10-Q 1 d10q.txt 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, 2001
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) 1300 Morris Drive, Suite 100 Chesterbrook, PA 19087 (610) 727-7000
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, 2001 was: Class A--52,655,648, Class B--8,446; Class C--159,768. INDEX AMERISOURCE HEALTH CORPORATION
PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated balance sheets--March 31, 2001 and September 30, 2000 Consolidated statements of operations--Three months ended March 31, 2001 and March 31, 2000 Consolidated statements of operations--Six months ended March 31, 2001 and March 31, 2000 Consolidated statements of cash flows--Six months ended March 31, 2001 and March 31, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and qualitative disclosures about market risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K
2 PART 1. FINANCIAL INFORMATION ITEM 1. Amerisource Health Corporation Financial Statements (Unaudited) AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS March 31, September 30, 2001 2000 ---------- ---------- (unaudited) Current assets: Cash and cash equivalents ........................... $ 126,268 $ 120,818 Accounts receivable, less allowance for doubtful accounts: 3/01--$37,142; 9/00--$34,506 ............ 676,654 623,961 Merchandise inventories ............................. 1,820,202 1,570,504 Prepaid expenses and other .......................... 4,341 5,336 ---------- ---------- Total current assets .............................. 2,627,465 2,320,619 Property and equipment, at cost: Land ............................................... 3,832 3,832 Buildings and improvements ......................... 39,118 37,478 Machinery, equipment and other................. 106,853 99,456 ---------- ---------- 149,803 140,766 Less accumulated depreciation ...................... 80,649 75,804 ---------- ---------- 69,154 64,962 Other assets, less accumulated amortization: ---------- ---------- 3/01--$7,492; 9/00--$11,747 ......................... 87,791 72,986 ---------- ---------- $2,784,410 $2,458,567 ========== ==========
See notes to consolidated financial statements. 3 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (CONTINUED) (dollars in thousands, except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30, 2001 2000 ---------- ---------- (unaudited) Current liabilities: Accounts payable ...................................... $1,756,364 $1,584,133 Accrued expenses and other ............................ 51,733 49,398 Accrued income taxes .................................. 11,257 12,284 Deferred income taxes ................................. 118,472 105,654 ---------- ---------- Total current liabilities .......................... 1,937,826 1,751,469 Long-term debt: Revolving credit facility ............................. - 20,000 Receivables securitization financing .................. 171,181 385,000 Convertible subordinated notes.......................... 300,000 - Other debt ............................................ 2,432 8,217 ---------- ---------- 473,613 413,217 Other liabilities ....................................... 7,534 11,587 Stockholders' equity: Common stock, $.01 par value: Class A (voting and convertible): 100,000,000 shares authorized; issued 3/01--53,361,565 shares; 9/00--52,660,813 shares ............................ 533 527 Class B (non-voting and convertible): 15,000,000 shares authorized; issued 5,908,445 shares ............................ 59 59 Class C (non-voting and convertible): 2,000,000 shares authorized; issued 3/01--159,768 shares; 9/00--161,978 shares ............................... 2 2 Capital in excess of par value ........................ 308,974 283,544 Retained earnings ................................... 62,089 4,382 Cost of common stock in treasury ...................... (6,220) (6,220) ---------- ---------- 365,437 282,294 ---------- ---------- $2,784,410 $2,458,567 ========== ==========
See notes to consolidated financial statements. 4 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Three months ended March 31, ---------------------------------- (unaudited) 2001 2000 ---------- ---------- Operating revenue...................................................... $3,480,685 $2,832,041 Bulk deliveries to customer warehouses................................. 313 10,162 ---------- ---------- Total revenue.......................................................... 3,480,998 2,842,203 Operating cost of goods sold........................................... 3,329,516 2,700,635 Cost of goods sold - bulk deliveries................................... 313 10,162 ---------- ---------- Total cost of goods sold............................................... 3,329,829 2,710,797 ---------- ---------- Gross profit........................................................... 151,169 131,406 Selling and administrative expenses.................................... 82,462 76,323 Depreciation........................................................... 3,680 3,577 Amortization........................................................... 601 392 ---------- ---------- Operating income....................................................... 64,426 51,114 Equity in net loss of unconsolidated affiliate......................... 1,801 Interest expense....................................................... 11,793 11,922 ---------- ---------- Income before taxes.................................................... 50,832 39,192 Taxes on income........................................................ 19,316 14,893 ---------- ---------- Net income............................................................. $ 31,516 $ 24,299 ========== ========== Earnings per share..................................................... $.60 $.47 ========== ========== Earnings per share - assuming dilution................................. $.57 $.47 ========== ==========
See notes to consolidated financial statements. 5 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Six months ended March 31, ---------------------------------- (unaudited) 2001 2000 ---------- ---------- Operating revenue...................................................... $6,787,436 $5,660,795 Bulk deliveries to customer warehouses................................. 757 20,790 ---------- ---------- Total revenue.......................................................... 6,788,193 5,681,585 Operating cost of goods sold........................................... 6,498,834 5,409,462 Cost of goods sold - bulk deliveries................................... 757 20,790 ---------- ---------- Total cost of goods sold............................................... 6,499,591 5,430,252 ---------- ---------- Gross profit........................................................... 288,602 251,333 Selling and administrative expenses.................................... 162,107 146,568 Depreciation........................................................... 6,978 6,976 Amortization........................................................... 1,197 940 ---------- ---------- Operating income....................................................... 118,320 96,849 Equity in net loss of unconsolidated affiliate......................... 2,575 - Interest expense....................................................... 22,669 22,820 ---------- ---------- Income before taxes.................................................... 93,076 74,029 Taxes on income........................................................ 35,369 28,131 ---------- ---------- Net income............................................................. $ 57,707 $ 45,898 ========== ========== Earnings per share..................................................... $1.10 $.89 ========== ========== Earnings per share - assuming dilution................................. $1.07 $.89 ========== ==========
See notes to consolidated financial statements. 6 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended March 31, ----------------------------------- (unaudited) 2001 2000 --------------- --------------- OPERATING ACTIVITIES Net income .................................................................... $ 57,707 $ 45,898 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation ................................................................. 6,978 6,976 Amortization, including deferred financing costs ............................. 2,846 1,807 Provision for losses on accounts receivable .................................. 7,363 2,615 Equity in net loss of unconsolidated affiliate ................................ 2,575 - (Gain) loss on disposal of property and equipment ............................ (163) 71 Gain on sale of a business .................................................... (454) - Deferred income taxes ........................................................ 7,365 10,938 Changes in operating assets and liabilities: Accounts receivable ........................................................ (67,656) (31,421) Merchandise inventories .................................................... (256,384) (29,642) Prepaid expenses and other ................................................. (250) (537) Accounts payable, accrued expenses and income taxes ........................ 180,728 78,970 Miscellaneous................................................................ (1,078) (788) --------------- --------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........................ (60,423) 84,887 INVESTING ACTIVITIES Capital expenditures .......................................................... (12,245) (7,685) Equity investment in a business................................................. (3,282) Collections on ESOP note receivable............................................. - 186 Proceeds from sales of property and equipment ................................. 310 1,256 Proceeds from sale of a business................................................ 12,993 - --------------- --------------- NET CASH USED IN INVESTING ACTIVITIES ...................................... (2,224) (6,243) FINANCING ACTIVITIES Long-term debt borrowings ..................................................... 1,245,068 714,167 Long-term debt repayments ..................................................... (1,185,130) (803,457) Deferred financing costs and other........................................... (9,350) (115) Exercise of stock options ..................................................... 17,509 504 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ 68,097 (88,901) --------------- --------------- Increase (decrease) in cash and cash equivalents ............................... 5,450 (10,257) Cash and cash equivalents at beginning of period ............................... 120,818 59,497 --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 126,268 $ 49,240 =============== ===============
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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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, 2001, the results of operations for the three and six months ended March 31, 2001 and 2000 and the cash flows for the six months ended March 31, 2001 and 2000 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited 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, 2000. NOTE 2--LEGAL MATTERS AND CONTINGENCIES In the ordinary course of its business the Company becomes involved in lawsuits, administrative proceedings, and governmental investigations, including antitrust, environmental, product liability, regulatory agency and other matters. In some of these proceedings plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. On the basis of information furnished by counsel and others, the Company does not believe that these matters, individually or in the aggregate, will have a material adverse effect on its business or financial condition. In November 1993, the Company was named a defendant, along with six other wholesale distributors and twenty-four pharmaceutical manufacturers, in a series of purported class action antitrust lawsuits brought by retail pharmacies alleging violations of various antitrust laws stemming from the use of chargeback agreements. In addition, the Company and four other wholesale distributors were added as defendants in a series of related antitrust lawsuits brought by independent pharmacies and chain 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 sought injunctive relief, treble damages, attorneys' fees and costs. In October 1994, the Company entered into a Judgment Sharing Agreement with the other wholesaler and pharmaceutical manufacturer defendants. Under the Judgment Sharing Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler defendants for litigation costs incurred up to an aggregate of $9 million; and (b) if a judgment is entered against both manufacturers and wholesalers, the total exposure for joint and several liability of the Company is limited to the lesser of 1% of such judgment or $1 million. In addition, the Company released any claims which it might have had against the manufacturers for the claims presented by the plaintiffs in these lawsuits. Subsequent amendments to the Judgment Sharing Agreement provided additional protection to the Company from litigation expenses in exchange for updated releases. The Judgment Sharing Agreement covers the federal court litigation as well as the cases which have been filed in various state courts. 8 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) NOTE 2 - 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 judgment as a matter of law 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 that 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 was served with approximately 120 additional complaints on behalf of approximately 4,000 pharmacies and chain retailers. Following fact and expert discovery, the Company and the other wholesale distributors filed a joint motion for summary judgment. On November 6, 2000 the District Court granted the Company's motion for summary judgment as to the chain and individual pharmacies' claims. Plaintiffs have appealed that decision to the Seventh Circuit. The Company believes it has meritorious defenses to the claims asserted in these lawsuits and intends to defend itself vigorously in all of these cases. 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 make 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 March 31, 2001), is based on an engineering analysis prepared by outside consultants and represents an estimate of the extent of contamination and choice of remedy based on existing technology and presently enacted laws and regulation. However, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. 9 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) NOTE 3--EARNINGS PER SHARE Earnings per share is computed on the basis of 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 of common stock outstanding during the period plus the dilutive effect of stock options. Additionally, the fiscal 2001 calculations consider the convertible subordinated notes as if converted and, therefore, the effect of interest expense related to these notes is added back to net income in determining income available to common stockholders.
Three months ended Six months ended March 31, March 31, --------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- (in thousands) Net income.............................................................. $31,516 $24,299 $57,707 $45,898 Interest expense - convertible subordinated notes, net of income taxes .................................................. 2,528 - 3,086 - ------- ------- ------- ------- Income available to common stockholders................................. $34,044 $24,299 $60,793 $45,898 ======= ======= ======= ======= Weighted average number of shares of common stock outstanding........................................... 52,701 51,370 52,528 51,329 Effect of dilutive securities: Stock options...................................................... 984 362 988 283 Convertible subordinated notes..................................... 5,664 - 3,423 - ------- ------- ------- ------- Weighted average number of shares of common stock and dilutive potential common stock.................................... 59,349 51,732 56,939 51,612 ======= ======= ======= =======
NOTE 4 - LONG-TERM DEBT 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 $290.7 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 $9.3 million of financing fees which were deferred and are being amortized over the term of the notes. NOTE 5 - STOCK OPTION PLANS During fiscal 2001, the Company adopted the AmeriSource Health Corporation 2001 Stock Option Plan (the "2001 Option Plan") and the AmeriSource Health Corporation 2001 Non-Employee Directors Stock Option Plan (the "2001 Directors Plan"). The 2001 Option Plan and the 2001 Directors Plan provide for the granting of nonqualified stock options to acquire up to 3,200,000 and 225,000 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 2001 Directors Plan is fixed by the plan and such options vest immediately. Options expire ten years after the date of grant. 10 AMERISOURCE HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) NOTE 6 - PROPOSED BERGEN BRUNSWIG CORPORATION MERGER The Company and Bergen Brunswig Corporation ("Bergen") have signed a definitive merger agreement dated as of March 16, 2001, providing for the Company to merge with Bergen. The stock-for-stock transaction will create a new company, called AmeriSource-Bergen Corporation ("AmeriSource-Bergen") with approximately $35 billion in annual revenue. Under the terms of the agreement, each share of Bergen common stock will be converted into .37 of a share of AmeriSource-Bergen common stock while each share of AmeriSource common stock will be converted into one share of AmeriSource-Bergen common stock. The new company will have approximately 103 million shares of common stock outstanding, with current AmeriSource shareholders owning approximately 51% of the combined company and current Bergen shareholders owning approximately 49%. The merger of the two companies has been structured as a tax-free transaction and is expected to be accounted for as a purchase transaction under the new guidelines for business combinations proposed by the Financial Accounting Standards Board. The new company will have its headquarters in Valley Forge, Pennsylvania and its west coast management center will be located in Orange, California. Under certain circumstances, in the event that the merger agreement is terminated as a result of either company entering into a competing transaction, the other company would be entitled to a termination fee of $75 million and reimbursement of expenses up to $15 million. The merger is expected to close during the summer of 2001. The transaction is subject to Hart-Scott-Rodino review, approval by shareholders of both companies, promulgation of the new FASB purchase accounting rules, and other customary closing conditions. 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 Bergen entered into Stock Option Agreements ("Option Agreements"). Pursuant to the Option Agreements, AmeriSource granted Bergen an irrevocable option to purchase up to 10,472,304 shares of AmeriSource common stock at an exercise price of $48.48 and Bergen granted AmeriSource an irrevocable option to purchase up to 26,961,420 shares of Bergen common stock at an exercise price of $17.9376, under certain circumstances in which the merger agreement is terminated. The Option Agreements may have the effect of discouraging persons who may be interested in acquiring an interest in, or otherwise effecting a business combination with, AmeriSource or Bergen from considering or proposing such a transaction. NOTE 7 - SHAREHOLDER RIGHTS PLAN During fiscal 2001, the Company's Board of Directors adopted a Shareholder Rights Plan. The Plan provides for one right to be distributed as a dividend for each share of AmeriSource common stock outstanding on March 30, 2001. In general, if a person acquires 15 percent or more of AmeriSource's common stock, each right will entitle the holder thereof to purchase one-tenth of a share of AmeriSource common stock (or the common stock of the surviving company in the case of a merger) at a 50 percent discount to market value. The rights are redeemable by the Company under certain circumstances. The rights will not be exercisable in connection with the proposed AmeriSource-Bergen merger (Note 6) and will expire on the earlier of March 16, 2002 or the consummation of the merger. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Operating revenue for the three months ended March 31, 2001 increased 23% from the prior-year quarter to $3.5 billion from $2.8 billion. For the six months ended March 31, 2001, operating revenue increased 20% to $6.8 billion compared to $5.7 billion in the prior-year period. During the three and six months ended March 31, 2001, respectively, sales to health systems increased 23% and 18%, sales to alternate site facilities increased 69% and 71%, sales to independent drugstore customers increased 9% and 6% and sales to the chain drugstore customer group increased 35% and 37%, in each case compared to the respective prior-year periods. The increase in health systems revenue was primarily due to revenue growth with the Veterans Administration and the Novation group purchasing organization ("GPO"). Revenue from the Veterans Administration for the six months ended March 31, 2001 grew 21% over the prior-year period and accounted for approximately 19% of total operating revenue in the six-month period ended March 31, 2001. During calendar 2000 members of the Novation GPO went through a distributor selection process and as a result of this process AmeriSource obtained a net gain of approximately $500 million in annualized revenue. During the first quarter of fiscal 2001, the Company realized approximately 70% to 80% of the estimated revenue impact and by the end of the second fiscal quarter realized 100% of the impact. Alternate site revenue increased significantly due to the effect of a large mail-order customer added in the third fiscal quarter of last year and the addition of a number of new customers since the prior-year quarter. The increase in chain revenue was primarily due to the addition of three new customers, one in the fourth quarter of fiscal 2000 and the remaining two during the first half of fiscal 2001. During the six months ended March 31, 2001, 53% of total operating revenue was from sales to institutional customers which include health systems (42%) and alternate site facilities (11%), and the remaining 47% was from retail customers, including independent community pharmacies (33%) and chain drugstores (14%). In the same period last year, the customer mix was 50% institutional and 50% retail. 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. After ceasing to do business with the Company's largest bulk customer, revenue from bulk deliveries decreased to $0.3 million in the second quarter and $0.8 million in the first six months of fiscal 2001 compared to $10.2 million and $20.8 million in the prior-year quarter and six- month period, respectively. Due to the insignificant service fees generated from these bulk shipments, fluctuations in volume have no significant impact on operating margins. Gross profit of $151.2 million in the second quarter of fiscal 2001 increased by 15% as compared to the prior year quarter due to the increase in operating revenue. As a percentage of operating revenue, the gross profit in the second quarter of fiscal 2001 was 4.34% as compared to 4.64% in the prior-year quarter. For the six months ended March 31, 2001, the gross profit percentage was 4.25% as compared to 4.44% in the prior-year period. The declines in gross profit percentages in the quarter and for the six-month period reflect the net impact of a number of factors, including the change in customer mix to a higher level of institutional and other large customers and the continuing competitive pricing environment, offset in part by higher buy-side margins than in the prior-year periods. Downward pressures on sell-side gross profit margin are expected to continue and there can be no assurance that increases in the buy- side component of the gross margin, including manufacturer price increases and negotiated deals, will be available in the future to fully or partially offset the anticipated decline. In addition, the Company's cost of goods sold for interim periods includes a LIFO provision that is based on the Company's estimated full-year provision. This provision is subject to changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences. 12 Selling and administrative expenses and depreciation increased by $6.2 million or 8% in the second quarter of fiscal 2001 compared with the prior year quarter and, as a percentage of operating revenue, were 2.47% in fiscal 2001 and 2.82% in fiscal 2000. For the first six months of fiscal 2001, selling and administrative expenses and depreciation as a percentage of operating revenue were 2.49% as compared to 2.71% in the prior-year period. This improvement reflects the changing customer mix to more institutional business, which is lower gross margin business, but requires lower operating expense as a percentage of revenue to service. The improvements also reflect warehouse efficiencies and cost reductions related to the Company's centralization initiatives completed last year. These factors were offset in part by an increase in the bad debt provision to $7.4 million for the first six months of fiscal 2001 compared to a $2.6 million provision in the prior-year period. The bad debt increase was primarily due to three customers in bankruptcy. There can be no assurance that similar events will not occur and result in additional bad debt expense in the future. Operating income of $64.4 million in the quarter ended March 31, 2001 increased by 26% from the prior-year period. The Company's operating margin for the quarter increased to 1.85% in fiscal 2001 from 1.80% in fiscal 2000. The five basis point increase represents the net effect of a 35 basis point reduction in operating expenses partially offset by a 30 basis point reduction in gross margin. For the six months ended March 31, 2001, the operating margin was 1.74% compared to 1.71% in the prior-year period. The three basis point increase represents the net effect of a 22 basis point reduction in operating expenses partially offset by a 19 basis point reduction in gross margin. While management has been historically able to lower expense ratios and expects to continue to do so, there can be no assurance that reductions will occur in the future, or that expense ratio reductions will exceed possible declines in gross margins. Interest expense of $11.8 million in the second quarter of fiscal 2001 represents a decrease of 1% compared to the prior-year quarter. The decrease reflects the net impact of higher average levels of debt, lower borrowing spreads and interest rates and includes the impact of $300.0 million of 5% fixed-rate convertible notes issued by the Company in December of 2000. Average borrowings during the quarter ended March 31, 2001 were $760 million as compared to average borrowings of $706 million in the prior-year quarter. Average borrowing rates under the Company's variable-rate debt facilities decreased approximately 30 basis points from the prior-year quarter due to lower market interest rates and lower borrowing spreads which reflect the Company's improved financial structure. Interest expense for the six months ended March 31, 2001 decreased modestly to $22.7 million from $22.8 million in the prior-year period. The decrease reflects the positive impact of the convertible notes, which more than offset an increase of $15 million in average borrowings and an 18 basis point increase in borrowing rates under the Company's variable-rate debt facilities for the six-month period. The income tax provision for the three and six months ended March 31, 2001 of 38% was computed based on an estimate of the full year effective tax rate. Net income in the second quarter of fiscal 2001 increased 30% to $31.5 million from $24.3 million in the prior-year quarter and earnings per share -- assuming dilution increased 21% to $0.57 per share as compared to $0.47 per share in the prior-year quarter. Net income of $57.7 million for the six months ended March 31, 2001 represents a 26% increase compared to the prior-year period. For fiscal 2001 the calculations of earnings per share - assuming dilution include the dilutive effect of the convertible subordinated notes issued by the Company in December 2000. The convertible subordinated notes are treated as if converted and, therefore, the weighted average number of common shares is increased and the effect of interest expense related to these notes is added back to net income in determining income available to common stockholders. 13 LIQUIDITY AND CAPITAL RESOURCES During the six months ended March 31, 2001, the Company's operating activities used $60.4 million in cash as compared to $84.9 million generated in the prior- year period. Cash use from operations during the first six months of fiscal 2001 resulted from an increase in merchandise inventories of $256.4 million and an increase in accounts receivable of $67.7 million offset in part by an increase in accounts payable, accrued expenses and income taxes of $180.7 million. Merchandise inventories were increased to support the 20% operating revenue increase, including the new Novation business. The proportionate increase in accounts receivable was less than the increase in operating revenue as the number of days sales outstanding during the period improved by more than two days over the prior-year period reflecting the change in the customer mix. Centralization of accounts payable processing and timing of vendor payments accounted for a one day increase in days payables outstanding over the prior- year period. Operating cash uses during the six months ended March 31, 2001 included $19.4 million in interest payments and $22.4 million in income tax payments. Capital expenditures for the six months ended March 31, 2001 were $12.2 million and related principally to investments in information technology, warehouse improvements, and warehouse automation equipment. Similar expenditures of approximately $10 million to $13 million are expected to occur in the next two quarters of fiscal 2001. During the six months ended March 31, 2001, the Company sold the net assets of one of its specialty products distribution facilities for approximately $13.0 million and recognized a gain of approximately $0.5 million. Cash provided by financing activities during the first six months of fiscal 2001 was $68.1 million. 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. Net proceeds from the notes of approximately $290.7 million were used to repay existing borrowings, and for working capital and other general corporate purposes. At March 31, 2001, there were no borrowings under the Company's $500 million revolving credit facility and borrowings under the $400 million receivables program were $171.2 million. The revolving credit facility provides for interest rates ranging from LIBOR plus 25 basis points to LIBOR plus 125 basis points based upon certain financial ratios. This facility expires in January 2002 and the Company is currently discussing refinancing strategies with lenders. The receivables securitization facility was entered into in May 1999 and has a term of three years. Interest rates are based on prevailing market rates for short- term commercial paper plus a program fee of 38.5 basis points. The receivables securitization facility represents a financing vehicle utilized by the Company because of the availability of lower interest rates relative to other financing sources. The Company securitizes its trade account and note receivables, which are generally non-interest bearing, in transactions that do not qualify as sales transactions under SFAS No. 125. The Company's primary exposure to market risk consists of changes in interest rates on borrowings. An increase in interest rates would adversely affect the Company's operating results and the cash flow available after debt service to fund operations and expansion and, if permitted to do so under its revolving credit facility, to pay dividends on its capital stock. The Company enters into interest rate protection agreements from time to time to hedge the exposure to increasing interest rates with respect to its long-term debt agreements. The Company provides protection to meet actual exposures and does not speculate in derivatives. There were no such agreements outstanding at March 31, 2001. For every $100 million of unhedged variable rate debt, a 75 basis point increase in interest rates would increase the Company's annual interest expense by $0.75 million. The Company's operating results, together with borrowings under its debt agreements and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements and to fund capital expenditures and to pay interest on outstanding debt. The Company's primary ongoing cash requirements will be to pay interest on indebtedness, finance working capital, and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund the Company's ongoing cash requirements. The Company is subject to certain contingencies pursuant to environmental laws and regulations at one of its former distribution centers that may require remediation efforts. In fiscal 1994, the Company accrued a liability of $4.1 million to cover future consulting, legal and remediation, and ongoing monitoring costs. The accrued liability ($3.8 million at March 31, 2001), 14 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. OTHER - MERGER AGREEMENT The Company and Bergen Brunswig Corporation ("Bergen") have signed a definitive merger agreement dated as of March 16, 2001 providing for the Company to merge with Bergen. The stock-for-stock transaction will create a new company, called AmeriSource-Bergen Corporation ("AmeriSource-Bergen") with approximately $35 billion in annual revenue. Under the terms of the agreement, each share of Bergen common stock will be converted into .37 of a share of AmeriSource-Bergen common stock while each share of AmeriSource common stock will be converted into one share of AmeriSource-Bergen common stock. The new company will have approximately 103 million shares of common stock outstanding, with current AmeriSource shareholders owning approximately 51% of the combined company and current Bergen shareholders owning approximately 49%. The merger of the two companies has been structured as a tax-free transaction and is expected to be accounted for as a purchase transaction under the new guidelines for business combinations proposed by the Financial Accounting Standards Board. The new company will have its headquarters in Valley Forge, Pennsylvania and its west coast management center will be located in Orange, California. Under certain circumstances, in the event that the merger agreement is terminated as a result of either company entering into a competing transaction, the other company would be entitled to a termination fee of $75 million and reimbursement of expenses up to $15 million. The combination is expected to close during the summer of 2001. The transaction is subject to Hart-Scott-Rodino review, approval by shareholders of both companies, promulgation of the new FASB purchase accounting rules, and other customary closing conditions. 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 Bergen entered into Stock Option Agreements ("Option Agreements"). Pursuant to the Option Agreements, AmeriSource granted Bergen an irrevocable option to purchase up to 10,472,304 shares of AmeriSource common stock at an exercise price of $48.48 and Bergen granted AmeriSource an irrevocable option to purchase up to 26,961,420 shares of Bergen common stock at an exercise price of $17.9376, under certain circumstances in which the merger agreement is terminated. The Option Agreements may have the effect of discouraging persons who may be interested in acquiring an interest in, or otherwise effecting a business combination with, AmeriSource or Bergen from considering or proposing such a transaction. 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 3. Quantitative and Qualitative Disclosures About Market Risk. See discussion in Item 2. above. 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: Current Report on Form 8-K filed March 19, 2001, attaching Agreement and Plan of Merger dated March 16, 2001, by and among AmeriSource Health Corporation, Bergen Brunswig Corporation, AABB Corporation, A-Sub Acquisition Corp. and B-Sub Acquisition Corp. Also attached is the joint press release of AmeriSource Health Corporation and Bergen Brunswig Corporation dated March 19, 2001, and the press release of AmeriSource Health Corporation dated March 19, 2001. Current Report on Form 8-K filed March 27, 2001, attaching Rights Agreement, dated as of March 16, 2001, between AmeriSource Health Corporation and Mellon Investor Services LLC and press release announcing shareholder rights plan. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Amerisource Health Corporation /s/ George L. James III --------------------------------------------- George L. James III Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Michael D. DiCandilo --------------------------------------------- Michael D. DiCandilo Vice President, Controller (Principal Accounting Officer) Date: May 14, 2001 17