Exhibit 99.2
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.
. "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.
. All industry statistics in this report were obtained from data prepared
or provided by Healthcare Distribution Management Association ("HDMA")
and other recognized industry sources.
AmerisourceBergen
We are a leading national wholesale distributor of pharmaceutical products
and related healthcare services and solutions with operating revenue (excluding
bulk shipments) of approximately $40 billion, Adjusted EBITDA, as defined
below, of approximately $804 million and operating income of approximately $718
million for the fiscal year ended September 30, 2002.
We were formed in connection with the merger of AmeriSource and Bergen,
which was consummated in August 2001. As a result of the merger,
AmerisourceBergen is the largest pharmaceutical services company in the United
States that is dedicated solely to the pharmaceutical supply chain. We believe
that we are the leading wholesale distributor of pharmaceutical products and
services to hospital systems (hospitals and acute care facilities), alternate
site customers (mail order facilities, physicians' offices, long-term care
institutions, and clinics), independent community pharmacies, and regional
drugstore and food merchandising chains. Also a leader in the institutional
pharmacy marketplace, we provide outsourced pharmacies to long-term care and
workers' compensation programs.
We are organized based upon the products and services we provide our
customers. We have two operating segments: Pharmaceutical Distribution and
PharMerica.
The Pharmaceutical Distribution segment includes AmerisourceBergen Drug
Company ("AB Drug") and AmerisourceBergen Specialty Group ("The Specialty
Group"). AB Drug includes the full-service pharmaceutical distribution
facilities, American Health Packaging, and other healthcare related businesses.
AB Drug sells pharmaceuticals, over-the-counter medicines, health and beauty
aids, and other health-related products to hospitals, managed care facilities,
and independent and chain retail pharmacies. American Health Packaging packages
oral solid medications for nearly any need in virtually all settings of patient
care. AB Drug also provides promotional, inventory management and information
services to its customers. The Specialty Group sells specialty pharmaceutical
products and services to physicians, clinics and other providers in the
oncology, nephrology, plasma and vaccines sectors. The Specialty Group also
provides third party logistics and reimbursement consulting services to
healthcare product manufacturers.
The PharMerica segment consists solely of our PharMerica operations.
PharMerica provides institutional pharmacy products and services to patients in
long-term care and alternate site settings, including skilled nursing
facilities, assisted living facilities, and residential living communities.
PharMerica also provides mail order pharmacy services to chronically and
catastrophically ill patients under workers' compensation programs, and
provides pharmaceutical claims administration services for payors.
1
We have positioned ourselves in our markets 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 community pharmacies;
. the alternate site market; and
. national and regional retail pharmacy chains.
We currently serve customers throughout the United States through a
geographically diverse network of distribution centers. 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 to lower overall costs in the pharmaceutical supply chain.
Our customer base is geographically diverse and balanced with no single
customer representing more than 10% of fiscal 2002 operating revenue. We have
one of the leading market positions in pharmaceutical distribution to the
hospital systems/acute care facilities market and the alternate site facilities
market, which represented approximately 53% of fiscal 2002 operating revenue,
and the independent community pharmacies and national and regional retail
pharmacy chains, which represented approximately 47% of fiscal 2002 operating
revenue.
In the 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.
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 $73 billion in 1995 to an estimated $196 billion
in 2002 and are expected to grow to approximately $287 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.
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 55, 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 approximately 59 million in 2000 to more than 75 million by the year 2010.
Also, the introduction of new compounds through traditional research and
2
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 because a
significant number of patents for widely-used brand name pharmaceutical
products will expire in the next several years and because generic products
have historically provided a greater gross profit margin opportunity than brand
name products.
Business 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
business 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,
which is reflected in the high rankings we have achieved in customer
service surveys; (ii) delivering value-added solutions which improve the
efficiency and competitiveness of both customers and suppliers, allowing
the supply chain to better deliver healthcare to patients and consumers;
(iii) maintaining our low-cost operating structure to ensure that our
services are priced competitively in the marketplace; and (iv)
maintaining our decentralized operating structure to respond to
customers' needs more quickly and efficiently and to ensure the continued
development of local and regional management talent.
. 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. These solutions also increase customer loyalty
and strengthen AmerisourceBergen's overall role in the pharmaceutical
supply chain. They include: iECHO(R) and iBergen, our proprietary
internet-based ordering systems; Family Pharmacy(R) and Good Neighbor
Pharmacy(R), which enable independent community pharmacies and small
chain drugstores to compete more effectively through access to
pharmaceutical benefit and merchandising programs, disease management
services and pharmaceutical care programs, and best-priced generic
product purchasing services; Pharmacy Healthcare Solutions, which
provides hospital pharmacy consulting to improve operational
efficiencies; AmerisourceBergen Specialty Group, which delivers a
comprehensive supply of disease-state based products and services in
oncology, nephrology, vaccines, injectables and plasma to a variety of
providers of healthcare; American Health Packaging, which delivers unit
dose, punch card and unit-of-use packaging for institutional and retail
pharmacy customers; and Rita Ann, our cosmetics distributor.
. Expand Growth Opportunities through Healthcare Solutions for Our
Suppliers. We have been developing solutions for our 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 we currently
offer. 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 to enhance our position in the
pharmaceutical supply chain.
3
. Improve Operating and Capital Efficiencies. We believe we have one of
the lowest operating cost structures among our major national
competitors. We have developed merger integration plans to consolidate
our existing pharmaceutical distribution facility network and establish
new, more efficient distribution centers. More specifically, our plan is
to have a distribution facility network consisting of 30 facilities in the
next four to five years. We plan to accomplish this by building six new
facilities, expanding seven facilities, closing 28 facilities and
implementing a new warehouse operating system. During fiscal 2002, we
closed seven facilities. 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.
Recent Developments
Our Acquisition of AutoMed Technologies, Inc.
On July 15, 2002, we acquired all of the outstanding stock of AutoMed
Technologies, Inc., a leading provider of automated pharmacy dispensing
equipment with annual revenues of approximately $60 million, for $120 million
in cash, subject to adjustment based on a final calculation of AutoMed's
working capital as of the acquisition date. This $120 million payment included
our repayment of AutoMed's debt of approximately $52 million. The agreement and
plan of merger provides for contingency payments, not to exceed $55 million,
based on AutoMed achieving defined earnings targets through the end of calendar
2004. We have the option to make these payments in cash or in shares of our
common stock. The initial allocation of the purchase price, subject to
adjustment, was based on the estimated fair values of AutoMed's assets and
liabilities at the effective date of the acquisition and was allocated as
follows: tangible assets of $23 million, goodwill and identifiable intangible
assets of $110 million and liabilities of $12 million. AutoMed's results of
operations have been included as a component of our Pharmaceutical Distribution
segment from the date of the acquisition.
Pending Acquisition of Bridge Medical, Inc.
On November 5, 2002, we announced that we signed a definitive agreement to
purchase Bridge Medical, Inc., a leading provider of barcode-enabled
point-of-care software designed to reduce medication errors and decrease costs
in healthcare facilities, for approximately $27 million to be paid primarily in
our common stock. The agreement also includes incentive payments of up to a
maximum of $55 million based on Bridge Medical achieving defined earnings
targets through the end of calendar 2004. We intend to make the payments
primarily in shares of our common stock. We expect to close this transaction
before the end of calendar 2002.
Recent Results
On November 5, 2002, we reported results for our fourth fiscal quarter and
year ended September 30, 2002. Set forth below for comparative purposes are
unaudited pro forma consolidated results of operations for the three months
ended and for the fiscal year ended September 30, 2001 assuming the merger and
the related financing transactions had occurred at the beginning of the
respective periods.
4
The unaudited pro forma operating results do not reflect any anticipated
operating efficiencies or synergies and are not necessarily indicative of the
actual results which might have occurred had the operations and management of
AmeriSource and Bergen been combined during the periods presented. In addition,
the unaudited pro forma operating results for periods ending September 30, 2001
exclude expenses associated with merger-related facility consolidations,
employee severance and other integration activities. The following table should
be read in conjunction with the Consolidated Financial Statements and the
Unaudited Pro Forma Consolidated Condensed Statement of Operations, including
the notes thereto, included elsewhere in this report.
Pro Forma
Pro Forma Three Months Three Months
Year Ended Year Ended Ended Ended
September 30, 2001 September 30, 2002 September 30, 2001 September 30, 2002
------------------ ------------------ ------------------ ------------------
(in thousands, except per share data) (unaudited)
Statement of Operations Data:
Revenue:
Operating revenue................................ $34,599,310 $40,240,714 $ 9,052,684 $10,357,502
Bulk deliveries to customers' warehouses......... 4,532,479 4,994,080 1,344,635 1,243,418
----------- ----------- ----------- -----------
Total revenue.................................... 39,131,789 45,234,794 10,397,319 11,600,920
Cost of goods sold................................. 37,251,048 43,210,320 9,914,672 11,072,301
----------- ----------- ----------- -----------
Gross profit....................................... 1,880,741 2,024,474 482,647 528,619
Operating expenses:
Distributing, selling and administration......... 1,213,310 1,220,651 319,985 314,184
Depreciation and amortization(a)................. 63,061 61,151 16,160 16,962
Special charges.................................. (2,716)(b) 24,244(c) (2,716)(b) 3,859(d)
----------- ----------- ----------- -----------
Operating income................................... 607,086 718,428 149,218 193,614
Equity in losses of affiliates and other........... 13,055 5,647 6,919 4,460
Interest expense(e)................................ 181,068 140,734 39,015 31,663
----------- ----------- ----------- -----------
Income before taxes................................ 412,963 572,047 103,284 157,491
Income taxes....................................... 161,027 227,106 40,318 62,531
----------- ----------- ----------- -----------
Net income(a)...................................... $ 251,936 $ 344,941 $ 62,966 $ 94,960
=========== =========== =========== ===========
Earnings per share:
Basic............................................ $ 2.44 $ 3.29 $ 0.61 $ 0.89
Diluted(f)....................................... $ 2.38 $ 3.16 $ 0.59 $ 0.86
Weighted average common shares outstanding:
Basic............................................ 103,089 104,935 103,354 106,225
Diluted.......................................... 109,314 112,228 110,844 113,134
Other Operating Information:
EBITDA(g).......................................... $ 657,092 $ 773,932 $ 158,459 $ 206,116
Adjusted EBITDA(h)................................. $ 667,431 $ 803,823 $ 162,662 $ 214,435
Ratio of Adjusted EBITDA to interest expense....... 3.7x 5.7x 4.2x 6.8x
Ratio of total debt to Adjusted EBITDA............. 2.8x 2.3x n/a n/a
Ratio of earnings to fixed charges(i).............. 3.1x 4.6x 3.4x 5.3x
Capital expenditures............................... $ 48,816 $ 64,159 $ 6,608 $ 23,520
As of As of
As of June 30, 2002 September 30, 2002
September 30, 2001 (unaudited) (unaudited)
------------------ ------------- ------------------
(in thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents.................... $ 297,626 $ 363,406 $ 663,340
Total assets................................. 10,291,245 10,432,694 11,213,012
Total debt (including current portion of
$2,468, $45,000 and $60,819)(j)............. 1,874,379 1,813,631 1,817,313
Total stockholders' equity................... 2,838,564 3,190,071 3,316,338
Book value per share......................... $ 27.41 $ 30.13 $ 31.12
- --------
(a) As of October 1, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which revises the accounting and financial reporting
standards for goodwill and other intangible assets. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives
5
are not amortized; rather, they are tested for impairment on at least an
annual basis. In accordance with the transition provisions of SFAS No. 142,
we did not amortize goodwill arising from the merger in fiscal 2001. In
fiscal 2002, we have discontinued the amortization of all goodwill. Pursuant
to SFAS No. 142, we were required to complete an initial impairment test of
goodwill within six months of adopting the standard, with any impairment
charges recorded as a cumulative effect of a change in accounting principle.
We completed our initial impairment test in the quarter ended March 31, 2002
and determined that no impairment existed. We completed our annual
impairment test in the fourth quarter of fiscal 2002 and determined that no
impairment existed. The pro forma financial information has been adjusted to
eliminate all historical goodwill amortization.
(b) Special charges include a credit of $2.7 million relating to a reduction in
a reserve for an environmental liability.
(c) Special charges include merger costs of $24.2 million, which principally
relate to consulting fees in connection with the merger.
(d) Special charges include merger costs of $3.9 million, which principally
relate to consulting fees in connection with the merger.
(e) Interest expense includes distributions made on company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely debt securities of the Company.
(f) Diluted earnings per share considers the 5% convertible subordinated notes
as if converted and, therefore, the effect of interest expense related to
these notes is added back to net income.
(g) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because AmerisourceBergen believes it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in the industry. However, other
companies in the industry may calculate EBITDA differently than
AmerisourceBergen does. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to cash flow from operating activities or
as a measure of liquidity or an alternative to net income as indicators of
AmerisourceBergen's operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles.
(h) Adjusted EBITDA is calculated by adding to or deducting from EBITDA certain
items that AmerisourceBergen believes are not indicative of its future
operating performance. These items consist of (i) merger costs that
principally relate to consulting fees incurred during the quarter and
fiscal year ended September 30, 2002 in connection with the merger, (ii) a
reduction of a reserve during the quarter and fiscal year ended September
30, 2001 relating to a reduction in an estimated environmental liability
and (iii) equity in losses of affiliates and other. See "SEC Review." The
following table summarizes the impact of these adjustments to EBITDA for
the periods indicated:
Pro Forma
Pro Forma Three Months Three Months
Year Ended Year Ended Ended Ended
September 30, 2001 September 30, 2002 September 30, 2001 September 30, 2002
------------------ ------------------ ------------------ ------------------
(in thousands) (unaudited)
EBITDA................................. $657,092 $773,932 $158,459 $206,116
Adjustments:
Merger costs:
Consulting fees.................. -- 16,553 -- 2,391
Accelerated vesting of
AmeriSource stock options....... -- 2,149 -- --
Other............................ -- 5,542 -- 1,468
-------- -------- -------- --------
Total merger costs............ -- 24,244 -- 3,859
-------- -------- -------- --------
Environmental remediation........... (2,716) -- (2,716) --
Equity in losses of affiliates and
other.............................. 13,055 5,647 6,919 4,460
-------- -------- -------- --------
Adjusted EBITDA........................ $667,431 $803,823 $162,662 $214,435
======== ======== ======== ========
The EBITDA amounts presented above for the respective pro forma periods
ended September 30, 2001 are presented after pro forma adjustments. See
"Notes to Unaudited Pro Forma Consolidated Condensed Statement of
Operations--Pro Forma Adjustments." Certain of these pro forma adjustments
include other non-recurring charges.
Adjusted EBITDA represents EBITDA plus the additional adjustments noted in
the table above. Adjusted EBITDA is presented because AmerisourceBergen
believes it is frequently used by securities analysts, investors and other
interested parties in the evaluation of companies in the industry. However,
other companies in the industry may present Adjusted EBITDA differently than
AmerisourceBergen does. Adjusted EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to cash flow from operating activities or as a
measure of liquidity or an alternative to net income as indicators of
AmerisourceBergen's operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles. See "Consolidated Statements of Cash Flows" included in
AmerisourceBergen's financial statements.
(i) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include income before taxes and
fixed charges (adjusted for interest capitalized during the period). "Fixed
charges" include interest, whether expensed or capitalized, amortization of
deferred financing costs and the portion of rental expense that is
representative of the interest factor in these rentals.
6
(j) Total debt includes company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debt securities of the
Company of $274,616 as of September 30, 2001, $275,120 as of June 30, 2002
and $275,288 as of September 30, 2002.
Summary Discussion of Recent Results
The following discussion is a summary discussion of recent results based on
our preliminary analysis of fiscal 2002 financial information. The following
discussion is not intended to be, and should not be considered, a comprehensive
and definitive discussion and analysis of our results by AmerisourceBergen
management.
Consolidated Results
. Operating revenue, which excludes bulk deliveries, for the quarter ended
September 30, 2002 increased 14% to $10.4 billion from $9.1 billion in the
prior-year quarter on a pro forma basis. Bulk deliveries decreased to $1.2
billion in the quarter ended September 30, 2002 compared to $1.3 billion in
the prior year quarter on a pro forma basis. Operating revenue for both the
pharmaceutical distribution segment ($10.2 billion for the quarter ended
September 30, 2002, including $201.2 million of intersegment sales to
PharMerica) and PharMerica ($386.1 million for the quarter ended September
30, 2002) grew 14% from the prior year quarter on a pro forma basis. During
the quarter ended September 30, 2002, 54% of operating revenue in the
pharmaceutical distribution segment was from institutional customers and
46% was from retail customers. This compares to a 52% institutional and 48%
retail split in the prior year quarter on a pro forma basis. Operating
revenues for both customer groups grew at greater than 10% for the quarter
ended September 30, 2002 compared to the prior year quarter on a pro forma
basis. The increase in PharMerica's operating revenues was principally
attributable to its workers' compensation business, which grew at a faster
rate than its long-term care business. Operating revenue for the fiscal
year ended September 30, 2002 increased 16% to $40.2 billion from $34.6
billion in the prior fiscal year on a pro forma basis. Bulk deliveries
increased by 10% to $5.0 billion in the fiscal year ended September 30,
2002 compared to $4.5 billion in the prior fiscal year on a pro forma
basis. We expect operating revenue to grow in the future at a rate similiar
to the growth of the pharmaceutical market which currently is estimated by
IMS Health Inc. to be 11% to 14% over the next few years.
. Operating income of $193.6 million for the quarter ended September 30,
2002 reflects an increase of 30% from $149.2 million in the prior year
quarter on a pro forma basis. Operating income of $718.4 million for the
fiscal year ended September 30, 2002 reflects an increase of 18% from
$607.1 million in the prior fiscal year on a pro forma basis. Excluding
special charges, our operating income in the fiscal year ended September
30, 2002 was $742.7 million, which represents a 23% increase compared to
$604.4 million in the prior fiscal year on a pro forma basis.
. Four distribution facilities were consolidated during the quarter ended
September 30, 2002, bringing the total number of distribution facilities
consolidated during fiscal 2002 to seven, consistent with the plans
previously announced by us.
. Special charges primarily related to the merger and merger integration in
the quarter ended September 30, 2002 were approximately $3.9 million and
for the year ended September 30, 2002 were approximately $24.2 million.
7
. Operating income as a percentage of operating revenues increased in the
quarter and year ended September 30, 2002 in both business segments versus
the corresponding prior year periods on a pro forma basis due to lower
operating expenses as a percentage of operating revenues, which more than
offset lower gross margins. Operating expenses decreased as a percentage of
operating revenues due to customer mix changes, operational efficiencies
and synergy cost savings from the merger integration effort in the
pharmaceutical distribution segment. PharMerica's expense margin was
favorably impacted by its faster growing workers' compensation business and
the move to a single information technology platform combined with
receivable and operating discipline in its long-term care business. Gross
margins decreased due to changes in customer mix and competitive selling
price pressures in both business segments.
. Strong working capital management and historically low market interest
rates contributed to a significant reduction in interest expense from the
prior year quarter and prior fiscal year on a pro forma basis.
. Net income of $95.0 million for the quarter ended September 30, 2002
reflects an increase of 51% from $63.0 million in the prior year quarter on
a pro forma basis. Diluted earnings per share of $0.86 in the quarter ended
September 30, 2002 reflects a 46% increase as compared to $0.59 per share
in the prior year quarter on a pro forma basis. Net income of $344.9
million for the fiscal year ended September 30, 2002 reflects an increase
of 37% from $251.9 million in the prior fiscal year on a pro forma basis.
Diluted earnings per share of $3.16 in the fiscal year ended September 30,
2002 reflects a 33% increase as compared to $2.38 per share in the prior
fiscal year on a pro forma basis. Excluding special charges, diluted
earnings per share for the fiscal year ended September 30, 2002 was $3.29,
reflecting an increase of 39% compared to the prior fiscal year on a pro
forma basis.
8
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 $150 million per year by the end of fiscal 2004 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 pharmaceutical
distribution segment gross profit margins on operating revenue from 4.7% on a
combined basis in fiscal 1997 to 3.9% in fiscal 2002. 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.
9
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, 2002, sales to the federal
government (including sales under separate contracts with different departments
and agencies of the federal government), accounted for approximately 9% of our
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 us, loss of a major
federal government customer or GPO could lead to a significant reduction in
revenue. Other than the federal government, we have no individual customer that
accounted for more than 5% of our fiscal 2002 operating revenue. During the
fiscal year ended September 30, 2002, our revenues generated from bulk
deliveries to customers' warehouses primarily consisted of sales to Merck-Medco.
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, 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 orders or otherwise meet our business
obligations 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
10
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 and our operating results and/or financial condition
may be adversely affected if we are unable to identify suitable acquisition
candidates or if we undertake acquisitions of businesses that do not perform as
we expect.
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.
Acquisitions are among the ways by which we seek to expand our presence in
strategically important markets and to expand the breadth and scope of our
ancillary businesses and service offerings. At any particular time, we may be
in various stages of assessment, discussion and negotiation with regard to one
or more potential acquisitions, many of which will not proceed beyond the
assessment, discussion and/or negotiation stages. We make public disclosure of
pending and completed acquisitions when appropriate and required by applicable
securities laws and regulations.
Acquisitions involve numerous risks and uncertainties. If we complete one or
more acquisitions, our business, results of operations and financial condition
may be adversely affected by a number of factors, including:
. the difficulties in the integration of the operations, technologies,
services and products of the acquired companies;
. the diversion of our management's attention from other business concerns;
. the assumption of unknown liabilities;
. the failure to achieve the strategic objectives of these acquisitions or
the projected results of the acquired businesses; and
. other unforeseen difficulties.
We cannot assure you that we will be able to consummate any future
acquisitions. Our acquisition strategy may be limited, among other things, by
the availability of suitable acquisition candidates and our ability to
consummate future acquisitions on terms satisfactory to us.
11
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated condensed statement of
operations is presented to illustrate the effects of the merger and the
financings relating to the merger, as described hereafter, on the historical
results of operations of AmerisourceBergen and Bergen, using the assumptions
set forth below. Such information is not necessarily indicative of the results
of operations of AmerisourceBergen that would have occurred if the merger and
related financings had been consummated as of the dates indicated, nor should
it be construed as being a representation of the future 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. We estimate that these synergies will be $150 million
per year by the end of fiscal 2004. However, such synergies will be partially
offset by merger-related integration expenses. In addition, our current
estimates of future cost savings may prove to be inaccurate and are subject to
uncertainty and to factors beyond our control. See "Risks Related to Our
Business--AmerisourceBergen may not realize all of the anticipated benefits of
the merger." 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 AmerisourceBergen and
Bergen included elsewhere in this report.
The unaudited pro forma consolidated condensed statement of operations of
AmerisourceBergen for the fiscal year ended September 30, 2001 assumes that the
merger and the related financings took place on October 1, 2000. In the
following table, the "AmerisourceBergen" column includes the results of
AmerisourceBergen for the fiscal year ended September 30, 2001 and the results
of Bergen for the period from August 29, 2001 through September 30, 2001. The
"Bergen" column includes the results of Bergen for the period from October 1,
2000 through August 29, 2001.
12
AMERISOURCEBERGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended September 30, 2001
Pro Forma
Pro Forma Amerisource
AmerisourceBergen Bergen Adjustments Bergen
----------------- ----------- ----------- -----------
(in thousands, except per share data)
Operating revenue................................ $15,822,635 $18,776,675 $ -- $34,599,310
Bulk deliveries to customers' warehouses......... 368,718 4,163,761 -- 4,532,479
----------- ----------- -------- -----------
Total revenue.................................... 16,191,353 22,940,436 -- 39,131,789
Cost of goods sold............................... 15,491,235 21,759,813 -- 37,251,048
----------- ----------- -------- -----------
Gross profit..................................... 700,118 1,180,623 -- 1,880,741
Distribution, selling and administrative......... 397,848 814,820 642(a) 1,213,310
Depreciation..................................... 18,604 38,562 1,412(b) 58,578
Amortization..................................... 2,985 21,172 (19,674)(c) 4,483
Merger costs..................................... 13,109 31,291 (44,400)(d) --
Facility consolidation and employee severance.... 10,912 -- (10,912)(e) --
Environmental remediation........................ (2,716) -- -- (2,716)
----------- ----------- -------- -----------
Operating income................................. 259,376 274,778 72,932 607,086
Equity in losses (income) of affiliates and other 10,866 2,602 (413)(c) 13,055
Interest expense................................. 47,853 138,320 (5,105)(f) 181,068
----------- ----------- -------- -----------
Income before taxes.............................. 200,657 133,856 78,450 412,963
Income taxes..................................... 76,861 62,710 21,456(g) 161,027
----------- ----------- -------- -----------
Net income....................................... $ 123,796 $ 71,146 $ 56,994 $ 251,936
=========== =========== ======== ===========
Earnings per share:
Basic......................................... $ 2.16 $ 2.44
Diluted(h).................................... $ 2.10 $ 2.38
Weighted average common shares outstanding:
Basic......................................... 57,185 103,089
Diluted....................................... 62,807 109,314
13
AMERISOURCEBERGEN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NOTE 1. BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma consolidated condensed statement of operations gives
effect to the merger using the purchase method of accounting. Since the former
AmeriSource stockholders owned approximately 51% of AmerisourceBergen's common
stock immediately after the closing of the merger, AmerisourceBergen accounted
for the merger as an acquisition by AmeriSource of Bergen.
AmerisourceBergen issued 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 was converted into 0.37 of a share of
AmerisourceBergen stock).
All AmeriSource stock options granted prior to February 15, 2001 vested 100%
as of the close of business on the last day prior to the effective time of the
merger. As a result of this acceleration of vesting, AmeriSource recorded a
charge to its earnings on the date of acceleration. The charge was
approximately $6.5 million, using the market price of the AmeriSource common
stock at the date of acceleration. This amount is not reflected in the
accompanying pro forma statement of operations.
The pro forma operating results do not reflect any operating efficiencies or
synergies and are not necessarily indicative of the actual results which might
have occurred had the operations and management of AmeriSource and Bergen been
combined during fiscal 2001. In addition, the pro forma operating results do
not include any expenses associated with merger-related facility
consolidations, employee severance or other integration activities.
14
AMERISOURCEBERGEN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS--(Continued)
NOTE 2. PRO FORMA ADJUSTMENTS
(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 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 costs directly associated with the merger,
including $24.4 million of Bergen's merger transaction costs, $9.4
million of merger integration costs, $6.5 million for the accelerated
vesting of AmeriSource's stock options, and $4.1 million of other
incremental costs.
(e) Represents the elimination of facility consolidation and employee
severance costs, which were related to the announced closures of six
former AmeriSource facilities in connection with the Company's
distribution network integration plans.
(f) In connection with the merger, the Company refinanced a significant
portion of its outstanding debt. This refinancing included the issuance
of new senior term debt, the consummation of a new bank credit facility,
the repayment of amounts outstanding under the previous bank credit
facilities of AmeriSource and Bergen, and the repurchase of certain
Bergen term debt. Interest expense was revised for the effect of the
assumed consummation of this aforementioned refinancing at the beginning
of the year. Interest for fixed-rate debt was calculated based upon the
fixed rates of the new debt, while interest for variable-rate debt was
calculated based on the historical benchmark rates (such as LIBOR) plus
the spreads set forth in 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 on the effective date of the merger. Amortization of deferred
financing costs was adjusted to reflect the costs and terms of the new
bank credit facilities and debt issued.
(g) Represents the aggregate pro forma income tax effect of Notes 2(a)
through 2(f) above.
(h) Diluted earnings per share considers the 5% convertible subordinated
notes as if converted and, therefore, the effect of interest expense
related to these notes is added back to net income.
NOTE 3. RECLASSIFICATIONS
Reclassifications have been made to the historical financial statements of
AmeriSource and Bergen to conform to the presentation used by the combined
company.
NOTE 4. EARNINGS (LOSS) PER SHARE
The pro forma earnings per share 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, for the diluted earnings per share
calculations, Bergen's historical weighted average shares outstanding have been
adjusted to include the dilutive effect of Bergen's stock options.
Additionally, the diluted earnings per share calculations consider the
AmeriSource convertible subordinated notes as if they were converted and,
therefore, the effect of interest expense related to these notes is added back
to net income in determining income available to common stockholders.
15
AMERISOURCEBERGEN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS--(Continued)
NOTE 5. RECENTLY-ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." 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. The Company accounted for
the merger in accordance with SFAS No. 141.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which revises the accounting and financial reporting
standards for goodwill and other intangible assets. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are not amortized; rather,
they are tested for impairment on at least an annual basis. In accordance with
the transition provisions of SFAS No. 142, the Company did not amortize
goodwill arising from the merger in fiscal 2001. In fiscal 2002, the Company
has discontinued the amortization of all goodwill. In fiscal 2001, the
amortization of goodwill was approximately $1.5 million.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard sets forth the accounting for
the impairment of long-lived assets, whether they are held and used or are
disposed of by sale or other means. It also broadens and modifies the
presentation of discontinued operations. The standard is effective for the
Company's fiscal year 2003, although early adoption is permitted, and its
provisions are generally to be applied prospectively. The Company has adopted
this standard, effective October 1, 2002, but does not believe it will have a
material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard addresses the financial
accounting and reporting for costs associated with exit or disposal activities.
These costs relate to termination benefits provided to current employees that
are involuntarily terminated, costs to terminate a contract, and costs to
consolidate facilities or relocate employees. The standard is effective for
exit costs or disposal activities initiated after December 31, 2002, although
early adoption is encouraged. The Company has adopted this standard effective
September 23, 2002.
16
Impact of the Merger
Management expects that the benefits of the merger will include synergies
to the combined entity of $150 million per year by the end of the third year
following consummation of the merger. We expect these savings will be realized
from the consolidation of distribution facilities and related working capital
improvements, the elimination of duplicate administrative functions and from
generic inventory purchasing efficiencies. However, such synergies will be
partially offset by merger-related integration expenses. We expect to incur
additional charges in connection with the integration of AmeriSource and Bergen
until the integration process has been completed, including an expected $20 to
$25 million over the next year. In addition, our current estimates of future
cost savings may prove to be inaccurate and are subject to uncertainty and to
factors beyond our control. See "Risks Related to Our Business--
AmerisourceBergen may not realize all of the anticipated benefits of the
merger."
17
Liquidity and Capital Resources
The following table illustrates our debt structure at September 30, 2002,
including availability under our revolving credit facilities and receivables
securitization facilities.
Outstanding Additional
Balance Availability
----------- ------------
Fixed-Rate Debt: (in thousands)
AmerisourceBergen 8 1/8% senior notes due 2008............. $ 500,000 $ --
AmeriSource 5% convertible subordinated notes due 2007..... 300,000 --
Bergen 7 3/8% senior notes due 2003........................ 150,419 --
Bergen 7 1/4% senior notes due 2005........................ 99,758 --
PharMerica 8 3/8% senior subordinated notes due 2008....... 124,532 --
Bergen 6 7/8% exchangeable subordinated debentures due 2011 8,425 --
Redeemable preferred securities of subsidiary trust........ 275,288 --
Other...................................................... 3,891 --
---------- ----------
Total fixed-rate debt................................... 1,462,313 --
---------- ----------
Variable-Rate Debt:
Revolving credit facility.................................. -- 937,615
Term loan facility......................................... 300,000 --
AmeriSource receivables securitization financing due 2004.. -- 400,000
Bergen receivables securitization financing due 2005....... -- 450,000
Blanco revolving credit facility........................... 55,000 --
---------- ----------
Total variable-rate debt................................ 355,000 1,787,615
---------- ----------
Total debt, including current portion............... $1,817,313 $1,787,615
========== ==========
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 revolving credit facilities
and/or our securitization facilities, 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.
Our working capital usage fluctuates widely during the year, generally
peaking in the second fiscal quarter due to seasonal inventory buying
requirements and buy-side purchasing opportunities. During the second quarter
of fiscal 2002, our highest utilization was 79% of the aggregate availability
under our revolving credit facility and receivables securitization facilities,
which are described below.
We have a $1.3 billion senior secured credit facility with a syndicate of
lenders. The senior credit facility consists of a $1.0 billion revolving credit
facility and a $300 million term loan facility, both maturing in August 2006.
The term facility has scheduled maturities on a quarterly basis beginning on
December 31, 2002, totaling $60 million in each of fiscal 2003 and 2004, and
$80 million and $100 million in fiscal 2005 and 2006, respectively. Interest on
borrowings under the senior credit facility accrues at specified rates based on
our debt ratings. Such rates range from 1.0% to 2.5% over LIBOR or 0% to 1.5%
over prime. Currently, the rate is 1.5% over LIBOR or .50% over prime.
Availability under the revolving credit facility is reduced by the amount of
outstanding letters of credit ($62.4 million at September 30, 2002). We pay
quarterly commitment fees to maintain the availability under the revolving
credit facility at specified rates based on our debt ratings ranging from .25%
to .50% of the unused availability. Currently, the rate is .375%. The senior
credit facility contains restrictions on, among other things, additional
indebtedness, distributions and dividends to stockholders,
18
investments and capital expenditures. Additional covenants require compliance
with financial tests, including leverage and fixed charge coverage ratios, and
maintenance of minimum tangible net worth. We can choose to repay or reduce our
commitments under the senior credit facility at any time.
At September 30, 2002, there were no borrowings under the AmeriSource $400
million receivables securitization facility. The facility expires in May 2004
and interest rates are based on prevailing market rates for short-term
commercial paper plus a program fee of 38.5 basis points. In order to borrow
available amounts under this securitization facility, a back-up 364-day
liquidity facility is required to be in place. The current liquidity facility
expires in May 2003, but we expect that it will be renewed through May 2004. The
$450 million Bergen securitization facility expires in December 2005, and
interest rates are based on prevailing market rates for short-term commercial
paper plus a program fee of 75 basis points. In December 2001, Bergen
temporarily had increased its availability under the Bergen facility to $600
million through June 29, 2002. On June 30, 2002, the availability under the
Bergen facility was reduced back to $450 million. At September 30, 2002, there
were no borrowings under the Bergen receivables securitization facility. The
receivables securitization facilities represent financing vehicles utilized by
us because of the availability of attractive interest rates relative to other
financing sources. We securitize our trade accounts and notes receivable, which
are generally non-interest bearing, in transactions that are accounted for as
financing transactions under Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities."
Our most significant market risk is the effect of changing interest rates.
We manage this risk by using a combination of fixed- and variable-rate debt. At
September 30, 2002, we had approximately $1.5 billion of fixed-rate debt with a
weighted average interest rate of 7.3% and $355 million of variable-rate debt
with a weighted average interest rate of 3.5%. The amount of variable-rate debt
fluctuates during the year based on our working capital requirements. We
periodically evaluate various financial instruments that could mitigate a
portion of our exposure to variable interest rates. However, there are no
assurances that such instruments will be available on terms acceptable to us.
There were no such financial instruments in effect at September 30, 2002. For
every $100 million of unhedged variable-rate debt outstanding, a 35 basis-point
increase in interest rates (one-tenth of the average variable rate at September
30, 2002) would increase our annual interest expense by $.35 million.
Our operating results have generated sufficient cash flow which, together
with borrowings under our debt agreements and credit terms from suppliers, have
provided sufficient capital resources to finance working capital and cash
operating requirements, fund capital expenditures, and fund the payment of
interest on outstanding debt. Our primary ongoing cash requirements will be to
finance working capital, fund the payment of interest on indebtedness, finance
merger integration initiatives 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 our ongoing
cash requirements.
Following is a summary of our contractual obligations for future principal
payments on our debt, minimum rental payments on our noncancelable operating
leases and minimum payments on our other commitments at September 30, 2002 (in
thousands):
Payments Due by Period
------------------------------------------------
Within 1 1-3 4-5 After 5
Total year years years years
---------- -------- -------- -------- ----------
Debt............. $1,840,800 $265,819 $241,228 $101,229 $1,232,524
Operating leases. 141,611 47,679 56,822 26,596 10,514
Other commitments 10,000 4,000 6,000 -- --
---------- -------- -------- -------- ----------
Total......... $1,992,411 $317,498 $304,050 $127,825 $1,243,038
========== ======== ======== ======== ==========
In addition, the $150 million Bergen 7 3/8% senior notes, which are due in
January 2003, and Blanco's $55 million revolving credit facility, which expires
in late May 2003, are included in the Within 1 Year column in the
19
above repayment table. However, these two borrowings are not classified in the
current portion of long-term debt on the consolidated balance sheet because we
have the ability and intent to refinance them on a long-term basis.
Additionally, borrowings under Blanco's facility are secured by a standby
letter of credit under the senior credit facility, and therefore we are
effectively financing this debt on a long-term basis through that arrangement.
The debt amounts in the above table differ from the related carrying amounts
on the consolidated balance sheet due to the purchase accounting adjustments
recorded in order to reflect Bergen's obligations at fair value on the
effective date of the merger. These differences are being amortized over the
terms of the respective obligations.
Other commitments represent a future minimum payment of $10 million relating
to our acquisition of a physician management consulting company. We have paid
$5 million for a 20% equity interest and currently expect to pay an additional
$40 million, including $30 million contingent upon the entity's ability to
achieve defined earnings targets, for its 100% equity ownership in the entity.
The $30 million of contingent payments are not reflected in the above table.
Additionally, the AutoMed agreement and plan of merger provides for contingent
payments not to exceed $55 million, to be made based on AutoMed achieving
defined earnings targets through the end of calendar 2004. The AutoMed
contingent payments may be made in cash and/or our common stock at our
discretion, and are not reflected in the above table.
During the fiscal year ended September 30, 2002, our operating activities
generated in excess of $500 million in cash.
Capital expenditures for the fiscal year ended September 30, 2002 were $64.2
million and relate principally to investments in warehouse improvements,
information technology and warehouse automation. We have developed merger
integration plans to consolidate our existing pharmaceutical distribution
facility network and establish new, more efficient distribution centers. More
specifically, our plan is to have a distribution facility network consisting of
30 facilities. We plan to accomplish this by building six new facilities,
expanding seven facilities, closing 28 facilities and implementing a new
warehouse operating system. Capital expenditures related to this plan are
expected to be approximately $300 million to $350 million over the next 4 to 5
years. We anticipate that future cash flows from operations along with our
existing availability under our revolving credit facility and receivables
securitization facilities will be adequate to fund our merger integration plans.
During fiscal 2003, we intend to make between $100 million and $130 million of
capital investments related to our merger integration plans.
In fiscal 2002, we declared and paid quarterly dividends of $0.025 per
share, amounting to $0.10 per share in the aggregate. A dividend of $0.025 was
declared on October 30, 2002 and will be paid on December 2, 2002 to
stockholders of record at the close of business on November 18, 2002.
The following describes our cash flows provided by operating activities and
cash used in investing and financing activities during the nine months ended
June 30, 2002.
During the nine months ended June 30, 2002, our operating activities
generated $128.1 million in cash. This positive operating cash flow was the
result of $250.0 million of net income and $103.5 million of non-cash items
affecting net income. There was a $225.4 million negative cash flow effect from
changes in operating assets and liabilities during the nine months primarily
due to an increase in merchandise inventories of $117.6 million, an increase in
accounts and notes receivable of $26.3 million and a decrease in accounts
payable, accrued expenses and income taxes of $80.2 million. The increase in
merchandise inventories reflects inventory required to support the strong
revenue increase, as well as inventory purchased to take advantage of buy-side
gross profit opportunities including manufacturer price increases and negotiated
deals. Accounts and notes receivable, before changes in the allowance for
doubtful accounts, were relatively consistent to the balance at September 30,
2001, despite higher revenues in the third quarter of fiscal 2002 than in the
fourth quarter of fiscal 2001, primarily due to lower days sales outstanding in
both the Pharmaceutical Distribution and PharMerica segments as a result of
continued emphasis on receivable management at the local level. The decrease in
accounts payable, accrued expenses and income taxes is principally due to the
timing of payments to vendors. Operating cash uses during the nine months ended
June 30, 2002 included $84.0 million in interest payments and $88.8 million in
income tax payments, net of refunds.
During the nine months ended June 30, 2001, our operating activities used
$253.8 million in cash. Such cash usage primarily resulted from an increase in
merchandise inventories of $391.6 million and an increase in accounts and notes
receivable of $71.5 million, offset in part by an increase in accounts payable,
accrued expenses and income taxes of $77.2 million. Merchandise inventories
were increased to support a 20% operating revenue increase, including new
Novation business. Operating cash uses during the nine months ended June 30,
2001 included $31.5 million in interest payments and $26.0 million in income
tax payments, net of refunds.
During the nine months ended June 30, 2002, we used cash of $13.1 million to
purchase an initial equity interest in one business and additional equity
interests in four other businesses, all of which related to the Pharmaceutical
Distribution segment. We also invested an additional $4.5 million in January
2002 to acquire the majority of the remaining equity interest in a
pharmaceutical distribution services entity in which we previously had a 19.9%
ownership interest. Accordingly, the operating results of this entity have been
included in our consolidated financial statements beginning with the
acquisition date. The inclusion of the entity's operating results did not have
a significant impact on consolidated revenues or net income in the quarter and
the nine-month period ended June 30, 2002.
During the nine months ended June, 2001, we sold the net assets of one of
our specialty products distribution facilities for approximately $13.0 million
and recognized a gain of approximately $0.5 million.
During the nine months ended June 30, 2002, we made net repayments of $37.0
million on its receivables securitization facilities. We repaid debt of $23.1
million during the nine-month period, principally consisting of $20.6 million
for the retirement of Bergen's 7% debentures pursuant to a tender offer which
was required as a result of the merger. The first quarter cash distribution of
$5.9 million on the Trust Preferred Securities was paid on December 31, 2001.
The second and third quarter cash distributions of $5.9 million were paid on
April 1, 2002 and July 1, 2002, respectively, since the quarter-end payment
dates were not business days.
20
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 throughout the United States. 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 $73 billion in 1995 to an estimated $196 billion
in 2002 and are expected to grow to approximately $287 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 55 in the United
States grew from approximately 52 million in 1990 to approximately 59
million in 2000 and is projected to increase to more than 75 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 10% 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.
21
. 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. These products are 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 operating revenue (excluding
bulk shipments) of approximately $40 billion, Adjusted EBITDA of approximately
$804 million and operating income of approximately $718 million for the
twelve-month period ended September 30, 2002.
AmerisourceBergen was formed in connection with the merger between
AmeriSource and Bergen, which was consummated in August 2001. As a result of
the merger, AmerisourceBergen is the largest pharmaceutical services company in
the United States that is dedicated solely to the pharmaceutical supply chain.
We currently serve our customers throughout the United States, through a
geographically diverse network of distribution centers. 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 to lower overall costs in the pharmaceutical supply chain.
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
business 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,
which is reflected in the high rankings we have achieved in customer
service surveys; (ii) delivering value-added solutions which improve the
efficiency and competitiveness of both customers and suppliers, allowing
the supply chain to better deliver healthcare to patients and consumers;
(iii) maintaining our low-cost operating structure to ensure that our
services are priced competitively in the marketplace; and (iv)
maintaining our decentralized operating structure to respond to
customers' needs more quickly and efficiently and to ensure the continued
development of local and regional management talent.
. 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. These solutions also increase customer loyalty
and strengthen AmerisourceBergen's overall role in the pharmaceutical
supply chain. They include: iECHO(R) and iBergen, our proprietary
internet-based ordering systems; Family Pharmacy(R) and Good Neighbor
Pharmacy(R), which enable independent community pharmacies and small
chain drugstores to compete more effectively through access to
pharmaceutical benefit and merchandising programs, disease management
services and pharmaceutical care programs, and best-priced generic
product purchasing services; Pharmacy Healthcare Solutions, which
provides hospital pharmacy consulting to improve operational
efficiencies; AmerisourceBergen Specialty Group, which delivers a
comprehensive supply of disease-state based products in oncology,
nephrology, vaccines, injectables and plasma to a variety of providers of
healthcare; American Health Packaging, which delivers unit dose, punch
card and unit-of-use packaging for institutional and retail pharmacy
customers; and Rita Ann, our cosmetics distributor.
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. Expand Growth Opportunities through Healthcare Solutions for Our
Suppliers. We have been developing solutions for our 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 we currently
offer. 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, to enhance our position in the
pharmaceutical supply chain.
.. Improve Operating and Capital Efficiencies. We believe we have one of the
lowest operating cost structures among our major national competitors. We
have developed merger integration plans to consolidate our existing
pharmaceutical distribution facility network and establish new, more
efficient distribution centers. More specifically, our plan is to have a
distribution facility network consisting of 30 facilities in the next four
to five years. We plan to accomplish this by building six new facilities,
expanding seven facilities, closing 28 facilities and implementing a new
warehouse operating system. During fiscal 2002, we closed seven
facilities. 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. AmerisourceBergen operates in two segments:
Pharmaceutical Division, primarily our wholesale and specialty drug
distribution business, and PharMerica, our institutional pharmacy business.
Pharmaceutical Distribution. The Pharmaceutical Distribution segment
includes our core wholesale drug distribution business; ABSG, our
pharmaceutical alternate care 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
reimbursement, consulting services, cosmetics distribution, and third party
logistics services for pharmaceutical manufacturers. AmerisourceBergen is the
largest distributor of pharmaceutical products and services in the United
States.
We principally distribute a full line of brand name and generic
pharmaceuticals and over-the-counter medications throughout the United States
from distribution centers in 27 states and Puerto Rico. These products are sold
to institutional pharmacies, including hospitals, clinics, doctors' offices,
and mail order pharmacies and retail pharmacies, such as independent community
pharmacies and regional drugstore and food merchandising chain stores.
Our core wholesale drug distribution business is organized into seven
regions across the United States. Unlike our more centralized competitors, we
are structured as an organization of locally managed profit centers. We believe
that the delivery of healthcare is local and, therefore, the management of each
distribution facility has responsibility for its own customer service and
financial performance. These facilities utilize our corporate staff for
national/regional account management, marketing, data processing, financial,
purchasing, human resources, legal and executive management resources, and
corporate coordination of asset and working capital management.
PharMerica. Our second operating segment is PharMerica, a leading national
provider of institutional pharmacy services in long-term care and alternate
care settings. PharMerica also provides mail-order pharmacy services to
chronically and catastrophically ill patients under workers' compensation
programs.
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PharMerica's institutional pharmacy business involves the purchase of bulk
quantities of prescription and nonprescription pharmaceuticals, principally
from our Pharmaceutical Distribution segment, 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 115 locations covers a geographic area that includes
over 80% 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 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 product 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 regarding AmeriSource and
Bergen full-service pharmaceutical distribution centers on a pro forma combined
basis for the last five fiscal years:
Fiscal Year Ended September 30,
-----------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(dollars in millions; square feet in thousands)
Operating revenue............................... $21,482 $24,340 $28,165 $31,779 $36,981
Number of pharmaceutical distribution facilities 54 55 54 51 44
Average revenue per distribution facility....... $ 398 $ 443 $ 522 $ 623 $ 840
Total square feet (distribution facilities)..... 5,591 5,765 5,736 5,599 5,219
Average revenue per square foot in whole dollars
(distribution facilities)..................... $ 3,842 $ 4,222 $ 4,910 $ 5,676 $ 7,086
Customers and Markets. We have a diverse customer base that includes acute
care hospitals, health systems, independent community pharmacies, mail order
pharmacies, alternate care facilities, and regional retail drugstore 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
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improve the delivery of healthcare to patients and consumers. During fiscal
2002, AmerisourceBergen's reported operating revenue for its Pharmaceutical
Distribution segment was comprised of a sales mix of approximately 53%
institutional and 47% retail.
Sales to the federal government (including sales under separate contracts
with different departments and agencies of the federal government), represented
aproximately 9% of AmerisourceBergen's reported operating revenue in fiscal
2002. Including the Veterans Administration, AmerisourceBergen's top ten
customers represented approximately 32% of reported operating revenue during
fiscal 2002. Our revenues generated from bulk deliveries to customers'
warehouses during fiscal 2002 primarily consisted of sales to Merck-Medco.
Suppliers. AmerisourceBergen and its predecessors have obtained
pharmaceutical and other products from a number of manufacturers, none of which
accounted for more than approximately 9% of AmerisourceBergen's purchases in
fiscal 2002. The five largest suppliers in fiscal 2002 accounted for
approximately 37% of AmerisourceBergen's purchases. AmerisourceBergen has not
experienced difficulty in purchasing desired products from suppliers in the
past. We currently have agreements with many of our suppliers which generally
require us 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. Our customized
systems strengthen customer relationships by allowing the customer to lower its
operating costs and by providing a platform for a number of the value-added
services offered to our customers, including marketing data, inventory
replenishment, single-source billing, computer price updates and price labels.
AmerisourceBergen operates its full service pharmaceutical distribution
facilities on two different centralized management information systems. One is
the former AmeriSource system and the other is the former Bergen system. We are
now in the process of integrating the systems into a common system, while
maintaining our customers' ability to access the system through the order-entry
system used by either company. 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. 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, pricing, 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
25
local markets served by PharMerica and it may encounter substantial competition
from local market entrants. PharMerica competes with numerous billing companies
in connection with the portion of its business which electronically adjudicates
workers' compensation claims for payors.
Employees
As of September 30, 2002 we employed approximately 13,700 persons, of which
approximately 12,500 were full-time employees. Approximately 7% of full and
part-time employees are covered by collective bargaining agreements. We
consider our relationship with our employees to be good.
Government Regulation
The U.S. Drug Enforcement Administration ("DEA"), the U.S. Food and Drug
Administration ("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, meet various
security and operating standards and comply with regulations governing their
sale, marketing, packaging, holding and distribution. The FDA, DEA and State
Pharmacy Boards have broad enforcement powers, including their ability to seize
or recall products and impose significant criminal, civil and administrative
sanctions for violations of these laws and regulations. As a wholesale
distributor of pharmaceuticals and certain related products, we are subject to
these regulations. We have received all necessary regulatory approvals and
believe that we are in substantial compliance with all applicable wholesale
distribution requirements.
We (particularly in our PharMerica operations) and/or our customers are
subject to fraud and abuse laws which preclude, among other things, (a) 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 or
Medicaid and (b) physicians from making referrals to certain entities with
which they have a financial relationship. The fraud and abuse laws and
regulations are broad in scope and are subject to frequent modification and
varied interpretation.
As part of various changes made to Medicare, in 1997 the United States
Congress established the Prospective Payment System ("PPS") 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 to
Medicare their costs for certain products and services provided by PharMerica.
Instead, PPS provides PharMerica's customers 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
amount of skilled nursing facility Medicare reimbursement is limited by PPS,
facility customers 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 reimbursements for pharmaceuticals provided under state
Medicaid programs are also subject to government regulation. Since mid-2000,
PharMerica has experienced the negative impact of two regulatory events which
reduced reimbursements 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
Average Wholesale Price reimbursement levels for certain intravenous drugs
provided to Medicaid beneficiaries. The second event was the Center for
Medicare and Medicaid Services' reduction of Federal Upper Limit prices, which
are used to set the reimbursement levels for numerous drugs dispensed to
Medicaid beneficiaries.
As a result of a wide variety of political, economic and regulatory
influences, the healthcare delivery industry in the United States is 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.
26
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.
Properties
As of September 30, 2002, we conducted our business from office and
operating unit facilities at 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 which is
either owned or leased under lease agreements which expire through 2010.
Our 44 full service pharmaceutical distribution facilities range in size
from approximately 39,000 square feet to 231,500 square feet, with an aggregate
of approximately 5.2 million square feet. Leased facilities are located in
Puerto Rico plus the following states: Arizona, California, Colorado, Florida,
Georgia, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, Missouri, New
Jersey, North Carolina, Ohio, Texas, Utah and Washington. Owned facilities are
located in the following states: Alabama, California, Georgia, 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 September 30, 2002, our PharMerica operations were located in 115
leased locations ranging in size from approximately 150 to 89,000 square feet
and have a combined area of approximately 1.1 million square feet. The leases
expire through 2010.
As of September 30, 2002, 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 sixteen leased and one 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 778,000 square feet. The leases expire through 2007.
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 leases expire through 2010.
27
DESCRIPTION OF OTHER INDEBTEDNESS
Senior Credit Facility
We have a $1.3 billion senior secured credit facility with a syndicate of
lenders. Our senior credit facility consists of a $1.0 billion revolving credit
facility and a $300 million term loan facility, both maturing in August 2006.
Our term facility has scheduled maturities on a quarterly basis beginning on
December 31, 2002, totaling $60 million in each of fiscal 2003 and 2004, and
$80 million and $100 million in fiscal 2005 and 2006, respectively. Interest on
borrowings under our senior credit facility accrues at specified rates based on
our debt ratings. Such rates range from 1.0% to 2.5% over LIBOR or 0% to 1.5%
over prime. Currently, the rate is 1.5%
28
over LIBOR or .50% over prime. Availability under the revolving credit facility
is reduced by the amount of outstanding letters of credit ($62.4 million at
September 30, 2002). We pay quarterly commitment fees to maintain the
availability under the revolving credit facility at specified rates based on
our debt ratings ranging from .25% to .50% of the unused availability.
Currently, the rate is .375%. We can choose to repay or reduce our commitments
under our senior credit facility at any time.
Our senior credit facility contains affirmative covenants usual for
facilities and transactions of this type. These covenants include the following:
. satisfactory insurance;
. payment of taxes;
. delivery of financial statements;
. maintenance of properties; and
. compliance with laws.
Our senior credit facility also contains negative covenants restricting our
ability to:
. incur indebtedness;
. create liens;
. enter into sale/leaseback arrangements;
. pay dividends and distributions;
. incur capital expenditures;
. merge, acquire and dispose of assets;
. make investments;
. enter into transactions with affiliates;
. make changes in businesses conducted; and
. amend certain material documents.
Additional covenants require compliance with specified financial ratios,
including a leverage ratio and a fixed charge ratio and maintenance of minimum
tangible net worth. Obligations under our senior credit facility are
unconditionally guaranteed by our current domestic subsidiaries, and will be
unconditionally guaranteed by our future domestic subsidiaries, in each case,
with certain exceptions.
AmeriSource Securitization
Effective May 14, 1999, AmeriSource Corporation, through a consolidated
wholly owned special-purpose entity, established a receivables securitization
facility (the "ARFC Securitization Facility"). As amended, the ARFC
Securitization Facility provides a total commitment of $400 million. Effective
October 1, 2002, the Company effected an internal reorganization merging
several of its subsidiaries. In particular, Bergen was merged with and into
AmeriSource and AmeriSource changed its name to AmerisourceBergen Services
Corporation. In addition, Bergen Brunswig Drug Company was merged with and into
AmeriSource Corporation and AmeriSource Corporation changed its name to
AmerisourceBergen Drug Corporation. In connection with such reorganization,
both the ARFC Securitization Facility and the Blue Hill Securitization Program
described below were amended to permit such reorganization and provide for the
designation of the trade receivables of the merged AmerisourceBergen Drug
Corporation which would be sold into the AFRC Securitization Facility and the
Blue Hill Securitization Program. In connection with the ARFC Securitization
Facility, AmerisourceBergen
29
Drug Corporation sells on a revolving basis certain accounts receivables to a
100%-owned special purpose entity ("AFRC"), which in turn sells a percentage
ownership interest in the receivables to a commercial paper conduit sponsored
by a financial institution. AmerisourceBergen Drug Corporation is the servicer
of the accounts receivables under the ARFC Securitization Facility. 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
receivable under the facility.
The ARFC Securitization Facility has an expiration date of May 2004,
although in certain circumstances the ARFC Securitization Facility may be
terminated prior to such date. 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 (2.12% at
September 30, 2002). In order to borrow available amounts under this
securitization facility, a back-up 364 day liquidity facility is required to be
in place. The current liquidity facility expires in May 2003, but we expect
that it will be renewed through May 2004. AmerisourceBergen Drug Corporation is
required to pay a commitment fee of 25 basis points on any unused credit in
excess of $25 million.
The agreements governing the ARFC Securitization Facility contain
restrictions and covenants which include limitations on the following:
. incurrence of additional indebtedness;
. the making of certain restricted payments;
. issuance of preferred stock;
. creation of certain liens; and
. certain corporate acts such as mergers, consolidations and sale of
substantially all assets.
Bergen Securitization
Effective December 20, 2000, Bergen Brunswig Drug Company, through a
consolidated wholly owned special-purpose entity, established a receivables
securitization facility (the "Blue Hill Securitization Program"). As amended,
the Blue Hill Securitization Program provides a total commitment of $450
million. In connection with the reorganization of Bergen Brunswig Drug Company
and AmeriSource Corporation described above, the Blue Hill Securitization
Program was amended to permit such reorganization and provide for the
designation of the trade receivables of AmerisourceBergen Drug Corporation
which would be sold into the Blue Hill Securitization Program. In connection
with the Blue Hill Securitization Program, AmerisourceBergen Drug Corporation
sells on a revolving basis certain accounts receivables to a 100%-owned special
purpose entity ("Blue Hill"), which in turn sells a percentage ownership
interest in the receivables to a commercial paper conduit sponsored by a
financial institution. AmerisourceBergen Drug Corporation is the servicer of
the accounts receivables under the Blue Hill Securitization Program. 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
receivable under the program. The Blue Hill Securitization Program has an
expiration date of December 2005.
Interest is at short-term commercial paper rates plus a program fee of 75
basis points (2.49% at September 30, 2002). AmerisourceBergen Drug Corporation
is required to pay a commitment fee of 25 basis points on any unused credit.
The agreements governing the Blue Hill Securitization Program contains
restrictions and covenants which include limitations on the following:
. incurrence of additional indebtedness;
. the making of certain restricted payments;
. issuance of preferred stock;
. creation of certain liens; and
30
. certain corporate acts such as mergers, consolidations and sale of
substantially all assets.
Transactions under the ARFC Securitization Facility and the Blue Hill
Securitization Program are accounted for as financing transactions in
accordance with SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
Blanco Revolving Credit Facility
One of our subsidiaries has a $55 million bank revolving credit facility
which expires on May 20, 2003. Borrowings under the facility bear interest at
0.35% above LIBOR. Borrowings under the facility are secured by a standby
letter of credit under the senior credit facility for which we incur a fee of
1.625%, and therefore we are effectively financing this debt on a long-term
basis through that arrangement.
AmerisourceBergen 8 1/8% Senior Notes
In connection with the merger, we issued $500 million of 8 1/8% senior notes
due September 1, 2008 (the "8 1/8% Notes"). The 8 1/8% Notes are redeemable at
our option at any time before maturity at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption and, under some circumstances, a
redemption premium. Interest on the 8 1/8% Notes is payable on March 1 and
September 1 of each year, commencing March 1, 2002.
The indenture governing the 8 1/8% Notes contains covenants, subject to
certain exceptions, restricting our ability and the ability of certain of our
subsidiaries to incur additional indebtedness; create certain liens; pay
dividends or make other equity distributions; purchase or redeem capital stock;
make investments; sell assets or consolidate or merge with or into other
companies; engage in transactions with subsidiaries and affiliates; and enter
into sale and leaseback transactions.
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 (now known as AmerisourceBergen Services
Corporation) sold $150 million in 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 the issuer's ability and the
ability of certain of its 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
the issuer 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.
7 1/4% Senior Notes
On May 23, 1995, Bergen (now known as AmerisourceBergen Services
Corporation) sold $100 million in 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.
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The Indenture contains covenants restricting the issuer'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 the issuer and some of its subsidiaries to pay specific indebtedness
when due constitutes, among other things, an event of default under the 7 1/4%
notes and can lead to the acceleration of the payment of the 7 1/4% notes.
AmeriSource 5% Convertible Subordinated Notes
In December 2000, AmeriSource (now known as AmerisourceBergen Services
Corporation) issued $300 million of 5% convertible subordinated notes due
December 1, 2007 (the "5% Notes"). The 5% Notes were originally convertible
into Class A common stock of AmeriSource at $52.97 per share. Upon consummation
of the merger, we entered into a supplemental indenture providing that each of
the 5% Notes would thereafter be convertible into the number of shares of our
common stock which the note holder would have received in the merger if the
note holder had converted the 5% Notes immediately prior to the merger. The 5%
Notes are convertible at any time before their maturity or their prior
redemption or repurchase by us. On or after December 3, 2004, we have the
option to redeem all or a portion of the 5% Notes that have not been previously
converted. Interest on the 5% Notes is payable on June 1 and December 1 of each
year, with the first payment made on June 1, 2001. Net proceeds from the 5%
Notes of approximately $290.6 million were used to repay existing borrowings,
and for working capital and other general corporate purposes. In connection
with the issuance of the 5% Notes, the issuer incurred approximately $9.4
million of costs which were deferred and are being amortized over the term of
the issue.
PharMerica 8 3/8% Senior Subordinated Notes
On October 29, 2001, PharMerica, a wholly-owned subsidiary of
AmerisourceBergen, completed a tender offer to purchase the remaining $123.5
million of its 8 3/8% notes which were not repurchased on the merger date. No
notes were tendered in response to the offer, which was required as a result of
the merger according to the terms of the indenture under which the 8 3/8% notes
were issued. The notes receive interest on April 1 and October 1 of each year
and are redeemable at our option at a redemption price equal to 104.19% of the
aggregate principal amount to be redeemed, plus accrued and unpaid interest
thereon through the date of redemption. The indenture contains certain
restrictions on the sale, lease, conveyance or other disposition of assets, and
the issuance or sale of equity interests, of PharMerica and certain of its
subsidiaries.
Bergen 6 7/8% Exchangeable Subordinated Debentures
In July 1986, Bergen (now known as AmerisourceBergen Services Corporation)
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 the issuer.
Since March 1990, the issuer has redeemed an additional $2.5 million in
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 the issuer 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.
Bergen Trust Preferred Securities
In connection with the merger, the Company assumed Bergen's Capital I Trust
(the "Trust"), a wholly owned subsidiary of Bergen (now known as
AmerisourceBergen Services Corporation). In May 1999, the Trust issued
12,000,000 shares of 7.80% Trust Originated Preferred Securities/SM/
(TOPrS/SM/) (the "Trust Preferred Securities") at $25 per security. The
proceeds of such issuances were invested by the Trust in $300 million in
aggregate principal amount of Bergen's 7.80% subordinated deferrable interest
notes due June 30, 2039 (the
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"Subordinated Notes"). 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 the Company beginning in May 2004 at 100% of the principal amount
thereof. The Trust paid cash distributions of $23.4 million in fiscal 2002. The
obligations of the Trust related to the Preferred Securities are fully and
unconditionally guaranteed by the Company.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 7.80% of the liquidation amount of $25 per
security. The Trust Preferred Securities will be redeemable upon any repayment
of the Subordinated Notes at 100% of the liquidation amount beginning in May
2004.
Bergen (now known as AmerisourceBergen Services Corporation), 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 Trust Preferred Securities will compound quarterly
at an annual rate of 7.80%. So long as Trust Preferred Securities remain
outstanding, there are certain restrictions on the Company's ability to declare
or pay distributions on its capital stock; redeem, purchase or make a
liquidation payment on any of its capital stock; and 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.
In connection with the purchase price allocation, the carrying value of the
Trust Preferred Securities was adjusted to fair value based on quoted market
prices on the date of the merger. The difference between the fair value and the
face amount of the Trust Preferred Securities is accreted to redemption value
over the remaining term of the Trust Preferred Securities and is recorded as
preferred distributions, net of income tax benefit, on the consolidated
statement of operations.
The Subordinated Notes and the related Trust investment in the Subordinated
Notes have been eliminated in consolidation and the Trust Preferred Securities
are reflected as outstanding in the accompanying consolidated financial
statements.
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