As described below, of the acquired entities, PharMerica and Stadtlander have had the most significant impact on the Company's results of operations. Each of the transactions listed above is reflected in the Company's consolidated financial statements only from the respective acquisition date.

The Company reported an increase in operating earnings of 11% in the first quarter of fiscal 2000. The following table provides a summarized statement of operations on a consolidated basis, including key line item growth rates and ratios. PharMerica and Stadtlander, due to the nature of their pharmaceutical service businesses, have significantly higher gross margins and operating expense ratios than the Company's principal pharmaceutical distribution businesses. Accordingly, certain ratios in the table have also been shown excluding PharMerica and Stadtlander in order to present a more meaningful comparison with historical results.

Revenues excluding bulk shipments increased 22% in the first quarter of fiscal 2000. Of this increase, 15% represented internal growth while 7% represented the effect of acquired entities.

Along with other companies in its industry, the Company reports bulk shipments of pharmaceuticals in revenues and cost of sales. Bulk shipment transactions are arranged by the Company with its suppliers at the express direction of the customer, and involve either shipments from the supplier directly to customers' warehouse sites or shipments from the supplier to Company warehouses for immediate shipment to customers' warehouse sites. Bulk sales of pharmaceuticals do not impact the Company's inventory since the Company simply processes the orders that it receives from its suppliers directly to the customers' warehouses. The Company serves as an intermediary by paying the supplier and billing the customer for the goods. Due to the insignificant margins generated through bulk shipments, fluctuations in such revenues have an immaterial impact on the Company's operating earnings.

Gross profit as a percentage of revenues excluding bulk shipments ("gross margin") was 4.72% and 5.02% for the three months ended December 31, 1999 and 1998, respectively, excluding the effect of PharMerica and Stadtlander. Approximately half of the 30 basis point decline reflects lower margins in the Pharmaceutical Distribution segment. Such margins declined mainly due to intense price competition within the industry as well as to a change in the sales mix, with a greater proportion of revenues coming from high-volume, low-margin customers. In addition, ASD's gross margins decreased from a strong prior year quarter, in which ASD benefited from acute product shortages in the plasma and vaccine markets. The favorable effect of inventory investment buying profits partially offset the aforementioned factors. Gross margins were also lower in the Other Businesses segment, primarily due to lower medical-surgical buy-side opportunities in the current quarter.

In all of the Company's wholesale distribution businesses, it is customary to pass on manufacturers' price increases to customers. Investment buying enables distributors such as the Company to benefit by purchasing goods in advance of anticipated manufacturers' price increases. Consequently, the rate or frequency of future price increases by manufacturers, or the lack thereof, and the Company's ability to take advantage of investment buying opportunities, influences the profitability of the Company.

Management anticipates further downward pressure on gross margins in the distribution businesses in fiscal 2000 because of continued price competition influenced by high-volume customers. Management expects that these pressures may be offset to some extent by an increased sales mix of more profitable products and services and continued reduction of operating expenses as a percentage of revenues. However, no assurance can be given that such improved sales mix or expense reduction can be achieved since many of the factors that impact such results (e.g. the effect of group purchasing agreements, competitive inroads, market conditions, etc.) are outside the Company's control. Similarly, no assurance can be given that the Company will be able to offset such downward pressure through investment buying.

Operating expenses include distribution, selling, general and administrative expenses ("DSG&A"). Excluding PharMerica and Stadtlander, operating expenses as a percentage of revenues excluding bulk shipments were 3.40% and 3.62% for the three months ended December 31, 1999 and 1998, respectively. This reduction was primarily attributable to continued operating efficiencies and the spreading of fixed costs over a larger revenue base. The Company's distribution infrastructure has been able to process increasing volume without a proportionate increase in operating expenses. Also, the aforementioned shift in the distribution businesses' mix towards high-volume customers reduced the operating expense ratio because these customers are generally less costly to service.

Substantially all of the Company's growth in operating earnings has been contributed by the Pharmaceutical Distribution segment. Following is a summary of revenues and operating earnings for the Company's segments:

Revenues increased 17% in the first quarter of fiscal 2000, substantially all of which represented internal growth (only 2% resulted from acquisitions). BBDC's revenues increased 16% reflecting increased volume across all geographic regions and in both the retail and health systems customer categories. ASD's revenues increased 26% representing continued growth in its oncology and dialysis markets. These increases were comprised of higher shipments to existing BBDC and ASD customers as well as shipments to a significant number of new customers. National industry economic conditions were also favorable, with increases in prescription drug usage and higher pharmaceutical prices contributing to this segment's revenue growth.

Operating earnings in the first quarter of fiscal 2000 increased 12% over the first quarter of fiscal 1999 and, as a percentage of revenues, operating earnings were 1.78% and 1.86% for the three months ended December 31, 1999 and 1998, respectively. The 8 basis point reduction in the operating earnings ratio is due to lower gross margins, partially offset by operating expense efficiencies (see "Operating Earnings" section above).

Substantially all of the revenue growth in the first quarter of fiscal 2000 represented sales by PharMerica ($309.4 million) and Stadtlander ($145.0 million). The only other activity in this segment was related to a small mail service entity. The Pharmaceutical Services segment operated at just above the breakeven level in the first quarter of fiscal 2000, with PharMerica reporting operating earnings of $7.8 million and Stadtlander reporting an operating loss of $6.9 million.

On a stand-alone basis, PharMerica's revenues increased 5% from the quarter ended December 31, 1998 (not yet owned by the Company) and 8% from the quarter ended September 30, 1999, despite relatively flat admissions at its customers' facilities. PharMerica's operating earnings were in line with the Company's expectations.

PharMerica's operations have been adversely affected by negative industry trends resulting from dramatically lower reimbursement to nursing homes for Medicare patients under the Prospective Payment System ("PPS"). A negative consequence of these trends has been bankruptcy reorganization filings by several long-term care providers, including the recent filing by a significant customer of PharMerica (see Note 13). The adverse effects of PPS included (1) lower occupancy by Medicare-funded patients at nursing facilities serviced by PharMerica, (2) significantly diminished acuity levels among residents of these facilities, which reduced the overall utilization of drugs, and (3) increased customer pricing pressure, thereby reducing PharMerica's gross margins. While the Company did see further stabilization of these trends in the first quarter of fiscal 2000, management expects that they will continue to affect PharMerica throughout fiscal 2000. PharMerica sees some indications that Medicare admissions to its customers' facilities are increasing. Customers are also identifying new opportunities to expand their ability to service different acuity levels and the number of patient categories admitted to their facilities. Additional reimbursement that may be available as a result of recent legislative action may improve the number of high acuity admissions.

Management is continuing to implement its plan designed to improve PharMerica's earnings, including (1) enabling PharMerica to participate in the Company's generic purchasing programs in order to reduce drug costs, (2) consolidation of pharmacies to streamline operations, (3) outsourcing of delivery services, (4) strengthening of billing and collections management and (5) conversion of PharMerica's long-term care pharmacies to a common proprietary AS400 computer system.

Stadtlander has shown revenue growth from its pre-acquisition period in all of its major markets. Stadtlander's revenues increased 19% from the quarter ended December 31, 1998 (not yet owned by Bergen) and 1% from the quarter ended September 30, 1999. However, Stadtlander reported an operating loss primarily due to continued high bad debt provisions and low gross margins. Stadtlander has taken steps designed to improve receivables collection going forward; for example, Stadtlander has implemented new accounts receivable software, strengthened its billing controls, outsourced certain collection activities, and engaged The Lash Group to assist in obtaining reimbursement sources for indigent patients. Although no assurances can be given, management anticipates that days sales outstanding and bad debt losses will be lower by the end of fiscal 2000. Also, Stadtlander is working with payors and pharmaceutical companies on programs which, if successful, will improve gross margins.

Stadtlander is continuing to take additional steps to improve earnings. As a result of an operational review conducted by an independent consulting firm, the Company is commencing a major restructuring initiative at Stadtlander. The restructuring initiative includes a management reorganization; process re-engineering designed to affect a significant reduction in operating expense; the reorganization of the StadtSolutions joint venture; and the reorganization of the sales department. In addition, the Company is continuing to pursue other strategic opportunities for Stadtlander.

Revenues increased 4% in first quarter of fiscal 2000, principally related to a higher volume of medical-surgical shipments to both acute care and physician customers. Operating earnings decreased 79% in fiscal 2000, primarily reflecting lower gross margins in BBMC's medical-surgical business due to fewer buy-side opportunities in the current year quarter, partially offset by operating expense efficiencies. In addition, Choice is incurring higher expenses in connection with the launch of a new software product.

Corporate expenses increased $1.2 million, or 8%, in the first quarter of fiscal 2000, due to the incremental costs of operating the Company's expanded operations.

The Company's financing expenses are comprised of two line items on the statements of consolidated earnings:

Total financing expenses were $35.2 million in the first quarter of fiscal 2000, including net interest expense of $29.4 million and $5.8 million of pre-tax distributions on the Company's Preferred Securities, representing an increase of $26.5 million, or 304%, over the prior year. This increase was primarily due to higher borrowings under the Company's Credit Facility, Credit Agreement, Commercial Paper Agreements, debt assumed in connection with the fiscal 1999 acquisitions, and the issuance of the Preferred Securities. In addition, the Company has incurred higher interest rates on its borrowings due to both (a) increases in the prime lending rate; and (b) downgrading of the Company's credit ratings.

In the first quarter of fiscal 2000, a significant portion of the higher borrowings was related to the assumption of the debt of entities acquired in fiscal 1999 and the financing of a portion of the purchase price of certain of those entities.

Taxes on income, excluding the tax benefit on distributions of the Company's Preferred Securities, were 43.7% and 40.5% of pre-tax earnings in the three months ended December 31, 1999 and 1998, respectively. The 3.2% increase in the effective rate in the first quarter of fiscal 2000 primarily reflects the nondeductible goodwill amortization associated with the PharMerica and Blanco acquisitions. All of the goodwill amortization of Stadtlander is tax-deductible. The Company's total goodwill amortization in the first quarter of fiscal 2000 was $10.7 million (of which approximately $5.4 million was non-deductible) and its goodwill amortization in the first quarter of fiscal 1999 was $1.9 million (of which approximately $1.7 million was non-deductible).

Earnings per share fluctuations result primarily from changes in the Company's net earnings. However, during the first quarter of fiscal 2000, diluted earnings per share were also impacted by a 28% increase in the weighted average number of common shares outstanding, to 134.4 million shares from 105.0 million shares in the first quarter of fiscal 1999. The increase was primarily related to the issuance of 24.7 million shares in connection with the acquisition of PharMerica in April 1999 and the issuance of 5.7 million shares in connection with the acquisition of Stadtlander in January 1999. There were 134.5 million shares of the Company's common stock outstanding at December 31, 1999.

Following is a summary of the Company's capitalization at the end of the most recent quarter and fiscal year. Except that debt is net of cash and cash equivalents herein, these percentages are calculated in accordance with the covenants set forth in the Company's Credit Agreement and Credit Facility, in which certain non-cash charges are excluded from the calculation:

The decrease in the debt percentage is mainly due to a decrease in aggregate borrowings under the Company's Credit Facility, Credit Agreement and discretionary bank lines, and Commercial Paper Agreements to $865 million at December 31, 1999 from $943 million at September 30, 1999. The decreased debt percentage also reflects an increase in cash and cash equivalents to $136 million at December 31, 1999 from $116 million at September 30, 1999.

The Company currently has $1.0 billion of available credit under committed revolving bank credit lines, consisting of a $400 million Credit Agreement and $600 million Credit Facility. The Credit Agreement and the Credit Facility rank on a parity with each other. The Credit Agreement with a group of domestic and foreign banks is effective through March 2001 and allows additional borrowings under discretionary lines outside the Credit Agreement. The Credit Facility with a group of banks was initiated in April 1999 and expires in April 2000. The Company intends to replace the Credit Facility and the Credit Agreement prior to the end of the second quarter of fiscal 2000 and is in current discussions with several banks regarding the proposed terms of such new facility.

Also in April 1999, the Company entered into the Commercial Paper Agreements which provide for the private placement of short-term commercial paper notes of the Company up to a maximum of $1.0 billion outstanding. The Commercial Paper Agreements allow maturities of up to 364 days from the date of issue and are backed by the Credit Agreement and Credit Facility. The amount of credit available under the Credit Agreement and Credit Facility is reduced dollar-for-dollar by the amount outstanding under the Commercial Paper Agreements. Currently, the Company is not able to access the Commercial Paper market due to downgrades in the Company's credit rating which occurred in November and December 1999 and February 2000.

In December 1999, the Company's Credit Agreement and Credit Facility were amended to, among other things, (a) allow the Company or any of its subsidiaries to sell, transfer or convey certain trade receivables which would result in aggregate proceeds not to exceed $400 million, and (b) modify certain financial covenants.

Aggregate outstanding borrowings under the aforementioned agreements at December 31, 1999 totaled approximately $865 million.

On December 17, 1999, the Company entered into the Receivables Securitization Program with a bank which provides additional borrowing capacity for the Company. Through the Receivables Securitization Program, BBDC may sell, on an ongoing basis, certain of its accounts receivable to Blue Hill, a 100%-owned special purpose subsidiary. Blue Hill will, in turn, sell an undivided percentage ownership interest in such receivables, with recourse, to financial institutions. The program qualifies for treatment as a sale of assets under SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".

As of December 31, 1999, the Company had received $200 million from the sale of such receivables under the Receivables Securitization Program, and this amount is reflected as a reduction of accounts receivable in the accompanying consolidated balance sheets. On February 1, 2000, the Receivables Securitization Program was amended to increase the funding limit from $200 million to $300 million.

On May 26, 1999, the Company's Trust issued 12,000,000 shares of its Preferred Securities at $25 per security. The proceeds of such issuances were invested by the Trust in $300 million aggregate principal amount of the Company's Subordinated Notes. The Subordinated Notes represent the sole assets of the Trust and bear interest at the rate of 7.80%, payable quarterly, and are redeemable by the Company beginning in May 2004 at 100% of the principal amount thereof. The obligations of the Trust related to the Preferred Securities are guaranteed by the Company.

The Company's 1996 Registration Statement, which became effective on March 27, 1996, allows the Company to sell senior and subordinated debt or equity securities to the public from time to time up to an aggregate maximum principal amount of $400 million.

See Notes 5, 6 and 7 of the accompanying Notes to Consolidated Financial Statements for further information regarding the Receivable Securitization Program, Credit Agreement, the Credit Facility, the Commercial Paper Agreements, the Preferred Securities and the 1996 Registration Statement.

On November 4, 1999, the Company declared a regular quarterly cash dividend of $0.075 per share on the Company's Common Stock that was paid on December 1, 1999 to shareowners of record on November 16, 1999. On September 24, 1998, the Company declared a $0.075 per share quarterly cash dividend on the Company's Common Stock that was paid on December 1, 1998 to shareowners of record as of November 2, 1998. This $0.075 payment constituted the Company's dividend for the first quarter ended December 31, 1998. For accounting purposes, this cash dividend was recorded in the fourth fiscal quarter ended September 30, 1998, resulting in a larger than usual dividend in that quarter and no dividend during the quarter ended December 31, 1998. Regular quarterly cash dividends of $0.075 per share of Common Stock were paid on March 1, June 1, and September 1, 1999 and recorded in the second, third and fourth quarters, respectively, of fiscal 1999.

The Company's cash flows during the first quarters of fiscal 2000 and 1999 are summarized in the following table:

During the first quarter of fiscal 2000, the Company's borrowings were significantly higher than in the first fiscal quarter of the prior year, principally related to the financing of the purchase price of certain of the 1999 acquisitions, the assumption of debt of those acquisitions and funding working capital requirements to support the Company's growing operations. The negative cash flows from operations in fiscal 2000 are primarily associated with the Pharmaceutical Distribution segment, which had higher receivables and inventory in connection with higher sales levels, largely offset by a significant benefit from accounts payable.

The Company believes that internally-generated cash flows, funds available under the Credit Agreement, the Credit Facility, the Receivables Securitization Program, and funds potentially available in the private and public capital markets will be sufficient to meet anticipated cash and capital requirements. However, actual results could differ from this forward-looking statement as a result of unanticipated capital requirements or an inability to access capital on acceptable terms when, and if, necessary. Such access to capital may be more difficult and/or expensive in the future due to the downgrading of the Company's credit ratings in November and December 1999 and February 2000. The Company is currently in discussion with its key banks regarding the refinancing of the Credit Facility and the Credit Agreement.

Working capital decreased to $756 million at December 31, 1999 from $770 million at September 30, 1999. The decrease primarily reflects lower accounts receivable balances (due to the Receivables Securitization Program) and higher accounts payable balances, partially offset by higher inventory balances. The current ratio decreased slightly to 1.26 at December 31, 1999 from 1.29 at September 30, 1999.

Property acquisitions relate principally to the purchase of the Company's previously- leased Corporate headquarters building; warehouse and pharmacy equipment, and data processing equipment.

On April 26, 1999, the Company acquired PharMerica, one of the nation's largest providers of pharmaceutical products and pharmacy management services to long-term care and alternate site settings, headquartered in Tampa, Florida. The Company issued approximately 24.7 million shares of Common Stock valued at approximately $670 million, acquired net assets (excluding debt) at fair value of approximately $307 million, assumed debt of approximately $600 million and incurred costs of approximately $10 million. The Company recorded goodwill of approximately $973 million in the transaction.

On February 10, 1999, the Company acquired J.M. Blanco, Puerto Rico's largest pharmaceutical distributor, headquartered in Guaynabo, Puerto Rico, for a cash purchase price of approximately $30 million. The Company acquired net assets (excluding debt) at fair value of approximately $24 million, assumed debt of approximately $22 million and incurred costs of approximately $1 million. The Company recorded goodwill of approximately $29 million in the transaction.

On January 21, 1999, the Company acquired Stadtlander, a national leader in disease-specific pharmaceutical care delivery for transplant, HIV, infertility and serious mental illness patient populations and a leading provider of pharmaceutical care to the privatized corrections market, headquartered in Pittsburgh, Pennsylvania. The Company paid approximately $195 million in cash and issued approximately 5.7 million shares of Common Stock, previously held as Treasury shares, valued at approximately $140 million. The Company acquired net assets (excluding debt) at fair value of approximately $40 million, assumed debt of approximately $100 million and incurred costs of approximately $10 million. The Company recorded goodwill of approximately $405 million in the transaction.

On December 31, 1998, the Company acquired MII, a pre-filler of pharmaceuticals for oncology centers, located in Tampa, Florida. The Company issued approximately 200,000 shares of Common Stock, previously held as Treasury shares, valued at approximately $6.0 million, acquired net assets at fair value of approximately $0.1 million and incurred costs of $0.2 million. The Company recorded goodwill of approximately $6.1 million in the transaction.

Each of the aforementioned acquisitions was accounted for as a purchase for financial reporting purposes. The Company is in disagreement with the seller and the seller's independent auditors regarding the valuation of the net assets of Stadtlander. See Part II, Item 1 entitled "Legal Proceedings."

The Company's internal information technology systems and its other business systems have not been negatively impacted by Year 2000 compliance problems. In addition, the Company is not aware of any significant Year 2000 compliance problems at its major customers, suppliers or other third parties, and it has not experienced any significant disruptions of product deliveries, services or cash flows. However, the Company will maintain a limited Year 2000 project team through the first few months of the calendar year 2000 in order to monitor any Year 2000 issues which might arise within the systems of the Company or third parties. There can be no assurance that any such Year 2000 issues will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.