date hereof, all of the provisions of that
certain Amended and Restated Continuing Guaranty dated as of December 13, 1994
in favor of Agent, (ii) acknowledges receipt of a copy of the Fourth Amendment
to Amended and Restated Credit Agreement dated as of April 26, 1996 (the "Fourth
Amendment"), and (iii) consents to all of the provisions of the Fourth
Amendment.
Dated: April 26, 1996 HEALTH SERVICES CAPITAL CORPORATION
By: [SIGNATURE APPEARS HERE]
------------------------------
Title: Treasurer
---------------------------
<PAGE>
EXHIBIT 21
Subsidiaries of AmeriSource Health Corporation
As of December 1, 1996, the subsidiaries of AmeriSource Health
Corporation, together with their respective jurisdiction of incorporation, were
as follows:
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
AmeriSource Corporation Delaware
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements No.
333-01951, 033-60051, 033-58329 and 033-58321 on Form S-8 of our report dated
December 30, 1996, with respect to the consolidated financial statements and
schedules of AmeriSource Health Corporation and subsidiaries included in the
Form 10-K for the fiscal year ended September 30, 1996.
Philadelphia, Pennsylvania
December 30, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 9/30/96 FORM
10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 71,201
<SECURITIES> 0
<RECEIVABLES> 390,331
<ALLOWANCES> 14,848
<INVENTORY> 650,296
<CURRENT-ASSETS> 1,115,064
<PP&E> 91,508
<DEPRECIATION> 39,842
<TOTAL-ASSETS> 1,187,960
<CURRENT-LIABILITIES> 785,782
<BONDS> 433,693
0
0
<COMMON> 270
<OTHER-SE> (37,078)
<TOTAL-LIABILITY-AND-EQUITY> 1,187,960
<SALES> 5,551,671
<TOTAL-REVENUES> 5,551,671
<CGS> 5,249,238
<TOTAL-COSTS> 5,249,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,074
<INTEREST-EXPENSE> 35,980
<INCOME-PRETAX> 61,909
<INCOME-TAX> 19,259
<INCOME-CONTINUING> 42,650
<DISCONTINUED> 0
<EXTRAORDINARY> (7,242)
<CHANGES> 0
<NET-INCOME> 35,408
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.53
</TABLE>
