-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KV3rrk+waOHmzok0fL2V+ebpkfb1SZ5GIAmbZ5/S/xBVZ0FCn0rD4kcTxht7o8Y+ 1dsYXcgouJxZ4z5t+f3BbQ== 0001036050-98-000825.txt : 19980513 0001036050-98-000825.hdr.sgml : 19980513 ACCESSION NUMBER: 0001036050-98-000825 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERISOURCE DISTRIBUTION CORP CENTRAL INDEX KEY: 0000855042 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 232546940 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20485 FILM NUMBER: 98616734 BUSINESS ADDRESS: STREET 1: 300 CHESTER FIELD PWKY CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6102964480 MAIL ADDRESS: STREET 1: 300 CHESTER FIELD PKWY CITY: MALVERN STATE: PA ZIP: 19355 FORMER COMPANY: FORMER CONFORMED NAME: ALCO HEALTH DISTRIBUTION CORP /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AHSC HOLDINGS CORP DATE OF NAME CHANGE: 19920325 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
COMMISSION REGISTRANT, STATE OF INCORPORATION IRS EMPLOYER FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- ---------------------------------- ------------------ 33-27835-01 AmeriSource Health Corporation 23-2546940 (a Delaware Corporation) (formerly AmeriSource Distribution Corporation) P.O. Box 959, Valley Forge, Pennsylvania 19482 (610) 296-4480
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of shares of common stock of AmeriSource Health Corporation outstanding as of March 31, 1998 was: Class A--21,010,381, Class B--2,750,783, Class C--161,859. INDEX AMERISOURCE HEALTH CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets--March 31, 1998 and September 30, 1997 Consolidated statements of operations--Three months ended March 31, 1998 and March 31, 1997 Consolidated statements of operations--Six months ended March 31, 1998 and March 31, 1997 Consolidated statements of cash flows--Six months ended March 31, 1998 and March 31, 1997 Management's Discussion and Analysis of Financial Condition and Item 2. Results of Operations PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K
2 PART 1. FINANCIAL INFORMATION ITEM 1. AMERISOURCE HEALTH CORPORATION FINANCIAL STATEMENTS (UNAUDITED) AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(UNAUDITED) MARCH 31, SEPTEMBER 30, 1998 1997 ----------- ------------- ASSETS Current Assets: Cash and cash equivalents........................... $ 48,185 $ 60,045 Restricted cash..................................... 38,822 8,886 Accounts receivable less allowance for doubtful accounts: 3/98--$30,158, 9/97--$22,562............. 462,427 533,319 Merchandise inventories............................. 959,308 1,017,782 Prepaid expenses and other.......................... 4,180 4,622 ---------- ---------- Total current assets.............................. 1,512,922 1,624,654 Property and equipment, at cost....................... 118,386 114,979 Less accumulated depreciation....................... 52,991 47,517 ---------- ---------- 65,395 67,462 Other assets, less accumulated amortization: 3/98--$7,439; 9/97--$6,110........................... 52,854 52,924 ---------- ---------- $1,631,171 $1,745,040 ========== ==========
See notes to consolidated financial statements. 3 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(UNAUDITED) MARCH 31, SEPTEMBER 30, 1998 1997 ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................... $ 849,310 $1,036,462 Accrued expenses and other......................... 38,589 43,798 Accrued income taxes............................... 11,780 9,433 Deferred income taxes.............................. 42,361 40,406 ---------- ---------- Total current liabilities........................ 942,040 1,130,099 Long-Term Debt: Revolving credit facility.......................... 321,612 280,768 Receivables securitization financing............... 299,930 299,913 Other debt......................................... 8,998 9,138 ---------- ---------- 630,540 589,819 Other Liabilities.................................... 10,578 10,811 Stockholders' Equity Common Stock, $.01 par value: Class A (Voting and convertible): 50,000,000 shares authorized; issued 3/98--21,361,464 shares; 9/97--17,540,629 shares.......................... 214 175 Class B (Non-voting and convertible): 15,000,000 shares authorized; issued 3/98--5,700,783 shares; 9/97--9,440,370 shares........................... 57 94 Class C (Non-voting and convertible): 2,000,000 shares authorized; issued 3/98--161,859 shares; 9/97--166,495 shares............................. 2 2 Capital in excess of par value..................... 237,195 234,188 Retained earnings (deficit)........................ (183,235) (213,928) Cost of common stock in treasury................... (6,220) (6,220) ---------- ---------- 48,013 14,311 ---------- ---------- $1,631,171 $1,745,040 ========== ==========
See notes to consolidated financial statements. 4 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) THREE MONTHS ENDED MARCH 31, --------------------- 1998 1997 ---------- ---------- Revenues............................................... $2,192,285 $1,785,469 Cost of goods sold..................................... 2,079,272 1,692,568 ---------- ---------- Gross Profit........................................... 113,013 92,901 Selling and administrative expenses.................... 70,687 57,295 Depreciation........................................... 3,358 2,764 Amortization........................................... 361 255 ---------- ---------- Operating income..................................... 38,607 32,587 Interest expense....................................... 12,030 11,060 ---------- ---------- Income before taxes and extraordinary item............. 26,577 21,527 Taxes on income........................................ 10,367 8,395 ---------- ---------- Income before extraordinary item....................... 16,210 13,132 Extraordinary charge-early retirement of debt, net of income tax benefit.................................... -- (1,982) ---------- ---------- Net income........................................... $ 16,210 $ 11,150 ========== ========== Earnings per share: Income before extraordinary item..................... $ .68 $ .55 Extraordinary charge ................................ -- (.08) ---------- ---------- Net income......................................... $ .68 $ .47 ========== ========== Earnings per share - assuming dilution: Income before extraordinary item..................... $ .67 $ .55 Extraordinary charge................................. -- (.08) ---------- ---------- Net income......................................... $ .67 $ .46* ========== ==========
- -------- * Difference due to rounding See notes to consolidated financial statements. 5 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) SIX MONTHS ENDED MARCH 31, --------------------- 1998 1997 ---------- ---------- Revenues............................................... $4,446,845 $3,532,404 Cost of goods sold..................................... 4,228,226 3,353,351 ---------- ---------- Gross Profit........................................... 218,619 179,053 Selling and administrative expenses.................... 136,452 111,956 Depreciation........................................... 6,513 5,170 Amortization........................................... 643 350 ---------- ---------- Operating income..................................... 75,011 61,577 Interest expense....................................... 24,692 20,355 ---------- ---------- Income before taxes and extraordinary item............. 50,319 41,222 Taxes on income........................................ 19,626 16,273 ---------- ---------- Income before extraordinary item....................... 30,693 24,949 Extraordinary charge-early retirement of debt, net of income tax benefit.................................... -- (1,982) ---------- ---------- Net income........................................... 30,693 $ 22,967 ========== ========== Earnings per share: Income before extraordinary item..................... $ 1.29 $ 1.05 Extraordinary charge................................. -- (.08) ---------- ---------- Net income......................................... $ 1.29 $ .97 ========== ========== Earnings per share - assuming dilution: Income before extraordinary item..................... $ 1.27 $ 1.04 Extraordinary charge................................. -- (.08) ---------- ---------- Net income......................................... $ 1.27 $ .96 ========== ==========
See notes to consolidated financial statements. 6 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
(UNAUDITED) SIX MONTHS ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- OPERATING ACTIVITIES Net income.......................................... $ 30,693 $ 22,967 Adjustments to reconcile net income to net cash used in operating activities: Depreciation....................................... 6,513 5,170 Amortization....................................... 1,501 1,364 Provision for losses on accounts receivable........ 8,383 2,371 Gain on disposal of property and equipment......... (139) (125) Deferred income taxes.............................. 1,995 4,813 Loss on early retirement of debt................... -- 3,250 Changes in operating assets and liabilities (net of effect of companies acquired): Restricted cash................................... (29,936) (27) Accounts receivable............................... 64,640 (33,935) Merchandise inventories........................... 58,520 (79,820) Prepaid expenses.................................. 446 (724) Accounts payable, accrued expenses and income taxes............................................ (189,118) (5,384) Miscellaneous...................................... (47) 447 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES............ (46,549) (79,633) INVESTING ACTIVITIES Capital expenditures................................ (5,171) (8,058) Proceeds from sales of property and equipment....... 1,360 1,887 Cost of companies acquired.......................... -- (138,652) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES............ (3,811) (144,823) FINANCING ACTIVITIES Long-term debt borrowings........................... 1,175,687 1,304,260 Long-term debt repayments........................... (1,134,953) (1,081,798) Deferred financing costs and other.................. (4,207) (3,160) Exercise of stock options........................... 1,973 760 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES........ 38,500 220,062 ----------- ----------- Decrease in cash and cash equivalents................ (11,860) (4,394) Cash and cash equivalents at beginning of period..... 60,045 65,575 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 48,185 $ 61,181 =========== ===========
See notes to consolidated financial statements. 7 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--BASIS OF PRESENTATION The accompanying financial statements present the consolidated financial position, results of operations and cash flows of AmeriSource Health Corporation and its wholly-owned subsidiaries (the "Company") as of the dates and for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position as of March 31, 1998, the results of operations for the three and six months ended March 31, 1998 and 1997 and the cash flows for the six months ended March 31, 1998 and 1997 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. NOTE 2--LEGAL MATTERS AND CONTINGENCIES In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust, environmental, product liability and regulatory agency and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. On the basis of information furnished by counsel and others, the Company does not believe that these matters, individually or in the aggregate, will have a material adverse effect on its business or financial condition. The Company is subject to contingencies pursuant to environmental laws and regulations at one of its former distribution centers that may require the Company to take remediation efforts. In fiscal 1994, the Company accrued $4.1 million to cover future consulting, legal, and remediation and ongoing monitoring costs. The accrued liability, which is reflected in other long-term liabilities on the accompanying consolidated balance sheet ($3.8 million at March 31, 1998), is based on an engineering analysis prepared by outside consultants and represents an estimate of the extent of contamination and choice of remedy, existing technology and presently enacted laws and regulations. However, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time, although the Company intends to vigorously enforce its rights and remedies. In November 1993, the Company was named a defendant, along with six other wholesale distributors and twenty-four pharmaceutical manufacturers, in a series of purported class action antitrust lawsuits brought by retail pharmacies, alleging violations of various antitrust laws stemming from the use of chargeback agreements. In addition, The Company and four other wholesale distributors were added as defendants in a series of related antitrust lawsuits brought by independent pharmacies who have opted out of the class cases and chain drug stores. The Company also is a defendant in parallel suits filed in state courts in Minnesota, Alabama, and Mississippi. The Federal class actions were originally filed in the United States District Court for the Southern District of New York, and have been transferred along with the individual and chain drug store cases to the United States District Court for the Northern District of Illinois. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and costs. In October 1994, the Company entered into a Judgement Sharing Agreement with the other wholesaler and pharmaceutical manufacturer defendants. Under the Judgement Sharing Agreement; (a) the manufacturer defendants agreed to reimburse the wholesaler defendants for litigation costs incurred, up to an 8 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) aggregate of $9 million; and (b) if a judgement is entered into against both manufacturers and wholesalers, the total exposure for joint several liability of the Company is limited to the lesser of 1% of such judgement or $1 million. In addition, the Company has released any claims which it might have had against the manufacturers for the claims presented by the Plaintiffs in these lawsuits. The Judgement Sharing Agreement covers the federal court litigation as well as the cases which have been filed in various state courts. On April 4, 1996, the District Court granted the Company's motion for summary in the class case. Plaintiffs subsequently appealed the Company's grant of summary judgement to the United States Court of Appeals for the Seventh Circuit. On August 15, 1997, the Court of Appeals reversed the District Court's order granting summary judgement in favor of the Company and the other wholesalers. The Court of Appeals also denied the Company's petition for rehearing. The Company and the other wholesalers filed a petition for a writ of certiorari to the United States Supreme Court. 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. NOTE 3--EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. Earnings per share is computed on the basis of its weighted average number of shares outstanding during the periods presented (23,894,373 and 23,689,749 for the three months ended March 31, 1998 and 1997, respectively; and 23,875,220 and 23,681,217 for the six months ended March 31, 1998 and 1997, respectively) . Earnings per share--assuming dilution is computed on the basis of the weighted average number of shares outstanding during the period plus the dilutive effect of stock options (346,347 and 371,451 for the three months ended March 31, 1998 and 1997, respectively; and 356,929 and 349,298 for the six months ended March 31, 1998 and 1997, respectively). NOTE 4--PROPOSED MCKESSON CORPORATION MERGER On September 22, 1997, the Company and McKesson Corporation ("McKesson") signed a definitive merger agreement which was subsequently approved by the stockholders of both companies on February 9, 1998. McKesson is the largest distributor of pharmaceuticals and related health care products and value- added services in the United States. Under the terms of the agreement, stockholders of AmeriSource will receive a fixed exchange ratio of 1.42 shares of McKesson common stock for each share of AmeriSource common stock. The merger of the two companies has been structured as a tax-free transaction and will be accounted for as a pooling of interests. The combined company will operate under the McKesson name and will be headquartered in San Francisco, CA. Under certain circumstances, in the event that the merger agreement is terminated, McKesson would be entitled to a termination fee of $65 million from the Company. Merger related costs incurred prior to consummation of the merger ($4.2 million as of March 31, 1998) are being deferred and are included in other assets. Such costs will be expensed upon consummation of the merger or a determination that the consummation is not likely to occur. On March 9, 1998 the Federal Trade Commission filed a complaint in the U.S. District Court for the District of Columbia seeking a preliminary injunction to halt the merger. A court hearing is scheduled to begin on June 10, 1998 with a ruling anticipated in June or July. There can be no assurance that the merger will be completed, or that it will be completed as contemplated. 9 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) Concurrently with the execution of the merger agreement, the Company and McKesson entered into the AmeriSource Stock Option Agreement ("Option Agreement"). Pursuant to the Option Agreement, AmeriSource has granted McKesson an irrevocable option to purchase up to 3,418,601 shares of AmeriSource common stock at an exercise price of $70.87 per share, under certain circumstances in which the merger agreement is terminated. The Option Agreement may have the effect of discouraging persons who may be interested in acquiring an interest in, or otherwise effecting a business combination with AmeriSource, from considering or proposing such a transaction. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues for the three months ended March 31, 1998 increased 23% to $2.2 billion from $1.8 billion in the first quarter of fiscal 1997. For the six months ended March 31, 1998, revenues were $4.4 billion, an increase of 26% compared to the prior year period. The year-to-year revenue gains reflect increases across all customer groups and all geographic regions. The acquisition of Walker Drug Company, L.L.C. ("Walker Drug Company") in March 1997, contributed 7% and 9% of the increase in revenues for the three and six months ended March 31, 1998, respectively. During the six months ended March 31, 1998, sales to hospitals and managed care facilities increased 17%, sales to independent drug store customers increased 24%, and sales to the chain drug store customer group increased 53%, as compared with the prior year period. The chain growth was a result of a new service agreement with a grocery chain in the northeast which had previously self-warehoused. During the six months ended March 31, 1998, sales to hospitals and managed care facilities accounted for 45% of total revenues, while sales to independent drug stores accounted for 33% and sales to chain drug stores accounted for 22% of the total. Chain revenues are expected to significantly decrease in future quarters due to the termination of service contracts with two major warehousing chains that account for approximately $230 million of revenue per quarter. Approximately two-thirds of the $230 million will be lost in the Company's third fiscal quarter. The Company does not expect that operating income will be significantly affected by the loss as both chains had lower than average operating margins and the Company expects that it will be able to reduce expenses concurrently with the loss of gross profit. Future revenues may also be impacted by the continuing consolidations of customers and price competition in the industry. Gross profit of $113.0 million in the second quarter of fiscal 1998 increased by 22% over fiscal 1997 due to the increase in revenues. As a percentage of revenues, the gross profit in the second quarter of fiscal 1998 was 5.16% as compared to 5.20% in the prior year period. For the six months ended March 31, 1998, the gross profit percentage was 4.92% compared to 5.07% in the prior year period. The decline in gross profit percentage was due to a reduction in selling margin percentage resulting from the aforementioned above average revenue growth in the chain segment offset in part by an increase in inventory appreciation profits. Gross profit may continue to be impacted by price competition, changes in customer and product mix, and distribution center performance. The Company commenced cost reduction plans in the third quarter of fiscal 1997 to consolidate three of its pharmaceutical distribution facilities into other existing facilities and to restructure its sales force. The cost reduction initiatives resulted in a $6.4 million charge to selling and administrative expense in the third fiscal quarter of 1997 and were substantially completed by March 31, 1998. The Company is in the process of developing a plan to centralize its data processing and back office administration functions and is also considering plans to close one or two of its distribution facilities. It is expected that these plans will be finalized in the third quarter of fiscal 1998 and will result in a pre-tax restructuring charge, consisting of severance, asset disposals and lease cancellation costs, of approximately $15 to $20 million. Operating expenses increased by $6.0 million or 18% in the second quarter of fiscal 1998 compared with the prior year period, and as a percentage of revenues, were 3.39% in fiscal 1998 and 3.38% in fiscal 1997. For the first six months of fiscal 1998, operating expenses as a percentage of revenues were 3.23% versus 3.33% in the prior year. The increase in expenses was due to increased delivery and warehouse expense associated with the revenue increase, including the acquisition of Walker Drug Company and an increase in bad debt expense. The decrease as a percentage of revenue in fiscal 1998 is primarily due to increased production economies as a result of the additional sales volume in new and existing facilities and benefits resulting from the fiscal 1997 cost reduction initiatives discussed above. Operating income of $38.6 million in the quarter ended March 31, 1998 increased by 18% from the prior year period. The Company's operating margin declined slightly to 1.76% in fiscal 1998 from 1.83% in fiscal 1997. For the six months ended March 31, 1998, the operating margin was 1.69% compared to 1.74% in the prior year. The decline is due to the decrease in gross profit percentage discussed above, offset in part by reduced operating expenses as a percentage of revenues. 11 Interest expense of $12.0 million in the second quarter of fiscal 1998 represents an increase of 9% compared to the prior year period. The increase over the prior year was due to increased borrowings to fund the purchase of Walker Drug Company in March 1997 offset in part by reduced borrowing rates. Average borrowings during the quarter ended March 31, 1998 were $732 million as compared to average borrowings of $637 million in the prior fiscal year. For the six-month period ended March 31, 1998, average borrowings were $726 million versus $587 in the prior year period. The income tax provision for the three and six months ended March 31, 1998 was computed based on an estimate of the full year effective tax rate. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earning per share amounts for all periods have been reported, and where necessary, restated to conform to the Statement No. 128 requirements. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended March 31, 1998, the Company's operating activities used $46.6 million in cash due to the decrease in accounts payable and accrued expenses of $189.1 million offset in part by decreases in merchandise inventories of $64.6 million and accounts receivable of $58.5 million. Accounts payable decreased primarily due to the payment of extended term invoices during the period related to the Company's expansion of its Thorofare, NJ distribution facility. Operating cash uses during the six months ended March 31, 1998 included $24.6 million in interest payments and $14.5 million in income tax payments. Capital expenditures for the six months ended March 31, 1998 were $5.2 million and relate principally to investments in warehouse automation, warehouse improvements, and information technology. Similar expenditures of approximately $10 million are expected to occur in the second half of fiscal 1998. Cash provided by financing activities during fiscal 1998 represents borrowings under the Company's revolving credit facility and its Receivables Program primarily to fund working capital requirements. At March 31, 1998, borrowings under the Company's $500 million revolving credit facility were $321.6 million (at an average interest rate of 7.1%) and borrowings under the $375 million Receivables Program were $299.9 million (at an average interest rate of 6.0%). An increase in interest rates would adversely affect the Company's operating results and the cash flow available after debt service to fund operations and expansion and, if permitted to do so under its revolving credit facility, to pay dividends on its capital stock. The Company enters into interest rate protection agreements to hedge the exposure to increasing interest rates with respect to its long-term debt agreements. The Company provides protection to meet actual exposures and does not speculate in derivatives. The Company is required by its Credit Agreement to maintain interest rate cap protection on a minimum of $112.5 million through January 1999 and has interest rate cap agreements expiring in May 1999, which provide protection on $115 million of its long-term borrowings. The Company's operating results have generated sufficient cash flow which, together with borrowings under its debt agreements and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures, and interest currently payable on outstanding debt. The Company's primary ongoing cash requirements will be to fund payment of interest on indebtedness, finance working capital, and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund the Company's ongoing cash requirements. 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 12 accrued liability ($3.8 million at March 31, 1998), which is reflected in other long-term liabilities on the accompanying consolidated balance sheet, is based on an estimate of the extent of contamination and choice of remedy, existing technology, and presently enacted laws and regulations, however, changes in remediation standards, improvements in cleanup technology, and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time. The Company has conducted a review of its computer systems to identify and address all necessary code changes, testing, and implementation procedures necessary to make its systems Year 2000 compliant. The Company presently believes that with modifications to existing software, and converting to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted. The Company expects its internal systems to be substantially compliant by the end of 1998. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the Company. In addition there can be no assurance that the systems of other companies on which the Company's business relies will be timely converted or that any such failure to convert by another company would not have a material impact on the Company's business. The Company is in the process of determining how to address its business partners' compliance issues. Amounts expensed for Year 2000 projects have not been and are not expected to be significant to the Company's results of operations. On September 22, 1997, the Company and McKesson Corporation ("McKesson") signed a definitive merger agreement which was subsequently approved by the stockholders of both companies on February 9, 1998. McKesson is the largest distributor of pharmaceuticals and related health care products and value- added services in the United States. Under the terms of the agreement, stockholders of AmeriSource will receive a fixed exchange ratio of 1.42 shares of McKesson common stock for each share of AmeriSource common stock. The merger of the two companies has been structured as a tax-free transaction and will be accounted for as a pooling of interests. The combined company will operate under the McKesson name and will be headquartered in San Francisco. Under certain circumstances, in the event that the merger agreement is terminated, McKesson would be entitled to a termination fee of $65 million from the Company. Merger related costs including professional fees and stay- pay bonuses incurred prior to the consummation of the merger are being deferred ($4.2 million as of March 31, 1998) and are included in other assets. Total merger costs are expected to be $18-$20 million and will be expensed upon consummation of the merger or a determination that the consummation is not likely to occur. On March 9, 1998 the Federal Trade Commission filed a complaint in the U.S. District Court for the District of Columbia seeking a preliminary injunction to halt the merger. A court hearing is scheduled to begin on June 10, 1998 with a ruling anticipated in June or July. There can be no assurance that the merger will be completed, or that it will be completed as contemplated. Concurrently with the execution of the merger agreement, the Company and McKesson entered into the AmeriSource Stock Option Agreement ("Option Agreement"). Pursuant to the Option Agreement, AmeriSource has granted McKesson an irrevocable option to purchase up to 3,418,601 shares of AmeriSource common stock at an exercise price of $70.87 per share, under certain circumstances in which the merger agreement is terminated. The Option Agreement may have the effect of discouraging persons who may be interested in acquiring an interest in, or otherwise effecting a business combination with AmeriSource, from considering or proposing such a transaction. Certain information in this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as such term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. Certain factors such as changes in interest rates, competitive pressures, customer and product mix, inventory investment buying opportunities, regulatory changes, and capital markets could cause actual results to differ materially from those in forward-looking statements. 13 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. Amerisource Health Corporation /s/ Kurt J. Hilzinger _____________________________________ KURT J. HILZINGER VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Date: May 12, 1998 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 1(a) On February 9, 1998, the Company held a Special Meeting of Stockholders to consider and vote upon a proposal to approve an Agreement and Plan of Merger, dated as of September 22, 1997, as amended (the "Merger Agreement"), by and among AmeriSource, McKesson Corporation ("McKesson") and Patriot Acquisition Corp., a newly formed, wholly owned subsidiary of McKesson, which provides for the merger of AmeriSource with and into McKesson (the "Merger"). (b) Proxies were solicited by the Company's management pursuant to Regulation 14 under the Securities Exchange Act of 1934. (c) The results of the stockholders vote were as follows: 16,710,751 for; 68,488 against; and 12,821 abstain. 2(a) The Company's 1998 Annual Meeting of Stockholders was held on March 2, 1998. (b) Proxies were solicited by the Company's management pursuant to Regulation 14 under the Securities Exchange Act of 1934; there was no solicitation in opposition to management's nominees as listed in the proxy statement; and all director nominees were elected to the class indicated in the proxy statement pursuant to the vote of the Company's stockholders. (c) Matters voted upon at the Annual Meeting were as follows: Election of Bruce C. Bruckmann, Michael A. Delaney, Richard C. Gozon, Lawrence C. Karlson, George H. Strong, James A. Urry, Barton J. Winokur and R. David Yost as directors of the Company. The results of the stockholder vote were as follows: Mr. Bruckmann-- 16,162,850 for, 0 against, 73,383 withheld, and 0 broker non-votes; Mr. Delaney--16,161,653 for, 0 against, 74,580 withheld, and 0 broker non-votes; Mr. Gozon--16,162,946 for, 0 against, 73,287 withheld, 0 broker non-votes; Mr. Karlson--16,162,996 for, 0 against, 73,237 withheld, and 0 broker non-votes; Mr. Strong-- 16,161,884 for, 0 against, 74,349 withheld, and 0 broker non-votes; Mr. Urry--16,161,623 for, 0 against, 74,610 withheld, and 0 broker non-votes; Mr. Winokur--16,162,946 for, 0 against, 73,287 withheld, and 0 broker non-votes; Mr. Yost--16,162,546 for, 0 against, 73,687 withheld, and 0 broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27--Financial Data Schedule (b) Reports on Form 8-K: Current Report on Form 8-K filed March 10, 1998 attaching letter agreement among Amerisource Health Corporation, McKesson Corporation and Patient Acquisition Corp. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1998 OCT-01-1997 MAR-31-1998 48,185 0 462,427 30,158 959,308 1,512,922 118,386 52,991 1,631,171 942,040 630,540 0 0 273 47,740 1,631,171 4,446,845 4,446,845 4,228,226 4,228,226 143,608 8,383 24,692 50,319 19,626 30,693 0 0 0 30,693 1.29 1.27
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