<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
<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)
(formerly AmeriSource Distribution
Corporation)
P.O. Box 959, Valley Forge,
Pennsylvania 19482
(610) 296-4480
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
The number of shares of common stock of AmeriSource Health Corporation
outstanding as of March 31, 1998 was: Class A--21,010,381, Class B--2,750,783,
Class C--161,859.
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INDEX
AMERISOURCE HEALTH CORPORATION
<TABLE>
<C> <S>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--March 31, 1998 and September 30, 1997
Consolidated statements of operations--Three months ended March 31,
1998 and March 31, 1997
Consolidated statements of operations--Six months ended March 31,
1998 and March 31, 1997
Consolidated statements of cash flows--Six months ended March 31,
1998 and March 31, 1997
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. AMERISOURCE HEALTH CORPORATION FINANCIAL STATEMENTS (UNAUDITED)
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1998 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 48,185 $ 60,045
Restricted cash..................................... 38,822 8,886
Accounts receivable less allowance for doubtful
accounts: 3/98--$30,158, 9/97--$22,562............. 462,427 533,319
Merchandise inventories............................. 959,308 1,017,782
Prepaid expenses and other.......................... 4,180 4,622
---------- ----------
Total current assets.............................. 1,512,922 1,624,654
Property and equipment, at cost....................... 118,386 114,979
Less accumulated depreciation....................... 52,991 47,517
---------- ----------
65,395 67,462
Other assets, less accumulated amortization:
3/98--$7,439; 9/97--$6,110........................... 52,854 52,924
---------- ----------
$1,631,171 $1,745,040
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1998 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 849,310 $1,036,462
Accrued expenses and other......................... 38,589 43,798
Accrued income taxes............................... 11,780 9,433
Deferred income taxes.............................. 42,361 40,406
---------- ----------
Total current liabilities........................ 942,040 1,130,099
Long-Term Debt:
Revolving credit facility.......................... 321,612 280,768
Receivables securitization financing............... 299,930 299,913
Other debt......................................... 8,998 9,138
---------- ----------
630,540 589,819
Other Liabilities.................................... 10,578 10,811
Stockholders' Equity
Common Stock, $.01 par value:
Class A (Voting and convertible):
50,000,000 shares authorized;
issued 3/98--21,361,464 shares;
9/97--17,540,629 shares.......................... 214 175
Class B (Non-voting and convertible):
15,000,000 shares authorized;
issued 3/98--5,700,783 shares;
9/97--9,440,370 shares........................... 57 94
Class C (Non-voting and convertible):
2,000,000 shares authorized;
issued 3/98--161,859 shares;
9/97--166,495 shares............................. 2 2
Capital in excess of par value..................... 237,195 234,188
Retained earnings (deficit)........................ (183,235) (213,928)
Cost of common stock in treasury................... (6,220) (6,220)
---------- ----------
48,013 14,311
---------- ----------
$1,631,171 $1,745,040
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues............................................... $2,192,285 $1,785,469
Cost of goods sold..................................... 2,079,272 1,692,568
---------- ----------
Gross Profit........................................... 113,013 92,901
Selling and administrative expenses.................... 70,687 57,295
Depreciation........................................... 3,358 2,764
Amortization........................................... 361 255
---------- ----------
Operating income..................................... 38,607 32,587
Interest expense....................................... 12,030 11,060
---------- ----------
Income before taxes and extraordinary item............. 26,577 21,527
Taxes on income........................................ 10,367 8,395
---------- ----------
Income before extraordinary item....................... 16,210 13,132
Extraordinary charge-early retirement of debt, net of
income tax benefit.................................... -- (1,982)
---------- ----------
Net income........................................... $ 16,210 $ 11,150
========== ==========
Earnings per share:
Income before extraordinary item..................... $ .68 $ .55
Extraordinary charge ................................ -- (.08)
---------- ----------
Net income......................................... $ .68 $ .47
========== ==========
Earnings per share - assuming dilution:
Income before extraordinary item..................... $ .67 $ .55
Extraordinary charge................................. -- (.08)
---------- ----------
Net income......................................... $ .67 $ .46*
========== ==========
</TABLE>
- --------
* Difference due to rounding
See notes to consolidated financial statements.
5
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues............................................... $4,446,845 $3,532,404
Cost of goods sold..................................... 4,228,226 3,353,351
---------- ----------
Gross Profit........................................... 218,619 179,053
Selling and administrative expenses.................... 136,452 111,956
Depreciation........................................... 6,513 5,170
Amortization........................................... 643 350
---------- ----------
Operating income..................................... 75,011 61,577
Interest expense....................................... 24,692 20,355
---------- ----------
Income before taxes and extraordinary item............. 50,319 41,222
Taxes on income........................................ 19,626 16,273
---------- ----------
Income before extraordinary item....................... 30,693 24,949
Extraordinary charge-early retirement of debt, net of
income tax benefit.................................... -- (1,982)
---------- ----------
Net income........................................... 30,693 $ 22,967
========== ==========
Earnings per share:
Income before extraordinary item..................... $ 1.29 $ 1.05
Extraordinary charge................................. -- (.08)
---------- ----------
Net income......................................... $ 1.29 $ .97
========== ==========
Earnings per share - assuming dilution:
Income before extraordinary item..................... $ 1.27 $ 1.04
Extraordinary charge................................. -- (.08)
---------- ----------
Net income......................................... $ 1.27 $ .96
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 30,693 $ 22,967
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation....................................... 6,513 5,170
Amortization....................................... 1,501 1,364
Provision for losses on accounts receivable........ 8,383 2,371
Gain on disposal of property and equipment......... (139) (125)
Deferred income taxes.............................. 1,995 4,813
Loss on early retirement of debt................... -- 3,250
Changes in operating assets and liabilities (net of
effect of companies acquired):
Restricted cash................................... (29,936) (27)
Accounts receivable............................... 64,640 (33,935)
Merchandise inventories........................... 58,520 (79,820)
Prepaid expenses.................................. 446 (724)
Accounts payable, accrued expenses and income
taxes............................................ (189,118) (5,384)
Miscellaneous...................................... (47) 447
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES............ (46,549) (79,633)
INVESTING ACTIVITIES
Capital expenditures................................ (5,171) (8,058)
Proceeds from sales of property and equipment....... 1,360 1,887
Cost of companies acquired.......................... -- (138,652)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............ (3,811) (144,823)
FINANCING ACTIVITIES
Long-term debt borrowings........................... 1,175,687 1,304,260
Long-term debt repayments........................... (1,134,953) (1,081,798)
Deferred financing costs and other.................. (4,207) (3,160)
Exercise of stock options........................... 1,973 760
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........ 38,500 220,062
----------- -----------
Decrease in cash and cash equivalents................ (11,860) (4,394)
Cash and cash equivalents at beginning of period..... 60,045 65,575
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 48,185 $ 61,181
=========== ===========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of AmeriSource Health
Corporation and its wholly-owned subsidiaries (the "Company") as of the dates
and for the periods indicated. All material intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to present
fairly the financial position as of March 31, 1998, the results of operations
for the three and six months ended March 31, 1998 and 1997 and the cash flows
for the six months ended March 31, 1998 and 1997 have been included. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles, but
which are not required for interim reporting purposes, have been omitted. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
NOTE 2--LEGAL MATTERS AND CONTINGENCIES
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings and governmental investigations,
including antitrust, environmental, product liability and regulatory agency
and other matters. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts and the matters may remain
unresolved for several years. On the basis of information furnished by counsel
and others, the Company does not believe that these matters, individually or
in the aggregate, will have a material adverse effect on its business or
financial condition.
The Company is subject to contingencies pursuant to environmental laws and
regulations at one of its former distribution centers that may require the
Company to take remediation efforts. In fiscal 1994, the Company accrued $4.1
million to cover future consulting, legal, and remediation and ongoing
monitoring costs. The accrued liability, which is reflected in other long-term
liabilities on the accompanying consolidated balance sheet ($3.8 million at
March 31, 1998), is based on an engineering analysis prepared by outside
consultants and represents an estimate of the extent of contamination and
choice of remedy, 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.
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in a
series of purported class action antitrust lawsuits brought by retail
pharmacies, alleging violations of various antitrust laws stemming from the
use of chargeback agreements. In addition, The Company and four other
wholesale distributors were added as defendants in a series of related
antitrust lawsuits brought by independent pharmacies who have opted out of the
class cases and chain drug stores. The Company also is a defendant in parallel
suits filed in state courts in Minnesota, Alabama, and Mississippi. The
Federal class actions were originally filed in the United States District
Court for the Southern District of New York, and have been transferred along
with the individual and chain drug store cases to the United States District
Court for the Northern District of Illinois. Plaintiffs seek injunctive
relief, treble damages, attorneys' fees and costs. In October 1994, the
Company entered into a Judgement Sharing Agreement with the 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
8
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
aggregate of $9 million; and (b) if a judgement is entered into against both
manufacturers and wholesalers, the total exposure for joint 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.
On April 4, 1996, the District Court granted the Company's motion for
summary in the class case. Plaintiffs subsequently appealed the Company's
grant of summary judgement to the United States Court of Appeals for the
Seventh Circuit. On August 15, 1997, the Court of Appeals reversed the
District Court's order granting summary judgement in favor of the Company and
the other wholesalers. The Court of Appeals also denied the Company's petition
for rehearing. The Company and the other wholesalers filed a petition for a
writ of certiorari to the United States Supreme Court. The Company believes it
has meritorious defenses to the claims asserted in these lawsuits and intends
to vigorously defend itself in all of these cases.
NOTE 3--EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
Earnings per share is computed on the basis of its weighted average number
of shares outstanding during the periods presented (23,894,373 and 23,689,749
for the three months ended March 31, 1998 and 1997, respectively; and
23,875,220 and 23,681,217 for the six months ended March 31, 1998 and 1997,
respectively) . Earnings per share--assuming dilution is computed on the basis
of the weighted average number of shares outstanding during the period plus
the dilutive effect of stock options (346,347 and 371,451 for the three months
ended March 31, 1998 and 1997, respectively; and 356,929 and 349,298 for the
six months ended March 31, 1998 and 1997, respectively).
NOTE 4--PROPOSED MCKESSON CORPORATION MERGER
On September 22, 1997, the Company and McKesson Corporation ("McKesson")
signed a definitive merger agreement which was subsequently approved by the
stockholders of both companies on February 9, 1998. McKesson is the largest
distributor of pharmaceuticals and related health care products and value-
added services in the United States. Under the terms of the agreement,
stockholders of AmeriSource will receive a fixed exchange ratio of 1.42 shares
of McKesson common stock for each share of AmeriSource common stock. The
merger of the two companies has been structured as a tax-free transaction and
will be accounted for as a pooling of interests. The combined company will
operate under the McKesson name and will be headquartered in San Francisco,
CA. Under certain circumstances, in the event that the merger agreement is
terminated, McKesson would be entitled to a termination fee of $65 million
from the Company. Merger related costs incurred prior to consummation of the
merger ($4.2 million as of March 31, 1998) are being deferred and are included
in other assets. Such costs will be expensed upon consummation of the merger
or a determination that the consummation is not likely to occur.
On March 9, 1998 the Federal Trade Commission filed a complaint in the U.S.
District Court for the District of Columbia seeking a preliminary injunction
to halt the merger. A court hearing is scheduled to begin on June 10, 1998
with a ruling anticipated in June or July. There can be no assurance that the
merger will be completed, or that it will be completed as contemplated.
9
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Concurrently with the execution of the merger agreement, the Company and
McKesson entered into the AmeriSource Stock Option Agreement ("Option
Agreement"). Pursuant to the Option Agreement, AmeriSource has granted
McKesson an irrevocable option to purchase up to 3,418,601 shares of
AmeriSource common stock at an exercise price of $70.87 per share, under
certain circumstances in which the merger agreement is terminated. The Option
Agreement may have the effect of discouraging persons who may be interested in
acquiring an interest in, or otherwise effecting a business combination with
AmeriSource, from considering or proposing such a transaction.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1998 increased 23% to $2.2
billion from $1.8 billion in the first quarter of fiscal 1997. For the six
months ended March 31, 1998, revenues were $4.4 billion, an increase of 26%
compared to the prior year period. The year-to-year revenue gains reflect
increases across all customer groups and all geographic regions. The
acquisition of Walker Drug Company, L.L.C. ("Walker Drug Company") in March
1997, contributed 7% and 9% of the increase in revenues for the three and six
months ended March 31, 1998, respectively. During the six months ended March
31, 1998, sales to hospitals and managed care facilities increased 17%, sales
to independent drug store customers increased 24%, and sales to the chain drug
store customer group increased 53%, as compared with the prior year period.
The chain growth was a result of a new service agreement with a grocery chain
in the northeast which had previously self-warehoused. During the six months
ended March 31, 1998, sales to hospitals and managed care facilities accounted
for 45% of total revenues, while sales to independent drug stores accounted
for 33% and sales to chain drug stores accounted for 22% of the total.
Chain revenues are expected to significantly decrease in future quarters due
to the termination of service contracts with two major warehousing chains that
account for approximately $230 million of revenue per quarter. Approximately
two-thirds of the $230 million will be lost in the Company's third fiscal
quarter. The Company does not expect that operating income will be
significantly affected by the loss as both chains had lower than average
operating margins and the Company expects that it will be able to reduce
expenses concurrently with the loss of gross profit. Future revenues may also
be impacted by the continuing consolidations of customers and price
competition in the industry.
Gross profit of $113.0 million in the second quarter of fiscal 1998
increased by 22% over fiscal 1997 due to the increase in revenues. As a
percentage of revenues, the gross profit in the second quarter of fiscal 1998
was 5.16% as compared to 5.20% in the prior year period. For the six months
ended March 31, 1998, the gross profit percentage was 4.92% compared to 5.07%
in the prior year period. The decline in gross profit percentage was due to a
reduction in selling margin percentage resulting from the aforementioned above
average revenue growth in the chain segment offset in part by an increase in
inventory appreciation profits. Gross profit may continue to be impacted by
price competition, changes in customer and product mix, and distribution
center performance.
The Company commenced cost reduction plans in the third quarter of fiscal
1997 to consolidate three of its pharmaceutical distribution facilities into
other existing facilities and to restructure its sales force. The cost
reduction initiatives resulted in a $6.4 million charge to selling and
administrative expense in the third fiscal quarter of 1997 and were
substantially completed by March 31, 1998. The Company is in the process of
developing a plan to centralize its data processing and back office
administration functions and is also considering plans to close one or two of
its distribution facilities. It is expected that these plans will be finalized
in the third quarter of fiscal 1998 and will result in a pre-tax restructuring
charge, consisting of severance, asset disposals and lease cancellation costs,
of approximately $15 to $20 million.
Operating expenses increased by $6.0 million or 18% in the second quarter of
fiscal 1998 compared with the prior year period, and as a percentage of
revenues, were 3.39% in fiscal 1998 and 3.38% in fiscal 1997. For the first
six months of fiscal 1998, operating expenses as a percentage of revenues were
3.23% versus 3.33% in the prior year. The increase in expenses was due to
increased delivery and warehouse expense associated with the revenue increase,
including the acquisition of Walker Drug Company and an increase in bad debt
expense. The decrease as a percentage of revenue in fiscal 1998 is primarily
due to increased production economies as a result of the additional sales
volume in new and existing facilities and benefits resulting from the fiscal
1997 cost reduction initiatives discussed above.
Operating income of $38.6 million in the quarter ended March 31, 1998
increased by 18% from the prior year period. The Company's operating margin
declined slightly to 1.76% in fiscal 1998 from 1.83% in fiscal 1997. For the
six months ended March 31, 1998, the operating margin was 1.69% compared to
1.74% in the prior year. The decline is due to the decrease in gross profit
percentage discussed above, offset in part by reduced operating expenses as a
percentage of revenues.
11
<PAGE>
Interest expense of $12.0 million in the second quarter of fiscal 1998
represents an increase of 9% compared to the prior year period. The increase
over the prior year was due to increased borrowings to fund the purchase of
Walker Drug Company in March 1997 offset in part by reduced borrowing rates.
Average borrowings during the quarter ended March 31, 1998 were $732 million
as compared to average borrowings of $637 million in the prior fiscal year.
For the six-month period ended March 31, 1998, average borrowings were $726
million versus $587 in the prior year period.
The income tax provision for the three and six months ended March 31, 1998
was computed based on an estimate of the full year effective tax rate.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earning per share
amounts for all periods have been reported, and where necessary, restated to
conform to the Statement No. 128 requirements.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended March 31, 1998, the Company's operating
activities used $46.6 million in cash due to the decrease in accounts payable
and accrued expenses of $189.1 million offset in part by decreases in
merchandise inventories of $64.6 million and accounts receivable of $58.5
million. Accounts payable decreased primarily due to the payment of extended
term invoices during the period related to the Company's expansion of its
Thorofare, NJ distribution facility. Operating cash uses during the six months
ended March 31, 1998 included $24.6 million in interest payments and $14.5
million in income tax payments.
Capital expenditures for the six months ended March 31, 1998 were $5.2
million and relate principally to investments in warehouse automation,
warehouse improvements, and information technology. Similar expenditures of
approximately $10 million are expected to occur in the second half of fiscal
1998.
Cash provided by financing activities during fiscal 1998 represents
borrowings under the Company's revolving credit facility and its Receivables
Program primarily to fund working capital requirements. At March 31, 1998,
borrowings under the Company's $500 million revolving credit facility were
$321.6 million (at an average interest rate of 7.1%) and borrowings under the
$375 million Receivables Program were $299.9 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 enters into interest rate
protection agreements to hedge the exposure to increasing interest rates with
respect to its long-term debt agreements. The Company provides protection to
meet actual exposures and does not speculate in derivatives. The Company is
required by its Credit Agreement to maintain interest rate cap protection on a
minimum of $112.5 million through January 1999 and has interest rate cap
agreements expiring in May 1999, which provide protection on $115 million of
its long-term borrowings.
The Company's operating results have generated sufficient cash flow which,
together with borrowings under its debt agreements and credit terms from
suppliers, have provided sufficient capital resources to finance working
capital and cash operating requirements, fund capital expenditures, and
interest currently payable on outstanding debt. The Company's primary ongoing
cash requirements will be to fund payment of interest on indebtedness, finance
working capital, and fund capital expenditures and routine growth and
expansion through new business opportunities. Future cash flows from
operations and borrowings are expected to be sufficient to fund the Company's
ongoing cash requirements.
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
12
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accrued liability ($3.8 million at March 31, 1998), which is reflected in
other long-term liabilities on the accompanying consolidated balance sheet, is
based on an estimate of the extent of contamination and choice of remedy,
existing technology, and presently enacted laws and regulations, however,
changes in remediation standards, improvements in cleanup technology, and
discovery of additional information concerning the site could affect the
estimated liability in the future. The Company is investigating the
possibility of asserting claims against responsible parties for recovery of
these costs. Whether or not any recovery may be forthcoming is unknown at this
time.
The Company has conducted a review of its computer systems to identify and
address all necessary code changes, testing, and implementation procedures
necessary to make its systems Year 2000 compliant. The Company presently
believes that with modifications to existing software, and converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. The Company
expects its internal systems to be substantially compliant by the end of 1998.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
Company. In addition there can be no assurance that the systems of other
companies on which the Company's business relies will be timely converted or
that any such failure to convert by another company would not have a material
impact on the Company's business. The Company is in the process of determining
how to address its business partners' compliance issues. Amounts expensed for
Year 2000 projects have not been and are not expected to be significant to the
Company's results of operations.
On September 22, 1997, the Company and McKesson Corporation ("McKesson")
signed a definitive merger agreement which was subsequently approved by the
stockholders of both companies on February 9, 1998. McKesson is the largest
distributor of pharmaceuticals and related health care products and value-
added services in the United States. Under the terms of the agreement,
stockholders of AmeriSource will receive a fixed exchange ratio of 1.42 shares
of McKesson common stock for each share of AmeriSource common stock. The
merger of the two companies has been structured as a tax-free transaction and
will be accounted for as a pooling of interests. The combined company will
operate under the McKesson name and will be headquartered in San Francisco.
Under certain circumstances, in the event that the merger agreement is
terminated, McKesson would be entitled to a termination fee of $65 million
from the Company. Merger related costs including professional fees and stay-
pay bonuses incurred prior to the consummation of the merger are being
deferred ($4.2 million as of March 31, 1998) and are included in other assets.
Total merger costs are expected to be $18-$20 million and will be expensed
upon consummation of the merger or a determination that the consummation is
not likely to occur.
On March 9, 1998 the Federal Trade Commission filed a complaint in the U.S.
District Court for the District of Columbia seeking a preliminary injunction
to halt the merger. A court hearing is scheduled to begin on June 10, 1998
with a ruling anticipated in June or July. There can be no assurance that the
merger will be completed, or that it will be completed as contemplated.
Concurrently with the execution of the merger agreement, the Company and
McKesson entered into the AmeriSource Stock Option Agreement ("Option
Agreement"). Pursuant to the Option Agreement, AmeriSource has granted
McKesson an irrevocable option to purchase up to 3,418,601 shares of
AmeriSource common stock at an exercise price of $70.87 per share, under
certain circumstances in which the merger agreement is terminated. The Option
Agreement may have the effect of discouraging persons who may be interested in
acquiring an interest in, or otherwise effecting a business combination with
AmeriSource, from considering or proposing such a transaction.
Certain information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements as such term is defined in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Certain factors such as changes in interest
rates, competitive pressures, customer and product mix, inventory investment
buying opportunities, regulatory changes, and capital markets could cause
actual results to differ materially from those in forward-looking statements.
13
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Amerisource Health Corporation
/s/ Kurt J. Hilzinger
_____________________________________
KURT J. HILZINGER VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 12, 1998
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1(a) On February 9, 1998, the Company held a Special Meeting of
Stockholders to consider and vote upon a proposal to approve an
Agreement and Plan of Merger, dated as of September 22, 1997, as
amended (the "Merger Agreement"), by and among AmeriSource, McKesson
Corporation ("McKesson") and Patriot Acquisition Corp., a newly
formed, wholly owned subsidiary of McKesson, which provides for the
merger of AmeriSource with and into McKesson (the "Merger").
(b) Proxies were solicited by the Company's management pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
(c) The results of the stockholders vote were as follows:
16,710,751 for; 68,488 against; and 12,821 abstain.
2(a) The Company's 1998 Annual Meeting of Stockholders was held on March 2,
1998.
(b) Proxies were solicited by the Company's management pursuant to
Regulation 14 under the Securities Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in the
proxy statement; and all director nominees were elected to the class
indicated in the proxy statement pursuant to the vote of the Company's
stockholders.
(c) Matters voted upon at the Annual Meeting were as follows:
Election of Bruce C. Bruckmann, Michael A. Delaney, Richard C.
Gozon, Lawrence C. Karlson, George H. Strong, James A. Urry, Barton
J. Winokur and R. David Yost as directors of the Company. The
results of the stockholder vote were as follows: Mr. Bruckmann--
16,162,850 for, 0 against, 73,383 withheld, and 0 broker non-votes;
Mr. Delaney--16,161,653 for, 0 against, 74,580 withheld, and 0
broker non-votes; Mr. Gozon--16,162,946 for, 0 against, 73,287
withheld, 0 broker non-votes; Mr. Karlson--16,162,996 for, 0
against, 73,237 withheld, and 0 broker non-votes; Mr. Strong--
16,161,884 for, 0 against, 74,349 withheld, and 0 broker non-votes;
Mr. Urry--16,161,623 for, 0 against, 74,610 withheld, and 0 broker
non-votes; Mr. Winokur--16,162,946 for, 0 against, 73,287 withheld,
and 0 broker non-votes; Mr. Yost--16,162,546 for, 0 against, 73,687
withheld, and 0 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27--Financial Data Schedule
(b) Reports on Form 8-K: Current Report on Form 8-K filed March 10,
1998 attaching letter agreement among Amerisource Health
Corporation, McKesson Corporation and Patient Acquisition Corp.
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<PAGE>
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
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