<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
------------
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
[X]
For the Fiscal Year Ended September 30, 2000
OR
[_]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
<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)
1300 Morris Drive, Suite 100
Chesterbrook, PA 19087
(610) 727-7000
</TABLE>
Securities Registered Pursuant to Section 12(b) of the Act:
AmeriSource Health Corporation:
None
Securities Registered Pursuant to Section 12(g) of the Act:
AmeriSource Health Corporation:
Common Stock, $.01 par value per
share
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Non-affiliates of AmeriSource Health Corporation, as of December 1, 2000,
held 51,500,492 shares of voting stock. The registrant's voting stock is
traded on the New York Stock Exchange under the trading symbol "AAS." The
aggregate market value of the registrant's voting stock held by non-affiliates
of the registrant (based upon the closing price of such stock on the New York
Stock Exchange on December 1, 2000 and the assumption for this computation
only that all directors and executive officers of the registrant are
affiliates) was $2,517,086,546.50.
The number of shares of common stock of AmeriSource Health Corporation
outstanding as of December 1, 2000 was: Class A--52,109,492; Class B--8,446;
Class C--160,798.
Documents Incorporated by Reference
Portions of the following document are incorporated by reference in the Part
of this report indicated below:
Part III--Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Business
AmeriSource Health Corporation is a holding company and substantially all of
its operations are conducted through its direct wholly-owned subsidiary,
AmeriSource Corporation. We are a leading wholesale distributor of
pharmaceutical products and related healthcare solutions in the United States.
We provide services to health systems (hospitals and other acute care
facilities), alternate site customers (mail order facilities, nursing homes,
clinics and other non-acute care facilities), independent community pharmacies
and chain drugstores. We believe we are the largest provider of
pharmaceuticals to the health systems market.
We serve customers nationwide through 21 pharmaceutical distribution
facilities and three specialty products distribution facilities. We are
typically the primary source of supply for pharmaceutical and related products
to our customers. We offer a broad range of solutions to our customers and
suppliers designed to enhance the efficiency and effectiveness of their
operations, allowing them to improve the delivery of healthcare to patients
and consumers.
Over the past five years we have grown significantly, primarily as a result
of overall industry growth, acquisitions, and a focused business strategy that
has created market share gains in existing markets. During that period, our
operating revenue has increased at a compound annual growth rate of 18.9%, and
our operating income (before unusual items) has increased at a compound annual
growth rate of 15.1%.
AmeriSource Health Corporation was incorporated in Delaware in 1988. The
address of the principal executive office of the Company is 1300 Morris Drive,
Suite 100, Chesterbrook, PA 19087. The telephone number is (610) 727-7000 and
our web site is www.amerisource.com.
Business Strategy
AmeriSource's business strategy is anchored in national pharmaceutical
distribution and reinforced by the value-added business solutions it provides
its customers and suppliers. This focused strategy has resulted in significant
business expansion over the past five years and the Company believes it is
well-positioned to continue its revenue growth and increase operating income
through the execution of the following key elements of its business strategy:
. Increasing Market Share in Existing Markets. The Company believes that it
is well-positioned to continue to grow in its existing markets by: (i)
providing superior distribution services to its customers and suppliers;
(ii) delivering value-added solutions which improve the efficiencies and
competitiveness of both customers and suppliers, allowing the supply
chain to better deliver healthcare to patients and consumers; (iii)
focusing on market-based customer groups in order to deliver the specific
programs and services unique to each group; (iv) continuing to expand
geographically by further penetrating selected market areas which the
Company has only recently entered; (v) maintaining its low-cost operating
structure to ensure that the Company's services are priced competitively
in the marketplace; (vi) continuing to develop and acquire new value-
added solutions for customers and suppliers; (vii) maintaining its
decentralized operating structure to respond to customers' needs more
quickly and efficiently and to ensure the continued development of local
and regional management talent. These factors have allowed AmeriSource to
compete effectively in the marketplace and generate above-average
industry sales growth over the last five years.
. Acquisition Opportunities. The Company believes that opportunities may
arise to acquire local and regional distribution companies or other
companies which will deliver value-added solutions to customers or
suppliers.
. Continuing Growth of Healthcare Solutions for Customers. AmeriSource
works closely with customers to develop an extensive range of healthcare
solutions both for specific customer groups and across the
1
<PAGE>
customer base. In addition to enhancing the Company's profitability, these
solutions increase customer loyalty and strengthen AmeriSource's overall
role in the pharmaceutical supply channel. These solutions include: the
ECHO(R) Suite, a proprietary software system providing sophisticated
ordering and inventory management assistance to institutional and retail
customers as well as iECHO(R) for Internet access, iECHO(R) Plus for
multiple sites, ECHO(R) Inventory Module for physical inventory
management, and other ECHO(R) management tools; Family Pharmacy(R), which
enables independent community pharmacies and small chain drugstores to
compete more effectively through access to pharmaceutical benefit and
merchandising programs, disease management and pharmaceutical care
services, and familypharmacy.com, the new e-commerce site which provides
on-line shopping; AmeriSource Select(R), which provides best-priced
generic products; American Health Packaging, which delivers unit dose,
punch card and unit-of-use packaging for health systems, alternate site
and retail customers; Pharmacy Healthcare Solutions, which provides
hospital consulting to improve operational efficiencies and RECOVERx, a
program for recovering indigent patient pharmaceutical reimbursements;
Diabetes Shoppe and Diabetes Corner(TM), which provide independent and
chain pharmacies with an array of products for diabetics; Rita Ann, the
fragrance and cosmetic specialty distributor with a wide variety of
prestige products; and Health Services Plus, which delivers a
comprehensive supply of injectables, vaccines, plasma and oncology
products to a variety of providers of healthcare. In addition, the Company
owns a 19.9% interest in Telepharmacy Solutions, Inc., formerly ADDS,
Inc., a leading provider of e-commerce medications management solutions
for the healthcare industry.
. Continuing Growth of Healthcare Solutions for Suppliers. Since
centralizing procurement activities over a year ago, AmeriSource has been
rapidly developing solutions for suppliers to improve the healthcare
supply chain. Programs for suppliers to rapidly distribute new products,
marketing services to expand usage and availability of products, custom
packaging, and data sharing are only a few of the value-added solutions
being developed to support suppliers. The Company believes these services
will continue to expand and contribute to its revenue and income growth.
. Maintain Low-Cost Operating Structure. AmeriSource believes it has one of
the lowest operating cost structures among its four major national
competitors. This year the Company completed a two-year effort to move
its 21 pharmaceutical distribution centers to a common information
technology platform. This successful effort combined with the
centralization of the procurement, accounting and contract administration
activities has contributed significantly to reduced operating expenses as
a percentage of revenue. Specifically, the Company has reduced its
selling and administrative expenses and depreciation as a percentage of
operating revenue from 3.62% in fiscal 1995 to 2.73% in fiscal 2000. In
addition, AmeriSource believes it will continue to achieve productivity
and operating income gains as it invests in warehouse automation
technology, implements "best practices" in warehousing activities, and
increases operating leverage due to increased volume per pharmaceutical
distribution facility.
Industry Overview
The Company has benefited from the significant growth of the full-service
drug wholesale industry in the United States. Industry sales grew from $30
billion in 1990 to $95 billion in 1999. While sales throughout the wholesale
drug industry have grown, the number of pharmaceutical wholesalers in the
United States has declined significantly in recent years. This consolidation
trend may continue, with the industry's largest companies increasing their
percentage of total industry sales.
The factors contributing to the growth of the full-service drug wholesale
industry in the United States and other favorable industry trends include (i)
an aging population, (ii) the introduction of new pharmaceuticals, (iii) the
increased use of outpatient drug therapies, (iv) rising pharmaceutical prices,
and (v) expiration of patents for widely used brand name pharmaceuticals.
Aging Population. The number of individuals over age 65 in the United States
grew from approximately 31 million in 1990 to approximately 34 million in 2000
and is projected to increase to more than 39 million by the year 2010. This
age group suffers from a greater incidence of chronic illnesses and
disabilities than the rest of the population and is estimated to account for
approximately two-thirds of total health care expenditures in the United
States.
2
<PAGE>
Introduction of New Pharmaceuticals. Traditional research and development as
well as the advent of new research, production and delivery methods, such as
biotechnology and gene research and therapy, continue to generate new
compounds and delivery methods that are more effective in treating diseases.
These compounds have been responsible for significant increases in
pharmaceutical sales. The Company believes that ongoing research and
development expenditures by the leading pharmaceutical manufacturers will
contribute to continued growth of the industry.
Increased Use of Outpatient Drug Therapies. In response to rising healthcare
costs, governmental and private payors have adopted cost containment measures
that encourage the use of efficient drug therapies to prevent or treat
diseases. While national attention has been focused on the overall increase in
aggregate health care costs, the Company believes drug therapy has had a
beneficial impact on overall healthcare costs by reducing expensive surgeries
and prolonged hospital stays. Pharmaceuticals currently account for less than
11% of overall health care costs, and manufacturers' emphasis on research and
development is expected to continue the introduction of cost-effective drug
therapies.
Rising Pharmaceutical Prices. The Company believes that price increases by
pharmaceutical manufacturers will continue to equal or exceed the overall
Consumer Price Index. The Company believes that these increases will be due in
large part to the relatively inelastic demand in the face of higher prices
charged for patented drugs as manufacturers have attempted to recoup costs
associated with the development, clinical testing and Food and Drug
Administration ("FDA") approval of new products.
Expiration of Patents for Brand Name Pharmaceuticals. A significant number
of patents for widely used brand name pharmaceutical products will expire in
the next several years. Such products are expected to be marketed by generic
manufacturers and distributed by the Company. We consider this a favorable
trend because generic products have historically provided a greater gross
profit margin opportunity than brand name products.
Operations
Decentralized Operating Structure. AmeriSource currently operates 21
pharmaceutical distribution facilities and three specialty products
distribution facilities, organized into five regions across the United States.
Unlike its more centralized competitors, the Company is structured as an
organization of locally managed profit centers. The Company believes that
operating economies of scale exist principally at the distribution facility
level. Management of each distribution facility has responsibility for its own
financial performance. The distribution facility's results, including earnings
and achievement of asset management goals, have a direct impact on management
compensation at these facilities. The distribution facilities utilize the
Company's corporate staff for marketing, data processing, financial,
purchasing, legal and executive management resources and corporate
coordination of asset and working capital management. In the fourth quarter of
fiscal 1998, the Company began to centralize its data processing, accounting,
and contract administration and purchasing functions. As of September 2000,
the above functions of all drug distribution facilities have been centralized.
The Company believes that the centralization of these administrative functions
will result in future efficiencies without affecting the Company's
decentralized operations and management.
Sales and Marketing. The Company has over 250 sales professionals organized
regionally and specialized by customer group: health systems and alternate
site, independent community pharmacies and chain drugstores. Customer service
representatives are located in each distribution facility in order to respond
to customer needs in a timely and effective manner. In addition, a specially
trained group of telemarketing representatives makes regular contact with
customers regarding special promotions. AmeriSource's corporate marketing
department designs and develops the Company's array of value-added customer
solutions. Tailored to specific customer groups, and under the banner of
"Delivering Healthcare Solutions," these programs can be further customized at
the distribution facility level to adapt to local market conditions. Corporate
sales and marketing also services national account customers through close
coordination with local distribution centers.
Facilities. Each of the Company's distribution facilities carries an
inventory suited to the needs of the local market. The efficient distribution
of small orders is possible through the extensive use of computerization
3
<PAGE>
and modern warehouse techniques. These include computerized warehouse product
location, routing and inventory replenishment systems, gravity-flow racking,
mechanized order selection and efficient truck loading and routing. The
Company typically delivers its products to its customers on a daily basis. It
utilizes a fleet of owned and leased vans and trucks and contract carriers.
Night picking operations in its distribution facilities have further reduced
delivery time. Orders are generally delivered in less than 24 hours.
The following table presents certain information on a fiscal year basis
regarding the Company's operating units in the aggregate.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(dollars in millions; square feet in
thousands)
<S> <C> <C> <C> <C> <C>
Operating revenue................ $5,806.1 $8,173.7 $9,373.5 $9,760.1 $11,610.0
Number of Rx distribution facili-
ties............................ 21 22 23 22 21
Average revenue/Rx distribution
facility........................ $ 274.6 $ 366.9 $ 398.8 $ 430.8 $ 538.6
Total square feet (Rx facili-
ties)........................... 1,889.7 2,318.1 2,286.0 2,174.4 2,145.0
Average revenue/square foot (in
whole dollars) (Rx facilities).. $ 3,052 $ 3,482 $ 4,012 $ 4,359 $ 5,273
</TABLE>
Customers and Markets. The Company has a diverse customer base that includes
health systems and alternate site customers, independent community pharmacies
and chain drugstores, including pharmacy departments of supermarkets and mass
merchandisers. AmeriSource is typically the primary source of supply for its
customers. In addition, the Company offers a broad range of value-added
solutions designed to enhance the operating efficiencies and competitive
positions of its customers, allowing them to improve the delivery of
healthcare to patients and consumers. The table below illustrates the change
in the Company's customer sales mix over the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health Systems and
Alternate Site
Facilities............. $2,675 46% $3,710 45% $4,200 45% $4,650 48% $ 5,927 51%
Independents............ 2,057 35 2,929 36 3,567 38 3,855 39 4,278 37
Chains.................. 1,074 19 1,535 19 1,606 17 1,255 13 1,405 12
------ --- ------ --- ------ --- ------ --- ------- ---
Total operating
revenue............. $5,806 100% $8,174 100% $9,373 100% $9,760 100% $11,610 100%
====== === ====== === ====== === ====== === ======= ===
</TABLE>
No single customer represented more than 5% of the Company's total operating
revenue during fiscal 2000, except for the federal government, which includes
the Veterans Administration, which accounted for approximately 20%. Including
the federal government, the Company's top ten customers represented
approximately 28% of total operating revenues during fiscal 2000. A profile of
each customer class follows:
. Health Systems and Alternate Site. AmeriSource believes it is the
nation's largest distributor to the health systems market, which includes
hospitals and acute-care facilities, and a growing provider to the
alternate site market, which includes mail order facilities, nursing
homes, clinics and other non-acute care facilities. Health systems and
alternate site facilities purchase large volumes of high-priced, easily
handled pharmaceuticals. The Company benefits from quick turnover of both
inventory and receivables and lower-than-average operating expenses for
these customers. Sales to health systems and alternate site facilities
have grown at a compound rate of 19.6% from fiscal 1995 through fiscal
2000.
. Independent Community Pharmacies. Independent community pharmacy owners
provide an attractive opportunity for the application of the Company's
value-added solutions. The Company's sales to independent customers have
risen at a compound rate of 21.7% from fiscal 1995 through fiscal 2000.
This is due to market growth within this customer group, AmeriSource's
acquisition activity, and the success of the Company's customized
marketing and merchandising programs, such as its Family Pharmacy(R)
program.
4
<PAGE>
. Chain Drugstores. This class includes chain drugstores, including
pharmacy departments of supermarkets and mass merchandisers. The
Company's sales to chains have risen at a compound rate of 10.5% from
fiscal 1995 through fiscal 2000. This growth rate reflects new contracts
with non-warehousing retail chains as well as the growth of existing
retail chain customers. However, sales to chain drugstores decreased in
fiscal 1999 due to the termination of service contracts with two large
warehousing chain drugstores in fiscal 1998.
Suppliers. AmeriSource obtains pharmaceutical and other products from a
number of manufacturers, none of which accounted for more than approximately
9% of its net sales in fiscal 2000. The five largest suppliers in fiscal 2000
accounted for approximately 28% of net sales. Historically, the Company has
not experienced difficulty in purchasing desired products from suppliers. The
Company has agreements with many of its suppliers which generally require the
Company to maintain an adequate quantity of a supplier's products in
inventory. The majority of contracts with suppliers are terminable upon 30
days notice by either party. The loss of certain suppliers could adversely
affect the Company's business if alternate sources of supply were unavailable.
The Company believes that its relationships with its suppliers are good.
Management Information Systems. The Company has continually invested in
advanced management information systems and automated warehouse technology.
The Company's management information systems provide for, among other things,
electronic order entry by customers, invoice preparation and purchasing and
inventory tracking. As a result of electronic order entry, the cost of
receiving and processing orders has not increased as rapidly as sales volume.
The Company's customized systems strengthen customer relationships by allowing
the customer to lower its operating costs and by providing the basis for a
number of the value-added solutions the Company provides its customers,
including marketing data, inventory replenishment, single-source billing,
computer price updates and price labels. During fiscal 2000, the Company
completed converting the management information systems at its pharmaceutical
distribution facilities into one centralized management information system.
This initiative allowed the Company to improve its information capabilities
and eliminate redundant processing and computer operating expenditures.
Management plans to continue to make system investments to further improve its
information capabilities and meet its customer and operational needs.
Competition
AmeriSource engages in the wholesale distribution of pharmaceuticals and
related healthcare solutions in a highly competitive environment. The Company
competes with both national and regional distributors, some of which are
larger and have greater financial resources than AmeriSource. The Company's
national competitors include Bergen Brunswig Corporation, Bindley Western
Industries, Inc., Cardinal Health, Inc., and McKessonHBOC, Inc. In addition,
the Company competes with regional and local distributors, direct-selling
manufacturers, warehousing chain drugstores, and other specialty distributors.
Competitive factors include value-added service programs, breadth of product
line, price, service and delivery, credit terms and customer support. We
expect that the pharmaceutical wholesale industry will continue to undergo
further consolidation.
Employees
As of September 30, 2000, the Company employed approximately 3,700 persons,
of which approximately 3,550 were full-time employees. Approximately 12% of
full- and part-time employees are covered by collective bargaining agreements.
The Company believes that its relationship with its employees is good.
Regulatory and Environmental Matters
The United States Drug Enforcement Administration, and the FDA and various
state boards of pharmacy regulate the distribution of pharmaceutical products
and controlled substances, requiring wholesale distributors of these
substances to register for permits and to meet various security and operating
standards. As a wholesale distributor of pharmaceuticals and certain
medical/surgical products, the Company is subject to these regulations. The
Company has received all necessary regulatory approvals and believes that it
is in substantial compliance with all applicable wholesale distribution
requirements.
5
<PAGE>
The Company is aware that at its former Charleston, South Carolina
distribution center there is evidence of residual soil contamination remaining
from the fertilizer manufacturing process operated on that site by third
parties over thirty years ago. The Company's environmental consulting firm
conducted a soil survey and a groundwater study during fiscal 1994 and 1995.
The results of the studies indicate that there is lead on-site at levels
requiring further investigation and potential remediation. A preliminary
engineering analysis was prepared by outside consultants during the third
quarter of fiscal 1994, and indicated that, if both soil and groundwater
remediation are required, the most likely cost is estimated to be $4.1
million. Accordingly, a liability of $4.1 million was recorded during fiscal
1994 to cover future consulting, legal and remediation and ongoing monitoring
costs. The Company is working with the appropriate state and federal
regulatory agencies regarding further tests and potential site remediation.
That negotiation, investigation and remediation could take several years and
the actual costs may differ from the liability that has been recorded. The
accrued liability ($3.8 million at September 30, 2000), which is reflected in
other liabilities in the Company's consolidated balance sheet, is based on the
present estimate of the extent of contamination, choice of remedy, and enacted
laws and regulations, including remedial standards; however, changes in any of
these could affect the estimated liability.
Item 2. Properties
As of September 2000, the Company conducted its business from office and
operating unit facilities at 39 locations throughout the United States. In the
aggregate, the Company's operating units occupy approximately 2.7 million
square feet of office and warehouse space, of which approximately 0.9 million
square feet is owned and the balance is leased under agreements with
expiration dates ranging from 2000 to 2012. The Company's 21 pharmaceutical
distribution facilities range in size from approximately 20,000 square feet to
207,100 square feet. Leased facilities are located in the following states:
Alabama, Arizona, California, Delaware, Florida, Idaho, Indiana, Kentucky,
Massachusetts, Minnesota, New Jersey, Ohio, Oregon, Pennsylvania, Tennessee,
Texas, Virginia and West Virginia. Owned facilities are located in the
following states: Alabama, Illinois, Indiana, Kentucky, Maryland, Missouri,
Ohio, Tennessee and Virginia. The Company utilizes a fleet of owned and leased
vans and trucks, as well as contract carriers to deliver its products.
Item 3. Legal Proceedings
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. The
terms of the confidential settlement agreement did not have any adverse effect
on the Company's financial position or the results of operations.
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 drugstores,
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 drugstore cases to the
United States District Court for the Northern District of Illinois for
consolidated and coordinated pretrial proceedings. In essence, these lawsuits
all claim that the manufacturer and wholesaler defendants have combined,
contracted and conspired to fix the prices charged to retail pharmacies for
prescription brand name pharmaceuticals. Specifically, plaintiffs claim that
the defendants use "chargeback agreements" to give some institutional
pharmacies discounts that allegedly are not made available to retail drug
stores. Plaintiffs seek 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
6
<PAGE>
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. Subsequent amendments to the Judgment Sharing Agreement have
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.
After a ten-week trial in the federal class action case, 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' petition for a writ of certiorari to
the United States Supreme Court 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, but are inactive.
On or about October 2, 1997, a group of retail chain drugstores 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 cases. 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.
AmeriSource has been named as a defendant in four lawsuits based upon
alleged injuries attributable to a category of products typically referred to
as fen-phen. AmeriSource did not manufacture these products; however, prior to
an FDA recall, AmeriSource did distribute these products from several of its
vendors. In August 2000, the Company entered into an Indemnification Agreement
with one of the manufacturer defendants. Under the Indemnification Agreement,
the manufacturer agreed to reimburse the Company for past attorneys' fees and
to indemnify and defend the Company going forward, except the manufacturer
will only indemnify the Company based on the percentage of liability assigned
to its products if: (a) verdicts are rendered against a phentermine
manufacturer in at least three cases where 10% of liability is apportioned to
the phentermines; or (b) verdicts are rendered against a phentermine
manufacturer in seven cases, regardless of the percentage of liability.
The Company is a party to various lawsuits arising in the ordinary course of
business; however, the Company does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse
effect on its business or financial condition. (See Note 11 to the
consolidated financial statements.)
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal quarter ended September 30, 2000, there were no matters
submitted to a vote of shareholders.
7
<PAGE>
Item 4a. Executive Officers of the Registrant
The following is a list of the Company's executive officers, their ages and
their positions, as of December 1, 2000. Each executive officer serves at the
pleasure of the Company's Board of Directors.
<TABLE>
<CAPTION>
Current Position with the Other Positions Held in the last
Name Age Company and Period of Service five years
---- --- ------------------------------- ---------------------------------
<S> <C> <C> <C>
R. David Yost........... 53 Chairman and Chief Executive President and Chief Executive
Officer (December 2000-Present) Officer (May 1997-December
2000): Executive Vice
President--Operations (1995-1997)
Kurt J. Hilzinger....... 40 President and Chief Operating Senior Vice President and Chief
Officer (December 2000-Present) Operating Officer (January 1999-
December 2000), Senior Vice
President and Chief Financial
Officer (1997-1999); Vice
President, Chief Financial
Officer and Treasurer (1995-
1997)
George L. James, III.... 54 Vice President and Chief Senior Vice President and Chief
Financial Officer (May 1999- Financial Officer and other
Present) positions, BetzDearborn, Inc.
(1995-1998)
William D. Sprague...... 58 Vice President, General Counsel Vice President, General Counsel
and Secretary (November 1998- and Secretary, Lukens Inc.
Present) (1992-1998)
</TABLE>
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.
Since May 27, 1996, the Company's Class A Common Stock has been traded on
the New York Stock Exchange under the trading symbol "AAS." Prior to May 27,
1996, the Company's Class A Common Stock was traded over-the-counter in the
National Market System of the National Association of Securities Dealers, Inc.
(Nasdaq symbol ASHC). As of December 1, 2000, there were 278 record holders of
the Company's Class A Common Stock. The following table sets forth the high
and low closing sale prices of the Class A Common Stock for the periods
indicated.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Year Ended 9/30/99
First Quarter............................................. $32 9/16 $24 19/32
Second Quarter............................................ 40 17/32 33 3/4
Third Quarter............................................. 33 3/4 25
Fourth Quarter............................................ 28 13/16 23 1/16
Year Ended 9/30/00
First Quarter............................................. 23 5/8 11 3/4
Second Quarter............................................ 23 11/16 12
Third Quarter............................................. 31 1/8 14 5/8
Fourth Quarter............................................ 47 29 5/8
</TABLE>
There is no established public trading market for the Company's Class B
Common Stock. As of December 1, 2000, there were two record holders of the
Company's Class B Common Stock.
The Company's Class C Common Stock was held by three holders of record as of
December 1, 2000. The Class C Common Stock trades on a limited basis in the
over-the-counter market, and information concerning the historical trading
prices for the Class C Common Stock is not published by nationally recognized
independent sources.
8
<PAGE>
The Company has not paid any cash dividends to its stockholders on any class
of its Common Stock, and anticipates that for the foreseeable future its
earnings will be retained for use in its business. Payment of dividends is
within the discretion of the Company's Board of Directors and will depend,
among other factors, upon the Company's earnings, financial condition and
capital requirements and the terms of the Company's financing agreements,
which restrict the Company's ability to make dividend payments unless certain
financial tests are met.
Item 6. Selected Financial Data.
The following table should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
report.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------------
2000 (a) 1999 (b) 1998 (c) 1997 (d) 1996 1995
----------- ---------- ---------- ---------- ---------- ----------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue....... $11,609,995 $9,760,083 $9,373,482 $8,173,679 $5,806,126 $4,876,310
Bulk deliveries to
customer warehouses.... 35,026 47,280 129,555 124,956 111,046 107,342
----------- ---------- ---------- ---------- ---------- ----------
Total revenue........... 11,645,021 9,807,363 9,503,037 8,298,635 5,917,172 4,983,652
Gross profit............ 519,581 473,065 461,897 404,136 314,489 275,758
Operating expenses,
excluding amortization. 316,044 312,077 320,891 277,632 213,681 176,522
Operating income ....... 201,557 159,002 138,931 125,445 100,507 99,059
Income before
extraordinary items ... 99,014 70,915 46,030 50,123 43,463 28,256
Net income ............. 99,014 67,466 46,030 48,141 36,221 10,219
Earnings per share--
assuming dilution:
Income before
extraordinary items... 1.90 1.38 .91 1.00 .90 .71
Net income ............ 1.90 1.31 .91 .96 .75 .26
Weighted average common
shares outstanding--
assuming dilution...... 52,020 51,683 50,713 50,301 48,376 40,029
Balance Sheet:
Cash and cash
equivalents and
restricted cash....... $ 120,818 $ 59,497 $ 90,344 $ 71,551 $ 73,832 $ 46,995
Accounts receivable--
net................... 623,961 612,520 509,130 550,824 405,929 330,441
Merchandise
inventories........... 1,570,504 1,243,153 954,010 1,046,582 677,173 423,942
Property and
equipment--net........ 64,962 64,384 67,955 70,754 54,850 47,591
Total assets........... $ 2,458,567 $2,060,599 $1,726,272 $1,798,109 $1,236,221 $ 872,979
Accounts payable....... $ 1,584,133 $1,175,619 $ 947,016 $1,070,673 $ 749,481 $ 483,180
Long-term debt, less
current portion....... 413,217 558,705 539,464 601,454 443,690 446,182
Stockholders' equity... 282,294 166,277 75,355 18,881 (34,856) (134,126)
Total liabilities and
stockholders' equity.. $ 2,458,567 $2,060,599 $1,726,272 $1,798,109 $1,236,221 $ 872,979
</TABLE>
--------
(a) Includes the effect of $1.1 million reversal of costs related to facility
consolidations and employee severance.
(b) Includes the effect of $11.7 million of costs related to facility
consolidations and employee severance and $3.2 million of merger costs.
(c) Includes the effect of $18.4 million of merger costs and $8.3 million of
costs related to facility consolidations and employee severance.
(d) Includes the effect of $11.6 million of costs related to facility
consolidations and employee severance.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
AMERISOURCE HEALTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto contained herein.
Results of Operations
Year ended September 30, 2000 compared with Year ended September 30, 1999
Operating revenue for the fiscal year ended September 30, 2000 increased 19%
to $11.6 billion from $9.8 billion in the prior fiscal year. During the fiscal
year ended September 30, 2000, sales to health systems increased 22%, sales to
alternate site facilities increased 59%, sales to independent drugstore
customers increased 11% and sales to the chain drugstore customer group
increased 12% compared to the prior year. During the year ended September 30,
2000, sales to health systems and alternate site facilities accounted for 51%
of total operating revenue, while sales to independent community pharmacies
accounted for 37% and sales to chain drugstores accounted for 12% of the
total. The increase in health systems revenue was primarily due to 37% revenue
growth with the Veterans Administration, which accounted for 19% and 17% of
the total operating revenue for the fiscal years ended September 30, 2000 and
1999, respectively. The balance of the health systems growth was due to growth
from existing relationships with group purchasing organizations. Several new
alternate site customers were added as a result of the Company's sales
reorganization in the prior year, which created a national and regional
alternate site sales force. Approximately 15% of the alternate site revenue
growth was from a new contract with a mail order facility, which started in
the third quarter of fiscal 2000. The increase in independent community
pharmacy and chain drugstore revenue was consistent with overall industry
growth. Future operating revenue growth may be impacted by customer
consolidation and competition within the industry.
The Company reports as revenue bulk shipments to customer warehouses,
whereby the Company acts as an intermediary in the ordering and subsequent
delivery of pharmaceutical products. Bulk deliveries decreased 26% to $35.0
million in fiscal 2000 compared to fiscal 1999. Due to the insignificant
service fees generated from these bulk shipments, fluctuations in volume have
no significant impact on operating margins.
Gross profit of $519.6 million in fiscal 2000 increased by 10% as compared
to the prior year due primarily to the increase in operating revenue. As a
percentage of operating revenue, the gross profit in fiscal 2000 was 4.48% as
compared to 4.85% in the prior-year period. The decline in gross profit
percentage was primarily due to changes in the customer mix, which included
more lower-margin health systems business than in the prior year, and price
competition within the pharmaceutical distribution industry. Gross profit may
continue to be impacted by price competition, changes in customer and product
mix, distribution center performance and manufacturer pricing policies.
Selling and administrative expenses and depreciation increased by $20.0
million or 7% in fiscal 2000 as compared to the prior year, and decreased as a
percentage of operating revenue to 2.73% in fiscal 2000 from 3.04% in fiscal
1999. This improvement reflects the changing customer mix to more health
systems business, including the Veterans Administration, which is lower gross
margin business, but requires lower operating expense as a percentage of
revenue to service. The improvement also reflects warehouse efficiencies and
cost reductions related to the Company's fiscal 1998 and 1999 restructuring
efforts. These factors were offset in part by an increase in the bad debt
provision to $10.3 million for fiscal 2000 compared to a $7.0 million
provision in the prior year. The bad debt increase was primarily due to
certain customer business failures during the year.
10
<PAGE>
While the Company does not believe that this higher level of customer business
failure and resultant bad debt expense is indicative of a trend, there can be
no assurance that similar events will not occur and result in additional bad
debt expense in the future.
In fiscal 1999, the Company acquired C.D. Smith Healthcare, Inc. During
fiscal 2000, the Company closed C.D. Smith's Chicago, Illinois pharmaceutical
distribution facility and completed the consolidation of C.D Smith's
pharmaceutical packaging business. In addition, the Company completed the
conversion of the remaining two C.D. Smith facilities to a centralized system
for data processing and other administrative services. A charge of $12.8
million was recognized in the fourth quarter of fiscal 1999 related to these
efforts, which 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 noncancelable 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 September 30,
2000, all of the restructuring efforts have been completed except for the
final resolution of the noncancelable supply contract which was settled in
November 2000, for the anticipated amount. Severance accruals of $0.5 million
related to the fiscal 1999 charge were reversed into income during the third
quarter of fiscal 2000 primarily related to the decision to retain a manager
previously anticipated 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 two pharmaceutical distribution facilities. A charge of $8.3
million was recognized in the fourth quarter of fiscal 1998 related to these
efforts 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 September 30, 2000, all of the
Company's pharmaceutical distribution facilities have been converted to the
centralized system and substantially all of the 350 positions have been
eliminated. In the third quarter of fiscal 2000, the Company reversed
restructuring accruals related to the fiscal 1998 charge of approximately $0.6
million representing severance not paid to employees because they either 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 Company's statement of
operations. In fiscal 1999, the Company reversed $1.1 million of cost
originally accrued during fiscal 1997 for facility consolidations and employee
severance due to $0.8 million of proceeds in excess of estimates for disposed
assets and $0.3 million of severance settled for less than original estimates.
Operating income of $201.6 million in the year ended September 30, 2000
increased by 27% from the prior year in part because of the $1.1 million
restructuring charge reversal in fiscal 2000 as compared to the $14.9 million
in facility consolidations, employee severance and merger costs in fiscal
1999. Excluding these items in both years, the increase in operating income
was 15% and the Company's operating margin was 1.73% in fiscal 2000 as
compared to 1.78% in fiscal 1999. 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 $41.9 million in fiscal 2000 represents an increase of
6% compared to the prior year. The increase from the prior-year expense
reflects higher interest rates offset in part by lower average levels of debt
and lower borrowing spreads. The increase in average market interest rates
during fiscal 2000 was approximately 106 basis points compared to fiscal 1999.
Average borrowings during the year ended September 30, 2000 were $611 million
as compared to average borrowings of $625 million in the prior fiscal year.
Interest expense--adjustment of common stock put warrant to fair value of $0.3
million in the prior year 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.
11
<PAGE>
Income tax expense of $60.7 million in fiscal 2000 reflected an effective
tax rate of 38.0% versus 40.6% in the prior fiscal year. The reduction in the
effective rate was primarily due to the effect of the nondeductible goodwill
write-down and merger costs which occurred in fiscal 1999.
Income before extraordinary items of $99.0 million represents an increase of
40% over the prior year. Excluding facility consolidation and employee
severance and merger costs in both years, income before extraordinary items of
$98.3 million increased 19% compared to the prior fiscal year. Net income per
share (assuming dilution) increased 45% from the prior year to $1.90 per share
as compared to $1.31 per share in the prior year.
Year ended September 30, 1999 compared with Year ended September 30, 1998
Operating revenue for the fiscal year ended September 30, 1999 increased 4%
to $9.8 billion from $9.4 billion in fiscal 1998. During the fiscal year ended
September 30, 1999, sales to health systems and alternate site customers
increased 11%, sales to independent community pharmacies increased 8%, and
sales to the chain drugstore customer group decreased 22%, as compared with
the prior fiscal year. During the fiscal year ended September 30, 1999, sales
to health systems and alternate site customers accounted for 48% of total
operating revenue, while sales to independent community pharmacies accounted
for 39% and sales to chain drugstores accounted for 13% of the total. Revenue
growth for fiscal 1999 was adversely affected by the termination of service
contracts with two large warehousing chains and one large mail order customer
during the third quarter of fiscal 1998. Two of these customers were acquired
by companies serviced by other pharmaceutical distributors. Excluding the
operating revenue in fiscal 1998 from these three customer losses, operating
revenue would have increased 12% in the fiscal year ended September 30, 1999
compared to fiscal 1998. Health systems revenue, excluding alternate site
facilities, increased 17% in fiscal 1999 over 1998, slightly over one-half of
which was from the government sector due to the Company's expansion of its
relationship with the Veterans Administration. The federal government
accounted for 18% of total operating revenue in fiscal 1999 versus 15% in
fiscal 1998. The balance of the health systems growth was from existing
relationships with group purchasing organizations.
Bulk shipments decreased 64% to $47.3 million in fiscal 1999 compared to
fiscal 1998. Due to the insignificant service fees generated from these bulk
shipments, fluctuations in volume have no significant impact on operating
margins.
Gross profit of $473.1 million in fiscal 1999 increased by 2% compared to
fiscal 1998. As a percentage of operating revenue, the gross profit in fiscal
1999 was 4.85% as compared to 4.93% in the prior year. The decline was caused
by the shift in the customer mix as well as a reduction in selling margin due
to continued competition in the industry.
Selling and administrative expenses and depreciation increased by $3.0
million or 1% in fiscal 1999 compared to the prior fiscal year, and as a
percentage of operating revenue were 3.04% and 3.14% in fiscal 1999 and 1998,
respectively. The decrease as a percentage of operating revenue from the prior
year was due to the shift in customer mix away from warehousing chains,
resulting in decreases in warehouse and delivery expense compared to the prior
year, as well as continued productivity improvements from the Company's cost
reduction initiatives. These reductions combined with a reduction in bad debt
expense of $3.0 million offset costs incurred during the fiscal year ended
September 30, 1999 of $5.8 million related to the Company's centralization
process described above.
In addition to the facility consolidation and employee severance costs of
$12.8 million discussed above, the Company incurred merger costs of $3.2
million in the fourth quarter of fiscal 1999 in connection with its
acquisition of C.D. Smith, consisting primarily of investment banking,
accounting and legal fees. In fiscal 1998, the Company and McKessonHBOC
jointly terminated a definitive merger agreement signed in September 1997
after the Federal Trade Commission obtained an injunction halting the proposed
merger. Merger-related costs consisting of professional fees and stay-put
bonuses totaling $18.4 million were expensed in the fourth quarter of fiscal
1998 as a result of the termination of the McKessonHBOC merger agreement.
12
<PAGE>
Operating income of $159.0 million in fiscal 1999 increased by 14% from the
prior year. The Company's operating margin increased to 1.63% in fiscal 1999
from 1.48% in fiscal 1998 primarily due to the reduction in merger costs from
$18.4 million in fiscal 1998 to $3.2 million in fiscal 1999.
Interest expense of $39.4 million in fiscal 1999 represents a 22% decrease
from the prior year due to a combination of lower borrowing rates on variable-
rate debt facilities as well as reduced average borrowings. Average borrowing
rates under the Company's variable-rate debt facilities declined approximately
50 basis points from the prior fiscal year due to market interest rate
declines early in fiscal 1999 as well as the effect of a step-down of 12.5
basis points achieved under the revolving credit facility and the replacement
of the Company's receivables securitization facility with a lower cost
facility during the fiscal year. In addition, the Company extinguished higher-
rate C.D. Smith debt with its variable-rate debt in the fourth quarter of
fiscal 1999. Average borrowings decreased $89 million from $714 million in
fiscal 1998 to $625 million in fiscal 1999 due primarily to continued emphasis
on asset management.
Interest expense-adjustment of common stock put warrant to fair value
declined to $0.3 million in fiscal 1999 from $7.8 million in fiscal 1998. The
fair value of the common stock put warrant was based on the value of the
underlying common stock of C.D. Smith prior to the merger with AmeriSource.
The warrant was exercised and converted into common stock in the fourth
quarter of fiscal 1999.
Income tax expense of $48.4 million in fiscal 1999 reflected an effective
tax rate of 40.6% versus 43.0% in the prior fiscal year. The reduction in the
effective rate was due to the reduction in the nondeductible interest
expense--adjustment of common stock put warrant to fair value described above.
Income before extraordinary items increased to $70.9 million in fiscal 1999
from $46.0 million in fiscal 1998. Income before extraordinary items per
share--assuming dilution increased to $1.38 in fiscal 1999, a 52% increase
from fiscal 1998 primarily due to the reduction in merger costs and interest
expense discussed above.
Extraordinary items--early retirement of debt of $3.4 million, net of income
tax benefits of $2.0 million, in fiscal 1999, relates to the extinguishment of
long-term debt assumed in the acquisition of C.D. Smith in the fourth quarter
of fiscal 1999 as well as the replacement of the Company's prior receivables
securitization facility with a new receivables securitization facility
described below.
Liquidity and Capital Resources
During the year ended September 30, 2000, the Company's operating activities
generated $216.6 million in cash as compared to $3.0 million generated in
fiscal 1999. Cash generation from operations in fiscal 2000 resulted from an
increase of $416.0 million in accounts payable, accrued expenses and income
taxes offset by increases in accounts receivable of $23.8 million and
merchandise inventories of $327.4 million. The increase in accounts payable,
accrued expenses and income taxes in excess of the increase in merchandise
inventories was due to a 4% increase in days payable outstanding during the
year due to the centralization of accounts payable processing and the timing
of vendor purchases. Accounts receivable (net) increased only 2% despite the
19% revenue increase due to the change in customer mix to quicker paying
health systems customers and the collection of the disputed receivable
described in Note 11. Merchandise inventories increased 26% reflecting the
changes in customer mix and to support anticipated new customer contracts,
including additional business with the Novation group purchasing organization,
and seasonal buying opportunities.
During the year ended September 30, 1999, the Company's operating activities
generated $3.0 million in cash as compared to $120.9 million generated in
fiscal 1998. Cash generation from operations in fiscal 1999 was impacted by an
increase in accounts receivable of $111.7 million primarily due to the 15%
growth in operating revenue in the fourth quarter of fiscal 1999 as compared
to the similar period in the prior year as well as the $289.1 million increase
in merchandise inventories which was offset in part by the $246.3 increase in
accounts payable, accrued expenses and income taxes. Merchandise inventories
increased to support new customer contracts, provide for seasonal buying
opportunities and provide for year 2000 supply concerns. A decrease in
restricted cash of $41.8 million in fiscal 1999 due to the extinguishment of
the Company's prior receivables securitization facility also offset the
increase in receivables and inventories.
13
<PAGE>
During the year ended September 30, 1998, the Company's operating activities
generated $120.9 million in cash primarily due to a decrease in accounts
receivable of $72.0 million. The reduction in accounts receivable was due to a
combination of improved collection efforts and the loss of the three major
customers in fiscal 1998 described above. A decrease in merchandise inventory
in fiscal 1998 of $133.6 million was offset by a related decrease of $168.0
million in accounts payable, accrued expenses, and income taxes. These
decreases were also impacted by the nonrenewal of service contracts with the
three large customers in fiscal 1998 as well as the reversal of the fiscal
1997 year-end build-up of inventory related to the Company's expansion of its
Thorofare, New Jersey distribution facility.
The Company paid a total of $3.6 million, $5.2 million and $6.1 million of
severance, contract, and lease cancellation and other costs in fiscal 2000,
1999 and 1998, respectively, related to its fiscal 1999, 1998 and 1997 cost
reduction plans discussed above. Severance accruals of $0.1 million and
remaining contract and lease obligations of $3.0 million at September 30, 2000
are included in accrued expenses and other.
Capital expenditures for the years ended September 30, 2000, 1999 and 1998
were $16.6 million, $15.8 million and $12.1 million, respectively, and relate
principally to investments in warehouse improvements, information technology
and warehouse automation. Similar expenditures of approximately $20 to $25
million are expected in fiscal 2001.
During fiscal 2000, the Company and three other healthcare distributors
formed an Internet-based company that is an independent, commercially neutral
healthcare product information exchange focused on streamlining the process
involved in identifying, purchasing and distributing healthcare products and
services. The Company contributed $3.6 million to the joint venture in fiscal
2000 and its ownership interest of approximately 22% is being accounted for
under the equity method. The Company has committed to contribute approximately
$8.0 million over the next one to two years before the entity is expected to
become self-funding.
In fiscal 1998, C.D. Smith acquired the equity interests of the General Drug
companies for $28 million which was financed through borrowings of $16.0
million under its credit facility and the issuance of a subordinated note for
$12.0 million. In addition, C.D. Smith refinanced approximately $39.5 million
of indebtedness of the General Drug companies.
In fiscal 2000 and fiscal 1998, cash used by financing activities
represented net repayments of the Company's revolving credit facility from
cash provided by operations. Cash provided by financing activities during
fiscal 1999 represents borrowings under the Company's revolving credit and
receivable securitization facilities primarily to fund its working capital
requirements. In connection with its acquisition of C.D. Smith in fiscal 1999,
the Company extinguished approximately $78 million of C.D. Smith's long-term
debt with borrowings under its revolving credit facility.
At September 30, 2000, borrowings under the Company's $500 million revolving
credit facility were $20.0 million and borrowings under its $400 million
receivables securitization facility were $385.0 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 to replace its previous facility. The new
facility had an initial term of three years and interest rates are based on
prevailing market rates for short-term commercial paper plus a program fee of
38.5 basis points. During fiscal 2000, 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 and also extended the expiration date to May 2003. 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
note receivables, which are generally non-interest bearing, in transactions
that do not qualify as sales transactions under SFAS No. 125. In October 2000,
the Company entered into a short-term supplemental $200 million senior secured
revolving credit agreement with interest at a rate equal to LIBOR plus 137.5
basis points. This agreement expires April 30, 2001 and is intended to fund
seasonal inventory purchases if necessary.
14
<PAGE>
In December 2000, the Company issued $300.0 million of Convertible
Subordinated Notes due December 1, 2007. The notes have an annual interest
rate of 5%, payable semiannually, and are convertible into Class A Common
Stock of the Company at $52.97 per share at any time before their maturity or
their prior redemption or repurchase by the Company. On or after December 3,
2004, the Company has the option to redeem all or a portion of the notes that
have not been previously converted. Net proceeds from the notes of
approximately $290.9 million were used to repay existing borrowings, and for
working capital and other general corporate purposes. In connection with the
issuance of the notes, the Company incurred approximately $9.1 million of
financing fees which will be deferred and amortized over the seven-year term
of the notes.
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. There were no such agreements in effect at
September 30, 2000. 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 fund
the payment of interest on outstanding debt. The Company's primary ongoing
cash requirements will be to finance working capital, fund the 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.
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 September 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 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.
Recently Issued Financial Accounting Standards
In fiscal 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in fiscal 2000 by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as either
assets or liabilities in the balance sheet and measure such instruments at
fair value. The provisions of SFAS No. 133 are effective for fiscal years
beginning after June 15, 2000. Adoption of this statement will not currently
have any impact on the consolidated financial statements or related
disclosures.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which requires adoption during the fourth quarter of
fiscal 2001. At this time, the Company does not anticipate that the adoption
of SAB 101 will have a material impact on the consolidated financial
statements. The Company will continue to analyze the impact of SAB 101,
including any amendments or further interpretations, until the time of
adoption.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125 which the Company currently follows
15
<PAGE>
to account for its receivables securitization facility. The accounting
requirements of this statement are effective for transfers occurring after
March 31, 2001. Adoption of this statement is not expected to impact the
Company's treatment of its receivable securitization facility as a financing
transaction and any effect is expected to be limited to the form and content
of its disclosures.
Forward-Looking Statements
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations includes forward-looking
statements (as defined in Section 27A of the Securities Act and Section 21E of
the Exchange Act) that reflect the Company's current views with respect to
future events and financial performance. Certain factors such as competitive
pressures, success of restructuring or systems initiatives, market interest
rates, regulatory changes, changes in customer mix, changes in pharmaceutical
manufacturers' pricing and distribution policies, changes in U.S. Government
policies, customer insolvencies, or the loss of one or more key customer or
supplier relationships could cause actual results to differ materially from
those in forward-looking statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
See discussion in Item 7.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
AmeriSource Health Corporation
We have audited the accompanying consolidated balance sheets of AmeriSource
Health Corporation and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 2000. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AmeriSource Health Corporation and subsidiaries at September 30, 2000 and
1999, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
November 2, 2000, except for Note 14 as to
which the date is December 18, 2000.
17
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 120,818 $ 59,497
Accounts receivable, less allowance for doubtful
accounts: 2000--$34,506, 1999--$27,583................ 623,961 612,520
Merchandise inventories................................ 1,570,504 1,243,153
Prepaid expenses and other............................. 5,336 4,836
---------- ----------
Total current assets................................. 2,320,619 1,920,006
Property and equipment, at cost:
Land................................................... 3,832 4,125
Buildings and improvements............................. 37,478 38,855
Machinery, equipment and other......................... 99,456 91,760
---------- ----------
140,766 134,740
Less accumulated depreciation.......................... 75,804 70,356
---------- ----------
64,962 64,384
Other assets, less accumulated amortization: 2000--
$11,747, 1999--$8,967................................... 72,986 76,209
---------- ----------
$2,458,567 $2,060,599
========== ==========
</TABLE>
18
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $1,584,133 $1,175,619
Accrued expenses and other........................... 49,398 50,329
Accrued income taxes................................. 12,284 10,854
Deferred income taxes................................ 105,654 90,481
---------- ----------
Total current liabilities.......................... 1,751,469 1,327,283
Long-term debt:
Revolving credit facility............................ 20,000 225,227
Receivables securitization financing................. 385,000 325,000
Other debt........................................... 8,217 8,478
---------- ----------
413,217 558,705
Other liabilities...................................... 11,587 8,334
Stockholders' equity:
Common stock, $.01 par value:
Class A (voting and convertible):
100,000,000 shares authorized; issued 9/00--
52,660,813 shares; 9/99--51,737,893 shares........ 527 517
Class B (nonvoting and convertible):
15,000,000 shares authorized; issued 5,908,445
shares............................................ 59 59
Class C (nonvoting and convertible):
2,000,000 shares authorized; issued 9/00--161,978
shares; 9/99--165,936 shares...................... 2 2
Capital in excess of par value....................... 283,544 266,737
Retained earnings (accumulated deficit).............. 4,382 (94,632)
Cost of common stock in treasury..................... (6,220) (6,220)
Note receivable from ESOP............................ -- (186)
---------- ----------
282,294 166,277
---------- ----------
$2,458,567 $2,060,599
========== ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
-----------------------------------
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Operating revenue.......................... $11,609,995 $9,760,083 $9,373,482
Bulk deliveries to customer warehouses..... 35,026 47,280 129,555
----------- ---------- ----------
Total revenue.............................. 11,645,021 9,807,363 9,503,037
Operating cost of goods sold............... 11,090,414 9,287,018 8,911,585
Cost of goods sold--bulk deliveries........ 35,026 47,280 129,555
----------- ---------- ----------
Total cost of goods sold................... 11,125,440 9,334,298 9,041,140
----------- ---------- ----------
Gross profit............................... 519,581 473,065 461,897
Selling and administrative................. 303,038 281,798 279,392
Depreciation............................... 14,129 15,387 14,810
Amortization............................... 1,980 1,986 2,075
Merger costs............................... -- 3,162 18,406
Facility consolidations and employee
severance................................. (1,123) 11,730 8,283
----------- ---------- ----------
Operating income........................... 201,557 159,002 138,931
Interest expense........................... 41,857 39,356 50,363
Interest expense--adjustment of common
stock put warrant to fair value........... -- 334 7,816
----------- ---------- ----------
Income before taxes and extraordinary
items..................................... 159,700 119,312 80,752
Taxes on income............................ 60,686 48,397 34,722
----------- ---------- ----------
Income before extraordinary items.......... 99,014 70,915 46,030
Extraordinary items--early retirement of
debt, net of income tax benefits.......... -- 3,449 --
----------- ---------- ----------
Net income................................. $ 99,014 $ 67,466 $ 46,030
=========== ========== ==========
Earnings per share:
Income before extraordinary items........ $ 1.92 $ 1.40 $ .92
Extraordinary items...................... -- (.07) --
----------- ---------- ----------
Net income............................. $ 1.92 $ 1.33 $ .92
=========== ========== ==========
Earnings per share--assuming dilution:
Income before extraordinary items........ $ 1.90 $ 1.38 $ .91
Extraordinary items...................... -- (.07) --
----------- ---------- ----------
Net income............................. $ 1.90 $ 1.31 $ .91
=========== ========== ==========
Weighted average common shares outstanding:
Basic.................................... 51,552 50,698 49,877
Assuming dilution........................ 52,020 51,683 50,713
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
(Accumulated Cost of
Common Stock Capital in Deficit) Common
----------------------- Excess of Retained Stock in ESOP Note
Class A Class B Class C Par Value Earnings Treasury Receivable Total
------- ------- ------- ---------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1997...... $384 $188 $ 4 $234,083 $(208,128) $(7,173) $(477) $ 18,881
Net income............. 46,030 46,030
Stock conversions...... 76 (74) (2) --
Exercise of stock
options............... 6 6,676 6,682
Tax benefit from
exercise of stock
options............... 3,797 3,797
Collections on ESOP
note.................. 145 145
Purchases of treasury
stock................. (180) (180)
---- ---- --- -------- --------- ------- ----- --------
September 30, 1998...... 466 114 2 244,556 (162,098) (7,353) (332) 75,355
Net income............. 67,466 67,466
Stock conversions...... 55 (55) --
Exercise of stock
options............... 5 8,901 75 8,981
Tax benefit from
exercise of stock
options............... 4,058 4,058
Collections on ESOP
note.................. 146 146
Purchases of treasury
stock................. (449) (449)
Exercise of common
stock put warrant..... 10,262 458 10,720
Retirement of treasury
stock................. (9) (1,040) 1,049 --
---- ---- --- -------- --------- ------- ----- --------
September 30, 1999...... 517 59 2 266,737 (94,632) (6,220) (186) 166,277
Net income............. 99,014 99,014
Exercise of stock
options............... 10 11,914 11,924
Tax benefit from
exercise of stock
options............... 4,893 4,893
Collections on ESOP
note.................. 186 186
---- ---- --- -------- --------- ------- ----- --------
September 30, 2000...... $527 $ 59 $ 2 $283,544 $ 4,382 $(6,220) $ -- $282,294
==== ==== === ======== ========= ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 30,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................ $ 99,014 $ 67,466 $ 46,030
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 14,129 15,387 14,810
Amortization, including deferred
financing costs.................... 3,291 4,457 4,716
Adjustment of common stock put
warrant to fair value.............. -- 334 7,816
Provision for loss on accounts
receivable......................... 10,274 6,956 9,990
Loss (gain) on disposal of property
and equipment...................... 66 320 (197)
Provision for deferred income taxes. 25,824 11,283 19,451
Loss on early retirement of debt.... -- 3,557 --
Write-downs of assets............... -- 6,400 2,168
Changes in operating assets and
liabilities, excluding the effects
of acquisitions:
Restricted cash................... -- 41,833 (26,323)
Accounts and notes receivable..... (23,811) (111,744) 72,001
Merchandise inventories........... (327,351) (289,143) 133,571
Prepaid expenses and other........ (1,323) (1,049) 5,244
Accounts payable, accrued
expenses, and income taxes....... 415,961 246,289 (168,000)
Miscellaneous..................... 506 654 (361)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 216,580 3,000 120,916
INVESTING ACTIVITIES
Capital expenditures.................. (16,619) (15,793) (12,101)
Cost of companies acquired............ (3,032) -- (29,097)
Purchase of equity interests in
businesses........................... (3,660) (3,570) --
Collections on ESOP note receivable... 186 146 145
Proceeds from sales of property and
equipment............................ 1,636 2,436 2,455
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES... (21,489) (16,781) (38,598)
FINANCING ACTIVITIES
Long-term debt borrowings............. 1,303,131 2,373,656 2,433,210
Long-term debt repayments............. (1,448,583) (2,356,807) (2,531,954)
Deferred financing costs and other.... (242) (614) (1,645)
Purchases of treasury stock........... -- (449) (180)
Exercise of stock options and warrant. 11,924 8,981 6,682
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES............................. (133,770) 24,767 (93,887)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 61,321 10,986 (11,569)
Cash and cash equivalents at beginning
of year................................ 59,497 48,511 60,080
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................... $ 120,818 $ 59,497 $ 48,511
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 1--Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
AmeriSource Health Corporation and its wholly-owned subsidiaries (the
"Company") as of the dates and for the fiscal years indicated. All
intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual amounts could differ from these
estimated amounts.
Business
The Company is a wholesale distributor of pharmaceuticals and related health
care products within the United States.
Business Combinations
Business combinations accounted for under the purchase method of accounting
include the results of operations of the acquired business from the dates of
acquisition. Net assets of the companies acquired are recorded at their fair
value to the Company at the date of acquisition (see Note 2).
For business combinations accounted for under the pooling-of-interests
method of accounting, the assets, liabilities and stockholders' equity of the
acquired entities are combined with the Company's respective accounts at
recorded values (see Note 2).
Cash Equivalents
The Company classifies highly liquid investments with maturities of three
months or less at date of purchase as cash equivalents.
Concentrations of Credit Risk
The Company sells its merchandise inventories to a large number of customers
in the health care industry, including independent community pharmacies, chain
drugstores, health systems and other acute-care facilities, and, alternate
site facilities, including mail order facilities, clinics, nursing homes, and
other non-acute care facilities. The Company's trade accounts receivable are
exposed to credit risk, but the risk is limited due to the diversity of the
customer base and the customer base's wide geographic dispersion. The Company
performs ongoing credit evaluations of its customers' financial condition. The
Company maintains reserves for potential bad debt losses and such bad debt
losses have been within the Company's expectations. For fiscal 2000, 1999 and
1998, the Veterans Administration represented approximately 19%, 17% and 13%,
respectively, of operating revenue. No other single customer accounts for more
than 10% of the Company's operating revenue; however, the loss of any
significant customer, including the Veterans Administration, could have a
material effect on the Company.
The Company maintains cash balances at several large creditworthy banks
located in the United States. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company does not
believe there is significant credit risk related to its cash balances.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, which results in a matching of
current costs and revenues. If the first-in, first-out (FIFO) method of
23
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(continued)
valuation had been used for determining costs, inventories would have been
approximately $98.7 million and $98.9 million higher than the amounts reported
at September 30, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-
line method over the estimated useful lives of the assets which range from
three to 40 years.
Revenue Recognition
The Company recognizes revenue when products are delivered to customers. The
Company also acts as an intermediary in the bulk shipment of pharmaceuticals
from manufacturers to customers' warehouses. These bulk deliveries are
included in total revenue.
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack and
deliver inventory to customers. These costs, which were $143.7 million, $134.1
million and $138.8 million for the fiscal years ended September 30, 2000, 1999
and 1998, respectively, are included in selling and administrative expenses.
Stock-Based Compensation
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock-based compensation (see Note 8).
Employee Stock Ownership Plan
The Company follows Statement of Position 76-3, "Accounting Practices for
Certain Employee Stock Ownership Plans," issued by the American Institute of
Certified Public Accountants in accounting for its employee stock ownership
plan. Amounts contributed or committed to be contributed to the employee stock
ownership plan with respect to a given year are charged to expense. The
compensation and interest elements of the contribution are separately reported
(see Note 7).
Earnings Per Share and Share Data
Earnings per share is computed on the basis of the weighted average number
of shares of common stock outstanding during the periods presented. 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 and warrants.
Recently Issued Financial Accounting Standards
In fiscal 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in fiscal 2000 by SFAS No.
138, "Accounting for Certain Derivative Instruments and
24
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(continued)
Certain Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. The provisions of SFAS No. 133 are effective
for fiscal years beginning after June 15, 2000. Adoption of this statement
will not currently have any impact on the consolidated financial statements or
related disclosures.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which requires adoption during the fourth quarter of
fiscal 2001. At this time, the Company does not anticipate that the adoption
of SAB 101 will have a material impact on the consolidated financial
statements. The Company will continue to analyze the impact of SAB 101,
including any amendments or further interpretations, until the time of
adoption.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125 which the Company currently follows to account for its
receivables securitization facility. The accounting requirements of this
statement are effective for transfers occurring after March 31, 2001. Adoption
of this statement is not expected to impact the Company's treatment of its
receivable securitization facility as a financing transaction and any effect
is expected to be limited to the form and content of its disclosures.
Note 2--Acquisitions
On July 8, 1999, the Company acquired C.D. Smith Healthcare, Inc. ("C.D.
Smith"). Based in St. Joseph, Missouri, C.D. Smith was the seventh largest
wholesale pharmaceutical distributor with annual operating revenue of
approximately $800 million. Shareholders of C.D. Smith received a fixed
exchange of approximately 2.44 million shares of the Company's common stock
and .25 million common stock options for all of the outstanding common stock
and common stock options 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 business
combination was accounted for under the pooling-of-interests method of
accounting and, accordingly, the accompanying financial statements and
footnotes include the operations of C.D. Smith for all periods presented. For
the fiscal years ended September 30, 1999 (through the date of the
acquisition), and 1998, C.D. Smith's revenues were approximately $621.5
million and $834.2 million, respectively. For the fiscal years ended September
30, 1999 (through the date of the acquisition), and 1998, C.D. Smith's net
income (loss) was approximately $1.6 million and $(4.5) million, respectively.
On October 3, 1997, C.D. Smith acquired General Drug Companies ("General
Drug"), for $28.0 million in cash. General Drug was a wholesale pharmaceutical
distributor based in Chicago, Illinois and Boston, Massachusetts, which had
annual revenues of approximately $370 million. The transaction was accounted
for using the purchase method. The excess of the purchase price, over the fair
market value of the net assets acquired amounted to $25.8 million, of which
$12.0 million was allocated to customer lists and $13.8 million was allocated
to goodwill. Goodwill is being amortized over 40 years and customer lists are
being amortized over 20 years on a straight-line basis. Both goodwill and
customer lists are included in other assets, net of the write-down of goodwill
discussed in Note 10.
25
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Taxes on Income
The income tax provision is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended September 30,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current provision:
Federal.................................. $ 30,110 $ 34,108 $ 14,253
State and local.......................... 4,752 3,006 1,018
---------- ---------- ----------
34,862 37,114 15,271
Deferred provision:
Federal.................................. 22,655 8,106 15,538
State and local.......................... 3,169 3,177 3,913
---------- ---------- ----------
25,824 11,283 19,451
---------- ---------- ----------
Provision for income taxes................. $ 60,686 $ 48,397 $ 34,722
========== ========== ==========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<CAPTION>
Fiscal year ended September 30,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 35.0% 35.0% 35.0%
State and local income tax rate, net of
federal tax benefit....................... 3.2 3.4 4.0
Tax effect of goodwill write-down.......... -- 1.7 --
Tax effect of warrant accretion............ -- .1 3.3
Other...................................... (.2) .4 .7
---------- ---------- ----------
Effective income tax rate.................. 38.0% 40.6% 43.0%
========== ========== ==========
</TABLE>
26
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Taxes on Income--(continued)
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Significant components of the Company's deferred tax liabilities
(assets) are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Inventory................................................ $136,163 $117,251
Fixed assets............................................. 5,954 5,674
Other.................................................... 730 945
-------- --------
Gross deferred tax liabilities......................... 142,847 123,870
-------- --------
Net operating losses and tax credit carryovers........... (12,061) (22,239)
Allowance for doubtful accounts.......................... (13,180) (10,290)
Accrued expenses......................................... (1,372) (1,694)
Other postretirement benefits............................ (546) (541)
Other.................................................... (6,998) (9,595)
-------- --------
Gross deferred tax assets.............................. (34,157) (44,359)
Valuation allowance for deferred tax assets.............. 122 1,122
-------- --------
Net deferred tax liabilities............................. $108,812 $ 80,633
======== ========
</TABLE>
In fiscal 2000, 1999, and 1998, tax benefits of $4.9 million, $4.1 million,
and $3.8 million, respectively, related to the exercise of employee stock
options were recorded as capital in excess of par value.
As of September 30, 2000, the Company has $1.8 million of potential tax
benefits from state net operating losses expiring in 3 to 13 years. As of
September 30, 2000, the Company had $10.3 million of alternative minimum tax
credit carryforwards.
Income tax payments amounted to $26.5 million, $17.0 million, and $17.4
million in the fiscal years ended September 30, 2000, 1999, and 1998,
respectively.
Note 4--Long-Term Debt
Receivables Securitization Financing
Effective May 14, 1999, the Company, through a consolidated wholly-owned
special-purpose entity, established a new receivables securitization facility,
which provided the Company with up to $325 million in available credit. During
the third quarter of fiscal 2000, the Company amended its receivables
securitization facility to provide an additional $75 million of borrowing
capacity, increasing total commitments under this facility to $400 million
(the "Securitization Facility"). In connection with the Securitization
Facility, the Company sells 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 Securitization Facility has an expiration date of
May 2003. Interest is 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 (7.0% at September 30, 2000). 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 $0.9 million incurred to
establish and amend the
27
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Long-Term Debt--(continued)
Securitization Facility were deferred and are being amortized on a straight-
line basis over the term of the 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 Securitization
Facility as a financing transaction in its consolidated financial statements.
Proceeds from the Securitization Facility were used to extinguish the
Company's prior receivables securitization financing ("Receivables Program")
in the fourth quarter of fiscal 1999 and resulted 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. The Receivables Program bore interest
at rates ranging from LIBOR plus .2% to the federal funds rate plus 1%.
Transactions under this program also did not qualify as sales under SFAS No.
125 and, accordingly, the Company accounted for the Receivables Program as a
financing transaction.
Revolving Credit Facility
In January 1997, the Company entered into a revolving credit agreement (the
"Credit Agreement") with a syndicate of senior lenders providing a senior
secured facility of $500 million. Among other things, the Credit Agreement:
(1) is for a term of five years, expiring in January 2002; (2) provides for
interest rates ranging from LIBOR plus 25 basis points to LIBOR plus 125 basis
points based upon certain financial ratios; (3) provides for the release of
security upon the attainment of certain financial ratios or once the Company
achieves investment grade senior, unsecured debt ratings from two credit
rating agencies; (4) provides for a borrowing base of 70% of eligible
inventory; and (5) provides higher limits for possible acquisitions. In
connection with the Credit Agreement, the Company incurred approximately $3.0
million of financing fees which have been deferred and are being amortized on
a straight-line basis over the five-year term of the Credit Agreement.
Revolving loans made under the Credit Agreement may be prepaid during its
term without premium and may subsequently be reborrowed. Commitments under the
Credit Agreement may be permanently reduced in full or in part at any time at
the option of the Company upon prior written notice.
Borrowings under the Credit Agreement bear interest at the rate of LIBOR
plus an applicable margin (.50% at September 30, 2000) or the applicable prime
rate. Interest on loans under the Credit Agreement is payable quarterly. At
September 30, 2000, the $20.0 million outstanding under the Credit Agreement
bore interest at the rate of 7.3% per annum. Under the terms of the Credit
Agreement, the Company granted the senior lenders a perfected first priority
security interest in the Company's inventory for collateral against borrowings
under the Credit Agreement. The Company is required to pay a commitment fee on
the unused portion of the commitment under the Credit Agreement (.175% per
annum at September 30, 2000) plus an annual administration fee.
As discussed in Note 2, the Company acquired C.D. Smith in July 1999, and
assumed $78 million in long-term debt. The assumed long-term debt was
immediately extinguished with funds provided by the Company's revolving credit
facility, resulting in an extraordinary charge in the fourth quarter of fiscal
1999 of approximately $2.8 million (net of a $1.6 million tax benefit) related
to prepayment penalties, the write-off of unamortized original issue discount
and the write-off of unamortized deferred financing fees.
Other Debt
In connection with its General Drug acquisition in October 1997, C.D. Smith
issued a subordinated note due and payable October 3, 2004 in the principal
amount of $12.0 million with a detachable common stock put warrant (see Note
5) to an investment group. This note was extinguished in July 1999 when C.D.
Smith merged
28
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Long-Term Debt--(continued)
with the Company as discussed above. Interest on the note of 12% per annum was
payable quarterly and principal installments of $1.8 million were made in
fiscal 1999. The estimated fair value of the warrant at the date of issue in
October 1997 was $2.6 million and was recorded as a discount on the
subordinated debt. The discount was being amortized to interest expense over
the seven-year term using the interest method. At September 30, 2000, other
debt of $8.2 million primarily related to a mortgage note on a distribution
facility.
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. The Company provides protection to meet actual interest rate
exposure and does not speculate in derivatives. The Company was required by
its Credit Agreement to maintain interest rate protection on a minimum of
$112.5 million of its long-term debt through January 1999. The Company entered
into two-year interest rate cap agreements which expired in May 1999 which
specified that the 3-month LIBOR base rate would not be greater than 7.50%
with respect to $115 million of borrowings under the Credit Agreement. The
interest rate caps under these agreements exceeded the market rates at the
time they were entered into and their cost was included in interest expense
ratably over the life of the agreement. During the term of the interest rate
cap agreements, the 3-month LIBOR rate did not exceed 7.5%. There were no such
agreements outstanding at September 30, 2000.
The indentures governing the Securitization Facility and the Credit
Agreement contain restrictions and covenants which include limitations on
incurrence of additional indebtedness, restrictions on distributions and
dividends to stockholders, the repurchase of stock and the making of certain
other restricted payments, the issuance of preferred stock, the creation of
certain liens, transactions with subsidiaries and other affiliates, and
certain corporate acts such as mergers, consolidations, and the sale of
substantially all assets. Additional covenants require compliance with
financial tests, including leverage, fixed charge coverage, and maintenance of
minimum net worth.
Interest paid on the above indebtedness during the fiscal years ended
September 30, 2000, 1999, and 1998 was $40.5 million, $39.0 million, and $51.7
million, respectively.
Total amortization of financing fees and expenses (included in interest
expense) for the fiscal years ended September 30, 2000, 1999, and 1998 was
$1.3 million, $2.4 million, and $2.6 million, respectively.
As of September 30, 2000, the Company's revolving credit facility and
receivables securitization financing had fair values that approximated their
carrying amounts.
Note 5--Common Stock Put Warrant
The detachable common stock put warrant to purchase 415,267 shares of common
stock issued in connection with C.D. Smith's acquisition of General Drug in
October 1997, was exercised in July 1999 immediately prior to the Company's
acquisition of C.D. Smith. The exercise price was nominal and the fair value
of the put warrant of $10.3 million was credited to capital in excess of par
value. Prior to its exercise, the fair value of this put warrant was presented
as a liability in the accompanying consolidated balance sheet as a result of
the holder's option to require settlement in cash. The Company recorded $0.3
million and $7.8 million in interest expense for the fiscal years ended
September 30, 1999 and 1998, respectively, to adjust the common stock put
warrant to its estimated fair value based on the implied value of C.D. Smith
prior to its acquisition by the Company.
29
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Stockholders' Equity
The holders of the Class A common stock are entitled to one vote per share
on all matters on which holders of Class A common stock are entitled to vote.
The holders of the Class A common stock may elect at any time to convert any
or all such shares into the Class B common stock on a share-for-share basis
(but only to the extent that such record holder of Class A common stock shall
be deemed to be required to convert such Class A common stock into Class B
common stock pursuant to applicable law).
The rights of holders of Class B and Class C common stock and holders of
Class A common stock are substantially identical and entitle the holders
thereof to the same rights, privileges, benefits, and notices, except that
holders of Class B and Class C common stock generally do not possess the right
to vote on any matters to be voted upon by the stockholders of the Company,
except as provided by law. Holders of Class B and Class C common stock may
elect at any time to convert any and all of such shares into Class A common
stock, on a share-for-share basis, to the extent the holder thereof is not
prohibited from owning additional voting securities by virtue of regulatory
restrictions.
The Class C common stock is subject to substantial restrictions on transfer
and has certain registration and "take-along" rights. A share of Class C
common stock will automatically be converted into a share of Class A common
stock (a) immediately prior to its sale in a future public offering or (b) at
such time as such share of Class C common stock has been sold publicly.
The following table (in thousands) is a reconciliation of the numerator and
denominator of the computation of earnings per share and earnings per share--
assuming dilution.
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
-----------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income............................................. $99,014 $67,466 $46,030
Effect of dilutive warrant............................. -- 334 --
------- ------- -------
Net income--assuming dilution.......................... $99,014 $67,800 $46,030
======= ======= =======
Weighted average common shares outstanding............. 51,552 50,698 49,877
Effect of dilutive securities:
Options to purchase common stock..................... 468 666 836
Common stock put warrant............................. -- 319 --
------- ------- -------
Weighted average common shares outstanding--assuming
dilution.............................................. 52,020 51,683 50,713
======= ======= =======
</TABLE>
The effect of the common stock put warrant in fiscal 1998 was anti-dilutive
and therefore, was not included in the above computation.
30
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Pension and Other Benefit Plans
The Company provides a benefit for the majority of its employees under
noncontributory defined benefit pension plans. For each employee, the benefits
are based on years of service and average compensation. Pension costs, which
are computed using the projected unit credit cost method, are funded to at
least the minimum level required by government regulations.
The following table sets forth (in thousands) a reconciliation of the
changes in the Company-sponsored defined benefit pension plans:
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Change in Benefit Obligations:
Benefit obligation at beginning of year................. $ 58,948 $ 56,714
Service cost............................................ 3,802 4,089
Interest cost........................................... 4,584 3,955
Amendments.............................................. -- 125
Actuarial gains......................................... (266) (3,489)
Benefit payments........................................ (4,801) (2,446)
-------- --------
Benefit obligation at end of year....................... $ 62,267 $ 58,948
======== ========
Change in Plan Assets:
Fair value of plan assets at beginning of year.......... $ 48,582 $ 43,809
Actual return on plan assets............................ 2,532 3,434
Employer contributions.................................. 5,701 4,415
Expenses................................................ (465) (630)
Benefit payments........................................ (4,801) (2,446)
-------- --------
Fair value of plan assets at end of year................ $ 51,549 $ 48,582
======== ========
Funded Status........................................... $(10,718) $(10,366)
Unrecognized net actuarial loss......................... 9,748 7,597
Unrecognized net obligation............................. -- (144)
Unrecognized prior service cost......................... 2,294 2,671
-------- --------
Net amount recognized................................... $ 1,324 $ (242)
======== ========
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost.................................. $ 2,224 $ 1,018
Accrued benefit liability............................. (1,214) (1,623)
Intangible asset...................................... 314 363
-------- --------
Net amount recognized................................... $ 1,324 $ (242)
======== ========
</TABLE>
Assumptions used in computing the funded status of the plans were as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................... 8.00% 7.75% 7.00%
Rate of increase in compensation levels................. 6.50% 6.25% 5.50%
Expected long-term rate of return on assets............. 10.00% 10.00% 10.00%
</TABLE>
31
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Pension and Other Benefit Plans--(continued)
The following table provides components of net periodic benefit cost for the
Company-sponsored defined benefit pension plans together with contributions
charged to expense for multi-employer union-administered defined benefit
pension plans that the Company participates in (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended
September 30,
----------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost........................................ $3,948 $4,098 $3,159
Interest cost on projected benefit obligation....... 4,584 3,955 3,661
Expected return on plan assets...................... (5,130) (4,554) (3,939)
Amortization of net asset........................... (144) (170) (170)
Amortization of prior service cost.................. 377 371 369
Recognized net actuarial loss....................... 499 699 420
------ ------ ------
Net periodic pension cost of defined benefit pension
plan............................................... 4,134 4,399 3,500
Net pension cost of multi-employer plans............ 435 454 419
------ ------ ------
Total pension expense............................. $4,569 $4,853 $3,919
====== ====== ======
</TABLE>
Plan assets at September 30, 2000 are invested principally in listed stocks,
corporate and government bonds, and cash equivalents. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets
were $4.6 million, $2.7 million, and $1.6 million, respectively, as of
September 30, 2000 and $3.9 million, $3.0 million, and $1.4 million,
respectively, as of September 30, 1999.
Defined Contribution Plans
The Company sponsors the Employee Investment Plan, a defined contribution
401(k) plan, which covers salaried and certain hourly employees. Eligible
participants may contribute to the plan from 2% to 18% of their regular
compensation before taxes. The Company matches the employee contributions up
to a maximum of 6% of their regular compensation in an amount equal to 50% of
the participants' contributions. An additional discretionary Company
contribution in an amount not to exceed 50% of the participants' contributions
may also be made depending upon the Company's performance. All contributions
are invested at the direction of the employee in one or more funds. Employer
contributions vest over a five-year period depending upon an employee's years
of service. In addition, as a result of its acquisition of C.D. Smith, the
Company assumed a defined contribution 401(k) plan which covered substantially
all C.D. Smith employees with at least one year of service. Under the plan,
employees could elect to contribute a percentage of their annual salary
subject to Internal Revenue Code (IRC) maximum limitations. The plan provided
for employer matching and discretionary contributions, the amounts of which
were determined annually by the Board of Directors. During the 1999 plan year,
the Company matched 50% of employee contributions up to 4% of qualified
compensation. In fiscal 2000, the C.D. Smith 401(k) plan was merged into the
Company's 401(k) plan. Costs of the defined contribution plans charged to
expense for the fiscal years ended September 30, 2000, 1999, and 1998 amounted
to $1.6 million, $1.4 million, and $2.0 million, respectively.
Postretirement Benefit Obligations
As a result of special termination benefit packages previously offered, the
Company provides medical, dental, and life insurance benefits to a limited
number of retirees and their dependents. These benefit plans
32
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Pension and Other Benefit Plans--(continued)
are unfunded. The accumulated postretirement benefit obligation was $0.5
million as of September 30, 2000. The weighted average discount rate used in
determining the accumulated postretirement benefit obligations was 7.5% at
September 30, 2000 and 1999. The annual expense for such benefits is not
material.
Employee Stock Ownership Plan
As a result of its acquisition of C.D. Smith, the Company assumed the C.D.
Smith Healthcare, Inc. Employee Stock Ownership Plan ("ESOP"). The ESOP
covered substantially all employees of C.D. Smith with over one year of
service who were not associated with a collective bargaining unit. Under the
ESOP, C.D. Smith initially obtained a term loan from an outside bank in 1991
and disbursed the proceeds to the ESOP in exchange for a note receivable for
purposes of acquiring shares from the original shareholders. Shares held as
collateral under the term loan were released each year in the proportion of
principal and interest paid in the current year to the principal and interest
remaining to be paid over the life of the loan. The Company was obligated to
make annual contributions sufficient to enable the ESOP to repay the loan with
interest at 0.5% below the prime rate. ESOP contributions totaling $0.2
million, $0.1 million, and $0.1 million for the years ended September 30,
1999, 1998, and 1997, respectively, were expensed. The loan and receivable
were recorded in the Company's consolidated balance sheets as long-term debt
and a reduction in shareholders' equity, respectively, as of September 30,
1999. In fiscal 2000, the loan was repaid in full and the ESOP, which held
approximately 1.2 million shares of common stock in the Company on behalf of
its participants, was merged into the Company's 401(k) plan.
Note 8--Stock Option Plans
Effective October 1, 1996, the Company adopted the disclosure-only option
under SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
continues to use the accounting method under APB Opinion No. 25 ("APB 25") and
related interpretations for its employee stock options. Under APB 25,
generally, when the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
During fiscal 1995, the Company adopted the AmeriSource Health Corporation
1995 Stock Option Plan (the "1995 Option Plan"), which provides for the
granting of nonqualified stock options to acquire up to approximately 2.4
million shares of common stock to employees of the Company at a price not less
than the fair market value of the common stock on the date the option is
granted. The option terms and vesting periods are determined at the date of
grant by a committee of the Board of Directors. Options expire six years after
the date of grant unless an earlier expiration date is set at the time of
grant. No further grants will be made from the 1995 Option Plan.
During fiscal 1995, the Company also adopted the AmeriSource Health
Corporation Non-Employee Directors Stock Option Plan (the "1995 Directors
Plan"), which provides for the granting of stock options to the Company's non-
employee directors. Under the 1995 Directors Plan, stock options are granted
annually at the fair market value of the Company's common stock on the date of
grant. The number of options so granted annually is fixed by the plan and the
total number of shares to be issued under the 1995 Directors Plan may not
exceed 100,000 shares. Such options become fully exercisable on the first
anniversary of their respective grant, except for the options under the
initial grant, which are fully exercisable on the third anniversary of the
grant. No further grants will be made from the 1995 Directors Plan.
During fiscal 1997, the Company adopted the 1996 Stock Option Plan (the
"1996 Option Plan") and the 1996 Non-Employee Directors Stock Option Plan (the
"1996 Directors Plan"). The 1996 Option Plan and the 1996 Directors Plan
provide for the granting of nonqualified stock options to acquire up to
1,594,000 and
33
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Stock Option Plans--(continued)
100,000 shares of common stock, respectively, to employees and non-employee
directors at a price not less than the fair market value of the common stock
on the date the option is granted. The option terms and vesting periods of the
1996 Option Plan are determined at the date of grant by a committee of the
Board of Directors. The number of options to be granted annually under the
1996 Directors Plan are fixed by the plan and vest immediately. Options expire
ten years after the date of grant unless an earlier expiration date is set at
the time of grant. No further grants will be made from the 1996 Option Plan or
the 1996 Directors Plan.
During fiscal 1999, the Company assumed the C.D. Smith Drug Company 1996
Equity Compensation Plan pursuant to which options to purchase up to 2,000,000
shares of common stock may be granted to employees at a price not less than
the fair market value of the common stock on the date the option is granted.
The terms and vesting provisions of these options are determined by the Board
of Directors. Options expire ten years after the date of the grant. A total of
248,970 shares were reserved for issuance under the plan at the time of the
acquisition of C.D. Smith by AmeriSource. No further options will be granted
under this plan.
During fiscal 1999, the Company adopted the AmeriSource Health Corporation
1999 Stock Option Plan (the "1999 Option Plan") and the AmeriSource Health
Corporation 1999 Non-Employee Directors Stock Option Plan (the "1999 Directors
Plan"). The 1999 Option Plan and the 1999 Directors Plan provide for the
granting of nonqualified stock options to acquire up to 3,200,000 and 350,000
shares of common stock, respectively, at a price not less than the fair market
value of the common stock on the date the option is granted. The option terms
and vesting periods are determined at the date of grant by a committee of the
Board of Directors. The number of options to be granted annually under the
1999 Directors Plan is fixed by the plan and vest immediately. Options expire
ten years after the date of grant.
A summary of the Company's stock option activity for its option plans, and
related information for the fiscal years ended September 30 follows.
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
year....................... 3,578 $25 3,127 $19 2,888 $14
Granted................... 1,128 13 1,174 37 947 29
Exercised................. (919) 13 (604) 15 (549) 12
Forfeited................. (153) 28 (119) 25 (159) 15
------ ------ ------
Outstanding end of year..... 3,634 24 3,578 $25 3,127 $19
====== ====== ======
Exercisable at end of year.. 1,369 $24 1,534 $16 1,217 $12
Weighted average fair value
of options granted during
the year................... $ 6.67 $16.55 $12.16
</TABLE>
A summary of the status of options outstanding at September 30, 2000
follows:
<TABLE>
<CAPTION>
Exercisable
Outstanding Options Options
--------------------------- ---------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Price Number Contractual Exercise Number Exercise
Range (000) Life Price (000) Price
-------------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$1-$16.............................. 1,407 7 years $12 432 $12
$18-$25............................. 440 6 years $24 298 $24
$27-$46............................. 1,787 8 years $34 639 $33
</TABLE>
34
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Stock Option Plans--(continued)
Pro forma disclosures, as required by SFAS No. 123, regarding net income and
earnings per share have been determined as if the Company had accounted for
its employee stock options under the fair value method.
Option valuation models use highly subjective assumptions to determine the
fair value of traded options with no vesting or trading restrictions. Because
options granted under the Company's Stock Option Plans have vesting
requirements and cannot be traded, and because changes in the assumptions can
materially affect the fair value estimate, in management's opinion, the
existing valuation models do not necessarily provide a reliable measure of the
fair value of its employee stock options.
The fair values for the Company's options were estimated at the date of the
grant using a Black Scholes option pricing model with the following
assumptions for the years ending September 30, 2000, 1999, and 1998; a risk-
free interest rate ranging from 5.3% to 6.7%; no dividends; a volatility
factor of the expected market price of the Company's common stock ranging from
.392 to .509 and a weighted-average expected life of the options of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' assumed vesting period. SFAS
No. 123 requires only that the income effects of options granted since October
1, 1995 be included in the pro forma disclosures. Since a portion of the
Company's stock options vest over several years and additional options may be
granted each year, the pro forma effect on net income reported below is not
representative of the effect of fair value stock option expense on future
years' pro forma net income. The Company's pro forma information follows (in
thousands, except per share data).
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
-----------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Pro forma net income................................ $93,097 $62,392 $42,971
Pro forma earnings per share:
Basic............................................. $ 1.81 $ 1.23 $ .86
Assuming dilution................................. 1.79 1.21 .85
</TABLE>
Note 9--Leases
At September 30, 2000, future minimum payments totaling $52.3 million under
noncancelable operating leases with remaining terms of more than one fiscal
year were due as follows: 2001--$12.7 million; 2002--$10.3 million; 2003--$7.2
million; 2004--$5.3 million; 2005--$4.2 million; and thereafter--$12.6
million. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
Total rental expense was $17.7 million in fiscal 2000, $17.1 million in
fiscal 1999, and $14.9 million in fiscal 1998.
Note 10--Facility Consolidations and Employee Severance
During fiscal 2000, the Company closed one of C.D. Smith's pharmaceutical
distribution facilities and completed the consolidation of C.D. Smith's
pharmaceutical packaging business. In addition, the Company completed the
conversion of the remaining two C.D. Smith facilities to a centralized system
for data processing and other administrative services. 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 closed facility, $3.5 million of contract and lease
cancellations and other costs primarily relating to the expected
35
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Facility Consolidations and Employee Severance--(continued)
termination of a noncancelable supply contract, and $2.1 million of severance
for approximately 90 warehouse and administrative peronnel to be terminated as
a result of the facility consolidation and centralization. As of September 30,
2000, all of the restructuring efforts have been completed, except the final
resolution of the non-cancelable supply contract, which was settled in
November 2000 for the anticipated amount. 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 anticipated to be terminated.
In the fourth quarter of fiscal 1998, the Company began to centralize its
data processing, accounting and contract administration functions, reorganize
its pharmaceutical distribution facilities into five regions, and consolidate
two pharmaceutical distribution facilities. A charge of $8.3 million was
recognized in the fourth quarter of fiscal 1998 related to these efforts 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 September 30, 2000, all of the Company's pharmaceutical
distribution facilities have been converted to the centralized system and
substantially all of the 350 positions have been eliminated. In the third
quarter of fiscal 2000, the Company reversed restructuring accruals related to
the fiscal 1998 charge of approximately $0.6 million representing severance
not paid to employees because they either 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.
The cost reduction initiatives referred to above resulted in the following
charges for the fiscal years ended September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Write-downs of assets............................... $ -- $ 6,400 $2,168
Severance........................................... (1,123) 1,857 3,269
Contract and lease cancellations and other.......... -- 3,473 2,846
------- ------- ------
$(1,123) $11,730 $8,283
======= ======= ======
</TABLE>
Write-downs of assets in fiscal 1999 primarily relates to the write-off of
goodwill pertaining to the consolidated facility as well as the estimated loss
on the sale of the facility. Write-downs of assets in 1998 relate primarily to
computer equipment to be abandoned as a result of the data processing
centralization. The write-downs of assets were based on estimated salvage and
market values of related facilities and equipment compared to carrying values.
Computer and warehouse equipment were determined to have minimal salvage value
based on Company estimates.
Severance includes the termination of approximately 90 and 350
administrative and warehouse employees in fiscal 1999 and 1998, respectively.
Substantially all of the positions have been eliminated as of September 30,
2000. Accrued severance of $0.1 million and $3.1 million, at September 30,
2000 and 1999, respectively, is included in accrued expenses and other.
36
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Facility Consolidations and Employee Severance--(continued)
Contract and lease cancellations and other in fiscal 1999 relates primarily
to the expected termination costs of a noncancelable supply contract arising
from the C.D. Smith acquisition. The Company's obligation under this contract
was settled in November 2000 for the anticipated amount. Contract and lease
cancellations and other in fiscal 1998 relates primarily to noncancelable
lease obligations remaining after the conversion dates for computer equipment
to be abandoned as a result of the data processing centralization. Remaining
contract and lease obligations of $3.0 million and $4.3 million are included
in accrued expenses and other at September 30, 2000 and 1999, respectively.
In the fourth quarter of fiscal 1999, accruals established in fiscal 1997
related to asset write-downs and severance were adjusted by $0.8 million and
$0.3 million, respectively, and are netted against the fiscal 1999 facility
consolidations and employee severance charge.
Note 11--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.
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. The
terms of the confidential settlement agreement did not have any adverse effect
on the Company's financial position or the results of operations.
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 drugstores,
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 drugstore cases to the
United States District Court for the Northern District of Illinois. Plaintiffs
seek injunctive relief, treble damages, attorneys' fees and costs. In October
1994, the Company entered into a 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.
Subsequent amendments to the Judgment Sharing Agreement have 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.
37
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Legal Matters and Contingencies--(continued)
After a ten-week trial in the federal class action case, 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' petition for a writ of certiorari to
the United States Supreme Court 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, but are inactive.
On or about October 2, 1997, a group of retail chain drugstores 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 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
liabilities in the accompanying consolidated balance sheet ($3.8 million at
September 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
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.
Note 12--Merger Costs
In connection with its acquisition of C.D. Smith in the fourth quarter of
fiscal 1999, the Company expensed merger-related costs of $3.2 million
consisting primarily of investment banking, accounting, and legal fees.
In fiscal 1998, the Company and McKessonHBOC jointly terminated a definitive
merger agreement signed in September 1997 after the Federal Trade Commission
obtained an injunction halting the proposed merger. Merger-related costs
consisting of professional fees and stay-put bonuses totaling $18.4 million
were expensed in the fourth quarter of fiscal 1998 as a result of the
termination of the merger agreement.
38
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Quarterly Financial Information (Unaudited)
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------
December 31, March 31, June 30, September 30,
1999 2000 2000 2000
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Operating revenue............. $2,828,754 $2,832,041 $2,921,424 $3,027,776
Bulk deliveries to customer
warehouses................... 10,628 10,162 10,282 3,954
---------- ---------- ---------- ----------
Total revenue................. 2,839,382 2,842,203 2,931,706 3,031,730
Gross profit.................. 119,927 131,406 129,630 138,618
Selling and administrative
expenses, depreciation,
amortization, merger costs
and facility consolidations
and employee severance....... 74,192 80,292 80,731 82,809
Operating income.............. 45,735 51,114 48,899 55,809
Net income.................... 21,599 24,299 25,120 27,996
Net income per share.......... .42 .47 .49 .54
Net income per share--assuming
dilution..................... .42 .47 .48 .53
</TABLE>
In the third quarter of fiscal 2000, the Company reversed $1.1 million of
severance and restructuring accruals related to the fiscal 1999 and 1998
charges, described in Note 10.
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Operating revenue............. $2,362,648 $2,372,872 $2,455,797 $2,568,766
Bulk deliveries to customer
warehouses................... 12,087 12,299 12,740 10,154
---------- ---------- ---------- ----------
Total revenue................. 2,374,735 2,385,171 2,468,537 2,578,920
Gross profit.................. 111,126 122,986 113,025 125,928
Selling and administrative
expenses, depreciation,
amortization, merger costs
and facility consolidations
and employee severance....... 71,462 76,506 71,558 94,537
Operating income.............. 39,664 46,480 41,467 31,391
Income before extraordinary
items........................ 17,895 20,219 21,760 11,041
Extraordinary items--early
retirement of debt........... -- -- -- (3,449)
Net income.................... 17,895 20,219 21,760 7,592
Earnings per share:
Income before extraordinary
items...................... .36 .40 .43 .22
Extraordinary items......... -- -- -- (.07)
Net income................ .36 .40 .43 .15
Earnings per share--assuming
dilution:
Income before extraordinary
items...................... .35 .39 .39 .21
Extraordinary items......... -- -- -- (.07)
Net income................ .35 .39 .39 .15*
</TABLE>
--------
* Difference due to rounding.
In the fourth quarter of fiscal 1999, the Company incurred an $11.7 million
charge to consolidate a facility and centralize administrative functions in
connection with its acquisition of C.D. Smith (see Note 10). Additionally, the
Company incurred $3.2 million of merger costs in connection with the
acquisition (see Note 12).
39
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Subsequent Event
In December 2000, the Company issued $300.0 million of Convertible
Subordinated Notes due December 1, 2007. The notes have an annual interest
rate of 5%, payable semiannually, and are convertible into Class A Common
Stock of the Company at $52.97 per share at any time before their maturity or
their prior redemption or repurchase by the Company. On or after December 3,
2004, the Company has the option to redeem all or a portion of the notes that
have not been previously converted. Net proceeds from the notes of
approximately $290.9 million were used to repay existing borrowings, and for
working capital and other general corporate purposes. In connection with the
issuance of the notes, the Company incurred approximately $9.1 million of
financing fees which will be deferred and amortized over the seven-year term
of the notes.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
(No response to this Item is required.)
40
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Information appearing under "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Notice
of Annual Meeting of Stockholders and Proxy Statement for the 2001 annual
meeting of stockholders (the "2001 Proxy Statement") is incorporated herein by
reference. The Company will file the 2001 Proxy Statement with the Commission
pursuant to Regulation 14A within 120 days after the close of the fiscal year.
Information regarding executive officers is set forth in Part I of this
report.
Item 11. Executive Compensation.
Information regarding executive compensation appearing under "Management,"
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," "Report of the Compensation Committee of the Board of
Directors," and "Stockholder Return Performance" in the 2001 Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management appearing under "Security Ownership of Certain Beneficial Owners
and Management" in the 2001 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing under "Certain Relationships and Transactions" in the
2001 Proxy Statement is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) List of Financial Statements and Schedules.
Financial Statements: The following consolidated financial statements are
submitted in response to Item 14(a)(1):
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 17
Consolidated Balance Sheets as of September 30, 2000 and 1999............. 18
Consolidated Statements of Operations for the fiscal years ended September
30, 2000, 1999 and 1998.................................................. 20
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended September 30, 2000, 1999 and 1998............................ 21
Consolidated Statements of Cash Flows for the fiscal years ended September
30, 2000, 1999 and 1998.................................................. 22
Notes to Consolidated Financial Statements................................ 23
</TABLE>
Financial Statement Schedules: The following financial statement schedules
are submitted in response to Item 14(a)(2) and Item 14(d):
<TABLE>
<S> <C>
Schedule I--Condensed Financial Information of AmeriSource Health
Corporation as of September 30, 2000 and 1999 and for the fiscal
years ended September 30, 2000, 1999 and 1998.................... S-1
Schedule II--Valuation and Qualifying Accounts............................ S-4
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been
omitted.
41
<PAGE>
(a)(3) List of Exhibits.*
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2 Amended and Restated Agreement and Plan of Reorganization by and among
AmeriSource Health Corporation, Hawk Acquisition Corp., C.D. Smith
Healthcare, Inc. and a Person to be Designated Escrow Agent, dated as
of April 28, 1999, as amended and restated as of May 27, 1999
(incorporated by reference to Exhibit 2 to the Registrant's
Registration Statement on Form S-4, Registration No. 333-79591, filed
May 28, 1999).
3.1 Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4, Registration No. 333-
79591, filed June 8, 1999).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Amendment No. 1 (SEC
File No. 33-44244)).
4.1 Receivables Purchase Agreement, dated as of December 13, 1994 between
AmeriSource, as Seller and AmeriSource Receivables Corporation, as
Purchaser (incorporated by reference to Exhibit 4.11 to Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1994).
4.2 AmeriSource Receivables Master Trust Pooling and Servicing Agreement,
dated as of December 13, 1994 among AmeriSource Receivables
Corporation, as transferor, AmeriSource, as the initial Servicer, and
Manufacturers and Traders Trust Company, as Trustee (incorporated by
reference to Exhibit 4.12 to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
4.3 Revolving Certificate Purchase Agreement, dated as of December 13,
1994 among AmeriSource Receivables Corporation, AmeriSource, The
Revolving Purchasers and Bankers Trust Company, as Agent and Revolving
Purchaser (incorporated by reference to Exhibit 4.13 to Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1994).
4.4 Series 1994-1 Supplement to Pooling and Servicing Agreement, dated as
of December 13, 1994 among AmeriSource Receivables Corporation, as
Transferor, AmeriSource, as Initial Servicer, and Manufacturers and
Traders Trust Company, as Trustee (incorporated by reference to
Exhibit 4.14 to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994).
4.5 Credit Agreement, dated as of January 8, 1997 among AmeriSource
Corporation as Borrower, AmeriSource Health Corporation and Certain
Subsidiaries and Affiliates, as Guarantors and Nations Bank, N.A. as
Administrative Agent (incorporated by reference to Exhibit 4.14 to
Registrant's Quarterly Report Form 10-Q for its fiscal quarter ended
December 31, 1996).
4.6 Amendment No. 1, dated as of February 26, 1997 to the January 1997
Credit Agreement (incorporated by reference to Exhibit 4.15 to
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended March 31, 1997).
4.7 Amendment to Pooling and Servicing Agreement and Receivables Purchase
Agreement, dated as of March 5, 1997 among AmeriSource Receivables
Corporation, AmeriSource Corporation, and Manufacturers and Traders
Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1997).
4.8 Certificate Purchase Agreement, dated as of April 11, 1997, among
AmeriSource Corporation, AmeriSource Receivables Corporation, BT
Securities Corporation, Bankers Trust International PLC, and Bankers
Trust Australia Limited (incorporated by reference to Exhibit 4.2 to
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1997).
4.9 Amendment to Pooling and Servicing Agreement and Receivables Purchase
Agreement dated as of April 17, 1997 among AmeriSource Receivables
Corporation, AmeriSource Corporation, and Manufacturers and Traders
Trust Company, as Trustee (incorporated by reference to Exhibit 4.3 to
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1997).
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.10 Series 1997-1 Supplement to Pooling and Servicing Agreement dated as
of April 17, 1997 among AmeriSource Receivables Corporation as
Transferor, AmeriSource Corporation as initial Servicer and
Manufacturers and Traders Trust Company as Trustee (incorporated by
reference to Exhibit 4.4 to Registrant's Quarterly Report on Form 10-Q
for its fiscal quarter ended June 30, 1997).
4.11 Amendment No. 3, dated October 1997, to the January 1997 Credit
Agreement (incorporated by reference to Exhibit 4.15 to Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1998).
4.12 Amendment No. 4, dated November 1998, to the January 1997 Credit
Agreement (incorporated by reference to Exhibit 4.17 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998).
4.13 Receivables Purchase Agreement among AmeriSource Receivables Financial
Corporation, as Seller, AmeriSource Corporation, as Guarantor,
Delaware Funding Corporation, as Buyer, and Morgan Guaranty Trust
Company of New York, as Administrative Agent, dated as of May 14, 1999
(incorporated by reference to Exhibit 4.13 to the Registrant's
Registration Statement on Form S-4, Registration No. 333-79591, filed
May 28, 1999).
4.14 Purchase Agreement between AmeriSource Corporation, as Seller, and
AmeriSource Receivable Financial Corporation, as Payer, dated as of
May 14, 1999 (incorporated by reference to Exhibit 4.14 to the
Registrant's Registration Statement on Form S-4, Registration No. 333-
79591, filed May 28, 1999).
4.15 First Amendment, dated May 12, 2000, to the May 1999 Receivables
Purchase Agreement.
10.1 AmeriSource Master Pension Plan (incorporated by reference to Exhibit
10.9 to Registration Statement on Form S-1, Registration No. 33-27835,
filed March 29, 1989).
10.2 AmeriSource 1988 Supplemental Retirement Plan (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1,
Registration No. 33-27835, filed March 29, 1989).
10.3 Form of Take-Along and Registration Rights Agreement between
Registrant and Citicorp Venture Capital Ltd. (incorporated by
reference to Exhibit 4.19 to Amendment No. 2, filed September 7, 1989,
to the Registration Statement on Form S-1, Registration No. 33-27835).
10.4 Agreement, dated October 14, 1994, among certain manufacturers and
wholesalers of prescription products, including AmeriSource
(incorporated by reference to Exhibit 10.13 to Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994).
10.5 Registrant's 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.16 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-2 dated April 3, 1995, Registration No. 33-57513).
10.6 Registrant's Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.17 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-2 dated April 3, 1995, Registration
No. 33-57513).
10.7 Employment Agreement, dated September 4, 1997, between AmeriSource and
R. David Yost (incorporated by reference to Exhibit 10.12 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997).
10.8 Employment Agreement, dated September 4, 1997, between AmeriSource and
David M. Flowers (incorporated by reference to Exhibit 10.13 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997).
10.9 Employment Agreement, dated September 4, 1997, between AmeriSource and
Kurt J. Hilzinger (incorporated by reference to Exhibit 10.14 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997).
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.10 AmeriSource Health Corporation 1996 Stock Option Plan (incorporated by
reference to Appendix C to Registrant's Proxy Statement dated January
15, 1997 for the Annual Meeting of Stockholders held on February 11,
1997).
10.11 AmeriSource Health Corporation 1996 Non-Employee Directors Stock
Option Plan (incorporated by reference to Appendix D to Registrant's
Proxy Statement dated January 15, 1997 for the Annual Meeting of
Stockholders held on February 11, 1997).
10.12 1996 Amendment to the AmeriSource Health Corporation 1995 Stock Option
Plan (incorporated by reference to Appendix A to Registrant's Proxy
Statement dated January 15, 1997 for the Annual Meeting of
Stockholders held on February 11, 1997).
10.13 Consulting Agreement, dated October 31, 1997, between AmeriSource
Corporation and John F. McNamara (incorporated by reference to Exhibit
10.18 to Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997).
10.15 Form of Voting/Support Agreement among AmeriSource Health Corporation,
Hawk Acquisition Corp. and certain executives of C.D. Smith
(incorporated by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4, Registration No. 333-79591, filed
May 28, 1999).
10.16 Form of Voting/Support Agreement among AmeriSource Health Corporation,
Hawk Acquisition Corp. and Churchill ESOP Capital Partners
(incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-4, Registration No. 333-79591, filed
May 28, 1999).
10.17 C.D. Smith Healthcare, Inc. Employee Stock Ownership Plan, dated
January 1, 1987, as restated on December 10, 1991 (incorporated by
reference to Exhibit 10.17 to the Registrant's Registration Statement
on Form S-4, Registration No. 333-79591, filed May 28, 1999).
10.18 Amendment, dated October 1, 1992 to the C.D. Smith Healthcare, Inc.
Employee Stock Ownership Plan (incorporated by reference to Exhibit
10.18 to the Registrant's Registration Statement on Form S-4,
Registration No. 333-79591, filed May 28, 1999).
10.19 Amendment, dated December 2, 1994, to the C.D. Smith Healthcare, Inc.
Employee Stock Ownership Plan (incorporated by reference to Exhibit
10.19 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-4, Registration No. 333-79591, filed June 8, 1999).
10.20 Amendment, dated October 1, 1996, to the C.D. Smith Healthcare, Inc.
Employee Stock Ownership Plan (incorporated by reference to Exhibit
10.20 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-4, Registration No. 333-79591, filed June 8, 1999).
10.21 Amendment, dated January 1, 1998, to the C.D. Smith Healthcare, Inc.
Employee Stock Ownership Plan (incorporated by reference to Exhibit
10.21 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-4, Registration No. 333-79591, filed June 8, 1999).
10.22 AmeriSource Health Corporation 1999 Non-Employee Directors Stock
Option Plan (incorporated by reference to Appendix C to Registrant's
Proxy Statement dated February 5, 1999 for the Annual Meeting of
Stockholders held on March 3, 1999).
10.23 AmeriSource Health Corporation 1999 Stock Option Plan (incorporated by
reference to Appendix B to Registrant's Proxy Statement dated February
5, 1999 for the Annual Meeting of Stockholders held on March 3, 1999).
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule for the year ended September 30, 2000.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
99 Not Applicable.
</TABLE>
--------
* Copies of the exhibits will be furnished to any security holder of the
Registrant upon payment of the reasonable cost of reproduction.
(b) Reports on Form 8-K
None.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: December 20, 2000 By: _________________________________
(George L. James III)
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on December 18, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ R. David Yost Chairman and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
(R. David Yost)
/s/ George L. James III Vice President and Chief Financial
___________________________________________ Officer (Principal Financial Officer)
(George L. James III)
/s/ Michael D. DiCandilo Vice President, Controller (Principal
___________________________________________ Accounting Officer)
(Michael D. DiCandilo)
/s/ Bruce C. Bruckmann Director
___________________________________________
(Bruce C. Bruckmann)
/s/ Richard C. Gozon Director
___________________________________________
(Richard C. Gozon)
/s/ Lawrence C. Karlson Vice Chairman and Lead Director
___________________________________________
(Lawrence C. Karlson)
/s/ George H. Strong Director
___________________________________________
(George H. Strong)
/s/ Edward E. Hagenlocker Director
___________________________________________
(Edward E. Hagenlocker)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ J. Lawrence Wilson Director
___________________________________________
(J. Lawrence Wilson)
/s/ Barton J. Winokur Director
___________________________________________
</TABLE> (Barton J. Winokur)
47
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AMERISOURCE HEALTH CORPORATION
CONDENSED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 232 $ 59
Receivable from AmeriSource Corporation..................... 55,329 43,728
Other assets................................................ 169 119
Investment at equity in AmeriSource Corporation............. 226,681 122,472
-------- --------
$282,411 $166,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 117 $101
Stockholders' equity:
Common Stock, $.01 par value
Class A (voting and convertible):
50,000,000 shares authorized; issued 9/00--52,660,813
shares; 9/99--51,737,893 shares....................... 527 517
Class B (nonvoting and convertible):
15,000,000 shares authorized; issued 5,908,445 shares.. 59 59
Class C (nonvoting and convertible):
2,000,000 shares authorized; issued 9/00--161,978
shares; 9/99--165,936 shares.......................... 2 2
Capital in excess of par value............................ 283,544 266,737
Retained earnings (accumulated deficit)................... 4,382 (94,632)
Cost of common stock in treasury.......................... (6,220) (6,220)
Note receivable from ESOP................................. -- (186)
-------- --------
282,294 166,277
-------- --------
$282,411 $166,378
======== ========
</TABLE>
See notes to condensed financial statements.
S-1
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)
AMERISOURCE HEALTH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Equity in net income of subsidiary before
extraordinary items................................. $99,014 $70,915 $46,030
Extraordinary items--early retirement of debt, net of
income tax benefits................................. -- (3,449) --
------- ------- -------
Net income.......................................... $99,014 $67,466 $46,030
======= ======= =======
Earnings per share:
Income before extraordinary items................... $ 1.92 $ 1.40 $ .92
Extraordinary items................................. -- (.07) --
------- ------- -------
Net income.......................................... $ 1.92 $ 1.33 $ .92
======= ======= =======
Earnings per share--assuming dilution:
Income before extraordinary items................... $ 1.90 $ 1.38 $ .91
Extraordinary items................................. -- (.07) --
------- ------- -------
Net income.......................................... $ 1.90 $ 1.31 $ .91
======= ======= =======
Weighted average common shares outstanding:
Basic............................................... 51,552 50,698 49,877
Assuming dilution................................... 52,020 51,683 50,713
</TABLE>
---------------
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 99,014 $67,466 $ 46,030
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in net income of subsidiary.............. (99,014) (70,915) (46,030)
Adjustment of common stock put warrant to fair
value.......................................... -- 334 7,816
Changes in operating assets and liabilities:
Receivable from AmeriSource Corporation....... (11,601) (4,436) (2,888)
Accrued expenses.............................. 16 (257) 14
Miscellaneous................................. 50 143 22
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.................................... (11,535) (7,665) 4,964
FINANCING ACTIVITIES
Exercise of stock options and warrant........... 11,924 8,981 6,682
Purchases of treasury stock..................... -- (449) (180)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 11,924 8,532 6,502
INVESTING ACTIVITIES
Capital contribution, net....................... (216) (811) (11,465)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES.................................... (216) (811) (11,465)
-------- -------- --------
INCREASE IN CASH................................. 173 56 1
Cash at beginning of year........................ 59 3 2
-------- -------- --------
CASH AT END OF YEAR.............................. $ 232 $ 59 $ 3
======== ======== ========
</TABLE>
See notes to condensed financial statements.
S-2
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE--I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
The accompanying condensed financial statements present the financial
position, results of operations and cash flows of AmeriSource Health
Corporation (the "Company") as of the dates and for the periods indicated in
accordance with Rule 12-04 of Regulation S-X of the Securities Exchange Act of
the Securities and Exchange Commission and, accordingly, do not include the
accounts of its wholly-owned subsidiaries. The Company's primary asset is its
investment in and receivables from AmeriSource Corporation, which is a wholly-
owned subsidiary of the Company. Substantially all of the Company's operations
are transacted by AmeriSource Corporation. The ability of the Company to pay
its obligations depends on the operations of AmeriSource Corporation.
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements of AmeriSource Health Corporation and
Subsidiaries contained in Item 8 of this document for more information on
long-term debt, stockholders' equity and other disclosures.
Note 2--Subsequent Event
In December 2000, the Company issued $300.0 million of Convertible
Subordinated Notes due December 1, 2007. The notes have an annual interest
rate of 5%, payable semiannually, and are convertible into Class A Common
Stock of the Company at $52.97 per share at any time before their maturity or
their prior redemption or repurchase by the Company. On or after December 3,
2004, the Company has the option to redeem all or a portion of the notes that
have not been previously converted. Net proceeds from the notes of
approximately $290.9 million were used to repay existing borrowings, and for
working capital and other general corporate purposes. In connection with the
issuance of the notes, the Company incurred approximately $9.1 million of
financing fees which will be deferred and amortized over the seven-year term
of the notes.
S-3
<PAGE>
AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
-----------------------------------------------------------------------------------------
Additions
-----------------------------------
Balance at Charged to Balance at
Beginning Costs and Charged to Deductions- End of
Description of Period Expenses Other Accounts Describe (1) Period
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AmeriSource Health
Corporation and
Subsidiaries
-------------------------------------------------
Year Ended September 30,
2000
Allowance for dobtful
accounts............... $27,583,000 $10,274,000 $-- $3,351,000 $34,506,000
=========== =========== ==== ========== ===========
Year Ended September 30,
1999
Allowance for doubtful
accounts............... $27,498,000 $ 6,956,000 $-- $6,871,000 $27,583,000
=========== =========== ==== ========== ===========
Year Ended September 30,
1998
Allowance for doubtful
accounts............... $22,791,000 $ 9,990,000 $-- $5,283,000 $27,498,000
=========== =========== ==== ========== ===========
</TABLE>
--------
(1) Accounts written off during year, net of recoveries.
S-4
