For purposes of this Exhibit 99.2, unless the context otherwise requires:
. "we," "us," "AmerisourceBergen" and "the Company" refer to
AmerisourceBergen Corporation and its subsidiaries on a consolidated
basis after the merger described below.
. "AmeriSource" refers to AmeriSource Health Corporation and its
subsidiaries on a consolidated basis.
. "Bergen" refers to Bergen Brunswig Corporation and its subsidiaries on
a consolidated basis.
. "Pro forma" means adjusted as if the following had been completed as of
the beginning of the relevant time period: (i) the merger; (ii) certain
financings; (iii) the repayment of amounts outstanding under the existing
credit facilities of AmeriSource and Bergen; (iv) the closing of the new
credit facility and (v) the repurchase of all outstanding Durr-Fillauer
debentures pursuant to the terms of the change of control offer described
below.
. All industry statistics in this report were obtained from data prepared
or provided by the National Wholesale Druggists' Association and other
recognized industry sources.
AmerisourceBergen
We are a leading national wholesale distributor of pharmaceutical products
and related healthcare services and solutions with pro forma operating revenue
(excluding bulk shipments) of approximately $32 billion, pro forma adjusted
earnings before interest expense, taxes, depreciation and amortization
("Adjusted EBITDA" as defined below) of approximately $620 million and pro
forma operating income of approximately $462 million for the twelve-month
period ended March 31, 2001.
We were formed in March 2001 when AmeriSource and Bergen (the "predecessor
companies") announced their intent to combine in a merger-of-equals to form our
company. The merger will enable us to significantly enhance our competitive
position with:
. enhanced scale of operations;
. operating and administrative cost savings;
. improved purchasing efficiencies;
. improved working capital management; and
. broadened product offering.
As a result of the merger, we expect to achieve estimated cost savings of
approximately $125 million per year by the end of the third year following the
consummation of the merger from, among other things, the consolidation of
distribution facilities and related working capital improvements, the
elimination of duplicative administrative functions and generic inventory
purchasing efficiencies. We also expect to benefit from lower financing costs
as a result of the combination.
Our greater scale of operations enhances our competitive position in our
core wholesale pharmaceutical distribution business through improved access to
capital, enhanced purchasing efficiencies and a broader service offering to our
customers. We have several initiatives to provide additional value-added
services to our customers including pharmaceutical packaging, management
information and consulting services and specialty pharmaceutical product
distribution and services.
Our businesses operate in two segments. The first segment, pharmaceutical
distribution, includes our core wholesale pharmaceutical drug distribution
business, ASD Specialty Healthcare--our pharmaceutical alternate site
distribution business and American Health Packaging--our pharmaceutical
repackaging business. Pharmaceutical distribution also includes a number of
smaller specialty units in areas such as management
1
reimbursement consulting services and third party logistics services for
pharmaceutical manufacturers. Our second operating segment is PharMerica, a
leading national provider of institutional pharmacy services in long-term care
and alternate site settings. PharMerica also provides mail-order pharmacy
services to chronically and catastrophically ill patients under workers'
compensation programs.
We are attractively positioned in the market as the only national wholesale
pharmaceutical distributor exclusively focused on pharmaceutical product
distribution, services and solutions. We serve the following major market
segments:
. acute care hospitals and health systems;
. independent retail pharmacies;
. the alternate site market; and
. national and regional retail pharmacy chains.
We currently serve customers through a geographically diverse network of
distribution centers in the United States. 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 and lower overall costs in the
pharmaceutical supply chain.
Our customer base is geographically diverse and balanced with no single
customer representing more than 7.3% of pro forma fiscal 2000 operating
revenue. The merger combines two companies with complementary customer bases
that have minimal overlap. We have one of the leading market positions in the
acute care hospital and health systems market, which represented approximately
30% of pro forma fiscal 2000 operating revenue, and the independent retail
pharmacy market, which represented approximately 29% of pro forma fiscal 2000
operating revenue. We also have a strong presence with national and regional
retail pharmacy chains, which represented 17% of our pro forma fiscal 2000
operating revenue.
In the attractive alternate site market, we supply pharmaceuticals and other
related products and services to the oncology, nephrology, vaccine, plasma and
other specialty healthcare markets. We serve a continuum of customers including
physicians' offices and clinics, skilled nursing facilities, mail-order
facilities, assisted living centers and chronically ill patients. We also
provide plasma products to acute care hospitals. The alternate site market
represented approximately 24% of pro forma fiscal 2000 operating revenue.
Industry Overview
We have benefited from the significant growth of the full service wholesale
drug industry in the United States. According to an independent third party
provider of information to the pharmaceutical and healthcare industry, industry
sales grew from approximately $68 billion in 1995 to approximately $140 billion
in 2000 and are expected to grow to approximately $264 billion in 2005.
The factors contributing to the growth of the full service wholesale drug
industry in the United States, and other favorable industry trends, include:
. an aging population;
. the introduction of new pharmaceuticals;
. the increased use of outpatient drug therapy;
. rising pharmaceutical prices; and
. the expiration of patents for brand name pharmaceuticals.
2
We expect wholesale drug revenue, gross margins and profitability will
continue to benefit from these trends. For example, sales of pharmaceuticals to
individuals over age 65, who suffer from greater incidence of chronic illnesses
and disabilities and account for higher annual pharmaceutical expenditures, are
expected to increase. The population in this age group is projected to increase
from 35 million in 2000 to more than 39 million by the year 2010. Also, the
introduction of new compounds through traditional research and development as
well as the advent of new research, production and delivery methods, such as
biotechnology and gene research and therapy, have been responsible for
significant increases in pharmaceutical sales. We expect this trend to continue
as manufacturers strive to generate new compounds and delivery methods that are
more effective in treating diseases. We also expect that, consistent with
historical trends, price increases on pharmaceutical products will continue to
equal or exceed the overall Consumer Price Index. These price increases create
opportunities for appreciation on inventory acquired in advance of price
increases, thereby enhancing profitability. We also believe that gross profit
margins will be favorably impacted as a significant number of patents for
widely-used brand name pharmaceutical products will expire in the next several
years, as generic products have historically provided a greater gross profit
margin opportunity than brand name products.
Business Strategy
AmerisourceBergen's business strategy is anchored in national pharmaceutical
distribution and services, reinforced by the value-added healthcare solutions
we provide our customers and suppliers. This focused strategy has significantly
expanded our predecessors' businesses over the past five years and we believe
we are well-positioned to continue to grow revenue and increase operating
income through the execution of the following key elements of our business
strategy:
. Continue Growth in Existing Markets. We believe that we are well-
positioned to continue to grow in our existing markets by: (i) providing
superior distribution services to our customers and suppliers and (ii)
delivering specific programs and services unique to each of our customer
groups. We strive to provide exceptional service to our customers, which
is reflected in the consistently high rankings achieved by our
predecessor companies in recent customer surveys.
. Expand Growth Opportunities through Healthcare Solutions for
Customers. We are continually enhancing our services and packaging these
services into programs designed to enable customers to improve sales and
compete more effectively. As a result of the merger, we will broaden the
range of value-added solutions that AmeriSource and Bergen offered their
customers. We expect to integrate complementary AmeriSource and Bergen
services and programs, such as generic purchasing programs, independent
retail pharmacy marketing programs and customer order and inventory
management systems offered to retail pharmacies, into a comprehensive
solution package consisting of the best features of existing services
and programs. We intend to market these solutions to existing customers
and to use the increased range of services to attract new customers.
. Expand Growth Opportunities through Healthcare Solutions for
Suppliers. We have been developing solutions for suppliers to improve
the efficiency of the healthcare supply chain. Programs for suppliers to
assist with rapid new product launches, promotional and marketing
services to accelerate product sales, custom packaging, and product data
reporting are examples of value-added solutions currently offered. We
believe these services will continue to expand, further contributing to
our revenue and income growth. We also intend to acquire companies that
deliver complementary value-added products and services to our existing
customers and suppliers.
. Improve Operating and Capital Efficiencies. We believe we already have
one of the lowest operating cost structures among our major national
competitors. We expect to lower our cost structure further as we
consolidate our existing distribution facility network and establish
new, more efficient distribution centers. We also intend to further
reduce operating expenses as a percentage of revenue by eliminating
duplicate administrative functions. These measures are designed to
reduce marginal operating costs, to
3
provide greater access to financing sources and to reduce the cost of
capital. In addition, we believe we will continue to achieve productivity
and operating income gains as we invest in and continue to implement
warehouse automation technology, adopt "best practices" in warehousing
activities and increase operating leverage due to increased volume per
full service distribution facility.
The Merger and Related Transactions
On March 16, 2001, AmeriSource and Bergen entered into an Agreement and Plan
of Merger, pursuant to which AmeriSource and Bergen will be combined in a
merger-of-equals to form AmerisourceBergen. We believe that the combined
strengths of AmeriSource and Bergen will enable us to achieve significant
operating efficiencies and produce substantial benefits for our customers and
stockholders. By combining the companies, we believe we will create the
potential for stronger operating results and a stronger financial condition
than either company could achieve on its own.
We expect to refinance the existing senior secured credit facilities of
AmeriSource and Bergen, which had outstanding balances of $0 and $445.1
million, respectively, at March 31, 2001. The existing credit facilities and
the PharMerica debt described below are expected to be refinanced with the
proceeds of financings together with borrowings under a new credit facility with
a syndicate of banks led by The Chase Manhattan Bank, an affiliate of J.P.
Morgan Securities Inc., and Bank of America, N.A., an affiliate of Banc of
America Securities LLC. The new credit facility is expected to provide aggregate
commitments of $1.3 billion, of which $1 billion will consist of revolving loan
commitments and $300 million will consist of term loan commitments. After the
merger, we expect to make a change of control offer with respect to Bergen's
$20.6 million aggregate principal amount of 7% convertible subordinated
debentures due 2006 originally issued by Durr-Fillauer Medical Inc., a
subsidiary of Bergen, pursuant to the terms of the applicable indenture.
After consummation of the merger, we will be required to make a change of
control offer to repurchase approximately $308.1 million aggregate principal
amount of the outstanding 8 3/8% Senior Subordinated Notes due 2008 of Bergen's
PharMerica subsidiary, at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption. This
report has been prepared assuming that none of the PharMerica noteholders elect
to sell their securities in this change of control offer. We can provide no
assurance that this will be the case, and we will repurchase any notes so
tendered with the proceeds of certain financings.
Cash funding requirements to consummate the refinancings and pay costs
associated with the merger are expected to be $727.9 million, which will be
provided by financings. The receipt of proceeds of the financing transactions
are conditioned upon the completion of the merger.
Recent Developments
AmeriSource Reports Record Third Fiscal Quarter Revenues and Operating
Earnings.
For the fiscal quarter ended June 30, 2001, revenues, excluding bulk
shipments, increased 20% to a record $3.5 billion, compared to $2.9 billion for
the same period in fiscal 2000. Operating income rose to a record $61.1 million
for the quarter, up 28% from the year-ago period. Earnings before interest,
taxes, depreciation and amortization (EBITDA), were $65.3 million for the
quarter, an increase of 26% from the prior-year period. Excluding the
restructuring reversal in the prior-year period, net income increased 29%
compared to the fiscal 2000 quarter.
Bergen Reports Record Third Fiscal Quarter Revenues and Operating Earnings.
For the fiscal quarter ended June 30, 2001, revenues from continuing
operations, excluding bulk shipments, increased 14% to a record $5.5 billion,
compared to $4.8 billion for the same period in fiscal 2000. Operating
4
earnings from continuing operations rose to a record $98.6 million for the
quarter, up 34% from the prior-year period. Earnings before interest, taxes,
depreciation and amortization (EBITDA) were $115.7 million for the quarter, an
increase of 23% from the prior-year period. Net earnings and earnings from
continuing operations were $35.2 million for the third quarter, up 78% from
last year's earnings from continuing operations of $19.7 million.
5
Risks Related to Our Business
AmerisourceBergen may not realize all of the anticipated benefits of the
merger.
The success of the merger will depend in part on our ability to realize the
anticipated synergies of $125 million per year by the end of the third year of
the existence of AmerisourceBergen and growth opportunities from integrating
the businesses of AmeriSource and Bergen. Our success in realizing these
synergies, cost savings and growth opportunities, and the timing of this
realization, depends on the successful integration of AmeriSource's and
Bergen's operations. Even if we are able to integrate the business operations
of AmeriSource and Bergen successfully, we cannot assure you that this
integration will result in the realization of the full benefits of the
synergies, cost savings and growth opportunities that we currently expect to
result from this integration or that these benefits will be achieved within
the anticipated time frame. For example, the elimination of duplicative costs
may not be possible or may take longer than anticipated and the benefits from
the merger may be offset by costs incurred in integrating the companies.
Intense competition may erode our profit margins.
The wholesale distribution of pharmaceuticals and related healthcare
services is highly competitive. We compete primarily with the following:
. national wholesale distributors of pharmaceuticals such as Cardinal
Health, Inc. and McKesson Corporation;
. regional and local distributors of pharmaceuticals;
. chain drugstores that warehouse their own pharmaceuticals;
. manufacturers who distribute their products directly to customers; and
. other specialty distributors.
Some of our competitors have greater financial resources than we have.
Competitive pressures have contributed to a decline in our predecessors'
pharmaceutical wholesale drug distribution gross profit margins on operating
revenue from 5.2% in fiscal 1996 to 4.3% in fiscal 2000 on a combined basis.
This trend may continue and our business could be adversely affected as a
result.
PharMerica faces competitive pressure from other market participants that
are significantly larger than it is and that have significantly greater
financial resources than it does. These competitive pressures could lead to a
decline in gross profit margins for PharMerica in the future. In addition,
there are relatively few barriers to entry in the local markets served by
PharMerica, and PharMerica may encounter substantial competition from new
local market entrants. These factors could adversely affect PharMerica's
business in the future.
The changing United States healthcare environment may impact our revenue and
income.
Our products and services are intended to function within the structure of
the healthcare financing and reimbursement system currently existing in the
United States. In recent years, the healthcare industry has undergone
significant changes in an effort to reduce costs and government spending.
These changes include an increased reliance on managed care, cuts in Medicare
funding affecting our healthcare provider customer base, consolidation of
competitors, suppliers and customers, and the development of large,
sophisticated purchasing groups. We expect the healthcare industry to continue
to change significantly in the future. Some of these potential changes, such
as a reduction in governmental support of healthcare services or adverse
changes in legislation or regulations governing prescription drug pricing,
healthcare services or mandated benefits, may cause healthcare industry
participants to greatly reduce the amount of our products and services they
purchase or the price they are willing to pay for our products and services.
Changes in pharmaceutical manufacturers' pricing or distribution policies
could also significantly reduce our income.
6
Our operating revenue and profitability may suffer upon our loss of, or the
bankruptcy or insolvency of, a significant customer.
During the fiscal year ended September 30, 2000 and the six-month period
ended March 31, 2001, sales to the Veterans Administration accounted for 7.3%
and 7.6%, respectively, of our pro forma operating revenue. In addition, we
have contracts with group purchasing organizations ("GPOs") which represent a
concentration of buying power among multiple healthcare providers. While we
believe the risk of default by a federal government agency is minimal and the
credit risk with a GPO contract is spread among the members of the GPO that
purchase products from the Company, loss of a major federal government
customer or GPO could lead to a significant reduction in revenue. We otherwise
have no individual customer that accounted for more than 4.3% of our pro forma
fiscal 2000 operating revenue.
Failure in our information technology systems could significantly disrupt our
operations, which could reduce our customer base and result in lost revenue.
Our success depends, in part, on the continued and uninterrupted
performance of our information technology, or IT, systems. Our computer
systems are vulnerable to damage from a variety of sources, including
telecommunications failures, malicious human acts and natural disasters.
Moreover, despite network security measures, some of our servers are
potentially vulnerable to physical or electronic break-ins, computer viruses
and similar disruptive problems. Despite the precautions we have taken,
unanticipated problems affecting our systems could cause failures in our IT
systems. Sustained or repeated system failures that interrupt our ability to
process test orders, deliver test results or perform tests in a timely manner
would adversely affect our reputation and result in a loss of customers and
net revenue.
In addition, the wholesale drug distribution businesses of AmeriSource and
Bergen were based on different IT systems. We are in the process of evaluating
the differing systems and intend to use a common IT system in the future. This
process is complex and will take several years to complete. During systems
conversions of this type, workflow may be temporarily interrupted, which may
cause interruptions in customer service. In addition, the implementation
process, including the transfer of databases and master files to new data
centers, presents significant conversion risks which could cause failures in
our IT systems and disrupt our operations.
Our operations may suffer if government regulations regarding pharmaceuticals
change.
The healthcare industry is highly regulated at the local, state and federal
level. Consequently, we are subject to the risk of changes in various local,
state, federal and international laws, which include the operating and
security standards of the United States Drug Enforcement Administration, or
DEA, the Food and Drug Administration, or FDA, various state boards of
pharmacy and comparable agencies. These changes may affect our operations,
including distribution of prescription pharmaceuticals (including certain
controlled substances), operation of pharmacies and packaging of
pharmaceuticals. A review of our business by regulatory authorities may result
in determinations that could adversely affect the operations of the business.
If we fail to comply with extensive laws and regulations in respect of
healthcare fraud, we could suffer penalties or be required to make significant
changes to our operations.
We are subject to extensive and frequently changing local, state and
federal laws and regulations relating to healthcare fraud. The federal
government continues to strengthen its position and scrutiny over practices
involving healthcare fraud affecting the Medicare, Medicaid and other
government healthcare programs. Contractual relationships with pharmaceutical
manufacturers and healthcare providers subject our business to provisions of
the federal Social Security Act which, among other things, (i) preclude
persons from soliciting, offering, receiving or paying any remuneration in
order to induce the referral of a patient for treatment or for inducing the
ordering or purchasing of items or services that are in any way paid for by
Medicare, Medicaid or other government-sponsored healthcare programs and (ii)
impose a number of restrictions upon referring physicians and providers of
designated health services under Medicare and Medicaid programs. Legislative
7
provisions relating to healthcare fraud and abuse give federal enforcement
personnel substantially increased funding, powers and remedies to pursue
suspected fraud and abuse. While we believe that we are in material compliance
with all applicable laws, many of the regulations applicable to us, including
those relating to marketing incentives offered by pharmaceutical suppliers,
are vague or indefinite and have not been interpreted by the courts. They may
be interpreted or applied by a prosecutorial, regulatory or judicial authority
in a manner that could require us to make changes in our operations. If we
fail to comply with applicable laws and regulations, we could suffer civil and
criminal penalties, including the loss of licenses or our ability to
participate in Medicare, Medicaid and other federal and state healthcare
programs.
If key managers leave the Company, our operating results may be adversely
affected.
We depend on our senior management. If some of these employees leave us,
operating results could be adversely affected. We cannot be assured that we
will be able to retain these or any other key employees.
Federal and state laws that protect patient health information may increase
our costs and limit our ability to collect and use that information.
Our activities subject us to numerous federal and state laws and
regulations governing the collection, dissemination, use, security and
confidentiality of patient-identifiable health information, including the
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
and related rules and regulations, or Privacy Laws. For example, as part of
PharMerica's pharmaceutical dispensing, medical record keeping, third party
billing and other services, we collect and maintain patient-identifiable
health information, which activities may trigger certain requirements under
the Privacy Laws. The costs associated with our efforts to comply with the
Privacy Laws could be substantial. Moreover, if we fail to comply with certain
Privacy Laws, we could suffer civil and criminal penalties. We can provide no
assurance that the costs incurred in complying or penalties we may incur for
failure to comply with the Privacy Laws will not have a material effect on us.
Our growth may be limited if we are not able to implement our acquisition
strategy.
Since 1995, and prior to the merger of AmeriSource and Bergen, each of
AmeriSource and Bergen completed several acquisitions. Through these
acquisitions and other investments, AmeriSource and Bergen expanded their
respective geographic presence and breadth of service offerings. We expect to
continue to acquire companies as an element of our growth strategy. However,
we are not currently engaged in substantive negotiations for material
acquisitions. We may not however be able to identify suitable acquisition
candidates or to complete acquisitions on favorable terms. We also may not be
able to successfully integrate acquired businesses in a timely or efficient
manner.
8
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed financial
statements are presented to illustrate the effects of the merger and the
financings on the historical financial position and results of operations of
AmeriSource and Bergen, using the assumptions set forth below. Such
information is not necessarily indicative of the financial position or results
of operations of AmerisourceBergen that would have occurred if the merger and
the financings had been consummated as of the dates indicated, nor should it
be construed as being a representation of the future financial position or
results of operations of AmerisourceBergen.
Management expects that the benefits of the merger will include synergies
to the combined entity resulting from, among other things, the consolidation
of distribution facilities and related working capital improvements, the
elimination of duplicate administrative functions and generic inventory
purchasing efficiencies. These synergies are estimated at $125 million per
year by the end of the third year following consummation of the merger.
However, such synergies will be partially offset by merger-related integration
expenses. The accompanying pro forma financial information does not include
any adjustments to reflect these anticipated merger-related synergies or
expenses.
The unaudited pro forma information has been derived in part from, and
should be read in conjunction with, the historical audited and unaudited
consolidated financial statements and related notes of AmeriSource and Bergen
included elsewhere in this report.
The unaudited pro forma consolidated condensed balance sheet of
AmerisourceBergen at March 31, 2001 assumes that the merger and the financings
took place on that date. The unaudited pro forma consolidated condensed
statements of operations of AmerisourceBergen for the year ended September 30,
2000 and the six and twelve months ended March 31, 2001 assume that the merger
and the financings took place on October 1, 1999. Both AmeriSource and Bergen
have a fiscal year ending September 30; therefore, the accompanying pro forma
operating results represent the full fiscal 2000 and the first half of fiscal
2001 and the latest twelve months for each entity, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141 entitled Business Combinations and Statement No. 142 entitled Goodwill
and Other Intangible Assets. Accordingly, the following unaudited pro forma
consolidated condensed statements of operations have been prepared under the
rules to be set forth in the two new Statements.
9
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of March 31, 2001
(in thousands)
Amerisource
Pro Forma Bergen
AmeriSource Bergen Adjustments Pro Forma
----------- ---------- ----------- -----------
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 126,268 $ 57,510 $ -- $ 183,778
Accounts receivable, less
allowance for doubtful
accounts................. 676,654 1,071,518 35,921(a) 1,784,093
Merchandise inventories... 1,820,202 2,805,890 161,450(b) 4,787,542
Income taxes receivable... -- 16,293 (11,257)(c) 5,036
Deferred income taxes..... -- 12,783 (12,783)(d) --
Prepaid expenses and
other.................... 4,341 19,256 -- 23,597
---------- ---------- ---------- ----------
Total current assets.... 2,627,465 3,983,250 173,331 6,784,046
Property and equipment,
net........................ 69,154 197,507 30,000(e) 296,661
Other assets:
Goodwill, net............. 35,200 667,947 (667,947)(f) 2,275,741
2,240,541(g)
Deferred income taxes..... 3,535 21,445 (2,095)(d) 22,885
Deferred charges and other
assets................... 49,056 143,388 1,000(h) 198,580
5,136(a)
---------- ---------- ---------- ----------
Total other assets...... 87,791 832,780 1,576,635 2,497,206
---------- ---------- ---------- ----------
TOTAL ASSETS................ $2,784,410 $5,013,537 $1,779,966 $9,577,913
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $1,756,364 $2,592,629 $ -- $4,348,993
Accrued expenses and
other.................... 51,733 274,747 84,500(i) 415,386
45,000(j)
(40,594)(a)
Accrued income taxes...... 11,257 -- (11,257)(c) --
Deferred income taxes..... 118,472 -- 41,797(d) 160,269
---------- ---------- ---------- ----------
Total current
liabilities............ 1,937,826 2,867,376 119,446 4,924,648
Long-term debt, less current
portion.................... 473,613 1,046,789 (3,010)(k) 1,621,111
103,719(a)
Other liabilities........... 7,534 25,804 13,475(l) 46,813
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely debt securities of
Bergen..................... -- 300,000 (52,200)(m) 247,800
Stockholders' equity:
Common stock.............. 594 207,506 (207,571)(n) 1,029
500(j)
Capital in excess of par
value.................... 308,974 824,126 (830,281)(n) 2,674,703
2,371,884(j)
Accumulated other
comprehensive income..... -- 15 (15)(n) --
Retained earnings
(accumulated deficit).... 62,089 (232,922) 232,922(n) 61,809
(280)(a)
Other..................... -- -- -- --
Cost of common stock in
treasury................. (6,220) (25,157) 31,377(n) --
---------- ---------- ---------- ----------
Total stockholders'
equity................. 365,437 773,568 1,598,536 2,737,541
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY....... $2,784,410 $5,013,537 $1,779,966 $9,577,913
========== ========== ========== ==========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
10
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended September 30, 2000
(in thousands, except per share data)
Amerisource
Pro Forma Bergen
AmeriSource Bergen Adjustments Pro Forma
----------- ----------- ----------- -----------
Operating revenue....... $11,609,995 $18,725,611 $ -- $30,335,606
Bulk deliveries to
customers' warehouses.. 35,026 4,217,291 -- 4,252,317
----------- ----------- --------- -----------
Total revenue........... 11,645,021 22,942,902 -- 34,587,923
Cost of goods sold...... 11,125,440 21,703,755 -- 32,829,195
----------- ----------- --------- -----------
Gross profit............ 519,581 1,239,147 -- 1,758,728
Distribution, selling
and administrative..... 292,196 796,491 (750)(a) 1,087,937
Provision for doubtful
receivables............ 10,274 143,306 -- 153,580
Depreciation............ 14,129 45,594 4,267(b) 63,990
Amortization............ 1,980 37,104 (31,680)(c) 7,404
Special charges......... (1,123) 526,252 (505,300)(d) 19,829
----------- ----------- --------- -----------
Operating income (loss)
from continuing
operations............. 202,125 (309,600) 533,463 425,988
Impairment of investment
and other.............. 568 5,000 -- 5,568
Interest expense........ 41,857 112,016 949(e) 163,744
8,922(f)
----------- ----------- --------- -----------
Income (loss) from
continuing operations
before taxes and
distributions on
preferred securities of
subsidiary trust....... 159,700 (426,616) 523,592 256,676
Taxes on income from
continuing operations.. 60,686 40,306 (1,353)(g) 99,639
----------- ----------- --------- -----------
Income (loss) from
continuing operations
before distributions on
preferred securities of
subsidiary trust....... 99,014 (466,922) 524,945 157,037
Distributions on
preferred securities of
subsidiary trust, net
of income tax benefit.. -- (14,104) (794)(h) (14,898)
----------- ----------- --------- -----------
Income (loss) from
continuing operations.. $ 99,014 $ (481,026) $ 524,151 $ 142,139
=========== =========== ========= ===========
Earnings (loss) per
share from continuing
operations:
Basic................. $ 1.92 $ (3.58) $ 1.40
Assuming dilution..... $ 1.90 $ (3.58) $ 1.40
Weighted average common
shares outstanding:
Basic................. 51,552 134,504 (84,738) 101,318
Assuming dilution..... 52,020 134,504 (84,666) 101,858
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
11
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended March 31, 2001
(in thousands, except per share data)
Amerisource
Pro Forma Bergen
AmeriSource Bergen Adjustments Pro Forma
----------- ---------- ----------- -----------
Operating revenue.......... $6,787,436 $9,764,074 $ -- $16,551,510
Bulk deliveries to
customers' warehouses..... 757 1,989,826 -- 1,990,583
---------- ---------- ------- -----------
Total revenue.............. 6,788,193 11,753,900 -- 18,542,093
Cost of goods sold......... 6,499,591 11,120,219 -- 17,619,810
---------- ---------- ------- -----------
Gross profit............... 288,602 633,681 -- 922,283
Distribution, selling and
administrative............ 154,744 409,016 (375)(a) 563,385
Provision for doubtful
receivables............... 7,363 24,834 -- 32,197
Depreciation............... 6,978 22,631 2,133(b) 31,742
Amortization............... 1,197 11,549 (9,313)(c) 3,433
---------- ---------- ------- -----------
Operating income........... 118,320 165,651 7,555 291,526
Equity in net loss of
unconsolidated affiliate.. 2,575 -- -- 2,575
Interest expense........... 22,669 69,134 475(e) 91,312
(966)(f)
---------- ---------- ------- -----------
Income before taxes and
distributions on preferred
securities of subsidiary
trust..................... 93,076 96,517 8,046 197,639
Taxes on income............ 35,369 39,932 1,495(g) 76,796
---------- ---------- ------- -----------
Income before distributions
on preferred securities of
subsidiary trust.......... 57,707 56,585 6,551 120,843
Distributions on preferred
securities of subsidiary
trust, net of income tax
benefit................... -- (7,052) (397)(h) (7,449)
---------- ---------- ------- -----------
Net income................. $ 57,707 $ 49,533 $ 6,154 $ 113,394
========== ========== ======= ===========
Earnings per share:
Basic.................... $ 1.10 $ 0.37 $ 1.11
Assuming dilution........ $ 1.07 $ 0.36 $ 1.08
Weighted average common
shares outstanding:
Basic.................... 52,528 135,067 (85,092) 102,503
Assuming dilution........ 56,939 136,573 (86,041) 107,471
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
12
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Twelve Months Ended March 31, 2001
(in thousands, except per share data)
Amerisource
Pro Forma Bergen Pro
AmeriSource Bergen Adjustments Forma
----------- ----------- ----------- -----------
Operating revenue....... $12,736,636 $19,406,860 $ -- $32,143,496
Bulk deliveries to
customers' warehouses.. 14,993 4,091,081 -- 4,106,074
----------- ----------- -------- -----------
Total revenue........... 12,751,629 23,497,941 -- 36,249,570
Cost of goods sold...... 12,194,779 22,240,331 -- 34,435,110
----------- ----------- -------- -----------
Gross profit............ 556,850 1,257,610 -- 1,814,460
Distribution, selling
and administrative..... 303,555 804,293 (750)(a) 1,107,098
Provision for doubtful
receivables............ 15,022 139,269 -- 154,291
Depreciation............ 14,131 45,424 4,267(b) 63,822
Amortization............ 2,237 30,067 (25,173)(c) 7,131
Special charges......... (1,123) 526,252 (505,300)(d) 19,829
----------- ----------- -------- -----------
Operating income........ 223,028 (287,695) 526,956 462,289
Impairment of investment 2,575 5,000 -- 7,575
and other..............
Interest expense........ 41,706 132,497 949(e) 175,851
699(f)
----------- ----------- -------- -----------
Income (loss) from
continuing operations
before taxes and
distributions on
preferred securities of
subsidiary trust....... 178,747 (425,192) 525,308 278,863
Taxes on income......... 67,924 36,793 1,937(g) 106,654
----------- ----------- -------- -----------
Income before
distributions on
preferred securities of
subsidiary trust....... 110,823 (461,985) 523,371 172,209
Distributions on
preferred securities of
subsidiary trust, net
of income tax benefit.. -- (14,104) (794)(h) (14,898)
----------- ----------- -------- -----------
Income (loss) from
continuing operations.. $ 110,823 $ (476,089) $522,577 $ 157,311
=========== =========== ======== ===========
Earnings per share:
Basic................. $ 2.13 $ (3.53) $ 1.54
Assuming dilution..... $ 2.08 $ (3.53) $ 1.53
Weighted average common
shares outstanding:
Basic................. 52,151 134,851 (84,956) 102,046
Assuming dilution..... 54,683 135,745 (85,519) 104,909
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
13
AMERISOURCEBERGEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
NOTE 1. BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma consolidated condensed financial statements give
effect to the proposed merger using the purchase method of accounting. Since
the current AmeriSource stockholders will own approximately 51% of
AmerisourceBergen's common stock immediately after the closing of the merger,
AmerisourceBergen will account for the merger as an acquisition by AmeriSource
of Bergen.
Following is a summary of the estimated aggregate purchase price (in
thousands):
Market value of common stock to be issued to Bergen
stockholders.................................................. $2,294,672
Fair value of Bergen's stock options........................... 77,712
Estimated transaction costs.................................... 45,000
----------
Total purchase price......................................... $2,417,384
==========
AmerisourceBergen will issue approximately 50 million shares of
AmerisourceBergen common stock in exchange for approximately 135.2 million
outstanding common shares of Bergen, based on an exchange ratio of 0.37 to 1
(each outstanding Bergen share will be converted into 0.37 of a share of
AmerisourceBergen stock). The AmerisourceBergen common stock to be issued was
valued based on a price per share of $45.86, which was the weighted-average
market price of the AmeriSource common stock during the few days before and
after the date the merger was announced.
AmerisourceBergen will issue fully-vested options to purchase approximately
3.3 million shares of AmerisourceBergen common stock in exchange for all of
the fully-vested outstanding options of Bergen, based on a weighted-average
fair value of $23.29 per option. The fair value of the options was determined
using the Black-Scholes option-pricing model and was based on a weighted-
average exercise price of $36.63 and the following weighted-average
assumptions: expected volatility--50.90%; expected life--4 years; risk-free
interest rate--4.64%; and expected dividend yield--0.21%.
The estimated pro forma allocation of the purchase price is as follows (in
thousands):
Bergen's historical assets and liabilities..................... $ 773,568
Adjustment of Bergen's historical assets and liabilities to
fair value.................................................... 71,222
Elimination of Bergen's historical goodwill.................... (667,947)
New goodwill................................................... 2,240,541
----------
Total purchase price......................................... $2,417,384
==========
The above pro forma allocation of the purchase price to the acquired assets
and liabilities is based on management's best estimate of the respective fair
values at this early stage of the merger process. However, such allocation is
preliminary and is subject to the completion of a more comprehensive valuation
process. Accordingly, the final allocation of the purchase price could differ
materially from the pro forma allocation reflected herein if materially
different fair value information is obtained.
AmeriSource has announced to its employees that all stock options granted
prior to February 15, 2001 shall vest 100% as of the close of business on the
last business day prior to the effective time of the merger. As a result of
this acceleration of vesting, AmeriSource will record a charge to its earnings
on the date of acceleration. The charge is estimated to be approximately $2.0
million, using the weighted-average market price of the AmeriSource common
stock during the days before and after the date the merger was announced. The
actual charge will be based on the market price of the stock at the date of
acceleration. This amount is not reflected in the accompanying pro forma
statements of operations.
14
Management is currently in the process of determining the integration plans
concerning its distribution network, systems requirements and corporate
administrative functions. The integration planning has been designed as a
three-phase process. Phase I includes data capture, process mapping and day-
one-readiness tasks. The results of this phase will be recommendations for the
next steps. It is anticipated that these recommendations will be presented to
a steering committee during the third calendar quarter of 2001. During Phase
II, integration projects will be prioritized and a detailed integration plan
will be created. Phase II is expected to be completed in the fourth calendar
quarter of 2001. The final phase, Phase III, is the merger implementation
phase, which is expected to begin following the completion of Phase II. Based
on the timing of the activities as discussed above, the Company has not made
any integration decisions and, accordingly, the amounts of merger-related
integration costs have not been determined. Therefore, such merger-related
costs are not reflected in the pro forma purchase price allocation or the
accompanying pro forma statements of operations.
NOTE 2. PRO FORMA ADJUSTMENTS TO THE BALANCE SHEET
(a) Represents the net effect of the financings. The pro forma consolidated
balance sheet assumes that the financings occurred on March 31, 2001. Reflected
in the pro forma adjustment are the write-off of the historical amounts of
AmeriSource and Bergen deferred financing costs associated with the bank credit
facilities and debt to be retired, as well as the addition of estimated deferred
financing costs associated with the financings. Also reflected is the payment of
a prepayment penalty associated with Bergen's bank credit facility to be
retired.
(b) Represents the adjustment of Bergen's inventory to fair value,
primarily consisting of the elimination of Bergen's last-in, first-out (LIFO)
valuation reserve.
(c) Represents the reclassification of income taxes payable against income
taxes receivable based on the consolidated AmerisourceBergen net tax
receivable balance.
(d) Represents the establishment of deferred income tax assets and
liabilities to reflect differences between the book and tax bases resulting
from the pro forma adjustments described herein and the reclassification of
current deferred income tax assets against current deferred income tax
liabilities based on the consolidated AmerisourceBergen net current deferred
income tax liability.
(e) Represents the adjustment of Bergen's property and equipment to its
estimated fair value.
(f) Reflects the elimination of Bergen's historical goodwill balance.
(g) Represents the preliminary allocation of the purchase price to goodwill
as described in Note 1 above.
(h) Represents the adjustment of Bergen facility leases to their estimated
fair value, based on current market rental rates.
(i) Represents the estimated amounts payable in connection with the merger
under executive compensation and benefit arrangements.
(j) Represents the issuance of new shares of AmerisourceBergen common stock
in exchange for Bergen's common shares, and the issuance of new
AmerisourceBergen stock options in exchange for Bergen's stock options, as
described in Note 1 above. In addition, reflects accrued expenses of $45.0
million for the estimated transaction costs to be incurred by AmeriSource and
Bergen in connection with the merger, including investment banking, legal and
other professional fees, and other merger-related fees.
15
(k) Represents the adjustment of Bergen's long-term debt to fair value,
based on quoted market prices.
(l) Represents the adjustment of Bergen's pension liabilities to their
estimated fair value.
(m) Represents the adjustment of Bergen's preferred securities of
subsidiary trust to fair value, based on quoted market prices.
(n) Represents the elimination of Bergen's historical stockholders' equity
and the retirement of AmeriSource's treasury shares.
NOTE 3. PRO FORMA ADJUSTMENTS TO STATEMENTS OF OPERATIONS
(a) Represents the net effect of two adjustments: (i) the reduction of
periodic pension expense, due to the adjustment of Bergen's pension
liabilities to their fair value and (ii) the amortization of the fair value of
Bergen's leases over the average remaining lease term of four years.
(b) Represents an increase in the depreciation of Bergen's property and
equipment based on the adjustment of such assets to fair value.
(c) Represents the elimination of Bergen's historical goodwill amortization
expense. Under the accounting rules set forth in Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"), issued by the Financial Accounting Standards Board in July
2001, goodwill is not amortized against earnings other than in connection with
an impairment.
(d) Represents the elimination of Bergen's $505.3 million goodwill
impairment charge in fiscal 2000.
(e) Represents an increase to interest expense as a result of the
adjustment of Bergen's long-term debt to its fair value as described in Note
2(k) above. The difference between the fair value and the face amount of each
borrowing is amortized as additional interest expense over the remaining term
of the borrowing. The borrowings mature at various dates between 2003 and
2008.
(f) Represents the net effect on interest expense resulting from the
financings described in Note 2(h) above. Pro forma net interest expense was
calculated under the assumption that the financings occurred on October 1,
1999. Interest for fixed rate debt was calculated based upon the expected
fixed rates, while interest for variable rate debt was calculated based on the
historical benchmark rates (such as LIBOR) plus the spreads expected under the
new bank credit facilities. Historical borrowing levels were adjusted upward
to reflect the assumed payment of merger costs, financing costs, and certain
executive compensation and benefits shortly after the effective date of the
merger. Amortization of deferred financing costs was calculated based on the
expected amounts and terms of the financings.
(g) Represents the aggregate pro forma income tax effect of Notes 3(a)
through 3(f) above.
(h) Represents an increase in expense as a result of the adjustment of the
Bergen preferred securities of subsidiary trust to its fair value as described
in Note 2(m) above. The difference between the fair value and the face amount
of the securities is accreted to redemption value over the remaining term of
the securities, which mature in 2039. These adjustments are recorded as
preferred distributions, net of an assumed 40% income tax benefit.
NOTE 4. RECLASSIFICATIONS
Reclassifications have been made to the historical financial statements of
AmeriSource and Bergen to conform to the presentation expected to be used by
the combined company.
16
NOTE 5. EFFECT OF SPECIAL ITEMS
AmeriSource's historical amounts for the twelve months ended September 30,
2000 include the effect of a pre-tax $1.1 million reversal of costs related to
facility consolidations and employee severance. Bergen's historical amounts
for the twelve months ended September 30, 2000, excluding the write-down of
goodwill of $505.3 million described in Note 3(e) above, include special pre-
tax charges for provision for doubtful receivables associated with two
customers of $66.7 million, a restructuring charge of $10.7 million,
abandonment of capitalized software of $6.3 million, officer severance of $4.0
million, and an impairment of an investment of $5.0 million. The after-tax
effect of these special items on the unaudited pro forma consolidated
condensed results for the twelve months ended September 30, 2000 was to:
. reduce pro forma income from continuing operations by $55.3 million; and
. reduce pro forma earnings from continuing operations per share--assuming
dilution by $.54 per share.
NOTE 6. EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
The pro forma earnings (loss) per share from continuing operations has been
adjusted to reflect the issuance of AmerisourceBergen common stock in the
merger based on Bergen's historical weighted average shares outstanding for
the periods presented at the exchange ratio of 0.37 to 1. In addition,
Bergen's historical weighted average shares outstanding--assuming dilution for
the fiscal year ended September 30, 2000 have been adjusted to include the
dilutive effect of Bergen's stock options, which were anti-dilutive in
Bergen's historical financial statements. Additionally, the earnings per
share--assuming dilution calculation for the six months ended March 31, 2001
considers the AmeriSource convertible subordinated notes as if they were
converted and, therefore, the effect of interest expense related to the
financings is added back to net income in determining income available to
common stockholders.
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS No. 141") and SFAS No. 142. SFAS No. 141
applies to all business combinations completed after June 30, 2001 and
requires the use of the purchase method of accounting. SFAS No. 141 also
establishes new criteria for determining whether intangible assets should be
recognized separately from goodwill. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001, however, companies with fiscal years
beginning after March 15, 2001 may elect to early adopt the statement. SFAS
No. 142 provides that goodwill and intangible assets with indefinite lives
will not be amortized, but rather will be tested for impairment on an annual
basis. SFAS No. 141 is not expected to have a significant impact on the
results of operations or financial position of the Company. The Company
expects to early adopt SFAS No. 142 on October 1, 2001. Adoption of SFAS No.
142 is expected to result in the elimination of approximately $1.4 million of
amortization expense per year.
17
Liquidity and Capital Resources
AmeriSource
During the six months ended March 31, 2001, AmeriSource'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, AmeriSource 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 AmeriSource 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 AmeriSource at $52.97 per share at any time before their
maturity of their prior redemption or repurchase by AmeriSource. 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 AmeriSource'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 AmeriSource 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 on the secured receivables
facility 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 AmeriSource because of the
availability of lower interest rates relative to other financing sources.
AmeriSource 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.
AmeriSource's primary exposure to market risk consists of changes in
interest rates on borrowings. An increase in interest rates would adversely
affect AmeriSource'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. AmeriSource
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. AmeriSource 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 AmeriSource's annual
interest expense by $0.75 million.
AmeriSource'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
18
and to fund capital expenditures and to pay interest on outstanding debt.
AmeriSource'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
AmeriSource's ongoing cash requirements.
AmeriSource 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, AmeriSource 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), 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.
Bergen
Following is a summary of Bergen's capitalization at the end of the most
recent quarter and fiscal year:
March 31, September 30,
2001 2000
--------- -------------
Debt, net cash....................................... 49% 49%
Equity, including the Preferred Securities........... 51% 51%
The debt and equity percentages at March 31, 2001 were unchanged from the
most recent fiscal year-end because a small increase in net debt, which
resulted mainly from lower cash balances, was offset by an increase in equity,
which resulted mainly from Bergen's net earnings for the first six months of
fiscal 2001. Although Bergen's debt did not increase during the six-month
period, Bergen did increase its utilization of the Receivables Securitization
program (described below) by $132 million in order to finance higher seasonal
inventory purchases.
Bergen's $1.5 billion senior credit agreement originally consisted of an
$800 million revolving facility maturing in April 2003, a $200 million interim
term loan maturing in October 2001 ("Interim Term Loan"), a $300 million term
loan maturing in March 2005 ("Term A Loan") and a $200 million term loan
maturing in March 2006 ("Term B Loan"). In August and September 2000, Bergen
used the proceeds of the BBMC and Stadtlander dispositions to fully repay the
Interim Term Loan and to repay an aggregate $54 million of the Term A and Term
B Loans. Borrowings under the senior credit agreement are secured by
substantially all of Bergen's assets. The availability of revolving loans under
the senior credit agreement is tied to a borrowing base formula and certain
covenants; the maximum amount of revolving loans outstanding may not exceed
specified percentages of Bergen's eligible accounts receivable and eligible
inventory. There were no outstanding revolving loans at March 31, 2001 and
September 30, 2000. Interest accrues at specified rates based on Bergen's debt
ratings; such rates range from 2.5% to 3.5% over LIBOR or 1.5% over prime, with
a weighted average rate of approximately 8.93% on outstanding borrowings at
March 31, 2001. Bergen paid monthly commitment fees to maintain the
availability of revolving loans under the senior credit agreement. The senior
credit agreement has loan covenants which require Bergen to maintain certain
financial statement ratios and places certain limitations on, among other
things, acquisitions, investments, methods of operation, dividend payments and
capital expenditures. Effective September 29, 2000, the senior credit agreement
was amended to exclude the effect of certain special items recorded by Bergen
in the fourth quarter of fiscal 2000 from the calculation of the required
ratios and covenants.
One of Bergen's subsidiaries, Blanco, has a $55 million bank revolving
credit facility with a maturity date of May 20, 2002. Borrowings under the
facility bear interest at 0.35% above LIBOR and are secured by a standby letter
of credit under the senior credit agreement for which Bergen incurs a fee of
2.75%.
19
On December 20, 2000, Bergen replaced its Receivables Securitization
program by entering into a new Receivables Securitization agreement with a
financial institution. The new agreement, which has a five-year term, provides
for a longer commitment by the financial institution than did the prior
agreement, which had a one-year term. In addition the new agreement is
designed to give Bergen additional availability, improved pricing and more
flexibility in the timing of receivable sales. Availability is subject to
specified percentages of eligible receivables, as defined in the agreement.
The initial maximum availability under the program is $350 million, but Bergen
has the option to increase the maximum up to $450 million upon payment of an
additional fee. If Bergen increases the maximum availability above $358
million, Bergen will make a corresponding reduction in maximum availability of
bank borrowings pursuant to the terms of the senior credit agreement.
Through the new Receivables Securitization program, BBDC sells, on an
ongoing basis, its accounts receivable to Blue Hill, a 100%-owned special
purpose subsidiary. Blue Hill, in turn, sells an undivided percentage
ownership interest in such receivables to various investors. The program
qualifies for treatment as a sale of assets under SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." As of March 31, 2001, Bergen had outstanding net proceeds of
$300 million from the sale of such receivables under the new Receivables
Securitization program, and accounts receivable was reduced by this amount in
the accompanying Consolidated Balance Sheet.
On May 26, 1999, Bergen's Trust issued 12,000,000 shares of its Preferred
Securities at $25.00 per security. The proceeds of such issuances were
invested by the Trust in $300 million aggregate principal amount of Bergen's
Subordinated Notes due June 30, 2039. The Subordinated Notes represent the
sole assets of the Trust and bear interest at the rate of 7.80% per annum,
payable quarterly, and are redeemable at the option of Bergen beginning in May
2004 at 100% of the principal amount thereof. The obligations of the Trust
related to the Preferred Securities are guaranteed by Bergen.
On May 10, 2001, Bergen declared a quarterly cash dividend of $0.01 per
share on Bergen's Common Stock that will be paid on June 1, 2001 to
stockholders of record on May 18, 2001. Bergen also paid dividends of $0.01
per share in each of the first two quarters of fiscal 2001. During fiscal
2000, Bergen paid dividends of $.075 per share in each of the first and second
quarters and $0.01 per share in each of the third and fourth quarters.
Bergen's cash flows during the first six months of fiscal 2001 and 2000 are
summarized in the following table:
Six Months
Ended
March 31,
---------------
2001 2000
------ -------
(in millions)
Earnings from continuing operations, excluding non-cash
charges..................................................... $139.2 $ 126.9
Increases in operating assets and liabilities................ (261.6) (86.8)
------ -------
Net cash flows from operating activities..................... (122.4) 40.1
Property acquisitions........................................ (14.2) (52.6)
Net proceeds from sale of accounts receivable................ 132.0 260.0
Net repayment of debt and other obligations.................. (7.3) (291.4)
Cash dividends on common stock............................... (2.7) (20.2)
Distributions on preferred securities........................ (17.6) (11.7)
Discontinued operations...................................... -- (20.4)
Other--net................................................... (4.3) (6.0)
------ -------
Net decrease in cash and cash equivalents.................. $(36.5) $(102.2)
====== =======
For the six months ended March 31, 2001, Bergen generated $122.4 million of
negative cash flows from operations, compared with $40.1 million of positive
cash flows from operations in the comparable period in fiscal
20
2000. The negative cash flows in fiscal 2001 were primarily attributable to
BBDC's increased inventory levels due to a higher participation in seasonal
inventory investment buying activity. In the prior year, BBDC did not fully
participate in seasonal buying activity during the winter months primarily due
to the limited availability of funds preceding the refinancing of Bergen's
revolving credit agreement in April 2000. During the second quarter of fiscal
2001, Bergen generated $88.3 million of positive cash flows from operations.
Bergen's most significant "market risk" exposure is the effect of changing
interest rates. Bergen manages its interest expense by using a combination of
fixed and variable-rate debt. At March 31, 2001, Bergen's debt consisted of
approximately $588.8 million of fixed-rate debt, exclusive of obligations
under the Trust Originated Preferred Securities, with a weighted average
interest rate of 7.86% and $500.1 million of variable-rate debt (consisting
principally of bank borrowings under Bergen's former senior credit facility)
with a weighted average interest rate of 8.56%. The amount of the variable-
rate debt fluctuates during the year based on Bergen's cash requirements. If
interest rates on Bergen's former senior credit facility were to increase by
86 basis points (one-tenth of the rate at March 31, 3001), the impact on the
pre-tax earnings from continuing operations during the three months ended
March 31, 2001 would be a decrease of approximately $1.1 million.
Bergen periodically evaluates various financial instruments that could
mitigate a portion of its exposure to variable interest rates. However, there
are no assurances that such instruments will be available on terms acceptable
to Bergen.
Bergen also believes that its interest rate exposure could be somewhat
mitigated due to the favorable effect which inflation may have on Bergen,
specifically manufacturers' price inflation, which may accelerate concurrently
with a general increase on interest rates. The extent to which Bergen can take
advantage of such inflation is contingent upon various factors, including, but
not limited to, the availability of inventory and capital on terms acceptable
to Bergen.
Bergen believes that internally generated cash flows, funding available
under its senior credit facility, the receivables securitization program,
trade credit extended by suppliers in the ordinary course of business, and
funds potentially available in the private and public capital markets will be
sufficient to meet anticipated cash and capital requirements. However, actual
results could differ from this forward-looking statement as result of, among
other things, unanticipated capital requirements, changes in supplier trade
credit terms, or an inability to access the capital markets on acceptable
terms when, and if, necessary. Bergen's debt ratings are an important factor
in its ability to access capital on acceptable terms.
Property acquisitions relate principally to the purchase of warehouse,
pharmacy and data processing equipment, and included the purchase of Bergen's
previously-leased corporate headquarters building in October 1999.
Pro Forma Combined-Liquidity and Capital Resources
Following the merger, our primary ongoing cash needs will be to pay
interest on indebtedness, to finance working capital and to fund capital
expenditures, merger costs, routine growth and expansion through new business
opportunities. Combined capital expenditures for the six months ended March
31, 2001 were $26.4 million and related principally to investments in
information technology, warehouse improvements, and warehouse automation
equipment. We expect capital expenditures to increase significantly over the
next several years. While AmerisourceBergen has not formally adopted a budget
for fiscal 2002, we expect capital expenditures to reach approximately $180
million in fiscal 2002. The majority of these expenditures will be to
construct and open newer, larger distribution facilities, expand existing
facilities and for investments in related information technology, warehouse
improvements and warehouse automation equipment. In addition, the Company will
incur significant non-recurring costs in connection with the merger. We expect
to incur additional non-recurring merger-related costs in the range of $150 to
$175 million in the aggregate. These costs are for financial advisor and
professional fees, refinancing costs and severance and other employee
expenses. In the three years after the merger, we expect to incur non-
recurring costs in connection with the integration of
21
AmeriSource and Bergen. These costs, primarily for network and infrastructure
conversion and facility consolidations, are currently estimated to range from
$100 to $150 million in the aggregate over the three-year period. We are
currently developing a detailed integration plan which will further refine the
timing and amount of these costs.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that cash flow from operations and
available cash, together with available borrowings under our new credit
facility, will be adequate to meet our future liquidity needs for at least the
next few years. We may, however, need to refinance all or a portion of the
principal amount of the notes on or prior to maturity. See "Risk Factors--To
service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control."
The Company's primary exposure to market risk consists of changes in
interest rates on borrowings. An increase in interest rates would adversely
affect our operating results and the cash flow available after debt service to
fund operations and expansions and to pay dividends. We manage this risk in
part by using a combination of fixed and variable-rate debt. On a pro forma
basis, on June 30, 2001, we had approximately $1,267.0 million of fixed-rate
debt with a weighted average interest rate of 7.2% and $919.1 million of
variable rate debt (including Bergen's receivables securitization facility)
with a weighted average interest rate of 5.7%. The amount of variable-rate
debt fluctuates during the year based on the Company's cash requirements. For
every $100 million of variable-rate debt, a 75 basis point increase in
interest rates would increase our annual interest expense by $0.75 million.
We periodically evaluate various financial arrangements that could mitigate
a portion of our exposure to variable interest rates. We do not currently have
any such arrangements in place.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS No. 141") and SFAS No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 141 applies to all business combinations completed
after June 30, 2001 and requires the use of the purchase method of accounting.
SFAS No. 141 also establishes new criteria for determining whether intangible
assets should be recognized separately from goodwill. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, however
companies with fiscal years beginning after March 15, 2001 may elect to early
adopt the statement. SFAS No. 142 provides that goodwill and intangible assets
with indefinite lives will not be amortized, but rather will be tested for
impairment on an annual basis. SFAS No. 141 is not expected to have a
significant impact on the results of operations or financial position of the
Company. The Company expects to early adopt SFAS No. 142 on October 1, 2001.
Adoption of SFAS No. 142 is expected to result in the elimination of
approximately $1.4 million of amortization expense per year.
22
BUSINESS
AmerisourceBergen
We are a leading wholesale distributor of pharmaceutical products and
related healthcare services and solutions in the United States. We distribute
a full line of products, including pharmaceuticals, proprietary medicines,
cosmetics, toiletries, personal health products, sundries and home healthcare
supplies and equipment. We provide services to acute care hospitals and health
systems, independent retail pharmacies, alternate site customers (physicians'
offices and clinics, skilled nursing facilities, mail-order facilities,
assisted living centers and patients with chronic illnesses), and national and
regional retail pharmacy chains located in all 50 states, the District of
Columbia, Puerto Rico and the Territory of Guam. We believe we are the largest
distributor of pharmaceuticals to the acute care hospital and health systems
market and one of the largest wholesalers of pharmaceuticals and specialty
healthcare products to the independent retail pharmacy market. We also
distribute pharmaceuticals to long-term care and workers' compensation
patients and provide product distribution, logistics, pharmacy management
programs, consulting services and internet fulfillment services designed to
reduce costs and improve patient outcomes.
Industry Overview
We have benefited from the significant growth of the full service wholesale
drug industry in the United States. According to an independent third party
provider of information to the pharmaceutical and healthcare industry,
industry sales grew from approximately $68 billion in 1995 to approximately
$140 billion in 2000 and are expected to grow to approximately $264 billion in
2005.
The factors contributing to the growth of the full service wholesale drug
industry in the United States, and other favorable industry trends, include:
. Aging Population. The number of individuals over age 65 in the United
States grew from approximately 31 million in 1990 to approximately 35
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 healthcare
expenditures in the United States.
. 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. We believe 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 healthcare costs, we believe that
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 healthcare
costs, and manufacturers' emphasis on research and development is
expected to continue the introduction of cost-effective drug therapies.
. Rising Pharmaceutical Prices. Consistent with historical trends, we
believe that pharmaceutical price increases will continue to equal or
exceed the overall Consumer Price Index. We believe 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 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
23
expected to be marketed by generic manufacturers and distributed by us. We
consider this a favorable trend because generic products have historically
provided a greater gross profit margin opportunity than brand name
products.
The Company
We are a leading national wholesale distributor of pharmaceutical products
and related healthcare services and solutions with pro forma operating revenue
(excluding bulk shipments) of approximately $32 billion, Adjusted EBITDA of
approximately $620 million and pro forma operating income of approximately
$462 million for the twelve-month period ended March 31, 2001.
We were formed in March 2001 when AmeriSource and Bergen announced their
intentions to combine in a merger-of-equals to form our Company. The merger
enabled the Company to significantly enhance its competitive position with:
. enhanced scale of operations;
. operating and administrative cost savings;
. improved purchasing efficiencies;
. improved working capital management; and
. broadened product offering.
As a result of the merger, we expect to achieve estimated cost savings of
approximately $125 million per year by the end of the third year following the
consummation of the merger from, among other things, the consolidation of
distribution facilities and related working capital improvements, the
elimination of duplicative administrative functions and generic inventory
purchasing efficiencies. We also expect to benefit from lower financing costs
as a result of the combination.
We are attractively positioned in the market as the only national wholesale
pharmaceutical distributor exclusively focused on pharmaceutical product
distribution, services and solutions. We serve the following major market
segments:
. acute care hospitals and health systems;
. independent retail pharmacies;
. the alternate site market; and
. national and regional retail pharmacy chains.
We currently serve customers through a geographically diverse network of
distribution centers in the United States. 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 and lower overall costs
in the pharmaceutical supply chain.
Our customer base is geographically diverse and balanced with no single
customer representing more than 7.3% of pro forma fiscal 2000 operating
revenue. The merger combines two companies with complementary customer bases
that have minimal overlap. We have leading market positions in the acute care
hospital and health systems market, which represented approximately 30% of pro
forma fiscal 2000 operating revenue, and the independent retail pharmacy
market, which represented approximately 29% of pro forma fiscal 2000 operating
revenue. We also have a strong presence with the national and regional retail
pharmaceutical chains, which represented 17% of pro forma fiscal 2000
operating revenue.
24
In the attractive alternate site market we supply pharmaceuticals and other
related products and services to physicians in the oncology, nephrology,
vaccine, plasma and other specialty healthcare markets. We serve a continuum
of customers including physicians offices and clinics, skilled nursing
facilities, mail-order facilities, assisted living centers and patients with
chronic illnesses. We also provide plasma to acute care hospitals. The
alternate site market represents approximately 24% of pro forma fiscal 2000
operating revenue.
Strategy
Our business strategy is anchored in national pharmaceutical distribution
and services, reinforced by the value-added healthcare solutions we provide
our customers and suppliers. This focused strategy has significantly expanded
our predecessors' businesses over the past five years and we believe we are
well-positioned to continue to grow revenue and increase operating income
through the execution of the following key elements of our business strategy:
. Continue Growth in Existing Markets. We believe that we are well-
positioned to continue to grow in our existing markets by: (i) providing
superior distribution services to our customers and suppliers and (ii)
delivering specific programs and services unique to each of our customer
groups. We strive to provide exceptional service to our customers, which
is reflected in the consistently high rankings achieved by our
predecessor companies in recent customer surveys.
. Expand Growth Opportunities through Healthcare Solutions for
Customers. We are continually enhancing our services and packaging these
services into programs designed to enable customers to improve sales and
compete more effectively. As a result of the merger, we have broadened
the range of value-added solutions that AmeriSource and Bergen offered
their customers. We expect to integrate complementary AmeriSource and
Bergen services and programs, such as generic purchasing programs,
independent retail pharmacy marketing programs and customer order and
inventory management systems offered to retail pharmacies, into a
comprehensive solution package consisting of the best features of
existing services and programs. We intend to market these solutions to
existing customers and to use the increased range of services to attract
new customers.
. Expand Growth Opportunities through Healthcare Solutions for
Suppliers. We have been developing solutions for suppliers to improve the
efficiency of the healthcare supply chain. Programs for suppliers to
assist with rapid new product launches, promotional and marketing
services to accelerate product sales, custom packaging, and product data
reporting are examples of value-added solutions currently offered. We
believe these services will continue to expand, further contributing to
our revenue and income growth. We also intend to acquire companies that
deliver complementary value-added products and services to our existing
customers and suppliers.
. Improve Operating and Capital Efficiencies. We believe we already have
one of the lowest operating cost structures among our major national
competitors. We expect to lower our cost structure further as we
consolidate our existing distribution facility network and establish new,
more efficient distribution centers. We also intend to further reduce
operating expenses as a percentage of revenue by eliminating duplicate
administrative functions. These measures are designed to reduce marginal
operating costs, provide greater access to financing sources and reduce
the cost of capital. In addition, we believe we will continue to achieve
productivity and operating income gains as we invest in and continue to
implement warehouse automation technology, adopt "best practices" in
warehousing activities and increase operating leverage due to increased
volume per full service distribution facility.
Operations
Operating Structure. Our businesses operate in two segments. The first
segment, pharmaceutical distribution, includes our core wholesale
pharmaceutical drug distribution business, ASD Specialty Healthcare, our
pharmaceutical alternate site distribution business and American Health
Packaging, Inc., our pharmaceutical repackaging business. Pharmaceutical
distribution also includes a number of smaller specialty units in areas such
25
as management reimbursement consulting services and third party logistic
services for pharmaceutical manufacturers. Our second operating segment is
PharMerica, a leading national provider of institutional pharmacy services in
long-term care and alternate site settings. PharMerica also provides mail-
order pharmacy services to chronically and catastrophically ill patients under
workers' compensation programs.
Pharmaceutical Distribution. The Pharmaceutical Distribution segment,
including ASD Specialty Healthcare, Inc. ("ASD"), American Health Packaging
("AHP"), Integrated Commercialization Solutions ("ICS"), The Lash Group
("Lash"), Pharmacy Healthcare Solutions, Ltd. ("PHS") and Choice Systems, Inc.
("Choice") form one of the largest national distributors of products sold or
used by hospital, institutional and retail pharmacies. We principally
distribute a full line of brand name and generic pharmaceuticals and over-the-
counter medications from distribution centers in 44 states and the
Commonwealth of Puerto Rico. These products are sold to acute care hospitals
and health systems, independent retail pharmacies, the alternate site market
and national and regional retail pharmacy chains located in all 50 states, the
District of Columbia, Puerto Rico and the Territory of Guam.
ASD was established during fiscal 1994 to provide pharmaceutical products
and services for the rapidly growing pharmaceutical alternate site business.
ASD is a leading supplier of pharmaceuticals and other products and services
to physicians in the oncology, nephrology, vaccine, plasma and other specialty
healthcare markets and has four principal distribution locations in four
states. AHP delivers unit dose, punch card and unit-of-use packaging for
health systems, alternate site and independent retail pharmacies. ICS provides
distribution, accounting, marketing, education and other outsourcing services
for pharmaceutical manufacturers. Lash provides consulting and management of
reimbursement and patient-assistance programs. PHS provides hospital
consulting to improve operational efficiencies and a proprietary program for
recovering indigent patient pharmaceutical reimbursements. Choice develops and
markets inventory management systems and related software for hospitals and
other healthcare providers.
PharMerica. PharMerica is a leading provider of institutional pharmacy
services to the elderly, chronically-ill and disabled in long-term care and
alternate site settings, including skilled nursing facilities, assisted living
facilities, specialty hospitals, residential living communities and the home.
PharMerica also provides mail-order pharmacy services to chronically and
catastrophically ill patients under workers' compensation programs. As of
March 31, 2001, PharMerica served approximately 300,000 patients in long-term
care and alternate site facilities and 87,000 patients covered under workers'
compensation benefits programs.
PharMerica's institutional pharmacy business involves the purchase of bulk
quantities of prescription and nonprescription pharmaceuticals, principally
from BBDC, and the distribution of those products to residents in long-term
care facilities. Unlike hospitals, most long-term care facilities do not have
onsite pharmacies to dispense prescription drugs but depend instead on
institutional pharmacies such as PharMerica to provide the necessary pharmacy
products and services and to play an integral role in monitoring patient
medication. PharMerica's pharmacies dispense pharmaceuticals in patient-
specific packaging in accordance with physician orders. In addition,
PharMerica provides infusion therapy services and Medicare Part B products, as
well as formulary management and other pharmacy consulting services.
PharMerica's network of 134 locations covers a geographic area that
includes over 85% of the nation's institutional/long-term care beds. Each
PharMerica pharmacy typically serves customers within a 150-mile radius.
PharMerica's workers' compensation business provides pharmaceutical claims
administration and mail-order distribution. PharMerica's services include home
delivery of prescription drugs, medical supplies and equipment and an array of
computer software solutions to reduce the payor's administrative costs.
Sales and Marketing. We have approximately 500 sales professionals
organized regionally and specialized by customer type. Customer service
representatives are located in distribution facilities 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. Our corporate
26
marketing department designs and develops the AmerisourceBergen array of
value-added customer solutions. Tailored to specific customer groups, these
programs can be further customized at the distribution facility level to adapt
to local market conditions. Corporate sales and marketing also serves national
account customers through close coordination with local distribution centers.
Facilities. Each of our 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 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. We typically deliver our
products to our customers on a daily basis. We utilize a fleet of owned and
leased vans and trucks and contract carriers. Night picking operations in our
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 AmeriSource and Bergen operating units on a combined basis prior
to the merger.
Fiscal Year Ended September 30,(/1/)
-------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(dollars in millions; square feet in thousands)
Operating revenue............ $15,087.2 $18,978.3 $22,114.5 $25,402.4 $29,452.3
Number of distribution
facilities.................. 52 56 56 57 57
Average revenue per
distribution facility....... $ 290.1 $ 338.9 $ 394.9 $ 445.7 $ 516.7
Total square feet
(distribution facilities)... 5,094 5,745 5,727 5,807 5,848
Average revenue per square
foot in whole dollars
(distribution facilities)... $ 2,962 $ 3,303 $ 3,861 $ 4,374 $ 5,036
- --------
(1) Includes full service pharmaceutical distribution facilities and ASD
distribution facilities.
Customers and Markets. We have a diverse customer base that includes acute
care hospitals, health systems, independent retail pharmacies, alternate site
customers, and national and regional retail pharmaceutical chains, including
pharmacy departments of supermarkets and mass merchandisers. We are typically
the primary source of supply for our customers. In addition, we offer a broad
range of value-added solutions designed to enhance the operating efficiencies
and competitive positions of our customers, allowing them to improve the
delivery of healthcare to patients and consumers.
No single customer represented more than 7.3% of AmeriSource's and Bergen's
total operating revenue on a combined basis during fiscal 2000. Including the
Veterans Administration, AmeriSource's, and Bergen's top ten customers on a
combined basis represented approximately 24.9% of the total pro forma
operating revenue during fiscal 2000.
Suppliers. Historically, AmeriSource and Bergen obtained pharmaceutical and
other products from a number of manufacturers, none of which accounted for
more than approximately 7% of AmeriSource's and Bergen's net sales on a
combined basis in fiscal 2000. The five largest suppliers in fiscal 2000
accounted for approximately 26% of AmeriSource's and Bergen's combined net
sales. AmeriSource and Bergen have not experienced difficulty in purchasing
desired products from suppliers in the past. We currently have agreements with
many of our suppliers which generally require them 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 our business if alternate sources of
supply are unavailable. We believe that our relationships with our suppliers
are good.
Management Information Systems. We continually invest in advanced
management information systems and automated warehouse technology. Our
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.
27
Our 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 offered to its customers, including marketing data,
inventory replenishment, single-source billing, computer price updates and
price labels.
AmeriSource and Bergen operate their respective full service pharmaceutical
distribution facilities with different centralized management information
systems. We are now in the process of evaluating the two systems and intend to
use a common system in the future. This process is complex and will take
several years to complete.
We plan to continue to make system investments to further improve our
information capabilities and meet our customer and operational needs.
Currently, we are expanding our electronic interface with suppliers and now
electronically process a substantial portion of our purchase orders, invoices
and payments. We also intend to expand our use of warehouse automation
systems.
Competition
We engage in the wholesale distribution of pharmaceuticals and related
healthcare solutions in a highly competitive environment. We compete with both
national and regional distributors, some of which are larger and have greater
financial resources than we do. Our national competitors include Cardinal
Health, Inc. and McKesson Corporation. In addition, we compete 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, price, service and delivery,
credit terms and customer support.
PharMerica's competitors principally include national institutional
pharmacies and long-term care company-owned captive pharmacies. We believe
that the competitive factors most important in PharMerica's lines of business
are quality and range of service offered, comparative prices, reputation with
referral sources, ease of doing business with the provider and the ability to
develop and maintain relationships with referral sources. One of PharMerica's
competitors is significantly larger than PharMerica. In addition, there are
relatively few barriers to entry in the local markets served by PharMerica and
it may encounter substantial competition from local market entrants.
PharMerica competes with numerous billing companies in connection with its
workers' compensation electronic claims adjudication business.
Employees
As of March 31, 2001 we employed approximately 13,700 persons, of which
approximately 12,000 were full-time employees. Approximately 6% of full and
part-time employees are covered by collective bargaining agreements. We
consider our relationship with our employees and the unions representing
certain of our employees to be satisfactory.
Government Regulation
From time to time various federal and state agencies may investigate our
compliance with legal and regulatory requirements applicable to our
operations, and may initiate actions in response to perceived non-compliance
with these requirements. Generally, we have been able to satisfy their
concerns or resolve the issues, and believe that we are in material compliance
with applicable requirements.
Healthcare Regulation
Certain pharmaceutical products and medical supplies sold by us are subject
to federal and state statutes and regulations governing the sale, marketing,
packaging and distribution of prescription drugs, including controlled
substances, and medical devices.
Licensure and Registration Laws
The DEA, 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
licenses, and to meet various security and operating standards. As a wholesale
distributor of pharmaceuticals, the Company is subject to these regulations.
Furthermore, we (particularly in our PharMerica operations) and/or
28
our customers are subject to extensive licensing requirements. The DEA and FDA
laws and regulations are broad in scope and are subject to frequent
modification and varied interpretation. Significant criminal, civil and
administrative sanctions may be imposed for violation of these laws and
regulations.
Medicare and Medicaid
As part of various changes made to Medicare, the United States Congress
established the Prospective Payment System ("PPS") in 1997 for Medicare
patients in skilled nursing facilities. PPS pays a federal daily rate for
virtually all covered skilled nursing facility services. Under PPS,
PharMerica's skilled nursing facility customers are no longer able to pass
through their costs for certain products and services provided by PharMerica.
Instead, PharMerica's customers receive a federal daily rate to cover the
costs of all eligible goods and services provided to Medicare patients, which
may include certain pharmaceutical and other goods and services provided by
PharMerica that were previously reimbursed separately under Medicare. Since
the reimbursement to skilled nursing facilities by Medicare is limited by PPS,
such facilities now have an increased incentive to negotiate with PharMerica
to minimize the costs of providing goods and services to patients covered
under Medicare. PharMerica continues to bill skilled nursing facilities on a
negotiated fee schedule.
PharMerica's reimbursement for pharmaceuticals provided under state
Medicaid programs are also subject to government regulation. During the fourth
quarter of fiscal 2000, PharMerica began to experience the negative impact of
two recent regulatory events which reduced reimbursement under state Medicaid
programs, and it is expected that such lower reimbursements will continue into
future years. The first event was the announcement by approximately 34 states
of a significant reduction in AWP reimbursement levels for certain intravenous
(IV) drugs provided to Medicaid beneficiaries. The second event was CMS'
reduction of FUL prices, which are used to set the reimbursement levels for
numerous pills and tablets dispensed to Medicaid beneficiaries.
Kickback/Referral Restrictions
The fraud and abuse laws (i) preclude, among other things, persons from
soliciting, offering, receiving or paying any remuneration in order to induce
the purchasing of items or services that are paid for by Medicare or Medicaid
and (ii) impose a number of restrictions upon referring physicians and
providers of designated health services under Medicare and Medicaid programs.
Significant criminal, civil and administration sanctions may be imposed for
violation of these laws.
Health Information Practices
HIPAA and related rules and regulations set forth health information
standards in order to protect security and privacy in the exchange of
individually identifiable health information. Significant criminal and civil
penalties may be imposed for violation of these standards. Management is not
currently in the position to estimate or predict the cost of compliance with
HIPAA requirements.
Healthcare Reform
As a result of a wide variety of political, economic and regulatory
influences, the healthcare delivery industry in the United States is and will
continue to be under intensive scrutiny and subject to fundamental changes. We
cannot predict which, if any, of such reform proposals will be adopted, when
they may be adopted or what impact they may have on us.
Environmental Regulation
We are aware that at our 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. Our environmental consulting firm conducted a soil survey
and a groundwater study during
29
fiscal 1994 and fiscal 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. We are 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 March 31, 2001), which is
reflected in other liabilities in our 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.
Properties
As of March 31, 2001, we conducted our business from office and operating
unit facilities at 185 owned and leased locations throughout the United States
and Puerto Rico. In the aggregate, our operating units occupy approximately
8.0 million square feet of office and warehouse space, of which approximately
2.9 million square feet is owned and approximately 5.1 million square feet is
leased under lease agreements with expiration dates ranging from fiscal 2001
to fiscal 2010.
Our 53 full service pharmaceutical distribution facilities range in size
from approximately 20,000 square feet to 231,500 square feet, with an
aggregate of approximately 5.8 million square feet. Leased facilities are
located in Puerto Rico plus the following states: Alabama, Arizona,
California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois,
Indiana, Kentucky, Maryland, Massachusetts, Minnesota, Missouri, New Jersey,
North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia,
Washington and West Virginia. Owned facilities are located in the following
states: Alabama, California, Georgia, Illinois, Indiana, Kentucky,
Massachusetts, Michigan, Mississippi, Missouri, Ohio, Oklahoma, Tennessee,
Texas and Virginia. We utilize a fleet of owned and leased vans and trucks, as
well as contract carriers to deliver our products. We consider our operating
properties to be in satisfactory condition and well utilized with adequate
capacity for growth.
As of March 31, 2001, our PharMerica operations were located in 114 leased
locations ranging in size from approximately 150 to 89,000 square feet and
have a combined area of approximately 1,152,000 square feet. The lease
expiration dates of the leased facilities range from fiscal 2001 through
fiscal 2010.
As of March 31, 2001, the other business units within the pharmaceutical
distribution segment (our pharmaceutical alternate site distribution business,
our pharmaceutical repackaging businesses and our smaller specialty units)
were located in thirteen leased and two owned locations. The locations range
in size from approximately 2,000 square feet to 153,000 square feet and have a
combined area of approximately 678,000 square feet. The leases expire from
fiscal 2001 through fiscal 2005.
We own and lease an aggregate of approximately 315,000 square feet of
general and executive offices in Orange, California and Chesterbrook,
Pennsylvania, and lease approximately 28,000 square feet of data processing
offices in Montgomery, Alabama. The lease expiration dates of these facilities
range from fiscal 2004 through fiscal 2010.
Legal Proceedings
AmeriSource
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On April 20, 2001, a class complaint was filed against AmeriSource and
others seeking damages for the alleged unlawful distribution of misbranded and
adulterated drugs. AmeriSource is currently in the process of evaluating the
complaint. At this time management is unable to determine the potential
exposure AmeriSource faces as a result of the complaint and what effect, if
any, the outcome may have on AmeriSource's business.
Bergen
On April 20, 2001, a class complaint was filed against Bergen and others
seeking damages for the alleged unlawful distribution of misbranded and
adulterated drugs. Bergen is currently in the process of evaluating the
complaint. At this time management is unable to determine the potential
exposure Bergen faces as a result of the complaint and what effect, if any,
the outcome may have on Bergen's business.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Debt
In connection with the merger, AmerisourceBergen will enter into a credit
agreement (the "Credit Agreement") with a syndicate of senior lenders
providing a senior secured facility of $1.3 billion. The new credit facility
(i) will provide for a revolving credit facility in the maximum amount of $1
billion and (ii) a term loan facility in the amount of $300 million. $100
million will be available for letters of credit. The new credit facility will
expire in August 2006. Among other things, the Credit Agreement will provide
for: (i) interest rates of LIBOR plus a spread and (ii) the release of
security based upon achievement of investment grade senior, unsecured debt
ratings from Moodys and Standard & Poors credit rating agencies. In connection
with the Credit Agreement, AmerisourceBergen will incur approximately $15
million of financing fees which will be deferred and amortized on a straight-
line basis over the five-year term of the Credit Agreement. The term loan
facility will be subject to amortization of principal in annual amounts to be
determined.
Borrowings under the Credit Agreement will bear interest at the rate of
LIBOR plus a spread or the applicable prime rate plus a spread. Interest on
loans under the Credit Agreement will be payable at least quarterly. Under the
terms of the Credit Agreement, AmerisourceBergen will grant the senior lenders
a perfected first priority security interest in AmerisourceBergen's inventory
and other assets for collateral against borrowings under the Credit Agreement.
AmerisourceBergen will be required to pay a commitment fee on the unused
portion of the commitment under the Credit Agreement plus an annual
administration fee.
The credit agreement will contain affirmative covenants usual for
facilities and transactions of this type. These covenants will include the
following:
. satisfactory insurance;
. payment of taxes;
. delivery of financial statements;
. maintenance of properties; and
. compliance with laws.
The credit agreement will also contain negative covenants usual for
facilities and transactions of this type. These include the following
restrictions:
. indebtedness;
. liens;
. sale/leaseback arrangements;
. dividends and distributions;
. capital expenditures;
. mergers, acquisitions and assets dispositions;
. investments;
. transactions with affiliates;
. changes in businesses conducted; and
. amendments of certain material documents.
Additional covenants will require compliance by AmerisourceBergen with
specified financial ratios, including a leverage ratio and a fixed charge
ratio. Obligations under the credit agreement will be unconditionally
guaranteed by AmerisourceBergen's current and future domestic subsidiaries,
with certain exceptions.
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AmeriSource Securitization
Effective May 14, 1999, AmeriSource, through a consolidated wholly-owned
special-purpose entity, established a new receivables securitization facility,
which provided AmeriSource with up to $325 million in available credit. During
the third quarter of fiscal 2000, AmeriSource 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, AmeriSource sells on a revolving basis certain accounts sponsored by
a financial institution. AmeriSource 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). AmeriSource 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 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. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and, accordingly, AmeriSource accounts for
the Securitization Facility as a financing transaction in its consolidated
financial statements.
Proceeds from the Securitization Facility were used to extinguish
AmeriSource'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 0.2% to the
federal funds rate plus 1%. Transactions under this program did not qualify as
sales under SFAS No. 125 and, accordingly, AmeriSource accounted for the
Receivables Program as a financing transaction.
The indenture governing the Securitization Facility contains restrictions
and covenants which include limitations on the following:
. incurrence of additional indebtedness;
. restrictions on distributions and dividends to stockholders;
. repurchase of stock and the making of certain other restricted payments;
. issuance of preferred stock;
. creation of certain liens;
. transactions with subsidiaries and other affiliates; and
. certain corporate acts such as mergers, consolidations, and sale of
substantially all assets.
Additional covenants require compliance with financial tests, including
leverage, fixed charge coverage and maintenance of minimum net worth.
Bergen Securitization
On December 20, 2000, Bergen replaced its receivables securitization
program by entering into a new receivables securitization agreement with a
financial institution. The new agreement, which has a five-year term, provides
for a longer commitment by the financial institution than did the prior
agreement, which had a one-year term. In addition, the new agreement is
designed to give Bergen additional availability, improved pricing and more
flexibility in the timing of receivable sales. Availability is subject to
specified percentages of eligible receivables, as defined in the agreement.
The initial maximum availability under the program is $350 million, but Bergen
has the option to increase the maximum up to $450 million upon payment of an
additional fee.
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Through the new Bergen receivables securitization program, Bergen's
subsidiary drug company sells, on an ongoing basis, its accounts receivable to
Blue Hill II ("Blue Hill"), a 100%-owned special purpose subsidiary. Blue
Hill, in turn, sells an undivided percentage ownership interest in such
receivables to various investors. The program qualifies for treatment as a
sale of assets under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Sales are recorded at
the estimated fair value of the receivables sold, reflecting discounts for the
time value of money based on specified interest rates and estimated credit
losses; the weighted average rate for the program was approximately 5.95% at
March 31, 2001.
As of March 31, 2001 and September 30, 2000, Bergen had outstanding net
proceeds of $300 million and $168 million, respectively, from the sale of such
receivables under its receivables securitization program, and accounts
receivable has been reduced by these amounts in the accompanying Consolidated
Balance Sheets. After the maximum limit of receivables sold has been reached
and as sold receivables are collected, additional receivables may be sold up
to the maximum amount available under the program. Aggregate discount and fees
of approximately $5.7 million and $4.5 million for the three-month periods
ended March 31, 2001 and 2000, and $10.9 million and $5.0 million for the six-
month periods, respectively, on the sold receivables are included in net
interest expense in the accompanying Statements of Consolidated Earnings.
Blanco Revolving Credit Facility
One of Bergen's subsidiaries has a $55 million bank revolving credit
facility which expires on May 20, 2002. Borrowings under the facility bear
interest at 0.35% above LIBOR and are secured by a standby letter of credit
under Bergen's senior credit facility for which Bergen incurs a fee of 2.75%.
Following the consummation of the new credit facility described above,
borrowings under the facility will be secured under the new credit facility
for which AmerisourceBergen will incur a fee based on the spread under the new
credit facility.
Bergen Senior Notes
On December 1, 1992, Bergen filed a $400 million shelf registration
relating to debt securities which may be either senior or subordinated in
priority of payment. Also on December 1, 1992, Bergen entered into a senior
indenture (the "Indenture") with Chemical Trust Company of California, as
senior trustee. The senior notes set forth below were issued pursuant to the
shelf registration and the Indenture.
7 3/8% Senior Notes
On January 14, 1993, Bergen sold $150 million aggregate principal amount of
unsecured 7 3/8% Senior Notes due January 15, 2003. The 7 3/8% notes are not
redeemable prior to maturity and are not entitled to any sinking fund.
Interest on the 7 3/8% notes is payable semi-annually on January 15 and July
15 of each year.
The Indenture contains covenants restricting Bergen's ability and the
ability of certain of Bergen's subsidiaries to incur or permit to exist liens
on their assets, except for permitted liens and to enter into sale and
leaseback transactions, except permitted sale and leaseback transactions.
The failure of Bergen and some of its subsidiaries to pay specific
indebtedness when due constitutes, among other things, an event of default
under the 7 3/8% notes and can lead to the acceleration of the payment of the
7 3/8% notes. As a result of the merger, these obligations will become
obligations of AmerisourceBergen.
7 1/4% Senior Notes
On May 23, 1995, Bergen sold $100 million aggregate principal amount of
unsecured 7 1/4% Senior Notes due June 1, 2005. The 7 1/4% notes are not
redeemable prior to maturity and are not entitled to any sinking fund.
Interest on the 7 1/4% notes is payable semi-annually on June 1 and December 1
of each year.
The Indenture contains covenants restricting Bergen's ability and the
ability of certain of Bergen's subsidiaries to incur or permit to exist liens
on their assets, except for permitted liens and to enter into sale and
leaseback transactions, except permitted sale and leaseback transactions. The
failure of Bergen's and some of its subsidiaries to pay specific indebtedness
when due constitutes, among other things, an event of default under the
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7 1/4% notes and can lead to the acceleration of the payment of the 7 1/4%
notes. As a result of the merger, these obligations will become obligations of
AmerisourceBergen.
Durr-Fillauer 7% Convertible Subordinated Debentures
In connection with the acquisition of Durr-Fillauer Medical Inc. and
subsidiaries ("Durr") in September 1992, Bergen assumed $69 million of Durr's
unsecured 7% Convertible Subordinated Debentures due March 1, 2006. Since
September 1992, Bergen has redeemed $48.4 million aggregate principal amount
plus accrued interest. The remaining unredeemed 7% debentures receive interest
on March 1 and September 1 of each year.
Under the terms of the indenture governing these debentures, Bergen must
make a change of control offer on the remaining debentures as a result of the
merger. As a result of the merger, the obligations under the 7% debentures
will become obligations of AmerisourceBergen.
AmeriSource 5% Convertible Subordinated Notes
In December 2000 AmeriSource issued $300 million of Convertible
Subordinated Notes due December 1, 2007 (the "AmeriSource notes"). The
AmeriSource notes have an annual interest rate of 5% and are payable
semiannually on June 1 and December 1 of each year. The AmeriSource notes are
convertible into Class A Common Stock of AmeriSource at $52.97 per share at
any time before their maturity or their prior redemption or repurchase by
AmeriSource. The AmeriSource notes are subordinated in right of payment to all
of AmeriSource's existing and future senior debt. AmeriSource's direct wholly-
owned subsidiary, AmeriSource Corporation, unconditionally guaranteed the
AmeriSource notes on a subordinated basis. Net proceeds from the AmeriSource
notes of approximately $290.7 million were used to repay existing borrowings
of AmeriSource, and for working capital and other general corporate purposes.
Upon the occurrence of specific changes in control of AmeriSource, each
note holder has the right to require AmeriSource to purchase all or a portion
of the note holder's AmeriSource notes at a price equal to 100% of the
aggregate principal amount of the AmeriSource notes. The failure of
AmeriSource and some of its subsidiaries to pay specific indebtedness when due
constitutes, among other things, an event of default under the AmeriSource
notes and can lead to the acceleration of the payment of the AmeriSource
notes. As a result of the merger, these obligations will become obligations of
AmerisourceBergen.
PharMerica 8 3/8% Senior Subordinated Notes
In March 1998, PharMerica, Inc. ("PharMerica"), a wholly-owned subsidiary
of Bergen, issued $325.0 million of 8 3/8% Senior Subordinated Notes due 2008.
On June 25, 1999, PharMerica completed an offer to purchase its unsecured
Senior Subordinated Notes. Holders tendered an aggregate principal amount of
$16.9 million in response to PharMerica's offer to purchase the PharMerica
notes at a cash price equal to $1,010 per $1,000 principal amount, plus
interest. The offer was required as a result of the acquisition of PharMerica
by Bergen on April 26, 1999 according to the terms of the indenture under
which the PharMerica notes were issued.
The indenture governing PharMerica's notes, among other things, prevents
PharMerica and its subsidiaries from guaranteeing the financings. That
indenture, with limited exceptions, also prevents PharMerica and its
subsidiaries from making any payment to us unless PharMerica has a fixed charge
coverage ratio (as defined therein) of at least 2.5 to 1, and such payments,
along with the aggregate of all other similar payments, are less than the sum of
(i) 50% of the consolidated net income for PharMerica and its subsidiaries for
the period from April 1, 1998 (or, if such consolidated net income for such
period is a deficit, less 100% of such deficit), (ii) 100% of the aggregate cash
proceeds from contributions of capital or the sale of equity (under certain
circumstances) and (iii) certain limited sales of assets.
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Pursuant to the terms of the indenture governing PharMerica's notes, after
consummation of the merger we will be required to make a change of control
offer to repurchase those notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption.
Bergen 6 7/8% Exchangeable Subordinated Debentures
In July 1986, Bergen issued $43 million of unsecured 6 7/8% Exchangeable
Subordinated Debentures due July 2011. During March 1990, $32.1 million
principal amount of the 6 7/8% debentures was tendered and purchased pursuant
to an offer from Bergen. Since March 1990, Bergen has redeemed an additional
$2.5 million aggregate principal amount plus accrued interest. The remaining
unredeemed 6 7/8% debentures receive interest on January 15 and July 15 of
each year.
The failure of Bergen and some of its subsidiaries to pay specific
indebtedness when due constitutes, among other things, an event of default
under the 6 7/8% debentures and can lead to the acceleration of the payment of
the 6 7/8% debentures. As a result of the merger, the obligations under the 6
7/8% debentures will become obligations of AmerisourceBergen.
Bergen Trust Preferred Securities
During the year ended September 30, 1999, Bergen formed Bergen Capital I
(the "Trust") which was established to sell preferred securities to the
public; sell common securities to Bergen; use the proceeds from these sales to
buy an equal amount of subordinated debt securities of Bergen; and distribute
the cash payments it receives on the subordinated debt securities it owns to
the holders of its preferred and common securities. In turn, Bergen will pay
principal, premium (if any) and interest on its subordinated debt securities
and will guarantee certain payments relating to the preferred securities.
On May 26, 1999, the Trust, a wholly-owned subsidiary of Bergen, issued
12,000,000 shares of 7.80% Trust Originated Preferred Securities SM (TOPrS SM)
(the "Preferred Securities") at $25 per security. The proceeds of such
issuances were invested by the Trust in $300 million aggregate principal
amount of Bergen's 7.80% Subordinated Deferrable Interest Notes due June 30,
2039. Bergen used the net proceeds from the Trust for general corporate
purposes, principally retirement of a portion of its outstanding debt. The
subordinated notes represent the sole assets of the Trust and bear interest at
the annual rate of 7.80%, payable quarterly, and are redeemable by Bergen
beginning in May 2004 at 100% of the principal amount thereof. The obligations
of the Trust related to the Preferred Securities are fully and unconditionally
guaranteed by Bergen.
Holders of the Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 7.80% of the liquidation amount of $25 per
security beginning June 30, 1999. The Preferred Securities will be redeemable
upon any repayment of the Subordinated Notes at 100% of the liquidation amount
beginning in May 2004.
Bergen, under certain conditions, may cause the Trust to defer the payment
of distributions for successive periods of up to 20 consecutive quarters.
During such periods, accrued distributions on the Preferred Securities will
compound quarterly at an annual rate of 7.80%. Also, during such periods,
Bergen may not declare or pay distributions on its capital stock; may not
redeem, purchase or make a liquidation payment on any of its capital stock;
and may not make interest, principal or premium payments on, or repurchase or
redeem, any of its debt securities that rank equal with or junior to the
Subordinated Notes.
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