<PAGE>
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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 JUNE 30, 1998
----------------
AMERISOURCE HEALTH CORPORATION
(A DELAWARE CORPORATION)
(FORMERLY AMERISOURCE DISTRIBUTION CORPORATION)
<TABLE>
<CAPTION>
(COMMISSION (REGISTRANT, STATE OF INCORPORATION (IRS EMPLOYER
FILE
NUMBER) ADDRESS AND TELEPHONE NUMBER) IDENTIFICATION NO.)
------- ----------------------------------- -------------------
<S> <C> <C>
33-27835-01 P.O. Box 959, Valley Forge, 23-2546940
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 June 30, 1998 was: Class A--21,155,756, Class B--2,750,783,
Class C--137,346.
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<PAGE>
INDEX
AMERISOURCE HEALTH CORPORATION
PART I.FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--June 30, 1998 and September 30, 1997
Consolidated statements of operations--Three months ended June 30, 1998 and June 30, 1997
Consolidated statements of operations--Nine months ended June 30, 1998 and June 30, 1997
Consolidated statements of cash flows--Nine months ended June 30, 1998 and June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE>
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)
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 51,563 $ 60,045
Restricted cash.................................... 65,012 8,886
Accounts receivable less allowance for doubtful ac-
counts:
6/98--$28,988, 9/97--$22,562...................... 448,969 533,319
Merchandise inventories............................ 876,111 1,017,782
Prepaid expenses and other......................... 5,493 4,622
---------- ----------
Total current assets............................. 1,447,148 1,624,654
Property and equipment at cost....................... 120,348 114,979
Less accumulated depreciation...................... 56,057 47,517
---------- ----------
64,291 67,462
Other assets, less accumulated amortization:
6/98--$8,211; 9/97--$6,110......................... 64,537 52,924
---------- ----------
$1,575,976 $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)
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 841,696 $1,036,462
Accrued expenses and other......................... 48,199 43,798
Accrued income taxes............................... 19,451 9,433
Deferred income taxes.............................. 45,344 40,406
---------- ----------
Total current liabilities...................... 954,690 1,130,099
Long-Term Debt:
Revolving credit facility.......................... 232,790 280,768
Receivables securitization financing............... 299,939 299,913
Other debt......................................... 8,887 9,138
---------- ----------
541,616 589,819
Other Liabilities.................................... 10,866 10,811
Stockholders' Equity:
Common Stock, $.01 par value:
Class A (Voting and convertible):
50,000,000 shares authorized:
issued 6/98--21,506,839 shares;
9/97--17,540,629 shares.......................... 215 175
Class B (Non-voting and convertible):
15,000,000 shares authorized:
issued 6/98--5,700,783 shares;
9/97--9,440,370 shares........................... 57 94
Class C (Non-voting and convertible):
2,000,000 shares authorized:
issued 6/98--120,862 shares;
9/97--166,495 shares............................. 1 2
Capital in excess of par value....................... 241,514 234,188
Retained earnings (deficit).......................... (166,763) (213,928)
Cost of common stock in treasury..................... (6,220) (6,220)
---------- ----------
68,804 14,311
---------- ----------
$1,575,976 $1,745,040
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues................................................. $2,094,510 $2,064,174
Cost of goods sold....................................... 1,995,041 1,963,714
---------- ----------
Gross Profit............................................. 99,469 100,460
Selling and administrative expenses...................... 59,009 75,888
Depreciation............................................. 3,549 3,257
Amortization............................................. 343 323
---------- ----------
Operating income....................................... 36,568 20,992
Interest expense......................................... 9,558 10,611
---------- ----------
Income before taxes...................................... 27,010 10,381
Taxes on income.......................................... 10,538 4,049
---------- ----------
Net income............................................... $ 16,472 $ 6,332
========== ==========
Earnings per share (fully diluted):
Net income per share..................................... $ .69 $ .27
========== ==========
Net income per share--assuming dilution.................. $ .68 $ .26
========== ==========
</TABLE>
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)
NINE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues................................................ $6,541,355 $5,596,578
Cost of goods sold...................................... 6,223,267 5,317,065
---------- ----------
Gross Profit............................................ 318,088 279,513
Selling and administrative expenses..................... 195,461 187,844
Depreciation............................................ 10,062 8,427
Amortization............................................ 986 673
---------- ----------
Operating income.................................... 111,579 82,569
Interest expense........................................ 34,250 30,966
---------- ----------
Income before taxes and extraordinary item.............. 77,329 51,603
Taxes on income......................................... 30,164 20,322
---------- ----------
Income before extraordinary item........................ 47,165 31,281
Extraordinary charge-early retirement of debt, net
income tax benefit..................................... -- (1,982)
---------- ----------
Net income.......................................... $ 47,165 $ 29,299
========== ==========
Earnings per share:
Income before extraordinary item...................... $ 1.97 $1.32
Extraordinary charge.................................. -- (.08)
---------- ----------
Net income.......................................... $ 1.97 $ 1.24
========== ==========
Earnings per share--assuming dilution...................
Income before extraordinary item $ 1.95 $ 1.30
Extraordinary charge.................................. -- (.08)
---------- ----------
Net income.......................................... $ 1.95 $ 1.22
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 47,165 $ 29,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 10,062 8,427
Amortization....................................... 2,273 2,125
Provision for losses on accounts receivable........ 8,505 3,252
(Gain) loss on disposal of property and equipment.. (64) 2,929
Deferred income taxes.............................. 5,039 6,025
Loss on early retirement of debt................... -- 3,250
Changes in operating assets and liabilities (net of
effect of companies acquired):
Restricted cash.................................. (56,126) (2,808)
Accounts receivable.............................. 79,023 (25,213)
Merchandise inventories.......................... 141,717 (49,518)
Prepaid expenses................................. (866) (263)
Accounts payable, accrued expenses and income
taxes........................................... (188,954) 92,053
Miscellaneous...................................... (33) 32
Payment of merger fees............................. (6,526) --
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 41,215 69,590
INVESTING ACTIVITIES
Capital expenditures................................. (7,855) (12,735)
Proceeds from sales of property and equipment........ 1,429 1,967
Cost of companies acquired........................... -- (138,652)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES.......... (6,426) (149,420)
FINANCING ACTIVITIES
Long-term debt borrowings............................ 1,386,219 1,615,923
Long-term debt repayments............................ (1,434,420) (1,517,307)
Deferred financing costs and other................... 52 (1,900)
Exercise of stock options............................ 4,878 1,464
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................... (43,271) 98,180
---------- ----------
(Decrease) increase in cash and cash equivalents....... (8,482) 18,350
Cash and cash equivalents at beginning of period....... 60,045 65,575
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 51,563 $ 83,925
========== ==========
</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 June 30, 1998, the results of operations
for the three and nine months ended June 30, 1998 and 1997 and the cash flows
for the nine months ended June 30, 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
June 30, 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 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
8
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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 courts.
On April 4, 1996, the District Court granted the Company's motion for
summary judgement 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 which was denied. On or
about October 2, 1997, a group of retail chain drug stores and individual
pharmacies, which had opted-out of the class cases, filed a motion with the
United States District Court for the Northern District of Illinois seeking to
add the Company and the other national wholesalers as defendants in their
cases against the manufacturer defendants, which are consolidated before the
same judge who is presently presiding over the class case. This motion was
granted and the Company and the other national wholesalers have been added as
defendants in those cases as well. As a result, the Company has been served
with approximately 120 additional complaints on behalf of approximately 4,000
pharmacies and chain retailers. Discovery and motion practice is presently
underway in all of these opt-out cases. 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.
A former customer of the Company has alleged that the Company has failed to
fulfill its service contract. In connection with this claim, the customer has
withheld payment on $22 million of invoices. In response the Company has filed
suit to collect the outstanding amount. The customer has not yet responded to
the Company's claim nor has it provided any support for its allegations. The
Company believes there is no merit to this claim and intends to aggressively
pursue collection of the outstanding amount. Accordingly, the Company is
unable at this time to estimate the impact of the claim and no provision for
loss has been made.
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 (23,983,454 and 23,723,236
for the three months ended June 30, 1998 and 1997, respectively; and
23,911,298 and 23,695,224 for the nine months ended June 30, 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 (296,171 and 342,497 for the three months
ended June 30, 1998 and 1997, respectively; and 336,650 and 328,896 for the
nine months ended June 30, 1998 and 1997, respectively).
NOTE 4--PROPOSED MCKESSON CORPORATION MERGER
On September 22, 1997, the Company and McKesson Corporation signed a
definitive merger agreement which was subsequently approved by the
stockholders of both companies on February 9, 1998. In August 1998, the merger
agreement was terminated after a federal judge granted the Federal Trade
Commission a preliminary injunction to halt the merger on July 31, 1998.
Merger related costs including professional fees and stay-put bonuses of $17.8
million incurred through June 30, 1998 have been deferred and are included in
other assets. Total merger costs are expected to be $19-$20 million and will
be expensed as a result of the termination of the merger agreement in the
fourth quarter of fiscal 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1998 were $2.2 billion, an
increase of 1% over the prior year quarter. For the nine months ended June 30,
1998, revenues were $6.5 billion, an increase of 17% compared to the prior
year period. During the nine months ended June 30, 1998, sales to hospitals
and managed care facilities increased 13%, sales to independent drug store
customers increased 17%, and sales to the chain drug store customer group
increased 26%, 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 nine months ended June 30, 1998
sales to hospitals and managed care facilities accounted for 48% of total
revenues, while sales to independent drug stores accounted for 33% and sales
to chain drug stores accounted for 19% of the total.
Slower revenue growth in the quarter reflected the termination of service
contracts with two major warehousing chains and one large mail order customer
that account for approximately $300 million of revenue per quarter.
Approximately 60% of the revenue was lost in the Company's third fiscal
quarter with the balance being lost in the fourth fiscal quarter. The Company
does not expect that future operating income will be significantly affected as
the lost customers 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.
Gross profit of $99.5 million in the third quarter of fiscal 1998 decreased
by 1% compared to the fiscal 1997 quarter. As a percentage of revenues, the
gross profit in the third quarter of fiscal 1998 was 4.75% as compared to
4.87% in the prior year period. For the nine months ended June 30, 1998, the
gross profit percentage was 4.86% compared to 4.99% in the prior year period.
The decline in gross profit percentage was due to a reduction in selling
margin percentage 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. These plans which were originally expected to be
completed and approved in the third fiscal quarter are now expected to be
finalized in the fourth quarter of fiscal 1998. The restructuring plan will
result in a pre-tax charge, consisting of severance, asset disposal and lease
cancellation costs, of approximately $10 to $15 million in the fourth quarter
of fiscal 1998.
Operating expenses decreased by $5.0 million or 7% in the third quarter of
fiscal 1998 compared with the prior year period, and as a percentage of
revenues, were 3.00% in fiscal 1998 and 3.29% in fiscal 1997. For the first
nine months of fiscal 1998, operating expenses as a percentage of revenues
were 3.16% versus 3.31% in the prior year. For comparison purposes, all prior
year expense numbers exclude the $6.4 million charge described above as well
as a $5.2 million charge for executive management changes in fiscal 1997. The
decrease in expenses for the quarter was primarily due to benefits resulting
from the fiscal 1997 cost reduction initiatives discussed above as well as the
shift in customer mix resulting from the loss of the two large warehousing
chain customers.
Operating income of $36.6 million in the quarter ended June 30, 1998
increased by 12% from the prior year period before the $11.6 million of
special charges in fiscal 1997. The Company's operating margin increased to
1.75% in fiscal 1998 from 1.58% in fiscal 1997. For the nine months ended June
30, 1998, the operating margin was 1.71% compared to 1.68% in the prior year.
The increase is due to the reduction in operating expenses as a percentage of
revenues.
10
<PAGE>
Interest expense of $9.6 million in the third quarter of fiscal 1998
represents a decrease of 10% compared to the prior year period. The decrease
from the prior year was due to a combination of reduced borrowings and a 12.5
basis point step-down in the interest rate under the Company's revolving
credit facility in May, 1998. Average borrowings during the quarter ended June
30, 1998 were $588 million as compared to average borrowings of $619 million
in the prior fiscal year. For the nine-month period ended June 30, 1998,
average borrowings were $680 million versus $597 in the prior year period.
The income tax provision for the three and nine months ended June 30, 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 nine-month period ended June 30, 1998, the Company's operating
activities generated $41.2 million in cash as decreases in merchandise
inventory of $141.7 million and accounts receivable of $79.0 million offset a
decrease in accounts payable and accrued expenses of $189.0 million and an
increase in restricted cash of $56.1 million. Accounts payable decreased
primarily due to the decrease in inventory and the payment of extended term
invoices during the period related to the Company's expansion of its
Thorofare, NJ distribution facility. Restricted cash increased to supplement
the collateral base supporting the receivable securitization facility at June
30, 1998. Operating cash uses during the nine months ended June 30, 1998
included $35.8 million in interest payments and $12.7 million in income tax
payments.
Capital expenditures for the nine months ended June 30, 1998 were $7.9
million and relate principally to investments in warehouse automation,
warehouse improvements, and information technology. Similar expenditures of
approximately $3 to $5 million are expected to occur in the fourth quarter of
fiscal 1998.
Cash provided by financing activities during fiscal 1998 represents
borrowing under the Company's revolving credit facility and its Receivable
Program primarily to fund working capital requirements. At June 30, 1998,
borrowings under the Company's $500 million revolving credit facility were
$232.8 million (at an average interest rate of 6.9%) 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.
11
<PAGE>
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 ($3.8 million at June 30, 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
regulation, 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.
A former customer has alleged that the Company has failed to fulfill its
service contract. In connection with this claim the customer has withheld
payment on $22 million of invoices. In response the Company has filed suit to
collect the outstanding amount. The customer has not yet responded to the
Company's claim nor has it provided any support for its allegations. The
Company believes there is no merit to this claim and intends to aggressively
pursue collection of the outstanding amount. Accordingly, the Company is
unable at this time to estimate the impact of the claim and no provision for
loss has been made.
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, 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 obtaining assurances from
its key customers and suppliers to determine their compliance with year 2000
issues. Amounts expensed for year 2000 projects have not been and are not
expected to be significant to the Company's results of operation.
On September 22, 1997, the Company and McKesson Corporation signed a
definitive merger agreement which was subsequently approved by the
stockholders of both companies on February 9, 1998. In August 1998, the merger
agreement was terminated after a federal judge granted the Federal Trade
Commission a preliminary injunction to halt the merger on July 31, 1998.
Merger related costs including professional fees and stay-put bonuses of $17.8
million incurred through June 30, 1998 have been deferred and are included in
other assets. Total merger costs are expected to be $19-$20 million and will
be expensed as a result of the termination of the merger agreement in the
fourth quarter of fiscal 1998.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27--Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter
ended June 30, 1998
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: August 13, 1998
14
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<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
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0
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