<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, 2000
<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) 727-7000
</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, 2000 was: Class A--51,619,386, Class B--8,446; Class
C--161,978.
<PAGE>
INDEX
AMERISOURCE HEALTH CORPORATION
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
<S> <C>
Consolidated balance sheets--June 30, 2000 and September 30, 1999
Consolidated statements of operations--Three months ended June 30, 2000 and June 30, 1999
Consolidated statements of operations--Nine months ended June 30, 2000 and June 30, 1999
Consolidated statements of cash flows--Nine months ended June 30, 2000 and June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and qualitative disclosures about market risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Amerisource Health Corporation Financial Statements (Unaudited)
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<S> <C> <C>
June 30, September 30,
2000 1999
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 36,160 $ 59,497
Accounts receivable less allowance for doubtful
accounts: 6/00--$32,844, 9/99--$27,583 ............... 595,397 612,520
Merchandise inventories ................................ 1,629,073 1,243,153
Prepaid expenses and other ............................. 5,564 4,836
---------- ----------
Total current assets .................................. 2,266,194 1,920,006
Property and equipment, at cost:
Land ................................................... 3,987 4,125
Buildings and improvements ............................. 39,206 38,855
Machinery, equipment and other ......................... 95,878 91,760
---------- ---------
139,071 134,740
Less accumulated depreciation .......................... 74,187 70,356
---------- ---------
64,884 64,384
Other assets, less accumulated amortization:
6/00--$10,845; 9/99--$8,967 ............................ 71,702 76,209
---------- ----------
$2,402,780 $2,060,599
========== ==========
</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>
<S> <C> <C>
June 30, September 30,
2000 1999
---------- ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $1,449,529 $1,175,619
Accrued expenses and other ................................. 51,645 50,329
Accrued income taxes ....................................... 15,289 10,854
Deferred income taxes ...................................... 99,667 90,481
---------- ----------
Total current liabilities ............................... 1,616,130 1,327,283
Long-term debt:
Revolving credit facility .................................. 149,591 225,227
Receivables securitization financing ....................... 375,000 325,000
Other debt ................................................. 8,288 8,478
---------- ----------
532,879 558,705
Other liabilities ............................................ 8,628 8,334
Stockholders' equity
Common stock, $.01 par value:
Class A (voting and convertible):
100,000,000 shares authorized;
issued 6/00--52,321,553 shares;
9/99--51,737,893 shares ................................. 523 517
Class B (non-voting and convertible):
15,000,000 shares authorized;
issued 6/00--5,908,445 shares;
9/99--5,908,445 shares ................................. 59 59
Class C (non-voting and convertible):
2,000,000 shares authorized;
issued 6/00--161,978 shares;
9/99--165,936 shares ................................... 2 2
Capital in excess of par value ............................. 274,393 266,737
Accumulated deficit ........................................ (23,614) (94,632)
Cost of common stock in treasury ........................... (6,220) (6,220)
Note receivable from ESOP.................................... -- (186)
---------- ----------
245,143 166,277
---------- ----------
$2,402,780 $2,060,599
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
(UNAUDITED)
<S> <C> <C>
2000 1999
Operating revenue...................................................... $2,921,424 $2,455,797
Bulk deliveries to customer warehouses................................. 10,282 12,740
---------- ----------
Total revenue.......................................................... 2,931,706 2,468,537
Operating cost of goods sold........................................... 2,791,794 2,342,772
Cost of goods sold - bulk deliveries................................... 10,282 12,740
---------- ----------
Total cost of goods sold............................................... 2,802,076 2,355,512
---------- ----------
Gross profit........................................................... 129,630 113,025
Selling and administrative expenses.................................... 77,944 67,330
Depreciation........................................................... 3,464 3,734
Amortization........................................................... 446 494
Facility consolidations and employee severance......................... (1,123)
---------- ----------
Operating income....................................................... 48,899 41,467
Interest expense....................................................... 8,383 8,218
Interest expense - adjustment of common stock put warrant to fair value -- (1,499)
---------- ----------
Income before taxes.................................................... 40,516 34,748
Taxes on income........................................................ 15,396 12,988
---------- ----------
Net income............................................................. $ 25,120 $ 21,760
========== ==========
Net income per share................................................... $.49 $.43
========== ==========
Net income per share - assuming dilution............................... $.48 $.39
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
June 30,
-----------------------------------
(unaudited)
<S> <C> <C>
2000 1999
---------- -----------
Operating revenue...................................................... $8,582,219 $7,191,317
Bulk deliveries to customer warehouses................................. 31,072 37,126
---------- ----------
Total revenue.......................................................... 8,613,291 7,228,443
Operating cost of goods sold........................................... 8,201,256 6,844,180
Cost of goods sold - bulk deliveries................................... 31,072 37,126
---------- ----------
Total cost of goods sold............................................... 8,232,328 6,881,306
---------- ----------
Gross profit........................................................... 380,963 347,137
Selling and administrative expenses.................................... 224,512 206,741
Depreciation........................................................... 10,440 11,309
Amortization........................................................... 1,386 1,476
Facility consolidations and employee severance......................... (1,123)
---------- ----------
Operating income....................................................... 145,748 127,611
Interest expense....................................................... 31,203 29,884
Interest expense - adjustment of common stock put warrant to fair value -- 334
---------- ----------
Income before taxes.................................................... 114,545 97,393
Taxes on income........................................................ 43,527 37,519
---------- ----------
Net income............................................................. $ 71,018 $ 59,874
========== ==========
Net income per share................................................... $1.38 $1.18
========== ==========
Net income per share - assuming dilution............................... $1.37 $1.16
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------------------
(unaudited)
<S> <C> <C>
2000 1999
----------- -----------
OPERATING ACTIVITIES
Net income ..................................................................... $ 71,018 $ 59,874
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation .................................................................. 10,440 11,309
Amortization, including deferred financing costs .............................. 2,469 3,658
Adjustment of common stock put warrant to fair value............................ -- 334
Provision for losses on accounts receivable ................................... 7,898 3,159
Loss on disposal of property and equipment .................................... 79 265
Deferred income taxes ......................................................... 15,856 15,112
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Restricted cash ............................................................. -- (16,267)
Accounts receivable ......................................................... 7,226 (36,515)
Merchandise inventories ..................................................... (385,920) (325,839)
Prepaid expenses and other .................................................. (2,606) (1,946)
Accounts payable, accrued expenses and income taxes ......................... 285,559 182,048
Miscellaneous................................................................. 86 933
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......................... 12,105 (103,875)
INVESTING ACTIVITIES
Capital expenditures ........................................................... (12,360) (12,274)
Purchases of equity interests in businesses .................................... (3,406) (3,570)
Collections on ESOP note receivable.............................................. 186 109
Proceeds from sales of property and equipment .................................. 1,258 767
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................................. (14,322) (14,968)
FINANCING ACTIVITIES
Long-term debt borrowings ...................................................... 1,033,146 1,794,830
Long-term debt repayments ...................................................... (1,058,891) (1,685,974)
Deferred financing costs and other............................................... (174) (549)
Purchase of treasury stock....................................................... -- (101)
Exercise of stock options ...................................................... 4,799 8,254
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ......................... (21,120) 116,460
----------- -----------
Decrease in cash and cash equivalents ........................................... (23,337) (2,383)
Cash and cash equivalents at beginning of period ................................ 59,497 48,511
----------- -----------
$ 36,160 $ 46,128
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................... =========== ===========
</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, 2000, the results of operations for the
three and nine months ended June 30, 2000 and 1999 and the cash flows for the
nine months ended June 30, 2000 and 1999 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,
1999.
In July 1999, the Company acquired C.D. Smith Healthcare, Inc. The business
combination was accounted for as a pooling-of-interests and, accordingly, prior
year results have been restated to reflect this accounting treatment.
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, regulatory agency and other
matters. In some of these proceedings plaintiffs may seek to recover large and
sometimes unspecified amounts and the matters may remain unresolved for several
years. On the basis of information furnished by counsel and others, the Company
does not believe that these matters, individually or in the aggregate, will have
a material adverse effect on its business or financial condition.
In 1998, the Company sued a former customer which refused to pay invoices, net
of credit memos, totaling approximately $21 million for goods sold and
delivered. The former customer filed counterclaims alleging it suffered damages
as a result of certain performance problems affecting the Company. In January
2000, the Company settled all claims with the former customer. Under the terms
of the confidential settlement agreement, which did not have any adverse effect
on the Company's financial position or results of operations, the Company
received periodic payments through July 2000.
8
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(Continued)
Note 2 - Legal Matters and Contingencies - continued
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in a series
of purported class action antitrust lawsuits brought by retail pharmacies
alleging violations of various antitrust laws stemming from the use of
chargeback agreements. In addition, the Company and four other wholesale
distributors were added as defendants in a series of related antitrust lawsuits
brought by independent pharmacies 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 sought injunctive relief, 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 released any
claims which it might have had against the manufacturers for the claims
presented by the plaintiffs in these lawsuits. Subsequent amendments to the
Judgment Sharing Agreement provided additional protection to the Company from
litigation expenses in exchange for updated releases. 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 Seventh Circuit Court of Appeals.
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 in the class case then appealed the District Court's judgment to the
Seventh Circuit Court of Appeals. On June 9, 1999, the Seventh Circuit affirmed
the judgment the District Court entered in favor of the Company in the class
case. Plaintiffs filed a petition for a writ of certiorari to the United States
Supreme Court and that petition was denied.
The state cases are proceeding. The Minnesota case settled without any
payment or admission of liability by the Company. On November 29, 1999, the
trial court in Alabama dismissed all of the claims asserted against the Company
and the other wholesaler and manufacturer defendants in accordance with a ruling
from the Alabama Supreme Court. The Mississippi and Tennessee cases remain
pending, though there has been very little activity in either forum.
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 presides 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 defend itself vigorously in all of these cases.
9
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AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(Continued)
Note 2 - Legal Matters and Contingencies - continued
Environmental laws and regulations may require the Company to take
remediation efforts at the site of a former distribution center. 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 liabilities in the accompanying consolidated balance sheet
($3.8 million at June 30, 2000), 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
regulation. However, changes in remediation standards, improvements in cleanup
technology and discovery of additional information concerning the site could
affect the estimated liability in the future.
Note 3--Earnings Per Share
Earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the periods presented (51,583,313 and
50,731,153 for the three months ended June 30, 2000 and 1999, respectively; and
51,413,614 and 50,539,680 for the nine months ended June 30, 2000 and 1999,
respectively). Earnings per share--assuming dilution is computed on the basis of
the weighted average number of shares of common stock outstanding during the
period plus the dilutive effect of stock options and the common stock put
warrant (502,376 and 934,867 for the three months ended June 30, 2000 and 1999,
respectively; and 356,243 and 1,155,578 for the nine months ended June 30, 2000
and 1999, respectively). The fiscal 1999 calculations of earnings per share -
assuming dilution consider the common stock put warrant as if converted and,
therefore, net income excludes the effect of interest expense - adjustment of
common stock put warrant to fair value. All shares held by the ESOP are
considered outstanding for the purposes of computing earnings per share.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
All results for the prior year have been restated to reflect the July 1999
acquisition of C.D.Smith Healthcare, Inc. ("C.D. Smith") which was accounted for
as a pooling-of-interests.
Results of Operations
Operating revenue for the three months ended June 30, 2000 increased 19% from
the prior year quarter to $2.9 billion. For the nine months ended June 30, 2000,
operating revenue was $8.6 billion, an increase of 19% from the prior year
period. During the three and nine months ended June 30, 2000, respectively,
sales to health systems and alternate site facilities increased 26% and 28%,
sales to independent drug store customers increased 11% and 12%, and sales to
the chain drug store customer group increased 14% and 10% compared to the
respective prior year period. The increase in health systems and alternate site,
formerly described as hospital and managed care, revenue was primarily due to
41% revenue growth with the Veterans Administration, which accounted for 19% of
total operating revenue in the nine-month period ended June 30, 2000. In
addition, alternate site revenue increased significantly due to the Company's
sales reorganization in the prior year, which created a national and regional
alternate site sales force. The increase in independent drug store and chain
drug store revenue was consistent with overall industry growth. During the nine
months ended June 30, 2000, sales to health systems and alternate site
facilities accounted for 51% of total operating revenue, while sales to
independent drug stores accounted for 37% and sales to chain drug stores
accounted for 12% of the total.
Gross profit of $129.6 million in the third quarter of fiscal 2000 increased by
15% as compared to the prior year quarter due to the increase in operating
revenue. As a percentage of operating revenue, the gross profit in the third
quarter of fiscal 2000 was 4.44% as compared to 4.60% in the prior year quarter.
For the nine months ended June 30, 2000, the gross profit percentage was 4.44%
as compared to 4.83% in the prior year period. The declines in gross profit
percentages in the quarter and for the nine-month period were primarily due to
changes in the customer mix which included more lower margin hospital and
government hospital business than in the prior year and continuing price
competition within the pharmaceutical distribution industry. Gross profit may
continue to be impacted by changes in customer and product mix, price
competition, and manufacturer pricing policies. In addition, the Company's cost
of goods sold for interim periods includes a LIFO provision that is based on the
Company's estimated full-year provision. This provision is subject to changes
in inventory quantities, product mix, and manufacturer pricing practices, which
may be impacted by market and other external influences.
Selling and administrative expenses and depreciation increased by $10.3 million
or 15% in the third quarter of fiscal 2000 compared with the prior year quarter,
and as a percentage of operating revenue, were 2.79% in fiscal 2000 and 2.89% in
fiscal 1999. For the first nine months of fiscal 2000, selling and
administrative expenses and depreciation as a percentage of operating revenue
were 2.74% as compared to 3.03% in the prior year period. The increase in
operating expense during the quarter was due to the increase in operating
revenue as well as a $5.3 million provision for bad debt expense, which compares
to a $0.5 million provision in the prior year quarter. For the nine-month period
ended June 30, 2000, the bad debt provision was $7.9 million as compared to $3.2
million in the prior year period. The bad debt increase was primarily due to
certain customer account deteriorations and customer business failures during
the quarter. The Company does not believe that this higher level of customer
business failures and resultant bad debt expense is indicative of a trend;
however, there can be no assurance that similar events will not occur and result
in additional bad debt expense in the future. The decrease in expenses as a
percentage of operating revenue in the quarter and nine month period was due to
increased sales to the health systems and alternate site facilities described
above, warehouse efficiencies arising from increased throughput per facility,
and cost reductions related to the Company's fiscal 1998 and 1999 restructuring
efforts.
11
<PAGE>
In connection with its acquisition of C.D.Smith in July 1999, the Company began
the consolidation of C.D. Smith's Chicago, Illinois pharmaceutical distribution
facility into an existing AmeriSource distribution facility and the
consolidation of C.D Smith's pharmaceutical packaging business into
AmeriSource's packaging operation. In addition, the Company began to incorporate
the remaining two C.D. Smith facilities into the centralization process started
in the fourth quarter of fiscal 1998. The Chicago facility was closed in January
2000, and the St. Joseph, Missouri and Boston, Massachusetts pharmaceutical
distribution facilities were converted to the centralized system at the end of
March 2000 and April 2000, respectively. A charge of $12.8 million was
recognized in the fourth quarter of fiscal 1999 related to this effort, and
included a $7.2 million write-down of goodwill and fixed assets related to the
Chicago facility, $3.5 million of contract and lease cancellations and other
costs primarily relating to the expected termination of a non-cancelable supply
contract, and $2.1 million of severance for approximately 90 warehouse and
administrative personnel to be terminated as a result of the facility
consolidation and centralization. As of June 30, 2000, all of the restructuring
efforts except the final resolution of the non-cancelable supply contract have
been completed. The supply contract termination is currently in arbitration with
a decision expected to be reached in the fourth quarter of fiscal 2000.
Severance accruals of $0.5 million related to the fiscal 1999 charge were
reversed into income during the third quarter of fiscal 2000 primarily
reflecting the decision to retain a manager previously targeted to be
terminated.
In the fourth quarter of fiscal 1998, the Company began to centralize its data
processing, accounting, contract administration and purchasing functions,
reorganize its pharmaceutical distribution facilities into five regions, and
consolidate one pharmaceutical distribution facility into another facility. A
charge of $8.3 million was recognized in the fourth quarter of fiscal 1998
related to this effort and 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, 2000, 18 of the original 19
targeted distribution facilities have been converted to the centralized system.
The remaining facility has been rescheduled to be converted in September 2000.
As of June 30, 2000, approximately 30 of the 350 targeted employees have not yet
been terminated and in the quarter the Company reversed restructuring accruals
related to the fiscal 1998 charge of approximately $0.6 million representing
severance not paid to targeted employees who left the Company before receiving
their benefits or took other positions within the Company. This $0.6 million
reversal, combined with the $0.5 million reversal of the fiscal 1999 charge
described above, is included in the facility consolidations and employee
severance line in the statements of operations.
Operating income of $48.9 million in the quarter ended June 30, 2000 increased
by 18% from the prior year period, 3% of which was due to the reversal of the
restructuring charges described above. The Company's operating margin for the
quarter, excluding the restructuring reversal, decreased to 1.64% in fiscal 2000
from 1.69% in fiscal 1999. For the nine months ended June 30, 2000, the
operating margin was 1.69% compared to 1.77% in the prior year period. The
decrease is due to the reduction in gross margin described above offset in part
by the decrease in selling and administrative expenses and depreciation as a
percentage of operating revenue.
Interest expense of $8.4 million in the third quarter of fiscal 2000 represents
an increase of 2% compared to the prior year quarter. The increase from the
prior year was primarily due to an increase in market interest rates of
approximately 130 basis points offset in part by a decline in average borrowings
of 1% and the extinguishment of higher cost debt facilities in July 1999 assumed
in the acquisition of C.D. Smith. Average borrowings during the quarter ended
June 30, 2000 were $504 million as compared to average borrowings of $512
million in the prior year quarter. The decrease in average borrowings during the
quarter from the prior year was primarily due to a one day reduction in days
sales outstanding during the period. For the nine-month period ended June 30,
2000, interest expense increased 4% compared to the prior year period due to
increases in market interest rates and average borrowings. Average borrowings
for the nine-month period ended June 30, 2000 increased 1.6% to $621 million.
Interest expense-adjustment of common stock put warrant to fair value of $1.5
million (credit to income) in the prior year quarter did not recur in the
current fiscal year due to the conversion of the underlying warrant to common
stock in the fourth quarter of fiscal 1999.
The income tax provision for the three and nine months ended June 30, 2000, was
computed based on an estimate of the full year effective tax rate.
12
<PAGE>
Net income in the third quarter of fiscal 2000 increased 15% to $25.1 million
from $21.8 million in the prior year quarter and net income per share --
assuming dilution increased 23% from the prior year quarter to $0.48 per share
as compared to $0.39 per share in the prior year quarter. Net income of $71.0
million for the nine months ended June 30, 2000 represents a 19% increase
compared to the prior year period.
Liquidity and Capital Resources
During the nine-month period ended June 30, 2000, the Company's operating
activities generated $12.1 million of cash primarily from an increase in
accounts payable, accrued expenses and income taxes of $285.7 million which
combined with net income of $71.0 million and a decrease in accounts receivable
of $7.2 million offset increases in merchandise inventories of $385.9 million.
Centralization of accounts payable processing and timing of vendor payments
accounted for a 6% increase in days payables outstanding during the period.
Accounts receivable decreased despite the 19% increase in operating revenue due
to collections on the disputed receivables discussed in Note 2 as well as the
change in customer mix to quicker payment terms from the fast growing health
systems customer class. Merchandise inventories increased 31% during the nine-
month period ending June 30, 2000 due to the 19% increase in operating revenue
as well as additional inventory held in anticipation of manufacture price
increases and anticipated new customer accounts. During the nine-month period
ended June 30, 1999, the Company used $103.9 million of cash from operations as
increases in merchandise inventories of $325.8 million and accounts receivable
of $36.5 million offset net income of $59.9 million and increases in accounts
payable, accrued expenses and income taxes of $182.0 million. Merchandise
inventories increased in the prior year to support new customer contracts, to
provide for seasonal buying opportunities and to address year 2000 supply
concerns. Operating cash uses during the nine months ended June 30, 2000,
included $30.7 million in interest payments and $18.5 million in income tax
payments. Additionally, the Company paid $3.2 million of severance and lease
cancellation costs and other during the nine-month period ended June 30, 2000
related to its fiscal 1999, 1998, and 1997 cost reduction plans. Severance
accruals of $0.3 million and remaining contract and lease obligations of $3.0
million at June 30, 2000 related to the cost reduction plans are included in
accrued expenses and other.
Capital expenditures for the nine months ended June 30, 2000 were $12.4 million
and relate principally to investments in information technology and warehouse
automation equipment. Similar expenditures of approximately $4 million to $6
million are expected to occur in the next three months of fiscal 2000.
In August 2000, the Company and three other healthcare distributors signed a
definitive joint venture agreement to form an Internet-based company that would
be an independent, commercially neutral healthcare product information exchange
focused on streamlining the processes involved in identifying, purchasing and
distributing healthcare products and services. The Company's ownership interest
is expected to be approximately 22% and the Company has committed to contribute
approximately $11 million over the next one to two years before the entity is
expected to become self-sustaining.
Cash provided by financing activities during fiscal 2000 represents borrowings
under the Company's revolving credit facility and its receivable securitization
facility primarily to fund working capital requirements. At June 30, 2000,
borrowings under the Company's $500 million revolving credit facility were
$149.6 million and borrowings under the $400 million receivables program were
$375.0 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. The receivables
securitization facility was entered into in May 1999 and has a term of three
years. Interest rates are based on prevailing market rates for short-term
commercial paper 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 lower interest rates relative to other financing
sources. The Company securitizes its trade account and note receivables, which
are generally non-interest bearing, in transactions that do not qualify as sales
transactions under SFAS No. 125. During the third quarter, the Company amended
its receivables securitization facility to provide an additional $75 million of
borrowing capacity, increasing total commitments under this facility from $325
million to $400 million.
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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 exposures 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 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 on outstanding debt. The Company's primary
ongoing cash requirements will be to pay 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.
Environmental laws and regulations may require the Company to take remediation
efforts at the site of a former distribution center. 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, 2000), which is reflected in other long-term liabilities on the
accompanying consolidated balance sheet, is based on an estimate of the extent
of contamination and choice of remedy, existing technology, and presently
enacted laws and regulation, however, changes in remediation standards,
improvements in cleanup technology, and discovery of additional information
concerning the site could affect the estimated liability in the future.
Year 2000 Issue
The Company has not experienced any significant internal or external problems to
date related to its information systems or other assets as a result of the Year
2000 Issue. However, certain problems may have occurred with customers or
suppliers that the Company is not yet aware of that could have an adverse effect
on the Company.
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, market
technology, competitive pressures, customer and product mix, supplier pricing
practices, 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.
Item 3. Quantitative and qualitative disclosures about market risk.
See discussion in Item 2. above.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.15 -- First amendment dated May 12, 2000 to the Receivables Purchase
Agreement dated May 14, 1999.
27 -- Financial Data Schedules
27.1 -- June 30, 2000
27.2 -- June 30, 1999 (restated)
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter
ended June 30, 2000.
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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 11, 2000
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