<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 JUNE 30, 1999
<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 June 30, 1999 was: Class A--48,481,286, Class B--8,446; Class
C--255,602.
<PAGE>
INDEX
AMERISOURCE HEALTH CORPORATION
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
<S> <C>
Consolidated balance sheets--June 30, 1999 and September 30, 1998
Consolidated statements of operations--Three months ended June 30, 1999 and June 30, 1998
Consolidated statements of operations--Nine months ended June 30, 1999 and June 30, 1998
Consolidated statements of cash flows--Nine months ended June 30, 1999 and June 30, 1998
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>
June 30, September 30,
1999 1998
-------------- ---------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................... $ 46,061 $ 48,461
Restricted cash..................................... 54,049 37,044
Accounts receivable less allowance for doubtful
accounts: 6/99--$25,420, 9/98--$26,477............ 485,868 458,238
Merchandise inventories............................. 1,205,632 870,223
Prepaid expenses and other.......................... 4,273 4,356
---------- ----------
Total current assets............................. 1,795,883 1,418,322
Property and equipment, at cost:
Land................................................ 3,852 3,907
Buildings and improvements.......................... 34,197 33,339
Machinery, equipment and other...................... 85,764 81,267
---------- ----------
123,813 118,513
Less accumulated depreciation....................... 64,086 57,724
---------- ----------
59,727 60,789
Other assets, less accumulated amortization:
6/99--$11,145; 9/98--$8,847.......................... 59,302 73,171
---------- ----------
$1,914,912 $1,552,282
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- --------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable...................................... $1,049,916 $ 873,181
Accrued expenses and other............................ 39,796 48,532
Accrued income taxes.................................. 9,217 78
Deferred income taxes................................. 86,891 93,385
---------- ----------
Total current liabilities.......................... 1,185,820 1,015,176
Long-term debt:
Revolving credit facility............................. 266,730 145,000
Receivables securitization financing.................. 299,974 299,948
Other debt............................................ 8,539 8,813
---------- ----------
575,243 453,761
Other liabilities....................................... 8,661 8,036
Stockholders' equity
Common stock, $.01 par value:
Class A (voting and convertible):
100,000,000 shares authorized;
issued 6/99--49,183,453 shares;
9/98--43,184,020 shares............................ 492 432
Class B (non-voting and convertible):
15,000,000 shares authorized;
issued 6/99--5,908,445 shares;
9/98--11,401,566 shares............................ 59 114
Class C (non-voting and convertible):
2,000,000 shares authorized;
issued 6/99--255,602 shares;
9/98--258,474 shares............................... 3 2
Capital in excess of par value........................ 256,039 244,390
Retained earnings (deficit)........................... (105,185) (163,409)
Cost of common stock in treasury...................... (6,220) (6,220)
---------- ----------
145,188 75,309
---------- ----------
$1,914,912 $1,552,282
========== ==========
</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>
Three months ended
June 30, 1999
---------------------------------
(unaudited)
1999 1998
--------------- -----------------
<S> <C> <C>
Operating revenue................................................... $2,251,247 $2,094,510
Bulk deliveries to customer warehouses.............................. 10,102 34,682
---------- ----------
Total revenue....................................................... 2,261,349 2,129,192
Operating cost of goods sold........................................ 2,147,576 1,995,041
Cost of goods sold - bulk deliveries................................ 10,102 34,682
---------- ----------
Total cost of goods sold............................................ 2,157,678 2,029,723
---------- ----------
Gross profit........................................................ 103,671 99,469
Selling and administrative expenses................................. 61,231 59,009
Depreciation........................................................ 3,495 3,549
Amortization........................................................ 257 343
---------- ----------
Operating income.................................................... 38,688 36,568
Interest expense.................................................... 6,413 9,558
---------- ----------
Income before taxes................................................. 32,275 27,010
Taxes on income..................................................... 12,264 10,538
---------- ----------
Net income.......................................................... $ 20,011 $ 16,472
========== ==========
Net income per share................................................ $.41 $.34
========== ==========
Net income per share - assuming dilution............................ $.41 $.34
========== ==========
</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>
Nine months ended
June 30,
---------------------------------
(unaudited)
1999 1998
-------------- ---------------
<S> <C> <C>
Operating revenue................................ $6,580,135 $6,541,355
Bulk deliveries to customer warehouses........... 26,773 85,749
---------- ----------
Total revenue.................................... 6,606,908 6,627,104
Operating cost of goods sold..................... 6,263,545 6,223,267
Cost of goods sold--bulk deliveries.............. 26,773 85,749
---------- ----------
Total cost of goods sold......................... 6,290,318 6,309,016
---------- ----------
Gross profit..................................... 316,590 318,088
Selling and administrative expenses.............. 187,354 195,461
Depreciation..................................... 10,495 10,062
Amortization..................................... 767 986
---------- ----------
Operating income................................. 117,974 111,579
Interest expense................................. 24,064 34,250
---------- ----------
Income before taxes.............................. 93,910 77,329
Taxes on income.................................. 35,686 30,164
---------- ----------
Net income....................................... $ 58,224 $ 47,165
========== ==========
Net income per share............................. $1.20 $.99
========== ==========
Net income per share--assuming dilution.......... $1.19 $.97
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
-------------------------------------
(unaudited)
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................. $ 58,224 $ 47,165
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation............................................................... 10,495 10,062
Amortization, including deferred financing costs........................... 2,281 2,273
Provision for losses on accounts receivable................................ 2,765 8,505
Loss (gain) on disposal of property and equipment.......................... 235 (64)
Deferred income taxes...................................................... 15,267 5,039
Changes in operating assets and liabilities:
Restricted cash.......................................................... (17,005) (56,126)
Accounts receivable...................................................... (32,384) 79,023
Merchandise inventories.................................................. (335,409) 141,717
Prepaid expenses......................................................... (1,195) (866)
Accounts payable, accrued expenses and income taxes...................... 178,645 (188,954)
Miscellaneous.............................................................. (336) (33)
Payment of merger fees..................................................... -- (6,526)
--------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES..................... (118,417) 41,215
INVESTING ACTIVITIES
Capital expenditures........................................................ (10,458) (7,855)
Purchase of equity interest in a business................................... (3,570) --
Proceeds from sales of property and equipment............................... 707 1,429
--------------- --------------
NET CASH USED IN INVESTING ACTIVITIES................................... (13,321) (6,426)
FINANCING ACTIVITIES
Long-term debt borrowings................................................... 1,130,577 1,386,219
Long-term debt repayments................................................... (1,009,024) (1,434,420)
Deferred financing costs and other.......................................... (549) 52
Exercise of stock options................................................... 8,334 4,878
--------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..................... 129,338 (43,271)
--------------- --------------
Decrease in cash and cash equivalents........................................ (2,400) (8,482)
Cash and cash equivalents at beginning of period............................. 48,461 60,045
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 46,061 $ 51,563
=============== ==============
</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, 1999, the results of operations for the
three and nine months ended June 30, 1999 and 1998 and the cash flows for the
nine months ended June 30, 1999 and 1998 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,
1998.
The Company's earnings per share and share data in the financial statements
have been retroactively restated to reflect the effect of a two-for-one stock
split declared on March 3, 1999 and distributed on March 24, 1999 to
shareholders of record on March 3, 1999.
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.
A former customer of the Company has alleged that the Company failed to
fulfill its obligations under the service contract between the Company and the
former customer. In connection with this claim, the former customer withheld
payment on $22 million of invoices. In response, the Company filed suit to
collect the outstanding amount. The former customer has countersued the Company
for an unspecified amount. The Company believes there is no merit to this
counterclaim and intends to aggressively pursue collection of the outstanding
amount. Because the Company is unable at this time to determine the outcome of
this matter, no provision for loss has been made.
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 and
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 and chain drug stores, both of which opted out
of the class cases. The Company also was named a defendant in parallel suits
filed in state courts in Minnesota, Alabama, Tennessee and Mississippi. The
federal class actions were originally filed in the United States District Court
for the Southern District of New York, but were 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.
8
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Note 2 - Legal Matters and Contingencies - (continued)
In October 1994, the Company entered into a Judgment Sharing Agreement with the
other wholesaler and pharmaceutical manufacturer defendants. Under the Judgment
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 judgment is entered 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 judgment 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
Judgment 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
judgment in the class case. Plaintiffs subsequently appealed the Company's grant
of summary judgment 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 judgment 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 petition was denied. Trial in
the class case commenced in the United States District Court for the Northern
District of Illinois on September 23, 1998. After a ten-week trial, the Court
granted all of the defendants motions for a directed verdict and dismissed the
claims the class plaintiffs had asserted against the Company and the other
defendants. Plaintiffs appealed the dismissal of their claims to the Court of
Appeals, which on July 13, 1999, affirmed the decision of the District Court as
to the Company and the other wholesaler defendents. Plaintiffs may ask for a
rehearing or appeal their decision.
On or about October 2, 1997, a group of retail chain drug stores and
individual pharmacies, both of 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 wholesale distributors as
defendants in their cases against the manufacturer defendants, which cases are
consolidated before the same judge who is presently presiding over the class
case. This motion was granted and the Company and the other wholesale
distributors 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.
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, 1999), is based on an engineering analysis prepared by outside consultants
and represents an estimate of the extent of contamination and choice of remedy
based on 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.
9
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Note 3--Earnings Per Share
Earnings per share is computed on the basis of its weighted average number of
shares outstanding during the periods presented (48,712,834 and 47,966,908 for
the three months ended June 30, 1999 and 1998, respectively; and 48,556,031 and
47,822,596 for the nine months ended June 30, 1999 and 1998, 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 (367,582 and 592,342 for the three months ended June 30, 1999
and 1998, respectively; and 566,612 and 673,300 for the nine months ended June
30, 1999 and 1998, respectively). All share data prior to March 1999 has been
adjusted for the two-for-one stock split discussed in Note 1.
Note 4--Long-Term Debt
Effective May 14, 1999, the Company, through a consolidated wholly-owned
special purpose entity, established a new Receivables Securitization Facility
(the "1999 Securitization Facility"), which will provide the Company with up to
$325 million in available credit. In connection with the 1999 Securitization
Facility, the Company will sell on a revolving basis certain accounts
receivables to the special purpose entity which in turn sells a percentage
ownership interest in the receivables to a commercial paper conduit sponsored by
a financial institution. The Company was retained as servicer of the sold
accounts receivables. The 1999 Securitization Facility has a term of three
years. Interest will be at a rate at which funds are obtained by the financial
institution to fund the receivables (short-term commercial paper rates) plus a
program fee of 38.5 basis points. The Company is required to pay a commitment
fee of 25 basis points on any unused credit in excess of $25 million under the
facility. Fees of $0.5 million incurred to establish the 1999 Securitization
Facility were deferred and will be amortized on a straight-line basis over the
term of the 1999 Securitization Facility. The transaction does not qualify as a
"sale" in accordance with SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," and, accordingly, the
Company accounts for the 1999 Securitization Facility as a financing transaction
in its consolidated financial statements.
Proceeds from the 1999 Securitization Facility were used to extinguish the
Company's existing receivables securitization financing ("Receivables
Program") in the fourth quarter of fiscal 1999 and will result in an
extraordinary charge of $0.7 million (net of a $0.4 million tax benefit) related
to the write-off of unamortized deferred financing fees.
Note 5--Subsequent Event
Merger Agreement
On July 8, 1999, the Company acquired C.D. Smith Healthcare, Inc. ("C.D.
Smith"). Based in St. Joseph, Missouri, C.D. Smith is the seventh largest
wholesale pharmaceutical distributor with annual operating revenue of
approximately $800 million. Shareholders of C.D. Smith received a fixed exchange
of 2.69 million shares of the Company's common stock for all of the outstanding
common shares of C.D. Smith. The Company assumed $78 million in long-term debt
for a total transaction value of approximately $147 million based on the
Company's closing stock price on July 8, 1999. The assumed long-term debt was
immediately extinguished with funds provided by the Company's revolving credit
facility, resulting in an extraordinary charge, net of taxes, in the fourth
quarter of fiscal 1999 of approximately $3.0, relating to prepayment penalties
and the write-off of unamortized deferred financing fees. The combination has
been structured as a tax-free transaction which will be accounted for as a
pooling of interests.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating revenue for the three months ended June 30, 1999 increased 7% from
the prior year quarter to $2.3 billion. For the nine months ended June 30, 1999,
operating revenue was $6.6 billion, an increase of 1% compared to the prior year
period. The increase from the prior year was impacted by the termination of
service contracts in the prior year with two major warehousing chains and one
large mail order customer that accounted for approximately $125 million and $705
million of revenue in the prior year third quarter and nine-month period,
respectively. No revenues occurred with these three accounts subsequent to June
30, 1998, therefore, future quarterly comparisons to prior year periods will not
be impacted by their loss. During the nine months ended June 30, 1999, sales to
hospitals and managed care facilities increased 9% versus the prior year period
as 16% growth in the hospital sector offset the loss of the large mail order
customer. Sales to independent drug store customers increased 8% while sales to
the chain drug store customer group decreased 31%, as compared with the prior
year period. During the nine months ended June 30, 1999, sales to hospitals and
managed care facilities accounted for 50% of total operating revenue, while
sales to independent drug stores accounted for 36% and sales to chain drug
stores accounted for 14% of the total. Future revenue may be impacted by the
continuing consolidation of customers and price competition in the industry.
Gross profit of $103.7 million in the third quarter of fiscal 1999 increased
by 4% as compared to the prior year quarter due to the increase in operating
revenue. As a percentage of operating revenue, gross profit in the third quarter
of fiscal 1999 was 4.61% as compared to 4.75% in the prior year quarter. For the
nine months ended June 30, 1999, the gross profit percentage was 4.81% as
compared to 4.86% in the prior year period. The decline in gross profit
percentage for the quarter and the nine months ended June 30, 1999 were due to
changes in the customer mix and price competition in the industry. Gross profit
may continue to be impacted by price competition, changes in customer and
product mix, and distribution center performance.
In the fourth quarter of fiscal 1998, the Company began to centralize its data
processing, accounting, contract administration and purchasing functions,
reorganize its pharmaceuticals distribution facilities into five regions, and
consolidate one pharmaceutical distribution facility into another facility.
These initiatives are expected to be completed by the end of calendar 1999 and a
charge of $8.3 million was recognized in the fourth quarter of fiscal 1998
related to this effort. The charge included severance of $3.3 million for
approximately 350 administrative and warehouse personnel and asset write-downs
and lease cancellation costs of $5.0 million. As of June 30, 1999, 14 of 19
pharmaceutical distribution facilities have been converted to the centralized
system and the consolidation of the one pharmaceutical distribution into another
facility has been completed. As of June 30, 1999, 104 employees have been
terminated related to these initiatives and severance costs of $1.4 million have
been paid in fiscal 1999. Severance and lease obligations remaining to be paid
of $2.8 million are included in accrued expenses and other.
Selling and administrative expenses and depreciation increased by $2.2 million
or 3% in the third quarter of fiscal 1999 compared with the prior year period,
and as a percentage of operating revenue, were 2.88% in fiscal 1999 and 2.99% in
fiscal 1998. For the first nine months of fiscal 1999, selling and
administrative expenses and depreciation as a percentage of operating revenue
were 3.01% versus 3.14% in the prior year period. The decrease in expenses as a
percentage of operating revenue in the quarter and the nine months was due to a
shift in customer mix away from warehousing chains, which lowered delivery and
warehouse expense, as well as continued productivity improvements. In addition,
the nine months ended June 30, 1999, benefited from a lower bad debt provision
than in the prior year period. These reductions offset costs incurred in the
quarter and nine months of $1.0 and $4.1 million, respectively related to the
Company's ongoing centralization efforts.
Operating income of $38.7 million in the quarter ended June 30, 1999 increased
by 6% from the prior year period. The Company's operating margin decreased to
1.72% in fiscal 1999 from 1.75% in fiscal 1998. For the nine months ended June
30, 1999, the operating margin was 1.79% compared to 1.71% in the prior year.
The decrease in the quarter is due to the reduction in gross profit margin
discussed above. The increase for the nine-month period is due to the reduction
in operating expenses discussed above.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Interest expense of $6.4 million in the third quarter of fiscal 1999
represents a decrease of 33% compared to the prior year period. For the nine-
month period ending June 30, 1999, interest expense was $24.1 million, a decline
of 30% from the prior year. The decrease from the prior year was due to a
combination of lower borrowing rates on its variable-rate debt facilities as
well as reduced average borrowings. Average borrowings during the quarter ended
June 30, 1999 were $442 million as compared to average borrowings of $588
million in the prior year period. For the nine-month period ended June 30, 1999,
average borrowings were $ 539 million versus $ 680 million in the prior year
period. The decrease in borrowings from the prior year was due to the prior year
expansion of the Company's Thorofare, NJ facility which led to increased
borrowings in the prior year to support duplicate facilities during the
expansion. Average borrowings and interest expenses are expected to increase in
the fourth quarter due to the acquisition of C.D. Smith and increases in
inventory levels for seasonal buying opportunities and to address year 2000
supply concerns.
The income tax provision for the three and nine months ended June 30, 1999 was
computed based on an estimate of the full year effective tax rate.
Net income in the third quarter of fiscal 1999 increased to $20.0 million from
$16.5 million in the prior year quarter and net income per share assuming
dilution was $0.41, a 20.6% increase over the prior year quarter. For the nine
months net income per share assuming dilution increased 22.7%.
The Company's earnings per share and share data in the financial statements
have been restated to reflect the effect of a two-for-one stock split declared
on March 3, 1999 and distributed on March 24, 1999 to shareholders of record on
March 3, 1999.
Liquidity and Capital Resources
During the nine months ended June 30, 1999, the Company's operating activities
used $118.4 million in cash primarily due to increases in merchandise
inventories of $335.4 million and accounts receivable of $32.4 million offset by
net income and increases in accounts payable and accrued expenses of $178.6
million. Inventories increased to support new customer contracts, provide for
seasonal buying opportunities and to address year 2000 supply concerns.
Operating cash uses during the nine months ended June 30, 1999 included
$24.1 million in interest payments and $10.5 million in net income tax payments.
Capital expenditures for the nine months ended June 30, 1999 were $10.5
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 1999.
Cash provided by financing activities during fiscal 1999 represents borrowings
under the Company's revolving credit facility and its Receivables Program
primarily to fund its working capital requirements. At June 30, 1999, borrowings
under the Company's $500 million revolving credit facility were $266.7 million
and borrowings under the $375 million receivables securitization financing were
$300.0 million. The revolving credit facility expires in January 2002 and
provides for interest rates ranging from LIBOR plus 25 basis points to LIBOR
plus 125 basis points based upon certain financial ratios. In May, 1999, the
Company entered into a new $325 million receivables securitization facility "The
1999 Securitization Facility" to replace its previous facility. The 1999
Securitization Facility was funded in July, 1999. This new facility has a term
of three years and interest will be at a rate at which funds are obtained by the
financial institution to fund the receivable (short-term commercial paper rates)
plus a program fee of 38.5 basis points. The receivables securitization facility
represents a financing vehicle utilized by the Company because of the
availability of attractive interest rates relative to other financing sources.
The Company securitizes its trade accounts and notes receivable, which are
generally non-interest bearing, in transactions that do not qualify as sales
transactions under SFAS No. 125.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's primary exposure to market risk consists of changes in interest
rates on borrowings. 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 from time to time to hedge the exposure to
increasing interest rates with respect to its long-term debt agreements. The
Company provides protection to meet actual exposure and does not speculate in
derivatives. For every $100 million of unhedged variable rate debt, a 75 basis
point increase in interest rates would increase the Company's annual interest
expense by $0.75 million.
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 finance working capital, fund payment of interest on
indebtedness, 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. However, the Company is considering entering into a supplemental
credit facility of up to $200 million to provide liquidity for potential year
2000 disruptions and seasonal buying opportunities.
A former customer of the Company has alleged that the Company failed to
fulfill its obligations under the service contract between the Company and the
former customer. In connection with this claim, the former customer withheld
payment on $22 million of invoices. In response, the Company filed suit to
collect the outstanding amount. The former customer has countersued the Company
for an unspecified amount. The Company believes there is no merit to this
counterclaim and intends to aggressively pursue collection of the outstanding
amount. Because the Company is unable at this time to determine the outcome of
this matter, no provision for loss has been made.
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, 1999), 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.
Other
In July 1999, the Company acquired C.D. Smith Healthcare, Inc. ("C.D.
Smith"). Based in St. Joseph, Missouri, C.D. Smith is the seventh largest
wholesale pharmaceutical distributor with annual operating revenue of
approximately $800 million. Shareholders of C.D. Smith received a fixed
exchange of 2.69 million shares of the Company's common stock for all of the
outstanding common shares of C.D. Smith. The Company assumed approximately $78
million in long-term debt for a total transaction value of approximately $147
million based on the Company's stock price on the closing date. The combination
has been structured as a tax-free transaction which will be accounted for as a
pooling of interests. Merger expenses are expected to be $3 to $4 million and
will be expensed in the fourth quarter of fiscal 1999. In addition, the Company
is considering the closure of facilities and restructuring of sales and
administrative personnel in connection with the merger that may result in a pre-
tax charge of $6 to $12 million in the fourth quarter of fiscal 1999. Long-term
debt of C.D. Smith was also extinguished, resulting in an extraordinary charge
in the fourth quarter of fiscal 1999 of $ 3.0 million, net of tax benefits.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business practices.
The Company began addressing the Year 2000 Issue in 1995 on a decentralized
basis at each of its regional data processing centers. In 1997, the Company
began monitoring progress on a corporate level and a formal Year 2000 committee,
reporting to senior management, was established in early 1998 to coordinate and
monitor the Year 2000 Issue on an enterprise-wide basis. Based on assessments
made since 1995, the Company determined that modifications to or in limited
cases replacement of computer software and hardware was necessary to enable
those systems to operate properly after December 31, 1999. The Company presently
believes that with modifications to and replacement of existing software and
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 Issue
can have a material impact on the operations of the Company.
In the fourth quarter of fiscal 1998, the Company announced plans to
consolidate its data processing from its regional facilities to one corporate
facility by the end of 1999. However, the Company's plan to resolve the Year
2000 Issue described below is not dependent on the timely completion of the
Company's consolidation efforts.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has completed its assessment of all systems that could be significantly
affected by the Year 2000. The assessment indicated that most of the Company's
significant information technology systems could be affected, particularly the
Company's warehouse and distribution operating and accounting systems. The
assessment also indicated that software and hardware (embedded chips) used in
warehouse automation, scanning, and ordering as well as other equipment used in
the distribution process (operating equipment) are also at risk. Because the
Company is a distributor of pharmaceuticals, the Company's products are not at
risk.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
The following estimates of completion percentages and dates are based on the
Company's best estimates. However, there can be no guarantee that these dates
can be achieved and actual results may differ. For its information technology
exposures, the Company has completed the remediation phase, including software
reprogramming and replacement. Once software is reprogrammed or replaced for a
system, the Company begins testing and implementation. These phases run
concurrently for different systems. The Company has completed its initial
testing of all remediated systems but will continue to periodically test these
systems throughout the year.
The remediation of operating equipment with embedded chips or software has
also been completed. Initial testing of the affected equipment and
implementation of affected equipment is complete, however, ongoing testing will
be required throughout the year.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
Many of the Company's customers order products from the Company using ECHO(R),
the Company's proprietary software system. ECHO(R) was developed in-house and
has been Year 2000 compliant from its inception. The Company also issues the
majority of its purchase orders to vendors through the use of Electronic Data
Interchange ("EDI"). The Company is complete with its remediation efforts
relating to EDI software, and expects to continue testing with its vendors
throughout the remainder of the year.
In February 1999, the Company sent surveys to over 6,000 customers to assess
their Year 2000 compliance. The Company surveyed its top 100 vendors in May,
1999 and has also visited the majority of its top 50 vendors to assess Year 2000
compliance plans. Based on the nature of their responses, the Company has
developed and will continue to develop contingency plans as appropriate.
However, the Company has no means of assuring that external customers and
vendors will be Year 2000 compliant. The inability of these third parties to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company.
Costs
The Company has utilized and will continue to utilize both internal and
external resources to reprogram, or replace, test, and implement the software
and operating equipment for Year 2000 modifications. Many of the program fixes
were completed in conjunction with other projects and had little incremental
cost. The Company estimates that incremental costs relating to Year 2000
projects to date approximate $2 million. These costs have been expensed as
incurred. The Company expects to spend less than $1 million on Year 2000
projects in fiscal 1999. Year 2000 costs are difficult to estimate accurately
and the projected cost could change due to unanticipated technical difficulties,
project delays, and third party non-compliance, among other things.
Risks
Management of the Company believes that it has an effective program in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of its Year 2000 plan. Because of the
range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company or its
trading partners not properly complete their Year 2000 plans and become Year
2000 compliant. Such costs and any failure of compliance efforts could have a
material adverse effect on the Company. The Company believes that the most
likely risks of serious Year 2000 business disruption are external in nature,
including continuity of utility, telecommunication and transportation services,
and the potential failure of the Company's customers due to their own non-
compliance or the non-compliance of their business partners. In addition, the
Company may be affected by disruptions in the supply channel due to excess
demand for inventory by customers in anticipation of Year 2000 problems. In the
event the Company does not properly complete its Year 2000 efforts or is
affected by the disruption of outside services, the Company could be unable to
take orders, distribute goods, invoice customers or collect payments. In
addition, disruptions in the economy generally resulting from Year 2000 could
have a material adverse effect on the Company. The Company could be subject to
litigation for computer systems failure. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Contingency Plans
The Company is continuing to refine its contingency plans to address the above
Year 2000 risks as necessary. Contingency plans have been completed for all of
its drug distribution facilities. The Company is working on
finalizing contingency plans for its centralized data processing system. In
addition, as previously mentioned, the Company is considering entering into a
supplemental credit facility of up to $200 million to protest itself against any
potential year 2000 disruptions. In the normal course of business, the Company
has contingency plans for disruption of business events and intends to augment
those plans with specific Year 2000 considerations.
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, the Year 2000 Issue and capital markets could cause actual
results to differ materially from those in forward-looking statements.
16
<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, 1999.
17
<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/ George L. James III
------------------------------------------------------
George L. James III
Vice President and Chief Financial Officer (Principal
Financial Officer)
/s/ Michael D. DiCandilo
------------------------------------------------------
Michael D. DiCandilo
Vice President, Controller
(Principal Accounting Officer)
Date: August 13, 1999
18
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