<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, 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 March 31, 1999 was: Class A--48,416,286, Class B--8,446;
Class C--255,602.
<PAGE>
INDEX
AMERISOURCE HEALTH CORPORATION
<TABLE>
<C> <S>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--March 31, 1999 and September 30, 1998
Consolidated statements of operations--Three months ended March 31,
1999 and March 31, 1998
Consolidated statements of operations--Six months ended March 31,
1999 and March 31, 1998
Consolidated statements of cash flows--Six months ended March 31,
1999 and March 31, 1998
Management's Discussion and Analysis of Financial Condition and
Item 2. 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, except per share data)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 119,134 $ 48,461
Restricted cash..................................... 36,340 37,044
Accounts receivable less allowance for doubtful
accounts: 3/99--$25,775, 9/98--$26,477............. 480,326 458,238
Merchandise inventories............................. 942,152 870,223
Prepaid expenses and other.......................... 3,816 4,356
---------- ----------
Total current assets.............................. 1,581,768 1,418,322
Property and equipment, at cost:
Land................................................ 3,907 3,907
Buildings and improvements.......................... 34,170 33,339
Machinery, equipment and other...................... 83,283 81,267
---------- ----------
121,360 118,513
Less accumulated depreciation....................... 61,608 57,724
---------- ----------
59,752 60,789
Other assets, less accumulated amortization:
3/99--$10,324; 9/98--$8,847.......................... 78,005 73,171
---------- ----------
$1,719,525 $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>
March 31, September 30,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 917,292 $ 873,181
Accrued expenses and other......................... 42,518 48,532
Accrued income taxes............................... 7,927 78
Deferred income taxes.............................. 100,671 93,385
---------- ----------
Total current liabilities........................ 1,068,408 1,015,176
Long-term debt:
Revolving credit facility.......................... 210,004 145,000
Receivables securitization financing............... 299,965 299,948
Other debt......................................... 8,595 8,813
---------- ----------
518,564 453,761
Other liabilities.................................... 8,664 8,036
Stockholders' equity
Common stock, $.01 par value:
Class A (voting and convertible):
100,000,000 shares authorized;
issued 3/99--49,118,453 shares;
9/98--43,184,020 shares.......................... 491 432
Class B (non-voting and convertible):
15,000,000 shares authorized;
issued 3/99--5,908,445 shares;
9/98--11,401,566 shares.......................... 59 114
Class C (non-voting and convertible):
2,000,000 shares authorized;
issued 3/99--255,602 shares;
9/98--258,474 shares............................. 3 2
Capital in excess of par value..................... 254,752 244,390
Retained earnings (deficit)........................ (125,196) (163,409)
Cost of common stock in treasury................... (6,220) (6,220)
---------- ----------
123,889 75,309
---------- ----------
$1,719,525 $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
March 31 ,
---------------------
(unaudited)
1999 1998
---------- ----------
<S> <C> <C>
Operating revenue........................................ $2,167,984 $2,192,285
Bulk deliveries to customer warehouses................... 7,909 26,069
---------- ----------
Total revenue............................................ 2,175,893 2,218,354
Operating cost of goods sold............................. 2,056,758 2,079,272
Cost of goods sold--bulk deliveries...................... 7,909 26,069
---------- ----------
Total cost of goods sold................................. 2,064,667 2,105,341
---------- ----------
Gross profit............................................. 111,226 113,013
Selling and administrative expenses...................... 65,110 70,687
Depreciation............................................. 3,500 3,358
Amortization............................................. 254 361
---------- ----------
Operating income......................................... 42,362 38,607
Interest expense......................................... 9,510 12,030
---------- ----------
Income before taxes...................................... 32,852 26,577
Taxes on income.......................................... 12,484 10,367
---------- ----------
Net income............................................... $ 20,368 $ 16,210
========== ==========
Net income per share..................................... $ .42 $ .34
========== ==========
Net income per share--assuming dilution.................. $ .41 $ .33
========== ==========
</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>
Six Months Ended
March 31,
---------------------
(unaudited)
1999 1998
---------- ----------
<S> <C> <C>
Operating revenue........................................ $4,328,888 $4,446,845
Bulk deliveries to customer warehouses................... 16,671 51,067
---------- ----------
Total revenue............................................ 4,345,559 4,497,912
Operating cost of goods sold............................. 4,115,969 4,228,226
Cost of goods sold--bulk deliveries...................... 16,671 51,067
---------- ----------
Total cost of goods sold................................. 4,132,640 4,279,293
---------- ----------
Gross profit............................................. 212,919 218,619
Selling and administrative expenses...................... 126,123 136,452
Depreciation............................................. 7,000 6,513
Amortization............................................. 510 643
---------- ----------
Operating income......................................... 79,286 75,011
Interest expense......................................... 17,651 24,692
---------- ----------
Income before taxes...................................... 61,635 50,319
Taxes on income.......................................... 23,422 19,626
---------- ----------
Net income............................................... $ 38,213 $ 30,693
========== ==========
Net income per share..................................... $ .79 $ .64
========== ==========
Net income per share--assuming dilution.................. $ .78 $ .63
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31
---------------------
(unaudited)
1999 1998
-------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 38,213 $ 30,693
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 7,000 6,513
Amortization, including deferred financing costs....... 1,368 1,501
Provision for losses on accounts receivable............ 2,298 8,383
Loss (gain) on disposal of property and equipment...... 15 (139)
Deferred income taxes.................................. 9,398 1,995
Changes in operating assets and liabilities:
Restricted cash....................................... 704 (29,936)
Accounts receivable................................... (26,712) 64,640
Merchandise inventories............................... (71,929) 58,520
Prepaid expenses...................................... (738) 446
Accounts payable, accrued expenses and income taxes... 48,369 (189,118)
Miscellaneous.......................................... (88) (47)
-------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.. 7,898 (46,549)
INVESTING ACTIVITIES
Capital expenditures.................................... (6,087) (5,171)
Purchase of equity interest in a business............... (3,570) --
Proceeds from sales of property and equipment........... 57 1,360
-------- -----------
NET CASH USED IN INVESTING ACTIVITIES................ (9,600) (3,811)
FINANCING ACTIVITIES
Long-term debt borrowings............................... 729,805 1,175,687
Long-term debt repayments............................... (664,930) (1,134,953)
Deferred financing costs and other -- (4,207)
Exercise of stock options............................... 7,500 1,973
-------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 72,375 38,500
-------- -----------
Increase (decrease) in cash and cash equivalents......... 70,673 (11,860)
Cash and cash equivalents at beginning of period......... 48,461 60,045
-------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $119,134 $ 48,185
======== ===========
</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, 1999, the results of operations
for the three and six months ended March 31, 1999 and 1998 and the cash flows
for the six months ended March 31, 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,
8
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
treble damages, attorneys' fees and costs. 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.
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
March 31, 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.
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 (48,587,239 and 47,788,746
for the three months ended March 31, 1999 and 1998, respectively; and
48,477,629 and 47,750,440 for the six months ended March 31, 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 (832,730 and 692,694 for the three months
ended March 31, 1999 and 1998, respectively; and 666,127 and 713,858 for the
six months ended March 31, 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.
9
<PAGE>
Note 4--Subsequent Events
Merger Agreement
In April 1999, the Company signed a definitive merger agreement with 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. Under the terms of the
agreement, shareholders of C.D. Smith will receive 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 will assume about $89 million in long-term
debt for a total transaction value of approximately $169 million based on the
Company's stock price on the date of signing. The combination has been
structured as a tax-free transaction which will be accounted for as a pooling
of interests and is expected to be completed by the end of June, 1999, subject
to customary regulatory and C.D. Smith shareholder approval.
Long-Term Debt Refinancing
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 will be 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 $0.6 million incurred to establish the
1999 Securitization Facility will be deferred and 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 will be used to extinguish
the Company's existing receivables securitization financing ("Receivables
Program") in the fourth quarter of fiscal 1999 which will result in an
extraordinary charge of $0.8 million (net of a $0.5 million tax benefit)
related to the write-off of unamortized deferred financing fees.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating revenue for the three months ended March 31, 1999 decreased 1%
from the prior year quarter to $2.2 billion. For the six months ended March
31, 1999, operating revenue was $4.3 billion, a decrease of 3% compared to the
prior year period. The decline from the prior year was due to the termination
of service contracts with two major warehousing chains and one large mail
order customer that accounted for approximately $280 million and $580 million
in the prior year second quarter and six-month period, respectively. During
the six months ended March 31, 1999, sales to hospitals and managed care
facilities increased 6% versus the prior year period as 13% 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 37%, as compared with the prior year period.
During the six months ended March 31, 1999 sales to hospitals and managed care
facilities accounted for 49% of total operating revenue, while sales to
independent drug stores accounted for 37% 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 $111.2 million in the second quarter of fiscal 1999
decreased by 2% as compared to the prior year quarter due to the decrease in
operating revenue. As a percentage of operating revenue, gross profit in the
second quarter of fiscal 1999 was 5.13% as compared to 5.16% in the prior year
quarter. For the six months ended March 31, 1999, the gross profit percentage
was 4.92% unchanged from the prior year period. The slight decline in gross
profit percentage in the quarter was due to changes in the customer mix. 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 March 31, 1999, 11 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 March 31, 1999, 50 employees have
been terminated related to these initiatives and severance costs of
$0.8 million have been paid in fiscal 1999. Severance and lease obligations
remaining to be paid of $42 million are included in accrued expenses and
other.
Selling and administrative expenses and depreciation decreased by $5.4
million or 7% in the second quarter of fiscal 1999 compared with the prior
year period, and as a percentage of operating revenue, were 3.16% in fiscal
1999 and 3.38% in fiscal 1998. For the first six months of fiscal 1999,
selling and administrative expenses and depreciation as a percentage of
operating revenue were 3.08% versus 3.21% in the prior year period. The
decrease in expenses as a percentage of operating revenue in the quarter was
due to a lower provision for bad debts and a reduction in delivery and
warehouse expense related to the termination of service contracts with the two
warehousing chains. These reductions offset costs incurred in the quarter of
$1.5 million related to the Company's ongoing centralization efforts and to
register the stock of a significant stockholder.
Operating income of $42.4 million in the quarter ended March 31, 1999
increased by 10% from the prior year period. The Company's operating margin
increased to 1.95% in fiscal 1999 from 1.76% in fiscal 1998. For the six
months ended March 31, 1999, the operating margin was 1.83% compared to 1.69%
in the prior year. The increase is due to the reduction in selling and
administrative expenses and depreciation as a percentage of operating revenue
discussed above while gross profit margins remained relatively stable.
Interest expense of $9.5 million in the second quarter of fiscal 1999
represents a decrease of 21% compared to the prior year period. For the six-
month period ending March 31, 1999 interest expense was $17.7 million, a
11
<PAGE>
decline of 29% 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 March 31, 1999 were $658 million as compared to
average borrowings of $732 million in the period fiscal year. For the six-
month period ended March 31, 1999, average borrowings were $587 million versus
$726 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.
The income tax provision for the three and six months ended March 31, 1999
was computed based on an estimate of the full year effective tax rate.
Net income in the second quarter of fiscal 1999 increased to $20.4 million
from $16.2 million in the prior year quarter and net income per share assuming
dilution was $0.41, a 24.2% increase over the prior year quarter. For the six
months net income per share assuming dilution increased 23.8%.
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 six months ended March 31, 1999, the Company's operating
activities provided $7.9 million in cash primarily due to net income and
increases in accounts payable and accrued expenses of $48.4 million offset by
increases in merchandise inventories of $71.9 million and accounts receivable
of $26.7 million. Operating cash uses during the six months ended March 31,
1999 included $17.5 million in interest payments and $4.5 million in net
income tax payments.
Capital expenditures for the six months ended March 31, 1999 were $6.1
million and relate principally to investments in warehouse automation,
warehouse improvements, and information technology. Similar expenditures of
approximately $12 to $14 million are expected to occur later in 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 March 31, 1999,
borrowings under the Company's $500 million revolving credit facility were
$210.0 million (at an average interest rate of 5.9%) and borrowings under the
$375 million receivables securitization financing were $300.0 million (at an
average interest rate of 5.3%). 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 replaced its existing receivables securitization
facility with the $325 million 1999 Securitization Facility. 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 facilities represent financing vehicles 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.
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. 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
12
<PAGE>
long-term borrowings. 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 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.
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 March 31, 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 April 1999, the Company signed a definitive merger agreement with 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. Under the terms of the
Agreement, shareholders of C.D. Smith will receive 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 will assume about $89 million in long-term
debt for a total transaction value of approximately $169 million based on the
Company's stock price on the date of signing. The combination has been
structured as a tax-free transaction which will be accounted for as a pooling
of interests and is expected to be completed by the end of June 1999, subject
to customary regulatory and C.D. Smith shareholder approval. Merger expenses
are expected to be $2 to $4 million and will be expensed upon consummation of
the merger. 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 charge of $6 to $12 million. Long-term debt of
C.D. Smith may also be extinguished, resulting in an extraordinary change of
$3 to $4 million, net of tax benefits.
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.
13
<PAGE>
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, to date the Company is approximately 95% complete on the
remediation phase and expects to be completed with its software reprogramming
and replacement no later than May 31, 1999. 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 is
approximately 95% complete and is expected to be completed by May 31, 1999.
Testing of the affected equipment is approximately 95% complete and
implementation of affected equipment is 90% complete. Testing and
implementation are expected to be complete by June 30, 1999.
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 approximately 50% complete
with its remediation efforts relating to EDI software and expects to be
complete by May 31, 1999. Testing and implementation of this software is
expected to be completed by June 30, 1999.
In February 1999, the Company sent surveys to over 6,000 significant
customers to assess their Year 2000 compliance. The Company is planning to
survey its top 200 vendors in May, 1999 and has also visited its top 50
vendors to assess Year 2000 compliance plans. Based on the nature of their
responses, the Company is developing 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.
14
<PAGE>
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.
Contingency Plans
The Company is developing contingency plans to address the above Year 2000
risks as necessary. Currently contingency plans have been completed for 14 of
the 19 drug distribution facilities with the remainder expected to be
finalized by the end of May, 1999. Corporately the Company is working on
finalizing contingency plans for its centralized data processing system. 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.
15
<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 March 31, 1999.
16
<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 Senior Vice
President, Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael D. DiCandilo
_____________________________________
Michael D. DiCandilo Vice
President, Controller (Principal
Accounting Officer)
Date: May 17, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999
<PERIOD-START> OCT-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 155,474 155,474
<SECURITIES> 0 0
<RECEIVABLES> 480,326 480,326
<ALLOWANCES> 25,775 25,775
<INVENTORY> 942,152 942,152
<CURRENT-ASSETS> 3,816 3,816
<PP&E> 121,360 121,360
<DEPRECIATION> 61,608 61,608
<TOTAL-ASSETS> 1,719,525 1,719,525
<CURRENT-LIABILITIES> 1,068,408 1,068,408
<BONDS> 518,564 518,564
0 0
0 0
<COMMON> 553 553
<OTHER-SE> 123,336 123,336
<TOTAL-LIABILITY-AND-EQUITY> 1,719,525 1,719,525
<SALES> 4,345,559 2,175,893
<TOTAL-REVENUES> 4,345,559 2,175,893
<CGS> 4,132,640 2,064,667
<TOTAL-COSTS> 4,132,640 2,064,667
<OTHER-EXPENSES> 133,633 68,864
<LOSS-PROVISION> 2,298 1,703
<INTEREST-EXPENSE> 17,651 9,510
<INCOME-PRETAX> 61,635 32,852
<INCOME-TAX> 23,422 12,484
<INCOME-CONTINUING> 38,213 20,368
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 38,213 20,368
<EPS-PRIMARY> .79 .42
<EPS-DILUTED> .78 .41
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> OCT-01-1997 JAN-01-1998
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 87,007 87,007
<SECURITIES> 0 0
<RECEIVABLES> 462,427 462,427
<ALLOWANCES> 30,158 30,158
<INVENTORY> 959,308 959,308
<CURRENT-ASSETS> 1,512,922 1,512,922
<PP&E> 118,386 118,386
<DEPRECIATION> 52,991 52,991
<TOTAL-ASSETS> 1,631,171 1,631,171
<CURRENT-LIABILITIES> 942,040 942,040
<BONDS> 630,540 630,540
0 0
0 0
<COMMON> 544 544
<OTHER-SE> 47,469 47,469
<TOTAL-LIABILITY-AND-EQUITY> 1,631,171 1,631,171
<SALES> 4,497,912 2,218,354
<TOTAL-REVENUES> 4,497,912 2,218,354
<CGS> 4,279,293 2,105,341
<TOTAL-COSTS> 4,279,293 2,105,341
<OTHER-EXPENSES> 143,608 74,406
<LOSS-PROVISION> 8,383 5,317
<INTEREST-EXPENSE> 24,692 12,030
<INCOME-PRETAX> 50,319 26,577
<INCOME-TAX> 19,626 10,367
<INCOME-CONTINUING> 30,693 16,210
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30,693 16,210
<EPS-PRIMARY> .64 .34
<EPS-DILUTED> .63 .33
</TABLE>
