-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, F1VXCzOGa6ubD4QQqTkfcuQYX4kyDwi4ckTPqqlN0NvwsCRerAWlbBZLfDEzLkdd 9G8mQSWDCzy+dmJi7QBIJg== 0000893220-95-000206.txt : 19950414 0000893220-95-000206.hdr.sgml : 19950411 ACCESSION NUMBER: 0000893220-95-000206 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19950403 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERISOURCE DISTRIBUTION CORP CENTRAL INDEX KEY: 0000855042 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 232546940 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-57513 FILM NUMBER: 95526385 BUSINESS ADDRESS: STREET 1: PO BOX 959 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2152964480 MAIL ADDRESS: STREET 1: P.O. BOX 959 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: ALCO HEALTH DISTRIBUTION CORP /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AHSC HOLDINGS CORP DATE OF NAME CHANGE: 19920325 S-2/A 1 AMEND. NO. 2 TO FORM S-2, AMERISOUCE HEALTH CORP. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1995 REGISTRATION NO. 33-57513 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERISOURCE HEALTH CORPORATION* (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6719 23-2546940 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
300 CHESTER FIELD PARKWAY MALVERN, PENNSYLVANIA 19355 (610) 296-4480 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ TERESA T. CICCOTELLI, ESQ. AMERISOURCE HEALTH CORPORATION 300 CHESTER FIELD PARKWAY MALVERN, PENNSYLVANIA 19355 (610) 296-4480 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: CRAIG L. GODSHALL, ESQ. JOHN J. SCHUSTER, ESQ. DECHERT PRICE & RHOADS CAHILL GORDON & REINDEL 4000 BELL ATLANTIC TOWER 80 PINE STREET 1717 ARCH STREET NEW YORK, NEW YORK 10005 PHILADELPHIA, PENNSYLVANIA 19103-2793
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable on or after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - --------------- * The Registrant changed its name from "AmeriSource Distribution Corporation" on March 30, 1995. The Registrant is referred to in the Prospectus by the new name. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERISOURCE HEALTH CORPORATION ------------------------ CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K AND RULE 404(A)
FORM S-2 ITEM AND CAPTION LOCATION IN PROSPECTUS ---------------------------------------- ----------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................ Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus................... Inside Front and Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors 4. Use of Proceeds......................... Use of Proceeds 5. Determination of Offering Price......... Underwriting 6. Dilution................................ Dilution 7. Selling Security Holders................ Not Applicable 8. Plan of Distribution.................... Underwriting 9. Description of Securities to be Registered............................ Description of Capital Stock 10. Interests of Named Experts and Counsel............................... Legal Matters 11. Information with Respect to the Registrant............................ Prospectus Summary; Risk Factors; Dividend Policy; The Refinancing; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Relationships and Transactions; Principal Stockholders; Description of Capital Stock; Description of Indebtedness and Securitization Program; Shares Eligible for Future Sale; Unaudited Pro Forma Financial Statements; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference............................. Incorporation of Certain Information by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 3, 1995 PROSPECTUS APRIL , 1995 6,600,000 SHARES [AMERISOURCE LOGO] COMMON STOCK All of the shares of Common Stock, par value $0.01 per share ("Common Stock"), offered hereby are being offered by AmeriSource Health Corporation ("AmeriSource" or the "Company"). Of the 6,600,000 shares of Common Stock being offered, 5,280,000 shares are being offered for sale in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 1,320,000 shares are being offered for sale outside the United States and Canada in a concurrent offering by the International Managers (the "International Offering" and, together with the U.S. Offering, the "Offering"). The initial public offering price and the underwriting discount per share are the same for both the U.S. Offering and the International Offering. The class of Common Stock being offered hereby is the only voting stock of the Company. There are three classes of Company Common Stock, two of which are non-voting. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $18.00 and $20.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ASHC," subject to official notice of issuance. SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ Total(3).................................. $ $ $
- -------------------------------------------------------------------------------- (1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company has granted the U.S. Underwriters a 30-day option to purchase up to 990,000 additional shares of Common Stock on the same terms as set forth above to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by the Underwriters and subject to various prior conditions including their right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock offered hereby will be made in New York, New York on or about April , 1995. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BT SECURITIES CORPORATION 4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION, DATED APRIL 3, 1995 PROSPECTUS APRIL , 1995 6,600,000 SHARES [AMERISOURCE LOGO] COMMON STOCK All of the shares of Common Stock, par value $0.01 per share ("Common Stock"), offered hereby are being offered by AmeriSource Health Corporation ("AmeriSource" or the "Company"). Of the 6,600,000 shares of Common Stock being offered, 1,320,000 shares are being offered for sale outside the United States and Canada by the International Managers (the "International Offering") and 5,280,000 shares are being offered for sale in the United States and Canada in a concurrent offering by the U.S. Underwriters (the "U.S. Offering" and, together with the International Offering, the "Offering"). The initial public offering price and the underwriting discount per share are the same for both the International Offering and the U.S. Offering. The class of Common Stock being offered hereby is the only voting stock of the Company. There are three classes of Company Common Stock, two of which are non-voting. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $18.00 and $20.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ASHC," subject to official notice of issuance. SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ Total(3).................................. $ $ $
- -------------------------------------------------------------------------------- (1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company has granted the U.S. Underwriters a 30-day option to purchase up to 990,000 additional shares of Common Stock on the same terms as set forth above to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by the Underwriters and subject to various prior conditions including their right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock offered hereby will be made in New York, New York on or about April , 1995. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BANKERS TRUST INTERNATIONAL PLC 5 [MAP OF UNITED STATES] NORTH CENTRAL REGION NORTHEAST REGION Mishawaka, IN Thorofare, NJ Toledo, OH Springfield, MA Harrisburg, PA MID CENTRAL REGION Baltimore, MD Columbus, OH Louisville, KY SOUTHERN REGION Chattanooga, TN WESTERN REGION Valdosta, GA Minneapolis, MN Johnson City, TN Portland, OR Dallas, TX Joplin, MO Lynchburg, VA Sacramento, CA* Orlando, FL* SOUTH CENTRAL REGION CORPORATE OFFICE Paducah, KY Malvern, PA - --------------- * Announced opening of new facility. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements, including the notes thereto, included elsewhere or incorporated by reference in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." All industry statistics in this Prospectus were obtained from data prepared by the National Wholesale Druggists' Association. Unless otherwise indicated, all references in this Prospectus to the Company or AmeriSource shall mean the Company and its subsidiaries on a consolidated basis. THE COMPANY AmeriSource is the fifth largest full-service wholesale distributor of pharmaceutical products and related health care services in the United States. The Company services its customers nationwide through 16 drug distribution facilities and one specialty products distribution facility. AmeriSource is typically the primary source of supply to its customers and offers a broad range of services designed to enhance the operating efficiencies and competitive position of its customers and suppliers. The Company benefits from a diverse customer base that includes hospitals and managed care facilities (46%), independent community pharmacies including retail drug stores, nursing homes and clinics (34%) and chain drug stores including pharmacy departments of supermarkets and mass merchandisers (20%). Over the past five years, AmeriSource has significantly expanded its national presence as a leading, innovative wholesale distributor, and has achieved significant growth in revenues and adjusted operating income (as defined herein). The Company's revenues have increased from $2.6 billion in fiscal 1990 to $4.3 billion in fiscal 1994, a compound annual growth rate of 13.8%, while adjusted operating income increased from $43.8 million in fiscal 1990 to $86.1 million in fiscal 1994, a compound annual growth rate of 18.4%. The Company's growth is primarily the result of market share gains in existing markets, geographic expansion and overall industry growth. The Company believes it is well-positioned to continue its revenue growth and increase operating income through the execution of the following key elements of its business strategy: - Expanding into New Geographic Markets. The Company believes that there are substantial opportunities to grow by expanding into new geographic areas through opening new distribution facilities and making selective, complementary acquisitions. During the past 17 months, AmeriSource has opened three new distribution facilities in Dallas, Texas, Portland, Oregon and Springfield, Massachusetts. The Company plans to open new distribution facilities in Sacramento, California and Orlando, Florida during calendar 1995. In addition, the Company believes that as industry consolidation pressures continue, opportunities will arise to selectively acquire local and regional drug wholesale companies. Prior to the Acquisition (as defined herein) in 1988, AmeriSource's management team completed 18 acquisitions over a 10-year period. The completion of the Offering and the Refinancing (as defined herein) will significantly increase the Company's financial flexibility, including its ability to pursue acquisitions. - Increasing Market Share in Existing Markets. The Company believes that it is well positioned to continue to grow in its existing markets by: (i) providing superior distribution services and specialty value-added programs which reduce its customers' cost of operations; (ii) maintaining its low cost operating structure to ensure that the Company's services are priced competitively in the marketplace; (iii) continuing to focus on the higher growth hospital and managed care market segment through the use of dedicated facilities and advanced information systems; and (iv) maintaining a decentralized operating structure which responds to customers' needs more quickly and efficiently and ensures the continued development of local and regional management talent. These factors have allowed AmeriSource to compete effectively in the marketplace, generate above-average industry sales growth over the last three years and develop new types of customers, such as the federal government. - Continuing Growth of Specialty Services. AmeriSource works closely with both customers and suppliers to develop an extensive range of specialty services. In addition to enhancing the Company's 3 7 profitability, these services increase customer loyalty and strengthen the Company's overall role in the health care distribution channel. These services include: -- ECHO(TM), the Company's proprietary software system, provides sophisticated ordering and inventory management assistance to its hospital and retail customers. Since the introduction of ECHO(TM) in early fiscal 1991, the Company has installed approximately 2,000 systems nationwide and believes that its installed base of systems is one of the largest in the wholesale drug industry. -- Family Pharmacy(R) enables small chain and independent community pharmacies to compete more effectively by providing innovative marketing and merchandising programs and enhancing access to pharmaceutical benefit programs of large health care provider groups. Family Pharmacy(R) has grown dramatically in recent years, and as of December 31, 1994 its 1,861 member-stores would in effect constitute one of the largest drugstore chains in the United States. -- Income Rx(R) provides an integral value-added service to hospital and retail customers by continually reviewing the marketplace for generic pharmaceutical products that offer the best price, quality and availability. In addition, Income RePax(R) repackages pharmaceuticals from bulk quantities into smaller units thereby providing customers with lower product, inventory and dispensing (labor) costs. -- Health Services Plus distributes oncology and other specialty products to clinics and physician groups on a national basis. Rita Ann Distributors markets cosmetics and fragrances to chain drugstores and other retail customers. - Maintaining Low Cost Operating Structure. AmeriSource has the lowest operating cost structure among its four major national competitors. Over the past six years, the Company has reduced its selling and administrative expenses as a percentage of revenues from 5.36% in fiscal 1988 to 3.31% in fiscal 1994. The Company continues to achieve productivity and operating income gains from ongoing investments in advanced management information systems and warehouse automation technology, and from operating leverage due to above industry average volume per facility. In fiscal 1994, the Company's average revenue per facility was $287 million compared to a calendar 1993 industry average of approximately $175 million. The wholesale drug industry in the United States continues to experience significant growth. Industry sales grew from $30 billion in 1990 to an estimated $53 billion in 1994. Factors contributing to this growth include an aging population, new product introductions, the increased use of outpatient drug therapies, a higher concentration of distribution through wholesalers by both manufacturers and customers and rising pharmaceutical prices. In response to rising health care costs, governmental and private payors have adopted cost containment measures that encourage the use of efficient drug therapies to prevent or treat diseases instead of expensive prolonged hospital stays and surgical procedures. In addition, drug wholesalers offer their customers and suppliers more efficient distribution and inventory management. As a result, from 1980 to 1994, the percentage of total pharmaceutical sales through wholesale drug distributors increased from approximately 57% to approximately 78%. The industry also continues to undergo significant consolidation, with the number of wholesalers in the continental United States down from 139 at the end of 1980 to approximately 55 as of December 31, 1994. After giving effect to the Offering and the Option Exercises (as defined herein), the outstanding Common Stock of the Company will be owned 47.2% by 399 Venture Partners Inc., a wholly-owned indirect subsidiary of Citicorp ("VPI"), and 12.8% by management level employees of the Company (45.1% and 12.2%, respectively, if the over-allotment option is exercised in full). See "Management" and "Principal Stockholders." The Company was formed to acquire Alco Health Services Corporation, a public company listed on Nasdaq, in 1988 through a leveraged buyout (the "Acquisition"). The Company changed its name from Alco Health Distribution Corporation on July 15, 1994. The address of the principal executive office of the Company is 300 Chester Field Parkway, Malvern, Pennsylvania 19355, and its telephone number is (610) 296-4480. In connection with the Acquisition, the Company incurred approximately $545 million of indebtedness, with a resulting high level of interest expense. Due to its high leverage, the Company has experienced 4 8 significant net losses in each fiscal year since 1988. The Company had net losses of approximately $29.5 million, $23.3 million, $6.5 million, $18.6 million and $207.7 million during fiscal years 1990, 1991, 1992, 1993 and 1994. During this period, the Company's gross profit percentage decreased from 6.32% in fiscal 1990 to 5.47% in fiscal 1994. Since the Acquisition, the Company has refinanced all such indebtedness at substantially lower interest rates. See "Risk Factors," "The Refinancing" and "Capitalization." The Company recorded approximately $209.0 million of goodwill at the time of the Acquisition in 1988. After a detailed evaluation of the recoverability of its goodwill, the Company wrote-off its remaining goodwill balance of $179.8 million in the quarter ended June 30, 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the audited consolidated financial statements and related notes thereto included elsewhere in this Prospectus. THE OFFERING Common Stock offered hereby................. 6,600,000 shares Common Stock to be outstanding after the Offering(1)................................. 21,212,193 shares Use of Proceeds............................. For repayment of indebtedness and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............... ASHC
- --------------- (1) Includes 1,293,902 shares to be outstanding as a result of the Option Exercises and does not include up to approximately 1.1 million shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Company's 1995 Stock Option Plan (as defined herein) and Directors Plan (as defined herein), which is equivalent to 5% of all shares after giving effect to the Offering and the Option Exercises and is subject to an increase of approximately 50,000 shares if the over-allotment option is exercised in full. See "Management -- Stock Options" and "Description of Capital Stock." 5 9 RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors. ------------------------ Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Unless otherwise indicated, solely for the purposes of disclosure in this Prospectus, all share amounts and information derived therefrom have been adjusted to reflect: (i) the 2.95-for-1 stock split that will be implemented concurrently with the sale of Common Stock offered hereby; (ii) the issuance of 2,571,478 shares of Common Stock currently reserved for issuance upon the exercise of options under the Purchase Plan (as defined herein) and the 1991 Option Plan (as defined herein), which options will expire 90 days after the closing of the Offering and which the Company expects will be exercised during such period and AmeriSource's subsequent repurchase of 168,045 shares of Common Stock from the Purchase Plan and the 1991 Option Plan option holders to enable the holders to satisfy certain tax withholding obligations, and the exercise of options in December 1994 for 336,448 shares of Common Stock under the Partners Plan (as defined herein) and AmeriSource's subsequent repurchase of 107,085 shares of Common Stock from Partners Plan option holders to enable them to satisfy certain tax withholding obligations; and (iii) the Company's expected repurchase from VPI of 1,338,894 shares of Common Stock upon the exercise of options under the Purchase Plan and the 1991 Option Plan at a price of $0.34 per share. The transactions contemplated by clauses (ii) and (iii) above are collectively referred to herein as the "Option Exercises." The term "Common Stock" referred to in this Prospectus is the Class A Common Stock, $0.01 par value per share, Class B Common Stock, $0.01 par value per share and Class C Common Stock, $0.01 par value per share of the Company. The Class A Common Stock is the Company's only class of voting stock. Unless otherwise indicated, the Company's historical earnings (loss) per share data and weighted average common shares outstanding as presented in the Summary Financial Data and Selected Financial Data have been restated for the 2.95-for-1 stock split to be declared in connection with the Offering. 6 10 SUMMARY FINANCIAL DATA The summary financial data should be read in conjunction with "The Refinancing," "Use of Proceeds," "Capitalization," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the audited and unaudited consolidated financial statements and related notes thereto, and the unaudited pro forma financial statements and related notes included elsewhere in this Prospectus. The information for interim periods is unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information have been included. The interim results of operations may not be indicative of the results for the full fiscal year.
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------------------------------------- ----------------------- 1990 1991 1992 1993 1994 1993 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues........................ $2,564,008 $2,827,161 $3,329,909 $3,719,025 $4,301,832 $1,045,776 $1,157,100 Gross profit.................... 162,120 178,769 199,723 209,438 235,191 53,999 63,237 Selling and administrative expenses...................... 113,586 116,044 125,696 130,338 142,497 33,034 39,598 Write-off of excess of cost over net assets acquired(1)........ -- -- -- -- 179,824 -- -- Operating income (loss)(2)...... 38,270 46,838 63,094 67,824 (101,992) 18,000 21,939 Interest expense................ 73,675 72,208 71,025 66,696 62,611 15,233 17,323 Income (loss) before extraordinary items and cumulative effects of accounting changes............ (29,489) (23,319) (12,824) (7,474) (172,417) 2,579 886 Net (loss)...................... (29,489) (23,319) (6,476) (18,618) (207,671) (32,675) (10,863) PRO FORMA EARNINGS (LOSS) PER SHARE(3): Income (loss) before extraordinary items and cumulative effects of accounting changes............ $ (2.00) $ (1.58) $ (0.87) $ (0.51) $ (11.69) $ .18 $ .06 Extraordinary items............. -- -- 0.43 (0.75) (0.04) (.04) (.80) Cumulative effects of accounting changes....................... -- -- -- -- (2.35) (2.35) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)...................... $ (2.00) $ (1.58) $ (0.44) $ (1.26) $ (14.08) $ (2.21) $ (.74) ========== ========== ========== ========== ========== ========== ========== Weighted average common shares outstanding................... 14,750 14,750 14,750 14,750 14,750 14,750 14,750 PRO FORMA DATA(4): Adjusted operating income(5).... $ 86,054 $ 19,376 $ 21,939 Interest expense................ 33,695 8,430 10,843 Income (loss) before taxes, extraordinary items and cumulative effects of accounting changes............ (135,687) 9,570 11,096 Income (loss) before extraordinary items and cumulative effects of accounting changes............ (151,648) 7,419 5,039 Income (loss) per share before extraordinary items and cumulative effects of accounting changes............ $ (7.15) $ .35 $ .24 Weighted average common shares outstanding................... 21,212 21,212 21,212 OTHER OPERATING DATA: Adjusted operating income(5).... $ 43,815 $ 57,848 $ 68,643 $ 73,291 $ 86,054 $ 19,376 $ 21,939 Adjusted operating income as a % of revenues................... 1.71% 2.05% 2.06% 1.97% 2.00% 1.85% 1.90% Number of facilities at end of period........................ 19 19 18 16 15 17 17 Average revenue per facility.... $ 134,948 $ 148,798 $ 184,995 $ 232,439 $ 286,789 -- --
AT DECEMBER 31, 1994 -------------------------- ACTUAL AS ADJUSTED(6) (IN THOUSANDS) BALANCE SHEET DATA: Current assets........................................................................ $ 855,867 $ 855,867 Working capital....................................................................... 298,499 325,211 Total assets.......................................................................... 915,727 913,440 Long-term debt, including current portion............................................. 664,807 576,318 Stockholders' equity (deficit)........................................................ (312,745) (199,831)
- --------------- (see footnotes on the following page) 7 11 - --------------- (1) During the quarter ended June 30, 1994, the Company wrote off the remaining unamortized balance of its excess of cost over net assets acquired ("goodwill") of $179.8 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the audited consolidated financial statements included elsewhere in this Prospectus. (2) Excludes non-recurring charges as shown in the Selected Financial Data. Operating income is presented to assist the investor in evaluating the Company's results of operations before financing costs and in the case of adjusted operating income, before non-recurring charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9 to the audited consolidated financial statements included elsewhere herein for an explanation of the charges in 1992 and 1993. (3) Pro forma earnings (loss) per share represents the Company's historical per share data and weighted average common shares outstanding restated to reflect the 2.95-for-1 stock split to be declared in connection with the Offering. The pro forma earnings (loss) per share will be the historical amounts reflected in the Company's financial statements when the 2.95-for-1 stock split becomes effective. (4) The pro forma data represents the historical data for the fiscal year ended September 30, 1994 and the three months ended December 31, 1994 and 1993 adjusted to give effect to the Refinancing, the Offering and the Option Exercises as if each transaction had occurred at the beginning of the periods presented. See "Use of Proceeds," "The Refinancing" and the unaudited pro forma financial statements including notes thereto, included elsewhere in this Prospectus. Pro forma interest expense includes the cost of the Receivables Program (as defined herein). (5) Adjusted operating income is defined as operating income plus amortization of intangibles for each period plus a $5.5 million stock option compensation charge in fiscal 1991, a $4.1 million environmental remediation charge in fiscal 1994 and the $179.8 million write-off of goodwill in the quarter ended June 30, 1994. Adjusted operating income is not an alternative to operating income or cash flows (as determined under generally accepted accounting principles) as an indicator of operating and cash flow performance and should be read in conjunction with the Selected Financial Data and the Company's consolidated financial statements included elsewhere in this Prospectus. The Company believes adjusted operating income provides investors with an evaluation of the Company's historical results of operations on a comparable basis, since the unusual items noted above were incurred in some historical periods, but not in others. The presentation of adjusted operating income should not be interpreted to suggest that the Company will not incur similar unusual items in the future, although none are currently anticipated. (6) Represents the historical data as of December 31, 1994 adjusted to give effect to the Refinancing, the Offering and the Option Exercises as if each transaction had occurred on December 31, 1994. See "Use of Proceeds," "The Refinancing," and the unaudited pro forma financial statements including notes thereto, included elsewhere in this Prospectus. 8 12 RISK FACTORS Prospective purchasers of the Common Stock offered hereby should consider carefully the specific factors set forth below as well as the other information set forth elsewhere and incorporated by reference in this Prospectus. HISTORY OF NET LOSSES The Company has reported significant net losses since the Acquisition. The Company had a net loss of approximately $10.9 million in the first quarter of fiscal year 1995 (which included an extraordinary charge of $11.7 million related to the Refinancing) and a net loss for fiscal year 1994 of approximately $207.7 million (which included a one-time charge of $33.4 million relating to changes in accounting for income taxes). In addition, the Company's net loss for fiscal year 1994 included a write-off of its remaining goodwill balance of $179.8 million in the quarter ended June 30, 1994. As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as part of its evaluation of the recoverability of its goodwill during early 1994, the Company determined that its projected operating results were being adversely impacted by competition for market share, health care industry consolidation and the impact on drug prices of group purchasing organizations, managed care and health care reform. As part of that evaluation process, the Company's projections indicated that its long-term viability would require modification of its capital structure to reduce indebtedness and increase equity in the near-to mid-term. In the first quarter of fiscal 1995, the Company effected the Refinancing. After giving effect thereto and to the Offering, pro forma interest expense for fiscal 1994 would have been approximately $33.7 million. There are no scheduled principal payments of any of the Company's indebtedness until January 3, 2000. The Receivables Program (as defined herein) is expected to liquidate beginning in October 1999. See "The Refinancing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." FINANCIAL LEVERAGE As of December 31, 1994, the Company's aggregate long-term indebtedness was $664.8 million and its stockholders' deficit was $312.7 million. After giving effect to the Refinancing and the Offering, on a pro forma basis as of December 31, 1994, the Company's aggregate long-term indebtedness would have been approximately $576.3 million. Although the application of the proceeds of the Offering will reduce the Company's indebtedness, the terms of the Company's financing agreements contain numerous financial and operating covenants and prohibitions, including requirements that the Company satisfy certain financial ratios and maintain certain specified levels of net worth. In addition, the Company is more highly leveraged than certain of its competitors, which may place the Company at a competitive disadvantage. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The degree to which the Company is leveraged could have important consequences to stockholders of the Company, including the following: (i) the Company could be more vulnerable to changes in general economic conditions; (ii) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (iii) a significant portion of the Company's cash flow from operations must be dedicated to the payment of interest and, after 1999, the principal on the Company's indebtedness; (iv) the Amended and Restated Credit Agreement dated December 13, 1994 among the Company and its senior lenders (the "Credit Agreement") and the Indenture (the "Issuer Indenture") relating to the Company's 11 1/4% Senior Debentures due 2005 (the "Senior Debentures") contain restrictions on the payment of dividends and impose other operating and financial restrictions; (v) the Company's ability to generate or service receivables pursuant to the Receivables Program may be impaired; and (vi) certain of the Company's borrowings are at a floating rate of interest, which causes the Company to be more vulnerable to increases in interest rates. See "Description of Indebtedness and Securitization Program." 9 13 CONCENTRATION OF OWNERSHIP Upon completion of the Offering and the Option Exercises, VPI will own beneficially approximately 47.2% of the Company's outstanding Common Stock (including non-voting Common Stock which is convertible at the holder's option into voting Common Stock) and members of the management of the Company will own beneficially approximately 12.8% of the Company's outstanding Common Stock. If these stockholders were to vote all of their shares in a similar manner, they would effectively control the Company. In most circumstances, they would have sufficient voting power to elect the entire Board of Directors of the Company and, in general, to determine (without the consent of the Company's other stockholders) the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including mergers, consolidations and the sale of all or substantially all of the Company's assets, and to prevent or cause a change in control of the Company. COMPETITION The wholesale distribution of pharmaceuticals, health and beauty aids and other healthcare products is highly competitive. The Company competes with numerous national and regional distributors, some of which are larger and have substantially greater financial resources than the Company. The Company's national competitors include McKesson Corporation, Bergen Brunswig Corporation, Cardinal Health, Inc. and FoxMeyer Health Corporation. In addition, the Company competes with local distributors, direct-selling manufacturers and other specialty distributors. Competitive factors include price, service and delivery, credit terms, breadth of product line, customer support and marketing programs. In part due to competitive pressures, the Company's gross profit margins have declined from 6.00% in fiscal 1992 to 5.47% in fiscal 1994. There can be no assurance that the Company will not encounter increased competition in the future that could adversely affect the Company's business. The drug wholesale industry continues to undergo significant consolidation, with the number of wholesalers in the continental United States down from 139 at the end of 1980 to approximately 55 as of December 31, 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company is dependent on its senior and regional management, the loss of certain of whom could adversely affect the Company. The Company intends to offer employment contracts to John F. McNamara, R. David Yost and David M. Flowers, Chairman, President and Chief Executive Officer, Group President -- Central Region and Group President -- Eastern Region, respectively, of the Company. However, no member of the Company's management is currently subject to an employment contract. There can be no assurance that, over time, the Company will be able to retain Messrs. McNamara, Yost and Flowers or all of its other senior and regional managers. EXPANSION THROUGH ACQUISITIONS The Company intends to expand into new and contiguous geographic markets, in part, through selected acquisitions of drug wholesalers. There can be no assurance that suitable acquisition candidates will be identified, that acquisitions can be consummated on acceptable terms or that any acquired companies can be integrated successfully into the Company's operations. No substantive acquisition negotiations by the Company are currently pending, and the Company currently has no commitments, understandings or arrangements with respect to any specific acquisition. The Credit Agreement contains restrictions on the Company's ability to make acquisitions. See "Description of Indebtedness and Securitization Program -- The Credit Agreement." SHARES ELIGIBLE FOR FUTURE SALE; DEMAND REGISTRATION RIGHTS No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. The existing stockholders of AmeriSource (the "Existing Stockholders") were granted piggyback registration rights with respect to the Company's common stock when 10 14 they purchased such shares. These piggyback registration rights cover substantially all of the 14,612,193 shares of Common Stock beneficially owned by the Existing Stockholders. In addition, VPI has demand rights to require registration of the 10,021,073 shares of Common Stock held by it. Of the 21,212,193 shares of Common Stock outstanding after the Offering (and after the Option Exercises), approximately 9.7 million shares will be shares of Class A Common Stock, 10.0 million shares will be shares of Class B Common Stock and 1.5 million shares will be shares of Class C Common Stock. The Existing Stockholders are subject to restrictions on any public sale or distribution of Common Stock for a period of 90 days beginning on the effective date of the Registration Statement. Sales thereafter are subject to maximum quantity limitations. In addition, members of the management and board of directors of the Company who own shares of Common Stock of the Company and VPI have agreed, subject to certain exceptions, not to register for sale or offer, sell or transfer any shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). These agreements cover approximately 3.0 million shares of Class A Common Stock and 9.8 million shares of Class B Common Stock. Following the Option Exercises, certain members of AmeriSource's management intend to obtain margin loans secured by the shares of Common Stock acquired pursuant to such options from DLJ and Smith Barney Inc. primarily to satisfy withholding tax liability. In the event of a default, those shares of Common Stock may be sold during the 180-day period following closing of the Offering. See "Shares Eligible for Future Sale." DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in net tangible book value per share of Common Stock from the initial public offering price. The Existing Stockholders will experience an increase in net tangible book value per share as a result of the Offering. Assuming an offering price of $19.00 per share (the midpoint of the range of prices set forth on the cover of this Prospectus), the dilution in net tangible book value to purchasers of Common Stock in the Offering would be $28.94 per share, and the Existing Stockholders, including certain members of the management of AmeriSource, VPI, current and former employees and directors of AmeriSource, and others, would experience an increase in net tangible book value of $14.13 per share as a result of the Offering. See "Dilution" and "Principal Stockholders." ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK Prior to the Offering, there has been no public market for the Common Stock. A class of the Company's non-voting common stock trades on an infrequent basis in the over-the-counter market. Although the Common Stock has been approved for listing on the Nasdaq National Market (subject to official notice of issuance), there can be no assurance that an active or liquid trading market in the Common Stock will develop upon completion of the Offering or, if developed, that it will be sustained. The initial public offering price of the Common Stock will be determined through negotiations between the Company and the Underwriters and may not be indicative of the market price for the Common Stock after the Offering. The market price for shares of the Company's Common Stock may be highly volatile depending on changes in general market and industry conditions. See "Underwriting." 11 15 THE REFINANCING In December 1994, the Company sold substantially all of its trade accounts receivable and notes receivable (the "Receivables") to AmeriSource Receivables Corporation ("ARC"), an indirect wholly-owned special purpose subsidiary of the Company, in exchange for cash of $201.0 million and a residual certificate of $71.3 million pursuant to a trade receivables securitization program (the "Receivables Program"). Concurrently, the Company entered into a Receivables Purchase Agreement with ARC, whereby the Company agreed to sell, and ARC agreed to purchase on a continuous basis, Receivables originated by AmeriSource. Pursuant to the Receivables Program, ARC transfers such Receivables to a master trust in exchange for, among other things, certain trade receivables-backed certificates (the "Certificates"). Contemporaneously, variable principal Certificates in an aggregate principal amount of up to $230 million face amount were sold to a group of financial institutions. The Company has accounted for the transactions contemplated by the terms of the Receivables Purchase Agreement as a sale of receivables from AmeriSource to ARC and as a financing transaction by ARC on the Company's consolidated financial statements. The Certificates represent fractional undivided interests in the Receivables and other assets of the master trust, and do not otherwise represent recourse obligations of the Company. During the five year term of the Receivables Program, the cash generated by collections on the Receivables will be used to purchase, among other things, additional Receivables originated by the Company and/or repay the Certificates. The Certificates bear interest at a rate selected by the Company equal to (i) the higher of (a) the applicable prime lending rate and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis points. The interest rates for the Certificates are subject to the following step-ups: (i) with respect to the ABR tranche (based on the higher of the prime rate or federal funds rate plus 50 basis points), an additional 50 basis points beginning one year after the closing date (December 13, 1994) and (ii) with respect to the LIBOR tranche, an additional 12 1/2 basis points beginning six months after the closing date, an additional 12 1/2 basis points beginning nine months after the closing date, and an additional 75 basis points beginning one year after the closing date. ARC is currently negotiating the terms of new Certificates that do not contain an interest step-up feature, a majority of which will be fixed principal, variable rate obligations and the remainder of which will be variable principal, variable rate obligations. The Company expects to enter into interest rate protection contracts with respect to a majority of the fixed principal, variable rate obligations. Given existing market conditions, the Company expects that such interest rate contracts will apply to in excess of $150 million of the new Certificates, will be for a term of approximately two years and will cap the related variable interest rates at approximately 8%. Such new Certificates are expected to be issued shortly and will, among other things, refinance the existing Certificates. None of the Certificates have been registered under the Securities Act, and the Certificates may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. At the same time that it entered into the Receivables Program, the Company and its senior lenders amended its existing revolving credit agreement. Among other things, the amended Credit Agreement: (i) extended the term of the original credit agreement until January 3, 2000; (ii) established the amount the Company may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR plus 225 basis points and provided interest rate stepdowns upon the occurrence of certain events; (iv) modified the borrowing base availability from inventory- and receivable-based to inventory-based only; and (v) increased the Company's ability to make acquisitions and pay dividends. With the proceeds of the Receivables Program and the Credit Agreement, on January 12, 1995, the Company redeemed all of its outstanding 14 1/2% Senior Subordinated Notes due 1999 (the "Notes") at a redemption price of 106% of the principal amount plus accrued interest through the redemption date and repaid amounts under the former credit facility. With the redemption of the Notes, the Company has refinanced all of the debt originally incurred in the leveraged buyout to finance the Acquisition. The consummation of the Receivables Program, the execution of the Credit Agreement and the redemption of the Notes is referred to elsewhere in this Prospectus as the "Refinancing." See "Description of Indebtedness and Securitization Program." 12 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $116.6 million (approximately $134.2 million if the Underwriters' over-allotment option is exercised in full) assuming an initial public offering price of $19.00 per share and after deduction of underwriting discounts and commissions and estimated offering expenses. The Company expects to use a portion of the proceeds of the Offering (assuming the Offering was consummated on January 15, 1995) to redeem $74.3 million principal amount of 11 1/4% Senior Debentures due 2005 pursuant to an optional redemption provision in the Issuer Indenture at a price equal to 110% of the principal amount thereof plus accrued and unpaid interest through the date of redemption. The balance of the net proceeds will be used to fund internal growth and further expansion and for general corporate purposes, including working capital requirements. Pending application of the net proceeds, the Company intends to repay revolving borrowings under the Credit Agreement. Borrowings currently bear interest at an annual rate equal to, at the Company's option, either the applicable prime rate plus 1.00% or LIBOR plus 2.25% (10.0% and 8.5%, respectively, at January 31, 1995) and mature on January 3, 2000. Such interest rates are subject to reduction upon the occurrence of certain events including improved financial performance and the sale of certain minimum equity amounts by the Company. Following the Offering, the Company's interest rates will be reduced to the applicable prime rate plus 0.50% or LIBOR plus 1.75% (9.5% and 8.0%, respectively, at January 31, 1995). DIVIDEND POLICY Payment of dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, upon the Company's earnings, financial condition and capital requirements and the terms of the Company's financing agreements. The Company plans to retain future earnings for use in the business and, accordingly, the Company does not anticipate paying dividends in the foreseeable future. The Company has not paid any cash dividends to its stockholders. The Credit Agreement restricts the ability of the Company to make dividend payments unless certain financial tests are met. DILUTION At December 31, 1994, assuming the 2.95-for-1 stock split, the deficiency in net tangible book value (total tangible assets minus total liabilities) of the Company was $326.1 million, or ($24.07) per share of outstanding Common Stock. After giving effect to: (i) the sale of the 6,600,000 shares of Common Stock pursuant to the Offering at an assumed initial offering price of $19.00 per share (the midpoint of the range of prices set forth on the cover of this Prospectus) and the application of the net proceeds therefrom (after deducting estimated offering expenses and underwriting discounts and commissions) and (ii) the Option Exercises, the pro forma deficiency in net tangible book value of the Company at December 31, 1994 would have been $210.9 million or ($9.94) per share, representing an immediate increase in net tangible book value of $14.13 per share to the Existing Stockholders and an immediate dilution of $28.94 per share to persons purchasing shares of Common Stock in this Offering. The following table illustrates this per share dilution: Initial public offering price per share(1)..................... $ 19.00 Net tangible book value deficiency per share at December 31, 1994...................................................... $(24.07) Increase per share due to the Option Exercises............... 1.91 Increase per share attributable to new investors............. 12.22 ------- Pro forma net tangible book value deficiency per share after the Offering and the Option Exercises........................ (9.94) ------- Dilution per share to new investors............................ $(28.94) =======
- --------------- (1) Before deduction of expenses related to the Offering. 13 17 CAPITALIZATION The following table sets forth the unaudited capitalization of the Company as of December 31, 1994 on an actual basis and as adjusted to reflect (i) the Refinancing, (ii) the Offering (assuming an offering price of $19.00 per share, the midpoint of the range as set forth on the cover of this Prospectus) and (iii) the Option Exercises. This table should be read in conjunction with the consolidated financial statements of the Company and related notes, the unaudited pro forma financial statements and related notes, "The Refinancing" and "Use of Proceeds" included elsewhere in this Prospectus.
AT DECEMBER 31, 1994 ---------------------------- ACTUAL AS ADJUSTED(1) (DOLLARS IN THOUSANDS) Long-term debt (including current portion): Revolving credit facility....................................... $ 147,041 $ 298,671 Receivables securitization financing(2)......................... 202,000 202,000 14 1/2% Senior subordinated notes............................... 166,134 -- Other debt...................................................... 1,662 1,662 11 1/4% Senior debentures....................................... 147,970 73,985 --------- -------------- Total long-term debt, including current portion......... 664,807 576,318 Stockholders' equity (deficit): Preferred stock, $.01 par value: 5,000,000 shares authorized (cancelled, as adjusted); none issued........................ -- -- Common stock, $.01 par value: Class A (voting and convertible): 50,000,000 shares authorized, as adjusted; 10,040,069 shares issued as adjusted.................................................... 8 100 Class B (non-voting and convertible): 15,000,000 shares authorized, as adjusted; 12,980,885 shares issued as adjusted.................................................... 130 130 Class C (non-voting and convertible): 2,000,000 shares authorized; 1,475,000 shares issued as adjusted............. 15 15 Capital in excess of par value.................................... 4,787 127,203 Retained earnings (deficit)....................................... (315,847) (321,794) Cost of common stock in treasury.................................. (1,838) (5,485) --------- -------------- Total stockholders' equity (deficit)......................... (312,745) (199,831) --------- -------------- Total capitalization.................................... $ 352,062 $ 376,487 ========= ===========
- --------------- (1) Adjusted to reflect the Refinancing, the Offering and the Option Exercises. Assumes the application of $116.6 million of the net proceeds from the Offering to: redeem one-half of the 11 1/4% senior debentures for $81.0 million (including a $7.0 million redemption premium) representing a price equal to 110% of the principal amount plus accrued interest through the date of redemption; pay $3.2 million (net) related to the Option Exercises; and repay $32.4 million of borrowings under the Credit Agreement. Pro forma adjustments to retained earnings (deficit) include extraordinary charges due to the Offering of $7.0 million from the early extinguishment of debt and $2.3 million from the write-off of deferred financing costs, net of a $3.4 million tax benefit. Pro forma adjustments to common stock and capital in excess of par value include: $116.6 million of net proceeds from the Offering; reclassification of $5.5 million in accrued compensation associated with the 1991 Option Plan and $0.5 million of cash proceeds from the Option Exercises. Pro forma adjustments to the cost of common stock in treasury include $3.2 million related to the repurchase of shares to satisfy minimum tax withholding obligations related to the Option Exercises and $0.5 million related to common stock repurchased from VPI. Pro forma adjustments to stockholders' equity (deficit) do not include estimated tax benefits of $13.9 million related to the exercise of the non-qualified options under the Option Exercises noted above, which will be recorded as an addition to capital in excess of par value when such tax benefits are realized by the Company. (2) Comprises the Certificates outstanding under the Receivables Program, which represent fractional undivided interests in the Receivables and other assets of the master trust, and do not otherwise represent recourse obligations of the Company. See "The Refinancing." 14 18 SELECTED FINANCIAL DATA The following table sets forth selected financial data and other operating data of the Company. The statement of operations data and balance sheet data are derived from the audited and unaudited consolidated financial statements of the Company. The Company's historical per share data and weighted average common shares outstanding have been restated for the 2.95-for-1 stock split to be declared in connection with the Offering. The Company's primary and fully diluted earnings per share are the same. The selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Prospectus. The information for interim periods is unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information have been included. The interim results of operations may not be indicative of the results for the full fiscal year.
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------------------------------------- ----------------------- 1990 1991 1992 1993 1994 1993 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues........................... $2,564,008 $2,827,161 $3,329,909 $3,719,025 $4,301,832 $1,045,776 $1,157,100 Cost of goods sold................. 2,401,888 2,648,392 3,130,186 3,509,587 4,066,641 991,777 1,093,863 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit....................... 162,120 178,769 199,723 209,438 235,191 53,999 63,237 Selling and administrative expenses......................... 113,586 116,044 125,696 130,338 142,497 33,034 39,598 Environmental remediation.......... -- -- -- -- 4,075 -- -- Stock option compensation.......... -- 5,500 -- -- -- -- -- Depreciation....................... 4,719 4,877 5,384 5,809 6,640 1,589 1,700 Amortization of intangibles........ 5,545 5,510 5,549 5,467 4,147 1,376 -- Write-off of excess of cost over net assets acquired(1)........... -- -- -- -- 179,824 -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)(2)......... 38,270 46,838 63,094 67,824 (101,992) 18,000 21,939 Interest expense................... 73,675 72,208 71,025 66,696 62,611 15,233 17,323 Non-recurring charges(3)........... 928 951 2,244 2,223 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before taxes, extraordinary items and cumulative effects of accounting changes.......................... (36,333) (26,321) (10,175) (1,095) (164,603) 2,767 4,616 Taxes on income (benefit).......... (6,844) (3,002) 2,649 6,379 7,814 188 3,730 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effects of accounting changes............... (29,489) (23,319) (12,824) (7,474) (172,417) 2,579 886 Extraordinary items(4)............. -- -- 6,348 (11,144) (656) (656) (11,749) Cumulative effects of accounting changes(5)....................... -- -- -- -- (34,598) (34,598) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)......................... $ (29,489) $ (23,319) $ (6,476) $ (18,618) $ (207,671) $ (32,675) $ (10,863) ========= ========= ========= ========= ========= ========= ========= PRO FORMA EARNINGS (LOSS) PER SHARE(6): Income (loss) before extraordinary items and cumulative effects of accounting changes............... $ (2.00) $ (1.58) $ (0.87) $ (0.51) $ (11.69) $ .18 $ .06 Extraordinary items................ -- -- 0.43 (0.75) (0.04) (.04) (.80) Cumulative effects of accounting changes.......................... -- -- -- -- (2.35) (2.35) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss)......................... $ (2.00) $ (1.58) $ (0.44) $ (1.26) $ (14.08) $ (2.21) $ (.74) ========= ========= ========= ========= ========= ========= ========= Weighted average common shares outstanding...................... 14,750 14,750 14,750 14,750 14,750 14,750 14,750
15 19
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------------------------------------- ----------------------- 1990 1991 1992 1993 1994 1993 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OTHER OPERATING DATA: Adjusted operating income(7)....... $ 43,815 $ 57,848 $ 68,643 $ 73,291 $ 86,054 $ 19,376 $ 21,939 Adjusted operating income as a % of revenues......................... 1.71% 2.05% 2.06% 1.97% 2.00% 1.85% 1.90% Number of facilities at end of period........................... 19 19 18 16 15 17 17 Average revenue per facility....... $ 134,948 $ 148,798 $ 184,995 $ 232,439 $ 286,789 -- --
AT SEPTEMBER 30, AT DECEMBER 31, -------------------------------------------------------------- ----------------------- 1990 1991 1992 1993 1994 1993 1994 (IN THOUSANDS) BALANCE SHEET DATA: Current assets..................... $ 496,701 $ 530,212 $ 600,845 $ 627,483 $ 651,710 $ 702,663 $ 855,867 Working capital.................... 236,962 252,468 268,424 217,160 133,355 228,716 298,499 Total assets....................... 756,932 783,145 848,474 867,944 711,644 943,865 915,727 Long-term debt, including current portion.......................... 539,731 570,979 588,005 549,342 487,708 591,977 664,807 Stockholders' equity (deficit)..... (44,946) (68,271) (74,747) (93,040) (300,726)(6) (125,715) (312,745)(8)
- --------------- (1) During the quarter ended June 30, 1994, the Company wrote off the remaining unamortized balance of its excess of cost over net assets acquired ("goodwill"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the consolidated financial statement included elsewhere in this Prospectus. (2) Operating income is presented to assist the investor in evaluating the Company's results of operations before financing costs and in the case of adjusted operating income, before non-recurring charges. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Note 9 to the consolidated financial statements for a discussion of the non-recurring charges in 1992 and 1993. (4) Extraordinary items were as follows: extraordinary credits of $4.5 million during 1992 relating to the extinguishment of debt resulting from the settlement of a shareholder appraisal action arising from the Acquisition; extraordinary credits of $1.9 million in 1992 and $0.7 million in 1993, respectively, representing the utilization of net operating loss carryforwards; extraordinary charges of $11.9 million in fiscal 1993 and $0.7 million in fiscal 1994, respectively, net of tax benefits, representing the write-off of unamortized financing fees relating to debt refinancings and premiums paid on the purchase and retirement of a portion of the senior subordinated notes and extraordinary charges of $11.7 million, net of tax benefits, in the three months ended December 31, 1994, relating to the amendment of the revolving credit facility and the redemption premium of the senior subordinated notes. (5) Consists of the cumulative effect of $1.2 million for the change in the accounting for postretirement benefits other than pensions and the cumulative effect of $33.4 million for the change in the accounting for income taxes. (6) Pro forma earnings (loss) per share represents the Company's historical per share data and weighted average common shares outstanding restated to reflect the 2.95-for-1 stock split to be declared in connection with the Offering. The pro forma earnings (loss) per share will be the historical amounts reflected in the Company's financial statements when the 2.95-for-1 stock split becomes effective. (7) Adjusted operating income is defined as operating income plus amortization of intangibles for each period plus a $5.5 million stock option compensation charge in fiscal 1991, a $4.1 million environmental remediation charge in fiscal 1994 and the $179.8 million write-off of goodwill in the quarter ended June 30, 1994. Adjusted operating income is not an alternative to operating income or cash flows (as determined under generally accepted accounting principles) as an indicator of operating and cash flow performance and should be read in conjunction with the Company's consolidated financial statements included elsewhere in this Prospectus. The Company believes adjusted operating income provides investors with an evaluation of the Company's historical results of operations on a comparable basis, since the unusual items noted above were incurred in some historical periods, but not in others. The presentation of adjusted operating income should not be interpreted to suggest that the Company will not incur similar unusual items in the future, although none are currently anticipated. 16 20 (8) Includes the effect of the following charges recorded during the fiscal year ended September 30, 1994: (i) a $179.8 million write-off of excess of cost over net assets acquired during the three months ended June 30, 1994; (ii) extraordinary charges of $0.7 million, net of tax benefits, related to the early extinguishment of debt; (iii) the cumulative effect of $1.2 million for the change in the accounting for postretirement benefits other than pensions; (iv) the cumulative effect of $33.4 million for the change in the accounting for income taxes and, during the three months ended December 31, 1994, (v) extraordinary charges of $11.7 million, net of tax benefits, related to the amendment of the revolving credit facility and the redemption premium of the senior subordinated notes. 17 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements contained elsewhere herein. RECENT DEVELOPMENTS As a result of the Offering and the Refinancing, the Company believes that its liquidity and capital resources will be enhanced. In December 1994, the Company transferred approximately $272.3 million of its accounts receivable to a master trust for approximately $201.0 million in cash and $71.3 million of residual certificates. The cash proceeds were used to redeem all $166.1 million of the 14 1/2% senior subordinated notes due 1999 at a redemption price of 106%, to pay fees and expenses related thereto and to repay approximately $10.7 million of revolving credit borrowings. Upon consummation of the Offering, the Company will redeem $74.3 million of its 11 1/4% Senior Debentures at a redemption price of 110% of the principal amount thereof plus accrued and unpaid interest through the date of redemption (assuming a redemption date of January 15, 1995), pay fees and expenses related thereto and further reduce outstanding borrowings under the revolving credit facility. At the same time that it entered into the Receivables Program, the Company and its senior lenders amended its existing credit agreement. Among other things, the amended Credit Agreement: (i) extended the term of the Credit Agreement until January 3, 2000; (ii) established the amount the Company may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR plus 225 basis points (LIBOR plus 175 basis points upon consummation of the Offering) with further interest rate stepdowns upon the occurrence of certain events; (iv) modified the borrowing base availability from inventory and receivables based to inventory based only; and (v) increased the Company's ability to make acquisitions and pay dividends. At January 31, 1995, borrowings under the Credit Agreement were $344.8 million. The Company believes that its liquidity, capital resources and cash flows are sufficient to fund working capital requirements, planned capital expenditures and interest and principal payments for the foreseeable future. Pro forma interest expense for fiscal 1994, assuming average borrowings outstanding under the Credit Agreement and Receivables Program of approximately $204.6 million and $201.0 million, respectively, adjusted for the Offering and the Refinancing, would have been approximately $33.7 million. There are no mandatory scheduled repayments under the Credit Agreement and no scheduled principal payments of other debt until January 3, 2000. The Receivables Program is expected to liquidate beginning in October 1999. 18 22 RESULTS OF OPERATIONS
FISCAL YEAR ENDED THREE MONTHS SEPTEMBER 30, ENDED DECEMBER 31, ---------------------------- ---------------- 1992 1993 1994 1993 1994 Revenues................................... 100.00% 100.00% 100.00% 100.00% 100.00% Cost of goods sold......................... 94.00 94.37 94.53 94.84 94.53 ------ ------ ------ ------ ------ Gross profit............................. 6.00 5.63 5.47 5.16 5.47 Operating expenses: Selling and administrative............... 3.77 3.50 3.31 3.16 3.42 Environmental remediation................ -- -- 0.09 -- -- Depreciation............................. 0.16 0.16 0.15 0.15 0.15 Amortization of intangibles.............. 0.17 0.15 0.10 0.13 -- Write-off of excess of cost over net assets acquired....................... -- -- 4.18 -- -- ------ ------ ------ ------ ------ Operating income (loss).................... 1.89 1.82 (2.37) 1.72 1.90 Interest expense-in cash................. 1.49 1.14 1.02 1.04 1.09 Interest expense-pay in kind............. 0.52 0.55 0.35 0.34 0.34 Amortization of deferred financing costs................................. 0.12 0.11 0.09 0.08 0.07 Non-recurring charges.................... 0.07 0.06 -- -- -- ------ ------ ------ ------ ------ Income (loss) before taxes, extraordinary items and cumulative effects of accounting changes....................... (0.31) (0.03) (3.83) 0.26 0.40 Taxes on income............................ 0.08 0.17 0.18 0.01 0.32 ------ ------ ------ ------ ------ Income (loss) before extraordinary items and cumulative effects of accounting changes.................................. (0.39) (0.20) (4.01) 0.25 0.08 Extraordinary charges-early retirement of debt, net of income tax benefit.......... -- (0.32) (0.02) (0.06) (1.02) Extraordinary credits: Settlement of litigation................. 0.13 -- -- -- -- Reduction of income tax provision from carryforward of prior year operating losses................................ 0.06 0.02 -- -- -- Cumulative effect of change in accounting for postretirement benefits other than pensions................................. -- -- (0.03) (0.12) -- Cumulative effect of change in accounting for income taxes......................... -- -- (0.78) (3.19) -- ------ ------ ------ ------ ------ Net (loss)................................. (0.19)% (0.50)% (4.83)% (3.12)% (0.94)% ====== ====== ====== ====== ======
THREE MONTHS ENDED DECEMBER 31, 1994 COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1993 Revenues in the first quarter of fiscal 1995 increased 10.6% to $1.2 billion from $1.0 billion in fiscal 1994. The increase reflects real volume growth, the pass through to customers of price increases from manufacturers and the opening of two new distribution facilities in November 1994. The most significant revenue increase was in the hospital customer group, where revenues were approximately 16% ahead of the comparable period of the prior year. Gross profit in the three months ended December 31, 1994 increased to $63.2 million, an increase of 17.1% from the same quarter of fiscal 1994, due to increased revenues, increased purchase discounts and a greater level of price increases from manufacturers resulting in greater opportunities for forward purchasing. As a percentage of revenues, the gross profit margin for the quarter was 5.47% as compared to 5.16% in the prior year, due primarily to increased purchase discounts and a greater level of price increases from manufacturers resulting in greater opportunities for forward purchasing. The Company is not able to predict whether such opportunities and the resulting favorable impact on the results of operations will continue in the future. 19 23 Selling and administrative expenses for the first quarter of fiscal 1995 were $39.6 million compared to $33.0 million for the first quarter of fiscal 1994, an increase of 19.9%. The cost increases reflect inflationary increases and increases in warehouse and delivery expenses which are variable with the level of sales volume as well as start-up expenses incurred to open the two new distribution facilities. As a percentage of revenues, selling and administrative expenses were 3.42% in the first quarter compared to 3.16% in the same quarter last year. The decrease in amortization of intangibles in the first quarter of fiscal 1995 was as a result of the write-off of the value of the excess of cost over net assets acquired ("goodwill"), which the Company recorded in the quarter ended June 30, 1994. Interest expense payable currently for the three months ended December 31, 1994 of $12.6 million increased $1.8 million compared with interest expense payable currently for the three months ended December 31, 1993. The increase is due primarily to higher interest rates on the Company's variable rate borrowings, partially offset by lower average borrowings. In connection with the Receivables Program, the Company expects to enter into interest rate protection contracts with respect to a majority of the variable rate receivable-based certificates. The weighted average interest rate on the Company's variable rate borrowings during the three months ended December 31, 1994 was 9.0% as compared to 6.7% during the three months ended December 31, 1993. Interest expense which is not payable currently (pay-in-kind interest) was $4.0 million for the three months ended December 31, 1994 as compared to $3.6 million for the three months ended December 31, 1993. The income tax provision for the three months ended December 31, 1994 was computed on a regular tax basis and based on an estimate of the full year effective tax rate. The extraordinary charge of $15.4 million, net of a tax benefit of $3.7 million, relates to the amendment of the Credit Agreement and the redemption premium of the 14 1/2% senior subordinated notes and the consequent write-off of unamortized financing fees. YEAR ENDED SEPTEMBER 30, 1994 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1993 Revenues for the fiscal year ended September 30, 1994 were $4.3 billion, an increase of 15.7% over the $3.7 billion in revenues for 1993. The revenue growth, which occurred for all customer groups, reflects real volume growth as well as the pass through to customers of price increases from manufacturers. Price increases accounted for approximately one-tenth of the revenue increase in 1994. As compared with the prior fiscal year, sales to hospitals and managed care facilities grew by 27%, sales to chain drug stores, excluding brokerage business, increased by 8% and sales to independent community pharmacies increased by 4%. During 1994, sales to hospitals and managed care facilities accounted for 46% of total revenues, while sales to independent community pharmacies represented 34% and sales to chain drug stores, 20% of the total. Gross profit of $235.2 million for 1994 increased by 12.3% over 1993, primarily due to the increase in revenues. As a percentage of revenues, gross profit declined to 5.47% in 1994 from 5.63% in 1993. The reduction in the gross profit percentage resulted from continued industry price competition and increased sales to larger volume, lower margin customers, such as hospitals. Selling and administrative expenses for 1994 were $142.5 million compared to $130.3 million for 1993, an increase of 9.3%. The cost increases reflect inflationary increases and increases in warehouse and delivery expenses which are variable with the level of sales volume. Continued emphasis on cost containment programs as well as the economies associated with the significant revenue growth, reduced overall selling and administrative expenses as a percentage of revenues to 3.31% in 1994 from 3.50% in 1993. Operating expenses in 1994 include a provision of $4.1 million to cover the expected environmental remediation costs with respect to the Company's former Charleston, South Carolina distribution center. In addition, in the third quarter of fiscal 1994, the Company completed a detailed evaluation of the recovery of the recorded value of the excess of cost over net assets acquired ("goodwill") and concluded that projected operating results together with its then existing capital structure would not support the future recovery of the remaining goodwill balance. Accordingly, the Company wrote off the remaining goodwill balance of $179.8 20 24 million in the quarter ended June 30, 1994. Goodwill of approximately $209 million was recorded at the time of the Acquisition in 1988. Interest expense which is payable currently (cash interest), principally related to the revolving credit facility and the senior subordinated notes, was $43.7 million in 1994 as compared with $42.4 million in 1993, an increase of 3.3%. The increase was a result of higher interest rates on the Company's variable rate borrowings offset in part by lower variable rate borrowing levels and the reduction in principal amount of the senior subordinated notes. Interest expense in 1994 reflects reductions as a result of the purchase and retirement of an aggregate principal amount of $8.9 million of senior subordinated notes, which occurred during the fourth quarter of fiscal 1993 and first quarter of fiscal 1994. Interest expense in 1994 includes $621,000 paid to the holders of an aggregate of $165.7 million in principal amount of senior subordinated notes (see Note 4 of "Notes to Consolidated Financial Statements"). During 1994, the average outstanding debt level was $430 million at an average interest rate of 10.0%. In 1993, the comparable average outstanding debt level was $441 million at an average interest rate of 9.6%. The decrease in interest expense which is not currently payable (pay-in-kind interest) of $5.5 million was due to the refinancing in July, 1993 of the 18% senior subordinated debentures, 18 1/2% merger debentures and 19 1/2% junior subordinated debentures with the 11 1/4% senior debentures. Interest expense in 1994 includes $4.0 million in amortization of financing fees as compared with $3.9 million in 1993. Income tax expense in 1994 and 1993 has been determined based on the alternative minimum tax system. As noted below, the Company changed its method of accounting for income taxes effective October 1, 1993. The extraordinary charge of $679,000, net of a tax benefit of $23,000, relates to the purchase and retirement of an aggregate principal amount of $4.4 million of senior subordinated notes. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (Statement 106) and Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109). The Company recorded, as of October 1, 1993, a total of $34.6 million in non-cash charges to net income for the effects of transition to these two new standards. Statement 106 requires that the expected cost of providing postretirement medical benefits be accrued during employees' working years rather than on a pay-as-you-go basis as was previously permitted. The cumulative effect of this change in accounting principle resulted in a non-cash charge to net income of $1.2 million as of October 1, 1993. Statement 109 requires a change in the method of accounting for income taxes from the deferred method to the liability method. Under the liability method, deferred taxes result from differences between the tax and financial reporting bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. The cumulative effect of this change in accounting principle resulted in a non-cash charge to net income of $33.4 million as of October 1, 1993, principally related to the provision of deferred income taxes to reflect the tax consequences on future years of the difference between the tax and financial reporting basis of merchandise inventories. YEAR ENDED SEPTEMBER 30, 1993 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1992 Revenues for the fiscal year ended September 30, 1993 were $3.7 billion, an increase of 11.7% over the $3.3 billion in revenues for 1992. The revenue growth, which occurred for all customer groups, was attributable to the addition of new accounts, increased sales to existing accounts through value added services and price increases. Price increases accounted for approximately one-fourth of the revenue increase in 1993. As compared with the prior fiscal year, sales to hospitals and managed care facilities increased by 24%, sales to independent community pharmacies increased by 3% and sales to chain stores grew by 7%. Sales to hospitals and managed care facilities accounted for 42% of total revenues in 1993, while sales to independent community pharmacies represented 37% and sales to chain drug stores, 21% of the total. As a percentage of revenues, gross profit declined to 5.63% in 1993 from 6.00% in 1992. The decline in 1993 resulted from: increased sales to large volume, lower margin and lower-cost-to-service customers, principally hospitals; price competition within the industry; and a reduction in inventory purchasing gains associated with the decline in the rate and frequency of manufacturer price increases. 21 25 Selling and administrative expenses for the year ended September 30, 1993 were $130.3 million, or 3.50% of revenues, compared to $125.7 million, or 3.77% of revenues for the prior year. Selling and administrative expenses, which increased by $4.6 million, or 3.7% from the prior year, reflect the economies associated with the revenue growth and reductions due to cost containment measures and productivity improvements. The expense percentage improvement in 1993 also reflects the partial benefits of two distribution facility consolidations completed during the latter part of 1993. Expenses in 1993 include $1 million in costs incurred with respect to the two completed facility consolidations as well as an additional consolidation which began in late 1993 and is expected to be completed during the first quarter of fiscal 1994. As a result of the above, operating income increased 7.5%, or $4.7 million, to $67.8 million for the fiscal year ended September 30, 1993 in comparison to the prior year, while operating income as a percentage of revenues was 1.82% in 1993 versus 1.89% in 1992. Interest expense which is payable currently (cash interest), principally related to the revolving credit facility and the senior subordinated notes, was $42.4 million in 1993 as compared with $49.8 million in 1992, a decrease of 14.9%. The decrease is attributable to reduced borrowings and lower average interest rates. During 1993, the average outstanding debt level was $441 million at an average interest rate of 9.6%. In 1992, the comparable average outstanding debt level was $480 million at an average interest rate of 10.3%. Interest expense in 1993 includes $3.9 million in amortization of financing fees as compared with $4.0 million in 1992. Interest on the senior debentures, senior subordinated debentures, merger debentures and junior subordinated debentures which, at the option of the Company, is not currently payable (pay in kind interest), amounted to $20.4 million in 1993 as compared with $17.3 million in 1992. The non-recurring charges in 1993 consist of $1.3 million in losses on the disposal of three warehouses and charges of $969,000 for the write-down to net realizable value of two additional warehouses no longer in operation which are designated for sale. The non-recurring charges in 1992 consist of a loss of $287,000 incurred on the sale of a warehouse no longer in operation and the write-off of $2.0 million in professional fees incurred in connection with a public offering attempted during 1992 which was later abandoned due to market conditions. Income tax expense in both 1993 and 1992 was computed based on the alternative minimum tax system. The extraordinary charge of $16.7 million, net of a tax benefit of $4.8 million, relates to the write-off of unamortized financing fees relating to the refinancings of the revolving credit facility and the Company's debt and premiums paid on the purchase and retirement of a portion of the senior subordinated notes. The extraordinary credits for income taxes in 1993 and 1992 represent the utilization of net operating losses carried forward from earlier periods. INFLATION The Company uses the LIFO method of accounting in order to minimize the effect of inflation on inventory value. Under this method, the effect of suppliers' price increases is charged directly to cost of goods sold. Concurrently, the Company increases selling prices, where possible, in order to maintain its gross profit margin. The effect of price inflation, as measured by the excess of LIFO costs over FIFO costs, was $5.3 million in 1994, $13.5 million in 1993 and $13.2 million in 1992. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's operating results have generated sufficient cash flows which, together with borrowings under the revolving credit facility and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures and interest currently payable on outstanding debt. Future cash flows are expected to be sufficient to fund capital expenditures and interest currently payable over the near-term. The primary sources of the Company's working capital and cash operating requirements are cash flows from operations and borrowings under the Receivables Program and the Credit Agreement. 22 26 During the three-month period ended December 31, 1994, the Company's operating activities consumed $160.0 million in cash. The increase of $33.2 million in accounts receivable and the increase of $162.8 million in merchandise inventories offset by the $23.8 million increase in accounts payable accounted for most of the use of funds. The increases in merchandise inventories and accounts payable reflect the timing of seasonal purchases and related payments as well as purchases in anticipation of manufacturer price increases. A portion of the increase in merchandise inventories during the quarter was the result of the opening of the Springfield, Massachusetts and Portland, Oregon distribution facilities. Operating cash uses during the three-month period ended December 31, 1994 included $5.0 million in interest payments and $1.4 million in income tax payments. During the fiscal year ended September 30, 1994, operating activities provided cash of $84.0 million, compared to a generation of $99.2 million in cash during the fiscal year ended September 30, 1993. Accounts receivable and merchandise inventories increased during fiscal 1994 by $24.9 million and $5.3 million, respectively, offset by an increase of $70.2 million in accounts payable. The increases in accounts receivable and merchandise inventories are commensurate with the Company's revenue growth. Accounts payable, accrued expenses and income taxes increased by $76.8 million in 1994 as compared to an increase of $77.1 million in 1993. These year to year increases reflect increased credit from suppliers due to the Company's improved operating performance as well as increases to support the expanded revenue base and increases in tax liabilities as a result of the Company's return to taxpayor status. A portion of the increase in merchandise inventories was the result of the opening of the Dallas, Texas distribution facility, which occurred in the first quarter of fiscal 1994. Operating cash uses during fiscal 1994 included $46.1 million in interest payments and $3.9 million in income tax payments. Capital expenditures required for the Company's business historically have not been substantial. Capital expenditures for the three months ended December 31, 1994 were $3.4 million and relate principally to the opening of the two new distribution centers and additional investment in management information systems. Capital expenditures for the fiscal year ended September 30, 1994 were $8.5 million and related principally to improvements in warehouse distribution and management information systems. Capital expenditures for fiscal 1995 are projected to approximate $9.5 million. As a result of the Receivables Program financing in December 1994, borrowings under the Company's revolving credit facility were reduced to $147.0 million at December 31, 1994 (at an average interest rate of 9.0%) from the $175.9 million (at an average interest rate of 8.1%) outstanding at September 30, 1994. Borrowings under the Receivables Program were $202.0 million at December 31, 1994 at an interest rate of 7.05%. Cash used in financing activities during fiscal 1994 included $5.0 million in payments associated with the redemption of an aggregate principal amount of $4.4 million of senior subordinated notes. As a result of the cash generated during fiscal 1994, borrowings under the Company's revolving credit facility were reduced to $175.9 million at September 30, 1994 from the $248.0 million outstanding at September 30, 1993. In December, 1994, the Company called the senior subordinated notes for redemption. The senior subordinated notes were redeemed on January 12, 1995. At January 31, 1995 borrowings under the Credit Agreement were $344.8 million. The Company has become aware that its former Charleston, South Carolina distribution center was previously owned by a fertilizer manufacturer and that there is evidence of residual contamination remaining from the fertilizer manufacturing process operated on that site over thirty years ago. The Company engaged an environmental consulting firm to conduct a soil survey and initiated a groundwater study during fiscal 1994. The preliminary results of the groundwater study indicate that there is lead in the groundwater at levels requiring further investigation and response. A preliminary engineering analysis was prepared by outside consultants during the third quarter of fiscal 1994, and indicated that, if both soil and groundwater remediation are required, the most likely cost of remediation efforts at the Charleston site is estimated to be $4.1 million. Accordingly, a liability of $4.1 million was recorded during the third quarter of fiscal 1994 to cover future consulting, legal and remediation and ongoing monitoring costs. The Company has notified the appropriate state regulatory agency from whom approval must be received before proceeding with any further tests or with the actual site remediation. The approval process and remediation could take several years to accomplish and the actual costs may differ from the liability which has been recorded. The accrued liability, which is reflected in other long-term liabilities on the accompanying consolidated balance sheet, is based on an estimate of the 23 27 extent of contamination and choice of remedy, existing technology and presently enacted laws and regulations, however, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time, although the Company intends to vigorously enforce its rights and remedies. The Company's primary ongoing cash requirements will be to fund payment of principal and interest on indebtedness, finance working capital and fund capital expenditures. An increase in interest rates would adversely affect the Company's operating results and the cash flow available after debt service to fund operations and any expansion and, if permitted to do so under its revolving credit facility and the indenture for the senior debentures, the ability to pay dividends on its capital stock. The Company wrote-off its goodwill balance of $179.8 million in the quarter ended June 30, 1994. The goodwill was recorded at the time of the leveraged buyout transaction ("Acquisition") in 1988. Since the Acquisition, the Company has been unable to achieve the operating results projected at the time of the Acquisition. The projections at the time of the Acquisition were developed based on historical experience, industry trends and management's estimates of future performance. These projections assumed significant growth rates in revenues, stable gross profit margins and cash flow from operations to reduce Acquisition indebtedness and did not anticipate long-term losses or indicate an inability to recover the value of goodwill. Due to persistent competitive pressures and a shift in the customer mix to larger volume, lower margin customers, gross profit margins have declined from 7.10% in fiscal 1989 to 5.63% in fiscal 1993 and 5.47% in fiscal 1994, resulting in: operating results which are substantially below the projections made at the time of the Acquisition; an increase in the Company's indebtedness; and an accumulated deficit in retained earnings at June 30, 1994 before the goodwill write-off of $126.4 million. During the period since the Acquisition, the Company has been affected by price competition for market share within the industry, health care industry consolidation and the impact of group purchasing organizations, managed care and health care reform on drug prices. As a result of the negative impact of these factors and the Company's expectation that such factors would continue to negatively impact operating results into the foreseeable future, the Company initiated a detailed evaluation of the long-term expected effects of these factors on the ability to recover the recorded value of goodwill over its remaining estimated life. Based on industry trends, interest rate trends and the health care reform environment, in the quarter ended June 30, 1994, the Company revised its operating projections and concluded that the projected operating results (the "Projection") would not support the future recovery of the remaining goodwill balance. The methodology employed to assess the recoverability of the Company's goodwill was to project results of operations forward 36 years, which approximated the remaining amortization period of the goodwill balance at June 30, 1994. The Company then evaluated the recoverability of goodwill on the basis of the Projection. The Company's Projection assumed that, based on industry conditions and competitive pressures, future revenue growth would approximate 12.6% in the near-term gradually declining to approximately 5% over the longer-term. These assumptions reflected expected benefits in the near-term from continued industry consolidation, and an expectation that manufacturers would continue to increase their reliance on wholesalers in their own cost control measures in the face of healthcare reform. Over the next five to ten year period, growth in revenue was expected to moderate as the industry consolidation trend was completed, and over the long-term (next twenty years), stable growth of 5% was assumed. The gross profit percentage was projected to gradually decline over the projected period from the then current rate to 3.60% in the fiscal year 2000 and to 2.68% in the longer term. The short-term gross profit declines reflected the impact of the worsened trends in 1994 caused by consolidation of certain major competitors and deteriorated gross profit margins from existing contracts with certain group purchasing organizations. The long-term decline in gross profit reflected the Company's belief that continued industry wide competitive pricing pressures would drive margins down, as the consolidated industry attempts to maintain market share. Operating expenses were projected to increase 6% per year in the near-term and 5% per year in the longer-term principally reflecting the Company's expectations regarding inflation. Working capital levels (as a percentage of revenues) were projected to improve as the Company aggressively managed its investment in receivables and inventory over the projected period. For 24 28 purposes of the Projection, the Company had assumed that it would be able to refinance its current revolving credit facility when it expired in 1996. For purposes of the Projection, the Company assumed that it would be able to increase its variable rate borrowings to finance increasing working capital and interest payment requirements. In order to meet the working capital and interest payment requirements projected in fiscal year 2000, the revolving credit facility would have to be increased to $460 million. Interest rates on the variable rate revolving credit facility were assumed to increase to 9.75% to reflect then current expectations of future short-term borrowing rates. The Projection also indicated that cash flow from operations would not be sufficient to satisfy maturities of the Company's fixed rate debt obligations, which consisted of the 14 1/2% senior subordinated notes due in fiscal 1998 and fiscal 1999 and the 11 1/4% senior debentures due in fiscal 2005. The Projection assumed that these fixed rate debt obligations would be refinanced at the time of the scheduled maturities at identical interest rates. The Company determined that unless it was able to develop successful strategic, operating or financing initiatives which would change these assumptions, the projected future operating results based on these assumptions represented the best estimate of the Company's projected performance given the Company's existing high leverage and industry trends. The Projection reflected significant cumulative losses indicating that the carrying value of goodwill was not recoverable. Accordingly, the Company wrote off its remaining goodwill balance of $179.8 million in the quarter ended June 30, 1994. More importantly, while the Company believed the reliability of any projection over such an extended period is highly uncertain, the Projection also indicated that the Company's long-term viability would require modification of its then current capital structure to reduce its indebtedness and increase its equity in the near to mid-term future. While the Projection indicated that in fiscal 1998 cash flow from operations would not be sufficient to satisfy required interest and principal payments on its current debt obligations, the Company believed and the Projection indicated, that cash flow generated from operations in the near-term (fiscal years 1995 through 1997) would be sufficient to service its then current debt obligations. The Company was unable to provide any assurance that the Company would be successful in efforts to restructure or recapitalize in order to be able to operate in a profitable manner for the long-term. In December 1994, the Company sold substantially all of its Receivables to ARC, pursuant to the Receivables Program. Pursuant to the Receivables Program, ARC will continuously transfer Receivables to a master trust in exchange for, among other things, Certificates representing a right to receive a variable principal amount. Contemporaneous with the consummation of the Receivables Program, the Company amended its existing Credit Agreement with its senior lenders and redeemed all of the outstanding Notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date. See "The Refinancing" and "Description of Indebtedness and Securitization Program." 25 29 BUSINESS AmeriSource is the fifth largest full-service wholesale distributor of pharmaceutical products and related health care services in the United States. The Company services its customers nationwide through 16 drug distribution facilities and one specialty products distribution facility. AmeriSource is typically the primary source of supply to its customers and offers a broad range of services designed to enhance the operating efficiencies and competitive position of its customers and suppliers. The Company benefits from a diverse customer base that includes hospitals and managed care facilities (46%), independent community pharmacies including retail drug stores, nursing homes and clinics (34%) and chain drug stores including pharmacy departments of supermarkets and mass merchandisers (20%). Over the past five years, AmeriSource has achieved significant growth in revenues and adjusted operating income. The Company's revenues have increased from $2.6 billion in fiscal 1990 to $4.3 billion in fiscal 1994, a compound annual growth rate of 13.8%, while adjusted operating income increased from $43.8 million in fiscal 1990 to $86.1 million in fiscal 1994, a compound annual growth rate of 18.4%. The Company's growth is primarily the result of market share gains in existing markets, geographic expansion and overall industry growth. BUSINESS STRATEGY Over the past five years, AmeriSource has significantly expanded its national presence as a leading, innovative wholesale distributor of pharmaceutical products and related health care services. The Company believes it is well-positioned to continue its revenue growth and increase operating income through the execution of the following key elements of its business strategy: - - Expanding into New Geographic Markets. The Company believes that there are substantial opportunities to grow by expanding into new geographic areas through opening new distribution facilities and making selective, complementary acquisitions. During the past 17 months, the Company has opened three new distribution facilities. In October 1993, the Company opened a facility in Dallas, Texas, and in November 1994, the Company opened two additional facilities in Portland, Oregon and Springfield, Massachusetts. Each of these new facilities began operations with an existing customer base in its regional marketplace, providing for profitable operations (on an operating income basis) almost immediately upon opening. The Company plans to open new distribution facilities in Sacramento, California and Orlando, Florida during calendar 1995. In addition, the Company believes that as industry consolidation pressures continue, opportunities will arise to selectively acquire local and regional drug wholesale companies facilitating expansion into new geographic areas and enhancement of its competitive position in existing markets. Prior to the Acquisition in 1988, AmeriSource's management team completed 18 acquisitions over a 10-year period. The completion of the Offering and the Refinancing will significantly increase the Company's financial flexibility, including its ability to pursue acquisitions. - - Increasing Market Share in Existing Markets. The Company believes that it is well positioned to continue to grow in its existing markets by: (i) providing superior distribution services and specialty value-added programs which reduce its customers' cost of operations; (ii) maintaining its low cost operating structure to ensure that the Company's services are priced competitively in the marketplace; (iii) continuing to focus on the higher growth hospital and managed care market segment through the use of dedicated facilities and advanced information systems; and (iv) maintaining its decentralized operating structure to respond to customers' needs more quickly and efficiently and to ensure the continued development of local and regional management talent. These factors have allowed AmeriSource to compete effectively in the marketplace, generate above-average industry sales growth over the last three years and develop new types of customers, such as the federal government. For example, over the past two years the Company has been awarded contracts to provide approximately 75% of the pharmaceuticals purchased by federal government hospital facilities nationwide. In addition, the Company continues to grow with its existing customers. In January 1995, the Company was selected by VHA Inc., one of the nation's largest healthcare providers, as one of its three preferred providers. 26 30 - - Continuing Growth of Specialty Services. The Company works closely with both customers and suppliers to develop an extensive range of specialty services. In addition to enhancing the Company's profitability, these services increase customer loyalty and strengthen the Company's overall role in the healthcare distribution channel. These services include: -- ECHO(TM), the Company's proprietary software system, provides sophisticated ordering and inventory management assistance to its hospital and retail customers. In addition to facilitating the primary supply arrangement between the Company and its customers, ECHO(TM) enables the Company's customers to reduce their costs through ordering more efficiently, selecting from best price alternatives and maintaining formulary compliance. Since the introduction of ECHO(TM) in early fiscal 1991, the Company has installed approximately 2,000 systems nationwide, 600 of which were installed in fiscal 1994, and believes that its installed base of systems is one of the largest in the wholesale drug industry. -- Family Pharmacy(R) enables small chain and independent community pharmacies to compete more effectively through: (i) innovative advertising, marketing and promotional campaigns; (ii) value-added merchandising programs including private label product lines; and (iii) enhanced access to pharmaceutical benefit programs of large health care groups, including third party payor programs. Family Pharmacy(R) has grown dramatically in recent years, adding over 550 new member-stores in fiscal 1994. As of December 31, 1994, the 1,861 Family Pharmacy(R) member-stores in effect constitute one of the largest drugstore chains in the United States. -- The Company's Income Rx(R) program provides an integral value-added service to its hospital and retail pharmacist customers by continually reviewing the marketplace for generic products that offer the best price, quality and availability. With the increasing importance of generic pharmaceuticals this program represents a significant opportunity for growth and profitability. Revenues attributable to AmeriSource's sale of generic and multi-source pharmaceuticals (including through the Income Rx(R) program) have increased to approximately $450 million in fiscal 1994, more than twice what they were in fiscal 1992. -- AmeriSource operates a pharmaceutical repackaging business that markets products through its Income RePax(R) program. Repackaging pharmaceuticals from bulk quantities into smaller units provides the Company's customers with lower product, inventory and dispensing (labor) costs. -- The Company's Health Services Plus subsidiary distributes oncology and other specialty products to clinics and physician groups on a national basis. Rita Ann Distributors markets cosmetics and fragrances to chain drugstores and independent retail customers. - - Maintain Low Cost Operating Structure. AmeriSource has the lowest operating cost structure among its four major national competitors. Over the past six years, the Company has significantly reduced operating expenses and investment in net working capital as a percentage of revenues. Specifically, the Company has reduced its selling and administrative expenses as a percentage of revenues from 5.36% in fiscal 1988 to 3.31% in fiscal 1994. In addition, the Company continues to achieve productivity and operating income gains from continued investments in advanced management information systems, warehouse automation technology, and from operating leverage due to above industry average volume per facility. In fiscal 1994, the Company's average revenue per facility was $287 million compared to a calendar 1993 industry average of $175 million. The addition of two new facilities in November 1994 was accomplished with minimal incremental investment in corporate overhead. As these facilities continue to expand in their regional markets, the Company believes that its growth and profitability will be further enhanced. INDUSTRY OVERVIEW The Company has benefited from the significant growth of the full-service drug wholesale industry in the United States. Industry sales grew from $30 billion in 1990 to an estimated $53 billion in 1994. The factors contributing to this growth, and the sources of future growth for the industry, include (i) an aging population, 27 31 (ii) the introduction of new pharmaceuticals, (iii) the increased use of outpatient drug therapies, (iv) a higher concentration of distribution through wholesalers by both manufacturers and customers, and (v) rising pharmaceutical prices. Aging Population. The number of individuals over age 65 in the United States has grown 23% from approximately 26 million in 1980 to approximately 32 million in 1990 and is projected to increase an additional 9% to more than 35 million by the year 2000. 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 health care expenditures in the United States. Introduction of New Pharmaceuticals. Traditional research and development as well as the advent of new research and production methods, such as biotechnology, continue to generate new compounds that are more effective in treating diseases. These compounds have been responsible for significant increases in pharmaceutical sales. The Company believes that ongoing research and development expenditures by the leading pharmaceutical manufacturers will contribute to continued growth of the industry. Cost Containment Efforts. In response to rising health care 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 health care costs, the Company believes drug therapy has had a beneficial impact on overall health care costs by reducing expensive surgeries and prolonged hospital stays. Pharmaceuticals currently account for less than 9% of overall healthcare costs, and manufacturers' emphasis on research and development is expected to continue the introduction of cost effective drug therapies. Higher Concentration of Distribution Through Wholesalers. Over the past decade, manufacturers of pharmaceuticals have significantly increased the distribution of their products through wholesalers as the cost and complexity of maintaining inventories and arranging for delivery of pharmaceutical products has risen. Drug wholesalers offer their customers and suppliers more efficient distribution and inventory management. As a result, from 1980 to 1994, the percentage of total pharmaceutical sales through wholesale drug distributors increased from approximately 57% to approximately 78%. Order processing, inventory management and product delivery by wholesale drug distributors allow manufacturers to allocate their resources to research and development, manufacturing and marketing their products. Customers benefit from this shift by having a single source of supply for a full line of pharmaceutical products as well as lower inventory costs, more timely and efficient delivery, and improved purchasing and inventory information. In addition, customers also benefit from the range of value-added programs developed by wholesale drug distributors that are targeted to the specific needs of these customers, which, in turn, reduce their costs and increase their operating efficiencies. Pharmaceutical Price Increases By Drug Manufacturers. The Company believes that price increases by pharmaceutical manufacturers will equal or exceed the overall Consumer Price Index. The Company believes that this increase 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 Food and Drug Administration ("FDA") approval of new products. At the same time that sales through the wholesale drug industry have grown, the number of pharmaceutical wholesalers in the United States has decreased from 139 at the end of 1980 to approximately 55 as of December 31, 1994. Industry analysts expect this consolidation trend to continue during the 1990s, with the industry's largest companies increasing their percentage of total industry sales. OPERATIONS Decentralized Structure. The Company believes that operating economies of scale exist principally at the distribution facility level. Beginning in fiscal 1989, the Company undertook an extensive consolidation program, which closed 17 of the 31 facilities open on October 1, 1988. During the course of this consolidation program, the Company continued to significantly increase its revenues in each fiscal year. During fiscal 1994, the Company's average revenue per facility was approximately $287 million, compared to the calendar 1993 28 32 industry average of $175 million. Five AmeriSource facilities each have annual volume of over $400 million and an additional seven facilities each have annual volume in excess of $175 million, which provides the Company with continued opportunities for significant leverage of fixed overhead and other costs. To expand into new geographic markets, AmeriSource opened three new facilities during the past 17 months, and currently operates 16 drug wholesale distribution facilities and one specialty products distribution facility, organized into six regions across the United States. The Company also plans to open additional distribution facilities in Sacramento, California and Orlando, Florida during calendar 1995. Several operating units of the Company have over 100 years of history in the business and are among the nation's first drug distribution businesses. Unlike its more centralized competitors, the Company is structured as an organization of locally managed profit centers. Management of each operating unit has fiscal responsibility for its unit, and each operating unit has an established executive, sales and operations staff. The operating unit's results, including earnings and asset management goals, have a direct impact on management compensation. The operating units utilize the Company's corporate staff for marketing, financial, legal and executive management resources and corporate coordination of asset and working capital management. Customers and Markets. The Company benefits from a diverse customer base that includes hospitals and managed care facilities (46%), independent community pharmacies including retail drug stores, nursing homes and clinics (34%) and chain drug stores including pharmacy departments of supermarkets and mass merchandisers (20%). The Company offers a broad range of services designed to enhance the operating efficiencies and competitive position of its customers and manufacturers. In addition, AmeriSource is typically the primary source of supply for its customers, delivering on a daily basis. The table below summarizes how the Company's customer sales mix has changed over the last five fiscal years.
FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- 1990 1991 1992 1993 1994 (DOLLARS IN MILLIONS) Hospitals and Managed Care Facilities................. $ 844 33% $1,001 35% $1,253 38% $1,554 42% $1,968 46% Independents................. 1,108 43% 1,203 43% 1,356 41% 1,397 37% 1,450 34% Chains....................... 612 24% 623 22% 721 21% 768 21% 884 20% ------ --- ------ --- ------ --- ------ --- ------ --- Total.................... $2,564 100% $2,827 100% $3,330 100% $3,719 100% $4,302 100% ====== ==== ====== ==== ====== ==== ====== ==== ====== ====
No single customer represented more than 4% of the Company's total revenues during fiscal 1994 other than the federal government which, in the aggregate, accounted for approximately 10%. Excluding the federal government, the Company's top ten customers represented approximately 15% of total revenues during fiscal 1994. The Company believes it is less dependent on any single customer than its four largest competitors. A profile of each customer segment follows: - Hospitals and Managed Care Facilities. AmeriSource is one of the nation's top three distributors in serving the hospital and managed care market segment, which is currently the fastest growing customer segment in the industry. Because hospitals and managed care facilities purchase large volumes of high priced, easily handled pharmaceuticals, the Company benefits from quick turnover of both inventory and receivables and lower than average operating expenses. The Company intends to continue to focus on the higher growth hospital and managed care market segment through the use of dedicated facilities and advanced information systems such as ECHO(TM). As a percentage of total revenues, sales to hospitals and managed care facilities increased from 33% in fiscal 1990 to 46% in fiscal 1994, and have grown at a compound rate of 23.6% over this period. - Independents. Independent community pharmacy owners represent the largest segment of the industry and provide the greatest opportunity for the Company's value-added services. The Company's sales to independent customers have risen at a compound rate of 7.0% over the five-year period from fiscal 1990 through fiscal 1994 due to the general growth of this customer segment and to the success of the Company's customized marketing and merchandising programs, such as its Family Pharmacy(R) program. 29 33 - Chains. This category includes chain drug stores, including pharmacy departments of supermarkets and mass merchandisers. The Company's sales to chains have risen at a compound rate of 9.6% over the five-year period from fiscal 1990 through fiscal 1994. This growth rate reflects the results from the Company entering into new contracts with several drug store chains, offset by the discontinuance in 1990 and 1991 of certain chain accounts, at the Company's election, because of their minimal profit contribution. The Company targets the smaller regional chain business for which the Company can provide higher margin, value-added services. Products and Services. AmeriSource provides services that improve the operating efficiencies of both its customers and suppliers. In addition, the Company is typically the primary source of product for its customers, delivering on a daily basis. The Company continually enhances its services and packages these services into programs designed to address the special needs of its various customer segments. These programs include a variety of management, merchandising and information processing services and programs, that enable customers to increase sales, reduce costs and compete more effectively. The Company believes that its broad range of customized services assists in attracting new customers and developing customer loyalty. In fiscal 1991, the Company introduced ECHO(TM), a proprietary software system that provides ordering and inventory management assistance for pharmaceutical products. The ECHO(TM) system is an interactive computerized method for reviewing pricing history, placing orders and tracing purchasing effectiveness. By creating a master file for each customer, the system automatically updates pricing data, monitors contract compliance, provides generic and therapeutic equivalent alternative purchase information and suggests order quantity information based on the customer's historical purchasing levels. As a result of its success and fast growth among its hospital and managed care customers, the Company has recently introduced ECHO(TM) to certain of its retail customers with the goal of increasing the competitiveness and reducing the costs of its retail pharmacy customers. Since the introduction of ECHO(TM), the Company has installed approximately 2,000 systems nationwide, 600 of which were installed in fiscal 1994. The Company believes its installed base of systems is one of the largest in the wholesale drug industry. The Family Pharmacy(R) program, another of the Company's customized services, enables small chain and independent community pharmacies to compete more effectively. These services include merchandising and pricing information, shelf labels and plan-o-grams, readily identifiable logos, signs and store decor, store operations manuals, advertising and promotional campaigns, and monthly newsletters. The Company also distributes private label vitamins and health and beauty aids under the Family Pharmacy(R) label, which provides higher profit margins both to the Company and the retailer. In addition, the Company negotiates with large health care groups, including third party payors, on behalf of member-stores for delivery of pharmaceutical benefit programs. The Family Pharmacy(R) program, initiated in 1982, had 1,169 member-stores as of December 31, 1991 and has increased its membership to 1,861 member-stores as of December 31, 1994. The combined member-stores of the Family Pharmacy(R) program in effect would constitute one of the largest drug chains in the United States. The Company's Income Rx(R) generic program provides an integral value-added service to its hospital and retail pharmacist customers by continually reviewing the marketplace for generic products that offer the best price, quality and availability. As with the industry, the Company has significantly increased sales of generic and multi-source pharmaceuticals over the past five years. Revenues attributable to the sale of generic and multi-source pharmaceuticals (including sales through the Income Rx(R) program) have increased to approximately $450 million in fiscal 1994, more than twice what they were in fiscal 1992. These products generate higher gross profit margins for wholesalers than branded pharmaceuticals. The Company estimates that industry sales of these products will double by 1996 due to the number of brands losing patent protection as well as third party payors' continued emphasis on cost containment. With the increasing importance of generic pharmaceuticals, the Income Rx(R) program represents a significant opportunity for growth and profitability. For all customer segments, the Company offers its Income RePax(R) program. Through the Income RePax(R) program, the Company purchases bulk quantities of certain pharmaceuticals and repackages them into smaller units, which enables pharmacists to sell pharmaceuticals at prices competitive with those of national drug chain operations. The Company's repackaging facility, located in Louisville, Kentucky, is licensed by the FDA and maintains rigid quality control standards. The Company also operates Health 30 34 Services Plus, which is a distributor of oncology and other special purpose products to clinics and alternate site businesses on a national basis, and Rita Ann Distributors, which is a distributor of cosmetics and fragrances to the Company's chain drugstore and other retail customers. Suppliers. AmeriSource purchases pharmaceutical and other products from a number of manufacturers, none of which account for more than approximately 7% of its purchases. The five largest suppliers in fiscal 1994 accounted for approximately 27% of total purchases. Historically, the Company has not experienced difficulty in purchasing desired products from suppliers. The Company has agreements with many of its suppliers which generally require the Company 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. While each of the Company's operating units on average carries a broad range of items from approximately 800 suppliers, purchases are concentrated among the top 25 manufacturers and about 250 items (SKUs). It is estimated that products from these 25 manufacturers account for approximately half the total annual sales volume of the Company. The Company believes that its relationships with its suppliers are good. Management Information Systems. The Company has continually invested in advanced management information systems and automated warehouse technology. For example, in fiscal 1994, AmeriSource introduced its BOSS warehouse automation system, a paperless warehouse production program customized to AmeriSource's unique requirements. Under the BOSS system, merchandise is received, placed in inventory, retrieved and shipped utilizing customized radio frequency equipment. The Company's management information systems also 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 costs of receiving and processing orders have not increased as rapidly as sales volume. The Company's customized systems strengthen customer relationships by allowing the customer to lower its operating costs and by providing the basis for a number of the value-added services the Company provides to its customers, including marketing data, inventory replenishment, single-source billing, computer price updates and price labels. AmeriSource believes that its management information systems are capable of serving its needs for the foreseeable future. COMPETITION The Company engages in the wholesale distribution of pharmaceuticals, health and beauty aids and other products in a highly competitive environment. The Company competes with numerous national and regional distributors, some of which are larger and have substantially greater financial resources than the Company. The Company's national competitors include McKesson Corporation, Bergen Brunswig Corporation, Cardinal Health, Inc. and FoxMeyer Health Corporation. In addition, the Company competes with local distributors, direct-selling manufacturers and other specialty distributors. Competitive factors include price, service and delivery, credit terms, breadth of product line, customer support and marketing programs. There can be no assurance that the Company will not encounter increased competition in the future that could adversely affect the Company's business. The drug wholesale industry continues to undergo significant consolidation, with the number of wholesalers in the continental United States down from 139 at the end of 1980 to approximately 55 as of December 31, 1994. PROPERTIES As of December 31, 1994, the Company conducted its business from office and operating unit facilities at 26 locations throughout the United States. In the aggregate, AmeriSource's operating units occupy approximately 1.5 million square feet of office and warehouse space, of which approximately 754,000 square feet is owned and the balance is leased under lease agreements with expiration dates ranging from 1995 to 2009. The Company's 16 drug distribution facilities range in size from approximately 43,600 square feet to 151,000 square feet. Leased facilities are located in the following states: Kentucky, Massachusetts, Minnesota, New Jersey, Ohio, Oregon, Pennsylvania, Tennessee and Texas. The Company has entered into a lease for a distribution facility in California, and is negotiating a distribution facility lease in Florida. Owned facilities are located in the following states: Georgia, Indiana, Kentucky, Maryland, Missouri, Ohio, Pennsylvania, Tennessee and Virginia. The Company utilizes a fleet of owned and leased vans and trucks, as well as contract 31 35 carriers to deliver its products. The Company believes that its properties are adequate to serve the Company's current and anticipated needs without making capital expenditures materially higher than historical levels. EMPLOYEES As of December 31, 1994, the Company employed approximately 2,400 persons, of which approximately 2,180 were full-time employees. Approximately 11% of full and part-time employees are covered by collective bargaining agreements. The Company believes that its relationship with its employees is good. REGULATORY MATTERS The United States Drug Enforcement Administration, the FDA and various state boards of pharmacy regulate the distribution of pharmaceutical products and controlled substances, requiring wholesale distributors of these substances to register for permits and to meet various security and operating standards. As a wholesale distributor of pharmaceuticals and certain medical/surgical products and as a repackager of certain pharmaceutical products, the Company is subject to these regulations. The Company has received all necessary regulatory approvals and believes that it is in substantial compliance with all applicable wholesale distribution requirements. The Company's former Charleston, South Carolina distribution center was previously owned by a fertilizer manufacturer. There is evidence of residual soil contamination remaining from the fertilizer manufacturing process operated on that site over thirty years ago. The Company engaged an environmental consulting firm to conduct a soil survey and initiated a groundwater study during fiscal 1994. The preliminary results of the groundwater study indicate that there is lead in the groundwater at levels requiring further investigation and response. A preliminary engineering analysis was prepared by outside consultants and indicated that if both soil and groundwater remediation are required, the most likely cost of remediation efforts at the Charleston site is estimated to be $4.1 million. Accordingly, a liability of $4.1 million was recorded during fiscal 1994 to cover future consulting, legal and remediation and ongoing monitoring costs. The Company has notified the appropriate state regulatory agency from whom approval must be received before proceeding with any further tests or with the actual site remediation. The approval process and remediation could take several years to accomplish and the actual costs may differ from the liability that has been recorded. The accrued liability, which is reflected in other long-term liabilities on the Company's consolidated balance sheet, is based on an estimate of the extent of contamination and choice of remedy, existing technology and presently enacted laws and regulations. However, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time, although the Company intends to vigorously enforce its rights and remedies. LEGAL PROCEEDINGS In November 1993, the Company was named a defendant, along with six other wholesale distributors and twenty-four pharmaceutical manufacturers, in fourteen civil actions filed by independent retail pharmacies in the United States District Court for the Southern District of New York, and in all cases plaintiffs have established these lawsuits, along with several other suits to which the Company is not a party, as a class action. In essence, these lawsuits claim that the manufacturer and wholesaler defendants have combined, contracted and conspired to fix the prices charged to plaintiffs and class members for prescription brand name pharmaceuticals. Specifically, plaintiffs claim that the defendants used "chargeback agreements" to give some institutional pharmacies discounts that were not allegedly made available to retail drug stores. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and costs. These actions have been transferred to the United States District Court for the Northern District of Illinois for consolidated and coordinated pretrial proceedings. In March 1995, the Company was named as a defendant, along with several other wholesale distributors and pharmaceutical manufacturers, in an additional civil action filed by independent retail pharmacies in the United States District Court for the Eastern District of Arkansas. Effective October 26, 1994, the Company entered into a Judgment Sharing Agreement with other wholesaler and pharmaceutical manufacturer 32 36 defendants. Under the Judgment Sharing Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler defendants for litigation costs incurred, up to an aggregate of $9 million; and (b) if a judgment is entered into against both manufacturers and wholesalers, the total exposure for joint and several liability of the Company is limited to the lesser of 1% of such judgment or $1 million. In addition, the Company has released any claims that it might have had against the manufacturers for the claims presented by the plaintiffs in these lawsuits. The Judgment Sharing Agreement covers the federal court litigation as well as the cases which have been filed in various state courts. Plaintiffs have filed a motion to declare the Judgment Sharing Agreement unenforceable. The Company believes that the plaintiffs' motion is without merit, and together with the other parties to the Judgment Sharing Agreement, has filed a memorandum against the plaintiffs' motion. The Company believes it has meritorious defenses to the claims asserted in these lawsuits and intends to vigorously defend itself in all of these cases. The Company has received notices from the Internal Revenue Service asserting deficiencies in federal corporate income taxes for the Company's taxable years 1987 through 1991. The notices indicate an aggregate increase in net taxable income for these years of approximately $24 million and relate principally to the deductibility of costs incurred with respect to the Acquisition. The Company has analyzed these matters with tax counsel and believes it has meritorious defenses to the deficiencies asserted by the Internal Revenue Service. The Company will contest the asserted deficiencies through the administrative appeals process and, if necessary, litigation. The Company believes that any amounts assessed will not have a material effect on the financial condition of the Company. The Company is a party to various lawsuits arising in the ordinary course of business. The Company, however, does not believe that the outcome of these lawsuits, individually or in the aggregate, will have a material adverse effect on its business or financial condition. 33 37 MANAGEMENT DIRECTORS AND OFFICERS OF THE REGISTRANT The following table sets forth information concerning the directors and officers of the Company.
NAME AGE TITLE John F. McNamara(1)(2)............ 59 Chairman, President and Chief Executive Officer David M. Flowers.................. 48 Group President -- Eastern Region R. David Yost..................... 47 Group President -- Central Region Kurt J. Hilzinger................. 34 Vice President, Chief Financial Officer and Treasurer Teresa T. Ciccotelli.............. 43 Vice President, Legal Counsel and Secretary Robert D. Gregory................. 65 Vice President, Human Resources and Assistant Secretary John A. Kurcik.................... 42 Vice President, Controller and Assistant Treasurer Robert E. McHugh.................. 53 Vice President, Marketing J. Michael McNamara............... 38 Senior Vice President, Sales Bruce C. Bruckmann................ 41 Director Michael A. Delaney(1)............. 40 Director Richard C. Gozon(3)............... 56 Director Lawrence C. Karlson(2)............ 52 Director George H. Strong(3)............... 68 Director James A. Urry(1).................. 41 Director Barton J. Winokur(1).............. 55 Director
- --------------- (1) Member of Compensation Committee. (2) Member of Acquisition Committee. (3) Member of Audit Committee. John F. McNamara. Mr. McNamara has been Chairman, President and Chief Executive Officer of the Company and AmeriSource since 1989 and has been President of AmeriSource since 1987. Prior to holding these positions, he was Chief Operating Officer of AmeriSource from 1986 to 1989 and Executive Vice President of AmeriSource from 1985 to 1987. He also served as Chairman, from 1986 to 1990, and President, from 1981 to 1986, of the Kauffman-Lattimer division of AmeriSource. Mr. McNamara served on the executive committee of the National Wholesale Druggists' Association from 1991 through 1994 and served as its chairman of the board from November 1993 to November 1994. David M. Flowers. Mr. Flowers has been Group President of the Eastern Region since 1989. Prior to that he was President of the AmeriSource Southeast Region from 1988 to 1989 and President of the Duff Brothers Division of AmeriSource from 1984 to 1987. R. David Yost. Mr. Yost has been Group President of the Central Region since 1989. Before serving in these positions he was President, from 1986 to 1989, and Executive Vice President and General Manager, from 1984 to 1986, of the Kauffman-Lattimer Division of AmeriSource. Kurt J. Hilzinger. Mr. Hilzinger has served as Vice President, Chief Financial Officer and Treasurer since January 1995. Prior to that, he served as Vice President, Finance and Treasurer since October 1993, and as Vice President, Financial Planning since March 1991. Before joining the Company, he was a Vice President in the Corporate Advisory Division of Citicorp from 1986 to 1991. Teresa T. Ciccotelli. Ms. Ciccotelli has served as Vice President, Legal Counsel and Secretary since 1989. Prior to that, from 1985 to 1989, she was an attorney with Alco Standard Corporation. Robert D. Gregory. Mr. Gregory has been Vice President, Human Resources and Assistant Secretary of the Company since 1989 and Vice President, Human Resources of AmeriSource since 1986. Prior to that, from 1984 to 1986, he served as Manager, Employee Relations for Alco Standard Corporation. 34 38 John A. Kurcik. Mr. Kurcik has been Vice President, Controller and Assistant Treasurer of the Company since 1989. Mr. Kurcik was Controller, from 1987, and Director of Accounting, from 1985 to 1987, of AmeriSource. Robert E. McHugh. Mr. McHugh joined the Company as Vice President, Marketing in August 1991. Prior to that he was President of J.E. Goold from 1990 to 1991 and Vice President, Industry Affairs of the National Wholesale Druggists' Association from 1983 to 1990. J. Michael McNamara. Mr. McNamara has served as Senior Vice President-Sales of the Company since November 1994. Previously, he served as Regional Vice President of the West Central Region of AmeriSource since April 1991. Prior to that he was Vice President, Sales and Marketing of the Company from 1990 to 1991, Vice President and General Manager of the Toledo Division of AmeriSource from 1988 to 1990, and Director of Marketing of the Columbus Division of AmeriSource from 1984 to 1988. Bruce C. Bruckmann. Mr. Bruckmann has been a director since August 1992. Mr. Bruckmann previously was a director of the Company since 1989 and of AmeriSource since 1988. Mr. Bruckmann resigned as a director of both companies in December 1991. Mr. Bruckmann is a Managing Director of Bruckmann, Rosser, Sherrill & Co., Inc. Until January 1995, Mr. Bruckmann was a Managing Director of Citicorp Venture Capital Ltd. and of Court Square Capital Limited. Mr. Bruckmann is Chairman of the Board of Polyfibron Technologies, Inc. He serves as a director of Chromcraft Revington, Inc., Cort Furniture Rental Corporation, New Cort Holdings Corporation, Mohawk Industries, Inc., Hancor Holding Corp., Triumph Group, Inc., Fair Markets, Inc., FF Holdings Corporation and Farm Fresh, Inc. Michael A. Delaney. Mr. Delaney has been a director since January 1995. Mr. Delaney has been a Vice President of Citicorp Venture Capital Ltd. since 1989. From 1986 through 1989 he was Vice President of Citicorp Mergers and Acquisitions, an affiliate of VPI. Mr. Delaney is also a director of Sybron Chemicals, Inc., GVC Holdings, JAC Holdings, DRA International, Enterprise Radio Corporation and Southern Coil Processing, Inc. Richard C. Gozon. Mr. Gozon was elected to the board of directors in 1994. Mr. Gozon has been Executive Vice President of Weyerhaeuser Company since June 1994. Mr. Gozon formerly was President and Chief Operating Officer of Alco Standard Corporation from 1988 to 1993. He is also a director of UGI Corp., The Triumph Group and Nocopi Technologies. Lawrence C. Karlson. Mr. Karlson was elected to the board of directors in 1994. Mr. Karlson is Chairman of Karlson Corporation and serves as a director of Meridian Bank Corp. and CDI Corporation. George H. Strong. Mr. Strong was elected to the board of directors in 1994. Mr. Strong is a private investor and serves as a director of Corefunds, Health South Rehabilitation Corp. and Integrated Health Services, Inc. James A. Urry. Mr. Urry has been a director since January 1995. Mr. Urry has been with Citibank, N.A. since 1981, serving as a Vice President since 1986. He has been a Vice President of Citicorp Venture Capital Ltd. since 1989. He is also a director of York International Corp., Cort Furniture Rental Corporation and New Cort Holdings Corporation. Barton J. Winokur. Mr. Winokur has been a director since 1990. Mr. Winokur is a partner of Dechert Price & Rhoads and serves as a director of CDI Corporation, FF Holdings Corporation, Farm Fresh, Inc., Davco Restaurants, Inc. and The Bibb Company. The directors were appointed to the board of the Company to serve until their successors are elected and qualified. Each director is a citizen of the United States. Officers are elected annually by the Board of Directors to serve for the ensuing year and until their respective successors are elected. There are no arrangements or understandings between any of the officers and any other person pursuant to which he or she was elected an officer. J. Michael McNamara, Senior Vice President-Sales, is the son of John F. McNamara, Chairman, President and Chief Executive Officer of the Company. 35 39 EXECUTIVE COMPENSATION The following table sets forth, for fiscal years ending September 30, 1992, 1993 and 1994, certain information regarding the cash compensation paid by the Company, as well as certain other compensation paid or accrued for those years, to each of the executive officers of the Company, in all capacities in which they served:
OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION COMPENSATION(2) John F. McNamara................ 1994 $396,609 $200,000 -- $ 8,468(3) Chairman, President and 1993 380,340 150,000 $ 110 7,434(3) Chief Executive Officer 1992 340,340 185,000 -- -- David M. Flowers................ 1994 $169,430 $100,000 -- $ 8,822(4) Group President -- Eastern 1993 159,980 75,000 -- 8,428(4) Region 1992 149,480 65,000 -- -- R. David Yost................... 1994 $179,790 $100,000 -- $ 8,704(5) Group President -- Central 1993 170,340 75,000 -- 9,079(5) Region 1992 156,840 75,000 -- -- Kurt J. Hilzinger............... 1994 $137,833 $ 65,000 -- $ 985(6) Vice President, Chief Financial 1993 124,000 50,000 -- -- Officer and Treasurer 1992 99,810 20,000 -- --
- --------------- (1) The amounts shown consist of cash bonuses earned in the fiscal year identified but paid in the subsequent fiscal year. (2) In accordance with SEC provisions, amounts of All Other Compensation are excluded for the Company's 1992 fiscal year. (3) "All Other Compensation" for Mr. McNamara in 1994 and 1993 respectively includes the following: (i) $967 and $782 in club dues, (ii) $1,450 and $1,200 in tax return preparation fees, (iii) $4,497 and $5,237 in contributions under the Company's Employee Investment Plan, (iv) for fiscal 1994, $1,554 for spousal travel expenses and (v) for fiscal 1993, $215 in miscellaneous items. (4) "All Other Compensation" for Mr. Flowers in 1994 and 1993 respectively includes the following: (i) $4,175 and $3,191 in club dues, (ii) for fiscal 1994, $150 for spousal travel expenses, and (iii) $4,497 and $5,237 in contributions under the Company's Employee Investment Plan. (5) "All Other Compensation" for Mr. Yost in 1994 and 1993 respectively includes the following: (i) $2,311 and $1,692 in club dues, (ii) $1,850 and $2,150 in tax return preparation fees, (iii) for fiscal 1994, $46 for spousal travel expenses, and (iv) $4,497 and $5,237 in contributions under the Company's Employee Investment Plan. (6) "All Other Compensation" for Mr. Hilzinger in 1994 includes $985 in contributions under the Company's Employee Investment Plan. Any outside director of the Company is paid an annual fee of $15,000 for service as a director of the Company, plus an additional fee of $1,000 for attendance at each meeting of the board of directors in excess of four annually and $500 per telephonic meeting of the board of directors. There are no fees paid for attendance at committee meetings. Certain outside directors of the Company may also be entitled to receive stock options for Common Stock pursuant to the AmeriSource Non-Employee Directors Stock Option Plan ("Directors Plan"). See "-- Stock Options." STOCK OPTIONS A total of 61 employees own shares of Common Stock or options to acquire Common Stock pursuant to the Purchase Plan, the Partners Plan and the 1991 Option Plan. In connection with the Offering, the Company expects to grant options to acquire Common Stock pursuant to the 1995 Option Plan to 100 employees, several of whom are participants in the Company's other stock option plans. 36 40 Purchase Plan. As of October 31, 1989, the Company adopted the AmeriSource Health Corporation and Subsidiaries Employee Stock Purchase Plan (the "Purchase Plan") to enable certain members of its management (the "Management Investors") to participate in the equity ownership of the Company on the terms agreed to at the time of the Acquisition. The Management Investors include Messrs. Flowers, John McNamara and Yost, other current officers of the Company and additional members of management of the Company and its subsidiaries. The securities of the Company subject to the Purchase Plan originally included (a) up to 2,212,500 shares of the Company's Common Stock and (b) $750,000 aggregate principal amount of the Company's 19 1/2% Junior Subordinated Debentures due 2001 (the "Junior Subordinated Debentures"). The Management Investors have been subject to restrictions on the sale or transfer of their Common Stock. Before January 1, 1994, a Management Investor could not transfer his or her securities except with the consent of the Company or in connection with specified events, such as the sale of the Company. If a Management Investor's employment with the Company was terminated, the Company had the right to repurchase the Common Stock owned or subject to options. VPI is required, under certain circumstances, to allow the Management Investors to participate if it proposes to sell shares of the Company's common stock. As of December 31, 1994, Management Investors had purchased 227,150 shares of Common Stock under the Purchase Plan and held options to purchase 1,531,603 shares of Common Stock (at an exercise price of $0.07 per share) pursuant to the Purchase Plan. Of the 1,531,603 shares subject to options, 343,269 shares will be repurchased from VPI by the Company for $0.34 per share before being issued pursuant to such options. No further awards will be granted under the Purchase Plan. By the terms of the Purchase Plan, the options issued under the Purchase Plan will expire 90 days after the closing of the Offering. Accordingly, the Company expects all such options will be exercised during such time period. Upon exercise of the Purchase Plan options, the holders will be subject to withholding tax liability based upon the difference between the exercise price and the estimated fair market value of the Common Stock at the time of exercise. In lieu of selling shares of Common Stock to satisfy their withholding requirement, certain members of AmeriSource's management intend to obtain margin loans secured by the shares of Common Stock acquired pursuant to such options from Smith Barney Inc. and DLJ. See "Shares Eligible for Future Sale." Partners Plan. On December 11, 1990, the Company adopted its Partners Stock Option Plan (the "Partners Plan") to enable employees of the Company other than the Management Investors to participate in the equity ownership of the Company. The Partners Plan was intended to distribute the equity ownership more broadly in order to further incentivize employees. An aggregate of 776,316 shares of Common Stock was originally available under the Partners Plan. On March 2, 1991, options ("Partners Options") for an aggregate of 368,160 shares of Common Stock were granted to 39 optionees, each of whom received options for 9,440 shares. As of September 30, 1994, there were 339,840 shares subject to options under the Partners Plan held by 36 optionees. Each Partners Option became 100% exercisable on September 30, 1994 at an exercise price of $0.34 per share and each was exercised by December 31, 1994. The Partners Plan originally required the holder to hold the Common Stock so acquired for two years, but the Company has waived this holding period requirement. No further awards will be granted under the Partners Plan. Upon exercise of the Partners Plan options, the holders were subject to tax liability based upon the difference between the exercise price and the estimated fair market value for private sales of the Common Stock. To assist holders of Partners Options with such tax liability, the Company offered to repurchase from such option holders up to 35% of their shares of Common Stock obtained through exercise of their options, and did repurchase 107,085 shares at the estimated fair market price for private sales of the Common Stock. 1991 Stock Option Plan. The Company's 1991 Stock Option Plan (the "1991 Option Plan"), which was adopted by the Board of Directors on February 19, 1992 and approved by the stockholders on April 7, 1992, provides for the granting of non-qualified stock options to acquire up to an aggregate of 1,069,375 shares of Common Stock to the Management Investors and certain other members of the Company's management. Options to acquire the entire 1,069,375 shares of Common Stock subject to this plan were granted on April 8, 1992. The options under the 1991 Option Plan once granted to the recipient are not subject to forfeiture and have an exercise price of $0.34 per share and were exercisable at a rate of 50% per year on each of January 1, 37 41 1993 and January 1, 1994. The options granted, which represent the shares unallocated under the Purchase Plan and options never granted under a performance stock option plan originally announced by the Company in 1989, reflect achievements in operating performance through fiscal 1991. Of the shares subject to options, 995,625 shares will be repurchased from VPI by the Company for $0.34 per share pursuant to a prior agreement. As of September 30, 1994, there were 1,039,875 shares of Common Stock subject to options under the 1991 Option Plan. Options granted to employees must be exercised by the earlier of November 3, 1999, the date the Company is sold or 90 days after the date of a public offering. Employees whose employment terminates for reasons other than death, disability or retirement must hold the shares acquired upon exercise for a period of three years. The 1991 Option Plan permits, with the consent of the administering committee and if permitted by the restrictions in the Company's financing agreements, the exercise of options by delivery of shares of Common Stock owned by the optionee, by withholding of such shares of Common Stock upon exercise of the option in lieu of or in addition to cash or by financing made available by the Company. The 1991 Option Plan will continue to be administered by the Board of Directors of the Company until the Company registers the Common Stock under Section 12 of the Exchange Act of 1934, as amended (the "Exchange Act"), whereupon, the 1991 Option Plan will be administered by a committee of Disinterested Persons as defined in the 1991 Option Plan. The Committee will have the power and authority to determine the extent to which exceptions to the exercisability of options may be granted, to determine the effect of certain dispositions or a change in control of the Company on outstanding options, to establish procedures, loans or financing arrangements to assist in the exercise of options and the satisfaction of tax withholding obligations, to adopt regulations to carry out the 1991 Option Plan and to amend options granted under the plan to carry out the purpose of the 1991 Option Plan. Because the options issued under the 1991 Option Plan will expire 90 days after the closing of the Offering, the Company expects all such options will be exercised during such time period. Upon exercise of the 1991 Option Plan options, the holders will be subject to withholding tax liability based upon the difference between the exercise price and the estimated fair market value of the Common Stock at the time of exercise. In lieu of selling shares of Common Stock to satisfy their withholding requirement, certain members of AmeriSource's management intend to obtain margin loans secured by the shares of Common Stock acquired pursuant to such options from Smith Barney and DLJ. See "Shares Eligible for Future Sale." 1995 Stock Option Plan. The Company has adopted the 1995 Option Plan, which will provide for the granting over time of non-qualified stock options to acquire up to approximately 1.1 million shares (equivalent to 5% of all shares after giving effect to the Offering and the Option Exercises and subject to increase of approximately 50,000 shares if the over-allotment option is exercised in full) of Common Stock to employees of the Company. Such options will be granted based upon performance and with vesting schedules to be determined at the time of grant. The Company expects to grant options to acquire approximately 895,000 shares of Common Stock under the 1995 Option Plan on the effective date of the Registration Statement of which this Prospectus is a part, at an exercise price equal to the price to the public set forth on the cover page of this Prospectus. Messrs. McNamara, Yost, Flowers and Hilzinger are expected to receive options to acquire 100,000, 65,000, 65,000 and 40,000 shares of Common Stock, respectively, at such time. The 1995 Option Plan will be administered by a yet to be determined committee of directors who are Disinterested Persons as defined in the 1995 Option Plan, which will have the power and authority to determine the employees to whom awards are granted, the number of shares of Common Stock with respect to such awards, and the terms of such awards, including the exercise price of the stock options and any vesting periods. The 1995 Option Plan will contain such other provisions, terms and conditions as such committee shall decide. Under the 1995 Option Plan, the exercise price of options will not be less than the fair market value of the Common Stock on the date of the grant. Options granted to employees will typically vest over four years and will not be exercisable after the expiration of six years from the date of the grant or such sooner date determined by the committee. During the four year period after the date of grant, 50 percent of the Common Stock acquired upon exercise of a holder's 1995 Option Plan stock options will not be transferable for a period 38 42 of one year after the date of exercise. The 1995 Option Plan will permit, with the consent of the committee and if permitted by the restrictions in the Company's financing agreements, the exercise of options by delivery of shares of Common Stock owned by the optionee, by withholding of such shares of Common Stock upon exercise of the option in lieu of or in addition to cash or by financing made available by the Company. The 1995 Option Plan will permit the committee to accelerate vesting upon a change of control and to adjust the number and kind of shares subject to options in the event of a reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares. Directors Plan. The Company has adopted the Directors Plan, which will provide for the granting of stock options on a non-discretionary basis to certain non-employee directors of the Company. An aggregate of 50,000 shares of Common Stock have been reserved for issuance under the Directors Plan. The Directors Plan is expected to provide for automatic grants of an option to purchase shares of Common Stock to certain non-employee directors who are not affiliates of VPI on an annual basis, which options will become exercisable over time. The option exercise price must be equal to 100% of the fair market value of the Common Stock on the date of grant of the option. Options granted to directors under the Directors Plan will be treated as nonstatutory stock options under the Internal Revenue Code, as amended. The Directors Plan will be administered by a committee of disinterested directors to be determined. The Directors Plan will permit, with the consent of the committee and if permitted by the restrictions in the Company's financing agreements, the exercise of options by delivery of shares of Common Stock owned by the optionee, by withholding of such shares of Common Stock upon exercise of the option in lieu of or in addition to cash or by financing made available by the Company. The Directors Plan will permit the committee to adjust the number and kind of shares subject to options in the event of a reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares. The Board of Directors may amend the Directors Plan at any time or may terminate any plan without approval of the stockholders; provided, however, that stockholder approval is required for any amendment to the plan that increases the number of shares for which options may be granted or changes in any material respect the limitations or provisions of the options subject to the plans. However, no action by the Board of Directors or stockholders may alter or impair any option previously granted to an optionee without such optionee's consent. VALUE OF UNEXERCISED OPTIONS The following table sets forth information regarding the number and value of unexercised options held by the named executive officers of the Company as of January 31, 1995. None of the named executive officers were granted or exercised any stock options in fiscal 1994.
NUMBER OF SHARES COVERED BY OUTSTANDING OPTIONS AND OPTION VALUES AS OF JANUARY 31, 1995 --------------------------------------------------------- VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT JANUARY 31, 1995 JANUARY 31, 1995 --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE John F. McNamara........................ 725,700 0 $13,662,300 0 Chairman, President and Chief Executive Officer David M. Flowers........................ 212,400 0 4,003,600 0 Group President -- Eastern Region R. David Yost........................... 238,950 0 4,499,050 0 Group President -- Central Region Kurt J. Hilzinger....................... 73,750 0 1,376,250 0 Vice President, Chief Financial Officer and Treasurer
- --------------- (1) The value of unexercised in-the-money options is estimated based upon a price per share of $19.00 (the midpoint of the range of prices set forth on the cover of this Prospectus). 39 43 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee of the Board of Directors during fiscal 1994 was composed of John F. McNamara, Bruce C. Bruckmann and Barton J. Winokur. Mr. McNamara is Chairman, President and Chief Executive Officer of the Company. Mr. Winokur is a partner of Dechert Price & Rhoads, which performed legal services for the Company during fiscal 1994. Upon consummation of the Offering, the Compensation Committee will be composed of Michael A. Delaney, James A. Urry and Barton J. Winokur. AGREEMENTS WITH EMPLOYEES The Company intends to offer employment contracts to Messrs. McNamara, Yost and Flowers. The employment contracts are expected to provide for three year terms of employment, each subject to a one year extension at the Company's discretion, annual base salaries substantially commensurate with present levels, and incentive compensation, bonuses and benefits in accordance with the Company's then prevailing practices. Each contract is expected to include customary termination for cause provisions, whereupon the Company's obligations under the respective employment contract would cease. By a majority vote of the Board of Directors, the Company would also be able to terminate the employment of the employee without cause, whereupon the Company would remain obligated to pay the greater of (i) one year of such employee's then current salary and (ii) the base salary of the employee for the balance of the term of employment contract. The contracts may also provide for acceleration of all or a portion of the employee's AmeriSource stock options then outstanding upon a termination without cause. Each contract is also expected to prohibit direct and indirect competition with the Company for a period of one year after termination of employment. The contracts will also contain customary prohibitions against the disclosure of confidential information and the solicitation of the Company's employees and customers. The Company has entered into noncompetition and nondisclosure agreements with certain officers and key employees of the Company, including Messrs. McNamara, Yost, Flowers and Hilzinger. The agreements provide that the employee will not (i) during the course of employment by AmeriSource and for a period of one year thereafter, engage in any business that directly or indirectly competes with the Company, and (ii) for a one-year period after termination of employment, solicit or divert the Company's employees or the business of the Company's customers. The agreements also provide that the employees will not disclose confidential information at any time during or after their employment with the Company. CERTAIN RELATIONSHIPS AND TRANSACTIONS The Company acquired Alco Health Services Corporation, the predecessor to AmeriSource Corporation, through a two-step acquisition -- a tender offer by the Company for approximately 92% of AmeriSource Corporation's shares in 1988 and a merger to acquire the remaining equity interest of AmeriSource Corporation in 1989 (the "Acquisition"). As a result of the tender offer and merger, AmeriSource Corporation became a wholly-owned subsidiary of the Company. Approximately $551.4 million was required to consummate the Acquisition and to pay related fees and expenses. Such funds were derived from borrowings pursuant to the AmeriSource Corporation senior credit facility, the issuance of AmeriSource Corporation notes, the Company's issuance of debentures to the remaining stockholders of AmeriSource Corporation and a capital contribution from the Company. The Company obtained the funds to make the capital contribution from the sale of 5,000,000 shares of common stock and borrowings from an affiliate of VPI, which were refinanced though the issuance of subordinated indebtedness to VPI. On July 26, 1993, the Company issued $126.5 million principal amount of its Senior Debentures in a public offering. Substantially all the net proceeds of the offering (approximately $122.1 million) were applied to redeem debt of the Company issued in connection with the Acquisition at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon through the date of redemption. Contemporaneously, the Company called its 18% Senior Subordinated Debentures due 2001 (the "Senior Subordinated Debentures") and the Junior Subordinated Debentures for redemption. As of July 26, 1993, the Company had outstanding $21.7 million principal amount of Senior Subordinated Debentures and $39.2 million principal amount of Junior Subordinated Debentures. On the date of redemption, VPI owned approximately $21.3 million principal amount of Senior Subordinated Debentures and $37.9 million principal amount of Junior Subordinated Debentures, certain investors currently or previously affiliated with VPI owned 40 44 $0.4 million principal amount of Senior Subordinated Debentures and $0.8 million principal amount of Junior Subordinated Debentures, and the Management Investors owned $0.5 million principal amount of Junior Subordinated Debentures. All the amounts set forth above include accrued and unpaid interest. As a result of the redemption of the Senior Subordinated Debentures and the Junior Subordinated Debentures, VPI, certain investors currently or previously affiliated with VPI and the Management Investors were paid $59.2 million, $1.2 million and $0.5 million, respectively. See Note 4 to the Financial Statements of the Company included in this Prospectus. On October 21, 1991, an involuntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code was filed against RDS Acquisition Corp. ("RDS"), which was a customer of the Company. Affiliates of VPI had substantial equity and debt interests in RDS and related entities. VPI indemnified the Company for up to $5.8 million of the amounts owed by RDS to the Company on October 25, 1991, for which the Company did not otherwise recover from RDS. On July 26, 1993, VPI paid $5.8 million to the Company pursuant to such indemnification. Pursuant to a prior arrangement, 343,269 and 995,625 shares of the Company's Common Stock will be repurchased from VPI by the Company at $0.34 per share before being issued pursuant to options granted under the Purchase Plan and the 1991 Option Plan, respectively. During fiscal years 1992, 1993 and 1994, Dechert Price & Rhoads performed, and currently does perform, legal services for the Company. Barton J. Winokur, a partner of Dechert Price & Rhoads and a director of the Company, owns 14,750 shares of the Common Stock of the Company. 41 45 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the ownership of the Company's voting Common Stock and all of the Company's Common Stock, by each of the Company's directors, all directors and executive officers as a group and each person who is known by the Company to beneficially own five percent or more of the Company's voting Common Stock. As of December 31, 1994, after giving effect to the 2.95-for-1 stock split and the Option Exercises, there would be 3,106,308 shares of the Company's voting Common Stock and 14,612,193 shares of the Company's total voting and non-voting Common Stock outstanding.
OWNERSHIP PRIOR TO THE OFFERING -------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF CLASS A CLASS B CLASS C COMMON PERCENT OF COMMON PERCENT OF COMMON PERCENT OF NUMBER OF STOCK CLASS A STOCK CLASS B STOCK CLASS C ALL SHARES BENEFICIALLY COMMON BENEFICIALLY COMMON BENEFICIALLY COMMON BENEFICIALLY PERCENT OF OWNED STOCK OWNED STOCK OWNED STOCK OWNED ALL SHARES DIRECTORS AND OFFICERS: John F. McNamara(1)........ 725,700 23.4% -- * -- * 725,700 5.0% David M. Flowers(1)........ 212,400 6.8 -- * -- * 212,400 1.5 R. David Yost(1)........... 238,950 7.7 -- * -- * 238,950 1.6 Kurt J. Hilzinger(1)....... 73,750 2.4 -- * -- * 73,750 * Bruce C. Bruckmann(2)...... 1,681 * 67,632 * -- * 69,313 * Michael A. Delaney(2)...... -- * -- * -- * -- * James A. Urry(2)........... -- * -- * -- * -- * Barton J. Winokur.......... 14,750 * -- * -- * 14,750 * All directors and executive officers as a group (6 persons)(3).............. 1,267,232 40.8 67,632 * -- * 1,334,863 9.1 OTHER VOTING 5% STOCKHOLDERS: 399 Venture Partners Inc. ("VPI")(4)............... 234,926 7.6% 9,786,147 97.6% -- * 10,021,073 68.6%
OWNERSHIP AFTER THE OFFERING AND THE OPTION EXERCISES ----------------------- NUMBER OF COMMON STOCK PERCENT OF BENEFICIALLY COMMON OWNED STOCK DIRECTORS AND OFFICERS: John F. McNamara(1)........ 725,700 3.4% David M. Flowers(1)........ 212,400 1.0 R. David Yost(1)........... 238,950 1.1 Kurt J. Hilzinger(1)....... 73,750 * Bruce C. Bruckmann(2)...... 69,313 * Michael A. Delaney(2)...... -- * James A. Urry(2)........... -- * Barton J. Winokur.......... 14,750 * All directors and executive officers as a group (6 persons)(3).............. 1,334,863 6.3 OTHER VOTING 5% STOCKHOLDERS: 399 Venture Partners Inc. ("VPI")(4)............... 10,021,073 47.2%
- --------------- * Less than 1%. (1) Pursuant to the Purchase Plan, Messrs. Flowers, McNamara and Yost received options, with limitations on exercise, to acquire 147,500, 442,500 and 147,500 shares, respectively, of Common Stock. Pursuant to the 1991 Option Plan, Messrs. Flowers, McNamara, Yost and Hilzinger received options, with limitations on exercise, to acquire 64,900, 283,200, 91,450 and 73,750 shares, respectively, of Common Stock. All of these options are currently exercisable. (2) Messrs. Delaney and Urry disclaim beneficial ownership relating to the shares of Common Stock held by VPI. (3) Pursuant to the Purchase Plan and the 1991 Option Plan, executive officers received options, with limitations on exercise, to acquire 737,500 shares and 513,300 shares, respectively, of voting Common Stock, all of which are exercisable currently. In addition, members of AmeriSource's management own an aggregate of 387,136 shares of the voting Common Stock and options to acquire an aggregate of 2,478,553 shares of the voting Common Stock. All of these options are currently exercisable. Certain members of AmeriSource's management intend to pledge shares of voting Common Stock in connection with margin loans incurred primarily to satisfy certain withholding tax liability. (4) VPI disclaims beneficial ownership as to shares of Common Stock held by investors currently or previously affiliated with VPI. VPI's address is 1209 Orange Street, Wilmington, Delaware 19801. VPI is a wholly-owned, indirect subsidiary of Citicorp. Pursuant to a prior agreement, the Company will repurchase for $0.34 per share, 343,269 shares and 995,625 shares from VPI upon exercise of options pursuant to the Purchase Plan and the 1991 Option Plan, respectively, for reissuance to management in connection with their exercise of options. 42 46 DESCRIPTION OF CAPITAL STOCK The following statements are brief summaries of certain provisions relating to the Company's capital stock and are qualified in their entirety by the provisions of the Company's Certificate of Incorporation, as amended. The Company's Certificate of Incorporation, as amended, is an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The currently authorized Common Stock of the Company consists of 50,000,000 shares of Class A Common Stock, 15,000,000 shares of Class B Common Stock and 2,000,000 shares of Class C Common Stock. As of December 31, 1994, without giving effect to the 2.95-for-1 stock split and the Option Exercises, 238,262 shares of Class A Common Stock, 3,854,163 shares of Class B Common Stock and 500,000 shares of Class C Common Stock were issued and outstanding. As of December 31, 1994, after giving effect to the 2.95-for-1 stock split and the Option Exercises, 3,106,307 shares of Class A Common Stock, 10,030,886 shares of Class B Common Stock and 1,475,000 shares of Class C Common Stock would have been issued and outstanding. Upon completion of the Offering, the Company will have 21,212,193 shares of Common Stock outstanding (22,202,193 shares if the over-allotment option is exercised). Class A Common Stock is referred to elsewhere in this Prospectus as "Common Stock." There is no established public trading market for the Class A Common Stock and Class B Common Stock. As of December 31, 1994, the Class A Common Stock was held by 60 holders of record, and the Class B Common Stock was held by 11 holders of record. As of September 30, 1994, the Class C Common Stock was held by approximately 12 holders of record. The Class C Common Stock trades on a limited basis in the over-the-counter market. Information concerning the historical trading prices for Class C Common Stock is not published by nationally-recognized independent sources. Contemporaneously with and subject to the completion of the Offering made hereby, all outstanding shares of Common Stock and all options to acquire shares of the Company's Common Stock will be adjusted for a 2.95-for-1 stock split. No fractional shares of Common Stock will be issued in connection with the stock split. Each holder of Common Stock will receive a cash payment in lieu of a fractional share to which such holder would otherwise be entitled pursuant to the stock split in the amount of the value of the fractional share at the offering price to the public. Class A Common Stock. Holders of Class A Common Stock are entitled to one vote per share on all matters on which holders of Class A Common Stock are entitled to vote and have no cumulative voting rights. Holders of Class A Common Stock do not have the preemptive right to subscribe for shares of Class A Common Stock issued by the Company, nor do they have any redemption rights. Holders of Class A Common Stock may elect at any time to convert any and all such shares into Class B Common Stock, on a share-for-share basis. Holders of Class A Common Stock are entitled to receive such dividends, if any, as may from time to time be declared by the Board of Directors of the Company out of funds legally available therefor. The Credit Agreement contains limitations on the Company's ability to pay dividends to its stockholders. See "Dividend Policy." Upon liquidation, dissolution or winding up of the Company, holders of Class A Common Stock are entitled to a pro rata share of the distribution of assets remaining after the payment of debts and expenses and after payment of the liquidation preference accorded to the holders of any preferred stock of the Company which may be issued in the future. Each share of Class A Common Stock has the same rights, privileges and preferences as every other share of Class A Common Stock. Shares of the Class A Common Stock to be issued pursuant to the Offering, when issued and paid for, will be fully paid and nonassessable. The transfer agent and registrar for the Class A Common Stock is Mellon Securities Trust Company. Class B Common Stock. The rights of holders of Class B Common Stock and holders of Class A Common Stock are identical and entitle the holders thereof to the same rights, privileges, benefits and notices, except as otherwise described herein. Holders of Class B Common Stock generally do not possess the right to vote on any matters to be voted upon by the stockholders of the Company, except as provided by law. Under 43 47 Section 242(b)(2) of the Delaware General Corporation Law, the holders of the Class B Common Stock shall be entitled to vote as a class upon any proposed amendment to the Company's Certificate of Incorporation, if such amendment would increase or decrease the number of shares or the par value of the shares of such class, or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. Holders of Class B Common Stock may elect at any time to convert any and all of such shares into Class A Common Stock, on a share-for-share basis, to the extent the holder thereof is not prohibited from owning additional voting securities by virtue of regulatory restrictions. Class C Common Stock. The rights of holders of Class C Common Stock and holders of Class A Common Stock are identical and entitle the holders thereof to the same rights, privileges, benefits and notices, except as otherwise described herein. Holders of Class C Common stock generally do not possess the right to vote on any matters to be voted upon by the stockholders of the Company, except as provided by law. Under Section 242(b)(2), of the Delaware General Corporation Law, the holders of the Class C Common Stock shall be entitled to vote as a class upon any proposed amendment to the Company's Certificate of Incorporation if such amendment would increase or decrease the number of shares or the par value of the shares of such class, or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. The Class C Common Stock is subject to substantial restrictions on transfer and has certain registration and "take-along" rights. A share of Class C Common Stock will automatically be converted into a share of Class A Common Stock (a) immediately prior to its sale in a future public offering or (b) at such time as such share of Class C Common Stock has been sold publicly after the Offering in a transaction that complies with any maximum quantity limitations applicable to such sale. Once a share of Class C Common Stock has been converted into Class A Common Stock it will no longer be subject to any restrictions on transfer nor will it be entitled to the benefits of registration and take-along-rights. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Section 203 of the Delaware General Corporation Law prevents an "interested stockholder" (defined in Section 203, generally, as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (defined in Section 203, generally, as mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder) with a publicly-held Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction that resulted in the interested stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the rights to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. The Company will opt out of Section 203 prior to the Offering, but this will not be effective until one year after the Offering. Accordingly, the provisions of Section 203 will apply to the Company for approximately one year following the consummation of the Offering. 44 48 DESCRIPTION OF INDEBTEDNESS AND SECURITIZATION PROGRAM THE CREDIT AGREEMENT On December 13, 1994, the Company amended its existing credit agreement with a syndicate of senior lenders providing a senior secured credit facility of $380 million. As a result of the amendment, the effective interest rate on borrowings under the Credit Agreement have been reduced by 100 basis points. In addition, among other things, the amendment (i) extended the term of the original credit agreement until January 3, 2000; (ii) provided interest rate stepdowns upon the occurrence of certain events; (iii) modified the borrowing base availability from inventory- and receivable-based to inventory-based; and (iv) increased the Company's ability to make acquisitions and pay dividends. The senior lenders under the Credit Agreement consist of a group of 13 financial institutions with General Electric Capital Corporation ("GECC") acting as the administrative agent for the group. The maximum amount that may be borrowed under the Credit Agreement is limited to the extent of a sufficient borrowing base (up to a maximum of $380 million), which is essentially 65% of eligible inventory in fiscal year 1995, 62.5% of eligible inventory in fiscal year 1996, and 60% of eligible inventory thereafter. As of January 31, 1995, the Company's borrowing base was approximately $387.5 million. The Credit Agreement will terminate, the commitment of the syndicate to make revolving credit loans expire, and any outstanding loans thereunder must be repaid in full, on January 3, 2000. Indebtedness under the Credit Agreement may be prepaid, although such indebtedness may be subsequently reborrowed. The indebtedness under the Credit Agreement may be permanently repaid in full at any time at the option of the Company, without premium or penalty, upon prior written notice to GECC, and the credit facility may be permanently reduced in part at any time and from time to time at the option of the Company, without premium or penalty, upon prior written notice and in certain minimum amounts. At the Company's option, borrowings under the Credit Agreement bear interest at a rate per annum determined as follows: (i) a LIBOR rate, adjusted for statutory reserves and assessments, plus 2.25% or (ii) the applicable prime rate of interest most recently published or announced from time to time in effect on such day, plus 1%. The margins relative to interest rates for borrowings under the Credit Agreement are subject to stepdown reduction of up to 1.00% if the Company (i) meets certain interest coverage tests or (ii) obtains at least $100 million of aggregate gross cash proceeds from the sale of equity securities of the Company and meets certain debt-to-earnings tests. Interest on loans under the Credit Agreement is payable quarterly or, if earlier, at the end of the applicable interest period loan intervals. The interest rates under the Credit Agreement are subject to reduction upon the occurrence of certain events including improved financial performance and the sale of certain minimum equity amounts by the Company. Under the terms of the Credit Agreement, the Company granted the senior lenders a perfected first priority security interest in substantially all of the Company's assets (except accounts receivable and certain related assets), including, without limitation, real property, fixed assets, equipment, inventory, stock of subsidiaries, trademarks and intangible assets, to secure its borrowings under the Credit Agreement. The Credit Agreement contains numerous restrictive financial and other covenants, including without limitation: (i) restrictions on the incurrence of indebtedness, guaranteed indebtedness, leases, liens and contingent obligations; (ii) restrictions on mergers, acquisitions, sales of assets, investments, employee loans and transactions with affiliates; (iii) restrictions on distributions and dividends to the Company's stockholders and changes in the capital structure of the Company; (iv) restrictions on optional redemptions, prepayments, distributions, cancellations and modifications with respect to other debt; (v) restrictions on capital expenditures; (vi) restrictions with respect to environmental matters and employee benefit plan obligations; (vii) restrictions on speculative transactions; (viii) restrictions on modifications to compensation plans, lock box account and tax sharing arrangements, business type and fiscal year-end; and (ix) financial tests, including, among others, those measuring AmeriSource's tangible net worth, current ratio, and interest coverage ratio. The Credit Agreement restricts the payment of dividends and the making of loans by AmeriSource to the Company and, consequently, the Company's ability to pay cash interest on the Senior Debentures and its ability to make the mandatory repurchase of the Senior Debentures required by the Issuer Indenture upon a Change in Control (as defined below). 45 49 The events of default under the Credit Agreement include, among others: (i) any failure of the Company to pay principal or interest thereunder when due; (ii) the breach by the Company of covenants, representations or warranties contained in the Credit Agreement; (iii) any failure to pay amounts due under certain other indebtedness or contingent obligations of the Company, or defaults that result in or permit the acceleration of certain other indebtedness or contingent obligations of the Company; (iv) certain events of bankruptcy, insolvency or dissolution of the Company; (v) the incurrence of certain pension-related liabilities; (vi) the existence of certain undischarged judgments or decrees against the Company that remain unstayed for 30 consecutive days; (vii) the occurrence of a Material Adverse Effect (as such term is defined in the Credit Agreement), other than changes in the value of the collateral granted in connection with the Credit Agreement and changes in the financial condition of the Company that affect or will affect the calculations made under the financial covenants in the Credit Agreement, but do not create or would be reasonably expected to create a breach or default under any such financial covenants; (viii) the failure or invalidity of any provision of the collateral documents delivered in connection with the Credit Agreement or any security interest granted to the senior lenders thereby; (ix) a Liquidation Event (as defined in the Receivables Program (as defined herein) documents), and certain material miscalculations, misrepresentations or breaches of warranties made in connection with the Receivables Program; and (x) the occurrence of a Change in Control Date, defined in the Credit Agreement as when (a) the Company shall fail to own and control 100% of the issued and outstanding stock of AmeriSource, with certain exceptions relating to a Qualified Public Offering (as defined in the Credit Agreement) of the Company's common stock or (b) VPI, VPI's employees, VPI's affiliates and the Company's employees fail to own and control, in the aggregate, 50% of the issued and outstanding stock of the Company, with certain exceptions relating to a Qualified Public Offering of the common stock of the Company. The Company is required to pay a commitment fee of 1/2 of 1% per annum on the average unused portion of the credit facility, subject to stepdown reductions to a minimum of 1/4 of 1% per annum if the Company meets certain interest coverage tests or obtains aggregate gross proceeds of $100 million from the sale of equity securities of the Company and meets certain debt-to-earnings tests. The Company must also pay an annual administrative agent's fee of $150,000 to GECC, payable in advance for each year. At January 31, 1995, the $344.8 million outstanding under the Credit Agreement bore interest at an effective rate of 8.74% per annum. Initial borrowings under the original Credit Agreement were used to extinguish the obligations outstanding under the Company's predecessor revolving credit facility, which was due to expire in December 1993. RECEIVABLES SECURITIZATION PROGRAM In the first quarter of fiscal 1995, the Company sold substantially all of its trade accounts receivable and notes receivable to ARC pursuant to the Receivables Program. Contemporaneously, the Company entered into a Receivables Purchase Agreement with ARC, whereby the Company agreed to sell, and ARC agreed to purchase on a continuous basis Receivables originated by the Company. Pursuant to the Receivables Program, ARC transfers such Receivables to a master trust in exchange for, among other things, Certificates. Contemporaneously, variable principal Certificates in an aggregate principal amount of up to $230 million face amount were sold to a group of financial institutions. The Company has accounted for the transactions contemplated by the terms of the Receivables Purchase Agreement as a sale of Receivables from AmeriSource to ARC and as a financing transaction by ARC on the Company's consolidated financial statements. The Certificates represent fractional undivided interests in the Receivables and other assets of the master trust, and do not otherwise represent recourse obligations of the Company. During the initial five-year term of the Receivables Program, the cash generated by collections on the Receivables will be used to purchase, among other things, additional Receivables originated by the Company and/or repay the Certificates. The Certificates bear interest at a rate selected by the Company equal to (i) the higher of (a) the prime lending rate of Bankers Trust Company and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis points. The interest rates for the Certificates are subject to the following step-ups: (i) with respect to the ABR tranche (based on the higher of the prime rate or federal funds rate plus 50 basis points), an additional 50 basis points beginning one year after the closing date (December 13, 1994) and (ii) with respect to the 46 50 LIBOR tranche, an additional 12 1/2 basis points beginning six months after the closing date, an additional 12 1/2 basis points beginning nine months after the closing date, and an additional 75 basis points beginning one year after the closing date. ARC is currently negotiating the terms of new Certificates that do not contain an interest step-up feature, a majority of which will be fixed principal, variable rate obligations and the remainder of which will be variable principal, variable rate obligations. The Company expects to enter into interest rate protection contracts with respect to a majority of the fixed principal, variable rate obligations. Given existing market conditions, the Company expects that such interest rate contracts will apply to in excess of $150 million of the new Certificates, will be for a term of approximately two years and will cap the related variable interest rates at approximately 8%. Such new Certificates are expected to be issued shortly and will, among other things, refinance the existing Certificates. None of the Certificates have been registered under the Securities Act, and the Certificates may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. According to its terms, the Receivables Program is expected to liquidate beginning in October 1999, whereupon the payment of the then-outstanding principal of the Certificates will commence. The Certificates are also subject to early liquidation upon the occurrence of certain events. In the event of a liquidation, losses on Receivables will first be absorbed by the residual certificate held by ARC and collections on Receivables will first be allocated to make payments of outstanding principal of the Certificates in accordance with their ratable interests in the assets of the master trust, after giving effect to the allocation of losses to the residual interest. Contemporaneous with the consummation of the Receivables Program and the execution of the amendment to the Credit Agreement, the Company called for optional redemption all of the outstanding Notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date of January 12, 1995. The Notes were redeemed on January 12, 1995. THE SENIOR DEBENTURES On July 26, 1993, the Company issued $126.5 million principal amount of its Senior Debentures in a public offering. Interest on the Senior Debentures is payable semi-annually on January 15 and July 15 of each year. Through and including the semi-annual interest payment due July 15, 1998, the Company may elect, at its option, to issue additional Senior Debentures in satisfaction of its interest payment obligations. The Senior Debentures are senior unsecured obligations of the Company and rank pari passu in right of payment with all senior borrowings of the Company and rank senior in right of payment to all subordinated indebtedness of the Company. As indebtedness of the Company, the Senior Debentures are structurally subordinated to all indebtedness and other obligations of AmeriSource. Substantially all the net proceeds of the Senior Debenture offering (approximately $122.1 million) were applied to redeem the Senior Subordinated Debentures, the Company's 18 1/2% Subordinated Debentures due 2004 and the Junior Subordinated Debentures at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of redemption. The indenture relating to the Senior Debentures contains restrictions relating to, among other things, the payment of dividends, the repurchase of stock and the making of certain other restricted payments, the incurrence of additional indebtedness and the issuance of preferred stock, the creation of certain liens, certain asset sales, transactions with subsidiaries and other affiliates, dividends and other payment restrictions affecting subsidiaries, and mergers and consolidations. The Issuer Indenture provides that in the event of a "Change in Control" (as defined below), the Company will be obligated to make an offer to repurchase all outstanding Senior Debentures at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the purchase date, provided, that transactions with affiliates, including transactions that increase the debt of the Company, may not result in a change in control. "Change in Control" is defined in the Issuer Indenture as any transaction or series of transactions the result of which (i) any party or group other than VPI, the Management Investors or their respective related parties or affiliates becomes the beneficial owner of more than 50% of the aggregate voting power (on a fully diluted basis) of the Company or (ii) during any two consecutive calendar years, 47 51 individuals who at the beginning of such period constituted the Company's Board of Directors (together with new directors approved by a majority of such directors) cease for any reason to constitute a majority of the directors then in office. Except under certain circumstances in connection with a public equity offering, the Senior Debentures may not be redeemed prior to July 15, 1998. On or after July 15, 1998, the Company may, at its option, redeem the Senior Debentures in whole or in part at redemption prices of 105.62% (if redeemed during the 12-month period beginning July 15, 1998), 102.81% (if redeemed during the 12-month period beginning July 15, 1999), and 100% (if redeemed thereafter), plus accrued and unpaid interest to the date of redemption. The Issuer Indenture also provides that, at any time prior to July 26, 1997, the Company may, at its option within 60 days of the Public Offering Consummation Date (as defined in the Issuer Indenture), redeem up to one-half of the Senior Debentures then outstanding with the net proceeds from one or more "Public Equity Offerings" (defined in the Issuer Indenture as any underwritten public offering of equity securities of the Company pursuant to a registration statement filed pursuant to the Securities Act of 1933, as amended (the "Securities Act")) at 110%; provided, that at least one-half of the aggregate principal amount of the Senior Debentures originally issued must remain outstanding immediately after any such redemption. The Company intends to use a portion of the proceeds of the Offering to redeem Senior Debentures. See "Use of Proceeds." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 21,212,193 shares of Common Stock. The 6,600,000 shares of Common Stock to be sold in the Offering made hereby will be freely tradeable without restriction under the Securities Act, unless acquired by an "affiliate" of the Company (defined in Rule 144 under the Securities Act, generally, as a person who, by virtue of equity ownership or otherwise, controls, or is controlled by, or is under common control with, the Company). The remaining 14,612,193 shares outstanding, excluding the shares of Class C Common Stock, upon completion of the Offering will be "restricted securities" as defined in Rule 144, absent registration of such shares under the Securities Act. The Company intends to file Form S-8 Registration Statements to register shares of Common Stock acquired by members of management pursuant to the exercise of options under the Purchase Plan, the 1991 Option Plan and the Partners Plan. Shares of Common Stock held by affiliates and restricted securities may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including the exemption from registration set forth in Rule 144 promulgated by the Securities and Exchange Commission (the "Commission"). Generally, Rule 144 will permit an affiliate or a person who has held restricted securities for more than two years to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of such stock during the four calendar weeks preceding such sale, provided that the Company has either filed certain periodic reports with the Commission or made publicly available certain information concerning it and provided that such sales are made in normal "brokers' transactions" or in transactions directly with a "market maker" without the solicitation of buy orders by the brokers or such affiliates. A person who is deemed not an affiliate of the Company at any time during the three months preceding a sale and who has held restricted securities for more than three years may sell such shares under Rule 144 without regard to the volume limitations described. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ASHC," subject to official notice of issuance. Sales of substantial amounts of Common Stock in the public market under Rule 144 could have a depressive effect on the price of the Common Stock. VPI, certain current and former affiliates of VPI, current and former employees and directors of AmeriSource, and the Management Investors hold their shares of Company common stock subject to certain restrictions on sales and transfers, including restrictions on sales in the public market. The holders of Class C Common Stock may sell in the public market after 90 days following the closing of the Offering, in which event their shares are automatically converted into Common Stock, provided that for 270 days after such 90-day period, any sales must meet the maximum quantity limitations and other requirements of Rule 144 set forth above. See "Management -- Stock Purchase Plan." 48 52 The Existing Stockholders were granted piggyback registration rights with respect to the Common Stock when they purchased their shares. After the Offering, an aggregate of 14,612,913 shares of Common Stock owned by the Existing Stockholders will be entitled to piggyback registration rights. In addition, VPI, which will hold in the aggregate 10,021,073 shares of Common Stock after the Offering, has been granted demand rights to require the registration of its shares. The Existing Stockholders (other than VPI and certain current officers and directors of the Company, who have agreed to restrictions for a 180-day period as discussed below) are subject to restrictions on public sale or distribution for a period of 90 days following the effective date of the Registration Statement. VPI and directors and members of AmeriSource's management holding, in the aggregate, approximately 12.8 million shares of Common Stock have agreed not to file, or cause the Company to file, a registration statement with respect to, enter into any agreement providing for or effect any public sale, public distribution or other public disposition of shares of capital stock of the Company, including any sale pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, for a period of 180 days following the closing date of the Offering without the prior written consent of DLJ. Such investors have further agreed that they will not otherwise dispose of any shares of capital stock of the Company unless the person to whom such disposition is made agrees to substantially the same as the foregoing. A total of approximately 1.8 million shares of Common Stock currently outstanding (excluding the shares sold in the Offering) are not subject to the 180-day restriction; however, all such shares are subject to restrictions on public sale or distribution for a period of 90 days as described above. Upon exercise of options granted under the Purchase Plan and 1991 Option Plan, the holders will be subject to withholding tax liability based upon the difference between the exercise price and the estimated fair market value of the Common Stock at the time of exercise. In lieu of selling shares of Common Stock to satisfy their withholding requirement, certain members of AmeriSource's management intend to obtain margin loans from Smith Barney Inc. and DLJ. In connection with such margin loans, such management have each agreed to pledge the shares of Common Stock acquired pursuant to exercise of such options as collateral for the margin loans. Under certain circumstances, Smith Barney Inc. and DLJ may foreclose on and sell such pledged Common Stock, and such sales may occur in the 180-day period following the closing of the Offering. CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following discussion concerns the material United States federal income and estate tax consequences of the ownership and disposition of Common Stock applicable to Non-U.S. Holders of such Common Stock. In general, a "Non-U.S. Holder" is any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in the United States or under the laws of the United States or of any State, or (iii) an estate or trust that is subject (or potentially subject) to U.S. federal income tax on its worldwide income on a net basis. The discussion is based on current law and is for general information only. The discussion does not address aspects of federal taxation other than income and estate taxation (such as, for example, gift taxes and generation skipping transfer taxes) and does not address all aspects of federal income and estate taxation. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. Accordingly, prospective investors are urged to consult their tax advisors regarding the United States federal, state, local and non-U.S. income and other tax consequences of holding and disposing of shares of Common Stock. Dividends. In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or any lower rate prescribed by an applicable tax treaty) unless the dividends are either (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, or (ii) if a tax treaty applies, attributable to a United States permanent establishment maintained by the Non-U.S. Holder. Dividends effectively connected with such a trade or business or attributable to such a permanent establishment will generally not be subject to withholding (if the Non-U.S. Holder files certain forms with the payor of the dividend) and will generally be subject to United States federal income tax at the same rates applicable to U.S. holders. In the case of a Non-U.S. Holder that is a corporation, such effectively connected income or income attributable to a permanent establishment also may be subject to the branch profits tax (which is generally imposed on a foreign corporation on the repatriation from the United States of effectively 49 53 connected earnings and profits) unless imposition of the branch profits tax is precluded by a treaty. To determine the applicability of a tax treaty providing for a lower rate of withholding on dividends that are neither effectively connected income nor attributable to a permanent establishment, dividends paid to an address in a foreign country are presumed under current Treasury regulations to be paid to a resident of that country, unless the Company has definite knowledge that such presumption is not warranted or an applicable treaty (or United States Treasury regulations thereunder) requires some other method for determining a Non-U.S. Holder's residence. Proposed Treasury regulations that are not currently effective would, if finally adopted, require Non-U.S. Holders to file certain forms to obtain the benefit of an applicable tax treaty providing for a lower rate of withholding tax on dividends. Such forms would contain the holder's name and address and an official statement by the competent authority in the foreign country (as designated in the applicable tax treaty) attesting to the holder's status as a resident thereof. Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the disposition of his Common Stock unless (i) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes (which the Company does not believe that it is or is likely to become); (ii) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States or, if a tax treaty applies, attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States; (iii) in the case of a Non-U.S. Holder who is an individual, the Non-U.S. Holder holds the shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are satisfied; or (iv) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to certain United States expatriates. Estate Tax. Common Stock owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes, unless an applicable tax treaty provides otherwise, and may be subject to United States federal estate tax. Backup Withholding and Information Reporting. The Company generally must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the Non-U.S. Holder resides. United States backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) will generally not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States. The payment of the proceeds from the disposition of Common Stock to or through the United States office of a broker will be subject to information reporting and backup withholding unless the owner certifies, among other things, its status as a Non-U.S. Holder (and the broker does not have knowledge to the contrary), or otherwise establishes an exemption. The payment of the proceeds from the disposition of Common Stock to or through a non-U.S. office of a non-U.S. broker will generally not be subject to information reporting (except under the circumstances described in the following sentence) and, under current temporary regulations, will not be subject to backup withholding. Information reporting will apply to dispositions through (a) a non-U.S. office of a U.S. broker and (b) a non-U.S. office of a non-U.S. broker that is either a "controlled foreign corporation" for United States federal income tax purposes or a person 50% or more of whose gross income from all sources for a certain three year period was effectively connected with a United States trade or business unless the broker has documentary evidence in its files that the owner is a Non-U.S. holder (and does not have actual knowledge to the contrary). Moreover, under proposed regulations, back-up withholding would also apply to proceeds from such dispositions if such broker had actual knowledge that the payee is a U.S. person. The backup withholding and information reporting rules are currently under review by the Treasury Department and their application to the Common Stock is subject to change. 50 54 UNDERWRITING Subject to certain terms and conditions contained in the Underwriting Agreement, the United States underwriters named below (the "U.S. Underwriters"), for whom DLJ, Smith Barney Inc. and BT Securities Corporation are acting as representatives (the "U.S. Representatives"), and the international underwriters named below (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters"), for whom DLJ, Smith Barney Inc. and Bankers Trust International PLC are acting as representatives (the "International Representatives" and, together with the U.S. Representatives, the "Representatives"), have severally agreed to purchase from the Company an aggregate of 6,600,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF U.S. UNDERWRITERS U.S. SHARES Donaldson, Lufkin & Jenrette Securities Corporation.................... Smith Barney Inc....................................................... BT Securities Corporation.............................................. ------------- U.S. Offering Subtotal............................................ 5,280,000 -------------
NUMBER OF INTERNATIONAL INTERNATIONAL UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation.................... Smith Barney Inc....................................................... Bankers Trust International PLC........................................ ------------- International Offering Subtotal................................... 1,320,000 ------------- Total........................................................ 6,600,000 ===========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to approval of certain legal matters by counsel and to certain other conditions precedent. If any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares of Common Stock (other than shares of Common Stock covered by the over-allotment option described below) must be so purchased. Prior to the Offering, there has been no established public trading market for the Common Stock. The initial price to the public for the Common Stock offered hereby will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of and the prospects for the industry in which the Company competes, the ability of the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the general condition of the securities markets at the time of the Offering, and the recent market prices of securities of generally comparable companies. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial offering price. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company has been advised by the Representatives that the Underwriters propose to offer the Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $ per share to any Underwriter and certain other dealers. The Company has granted to the U.S. Underwriters an option to purchase up to an aggregate of 990,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions solely to cover overallotments. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the U.S. Underwriters exercise such option, each of the U.S. 51 55 Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Representatives do not intend to confirm sales of Common Stock in excess of % of the number of Common Stock offered in the Offering to any accounts over which they exercise discretionary authority. VPI and directors and members of AmeriSource's management holding, in the aggregate, approximately 12.8 million shares of Common Stock have agreed not to file, or cause the Company to file, a registration statement with respect to, enter into any agreement providing for or effect any public sale, public distribution or other public disposition of shares of capital stock of the Company, including any sale pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, for a period of 180 days following the closing date of the Offering without the prior written consent of DLJ. See "Shares Eligible for Future Sale." Pursuant to the Agreement Between U.S. Underwriters and International Managers, each U.S. Underwriter has agreed that, as part of the distribution of the shares of Common Stock, (i) it is not purchasing any shares of Common Stock for the account of anyone other than a United States or Canadian Person (as defined below) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to such agreement, each International Underwriter has agreed that, as part of the distribution of shares of Common Stock (i) it is not purchasing any shares of Common Stock for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus in the United States or Canada or to any United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions, to certain other transactions between the U.S. Underwriters and the International Managers specified in the Agreement Between U.S. Underwriters and International Managers or to purchases, offers or sales by a U.S. Underwriter who is also acting as an International Underwriter or by an International Underwriter who is also acting as a U.S. Underwriter. As used herein, "United States" means the United States of America, its territories, its possessions and all areas subject to its jurisdiction, and "United States or Canadian Person" means any individual who is a resident in the United States or Canada, or any corporation, pension, profit sharing or other trust or entity organized under or governed by the laws of the United States or Canada or of any political subdivision thereof (other than the foreign branch of any United States or Canadian Person), and includes any United States or Canadian branch of a person other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. Underwriters and International Managers, sales may be made among the U.S. Underwriters and the International Managers of such number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. Unless otherwise agreed, the price of any shares so sold shall be the Price to the Public set forth on the cover page hereof, less any amount not greater than the per share amount of the concession to dealers set forth above, and the currency of settlement shall be U.S. Dollars. Pursuant to the Agreement Between U.S. Underwriters and International Managers, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock directly or indirectly in contravention of the securities laws of Canada or any province or territory thereof and has represented that any offer of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made. Similarly, each International Underwriter has represented and agreed that (i) it has not offered or sold and will not offer or sell any shares of Common Stock in the United Kingdom by means of any document (other than in circumstances which do not constitute an offer to the public within the meaning of the Companies Act of 1985 of Great Britain), (ii) it has complied with and will comply with all applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the shares of Common Stock in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the proposed offer or sale of the shares of Common Stock, other than any document which consists of or 52 56 forms part of listing particulars, supplementary listing particulars or any other document required or permitted to be published by listing rules under Part IV of the Financial Services Act 1986, if that person is of a kind described in Article 9(3) of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1988, or to any person to whom the document may otherwise lawfully be issued or passed on. BT Securities Corporation is a wholly-owned subsidiary of Bankers Trust Corporation and an affiliate of Bankers Trust Company ("BTCo"). BTCo is one of the agents and a lender under the Credit Agreement, for which it receives customary compensation. A portion of the proceeds of the Offering will be applied to repay revolving borrowings under the Credit Agreement. See "Use of Proceeds" and "Description of Indebtedness and Securitization Program -- The Credit Agreement." BTCo, as a lender under the Credit Agreement, will receive its pro rata portion of such repayment. Concurrently with the execution of the amendment to the Credit Agreement, BTCo was the purchaser of the Certificates issued under the Receivables Program. BT Securities Corporation acted as advisor to the Company in structuring the Certificates, for which it received customary compensation. BT Securities Corporation, Bankers Trust International PLC and DLJ are also acting as managers of an offering of new Certificates to be issued under the Receivables Program in the institutional and Euromarkets, the net proceeds of which would be used to retire certain of the existing Certificates. Such new Certificates will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. In addition, DLJ and BT Securities Corporation and its affiliates have provided investment banking and other advisory services to the Company and its affiliates and may continue to provide such services to the Company and its affiliates in the future. The Underwriters have reserved for sale at the initial public offering price, less Underwriters' discount, up to 50,000 shares to employees and directors of the Company as such persons have expressed an interest in purchasing such shares of Common Stock in the Offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. Certain members of AmeriSource's management intend to obtain margin loans from DLJ and Smith Barney Inc., primarily to satisfy certain withholding tax liability. In connection with such margin loans, such management will pledge the shares of Common Stock acquired pursuant to exercise of such options as collateral for the margin loans. Under certain circumstances, DLJ and Smith Barney Inc. may foreclose on and sell such pledged Common Stock. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Certain legal matters with respect to the shares of Common Stock offered hereby will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. Barton J. Winokur, a partner of Dechert Price & Rhoads, which performs various legal services for the Company, is a director of the Company and owns 14,750 shares of the Common Stock of the Company. EXPERTS The consolidated financial statements and schedules of AmeriSource Distribution Corporation and AmeriSource Corporation as of September 30, 1994 and 1993 and for each of the three years in the period ended September 30, 1994 appearing and/or incorporated by reference in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere and/or incorporated by reference herein and in the Registration Statement. Such consolidated financial statements and schedules are included and/or incorporated by reference herein in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 53 57 ADDITIONAL INFORMATION The Company has filed a Registration Statement (which term shall include any amendments thereto) on Form S-2 with the Commission under the Securities Act covering the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Company's Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits and schedules thereto. The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports and other information with the Commission. Copies of such materials may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549 and the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511 and 13th Floor, 7 World Trade Center, New York, New York 10048. The statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit are of necessity brief descriptions and are not necessarily complete. Each statement is qualified in its entirety by reference to such contract or document. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by the Company pursuant to the Exchange Act, are incorporated by reference in this Prospectus and made a part hereof. - The Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. - The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies, supersedes or replaces such statement. Any statements modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to any person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the documents which have been incorporated by reference in this Prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the documents so incorporated. Requests for such copies should be directed to Teresa T. Ciccotelli, Secretary, AmeriSource Health Corporation, P.O. Box 959, Valley Forge, Pennsylvania 19482 (telephone (610) 296-4480). 54 58 INDEX TO FINANCIAL STATEMENTS
PAGE ----- AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES ANNUAL FINANCIAL STATEMENTS: Report of Ernst & Young LLP, independent auditors..................................... F-2 Consolidated Balance Sheets as of September 30, 1994 and 1993......................... F-4 Consolidated Statements of Operations for the years ended September 30, 1994, 1993 and 1992................................................................................ F-6 Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 1994, 1993 and 1992................................................... F-7 Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1993 and 1992................................................................................ F-8 Notes to Consolidated Financial Statements............................................ F-9 QUARTERLY FINANCIAL STATEMENTS (UNAUDITED): Consolidated Balance Sheets as of December 31, 1994 and September 30, 1994............ F-24 Consolidated Statements of Operations for the three months ended December 31, 1994 and 1993.......................................................... F-26 Consolidated Statements of Cash Flows for the three months ended December 31, 1994 and 1993.......................................................... F-27 Notes to Consolidated Financial Statements............................................ F-28
F-1 59 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Stockholders of AmeriSource Distribution Corporation We have audited the accompanying consolidated balance sheets of AmeriSource Distribution Corporation (formerly Alco Health Distribution Corporation) and subsidiaries as of September 30, 1994 and 1993 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AmeriSource Distribution Corporation and subsidiaries at September 30, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements (Notes 3 and 6), in 1994 the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes. ERNST & YOUNG LLP Philadelphia, Pennsylvania November 2, 1994, except for Note 11, as to which the date is December 13, 1994 and Note 12, as to which date is January 30, 1995 F-2 60 [This Page Intentionally Left Blank] F-3 61 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
SEPTEMBER 30, SEPTEMBER 30, 1994 1993 ------------- ------------- Current Assets Cash................................................................. $ 25,311 $ 27,136 Accounts receivable less allowance for doubtful accounts: 1994 -- $9,370; 1993 -- $7,681..................................... 272,281 251,999 Merchandise inventories.............................................. 351,676 346,371 Prepaid expenses..................................................... 2,442 1,977 ------------- ------------- Total current assets............................................... 651,710 627,483 Property and Equipment, at cost........................................ 67,598 57,282 Less accumulated depreciation........................................ 26,416 21,176 ------------- ------------- 41,182 36,106 Other Assets Excess of cost over net assets acquired.............................. 183,810 Deferred financing costs and other, less accumulated amortization: 1994 -- $7,239; 1993 -- $3,781..................................... 18,752 20,545 ------------- ------------- 18,752 204,355 ------------- ------------- $ 711,644 $ 867,944 ============ ============
See notes to consolidated financial statements. F-4 62 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, SEPTEMBER 30, 1994 1993 ------------- ------------- Current Liabilities Current portion of other debt........................................ $ 133 $ 122 Accounts payable..................................................... 449,991 379,826 Accrued expenses..................................................... 27,485 29,771 Accrued income taxes................................................. 11,488 604 Deferred income taxes................................................ 29,258 ------------- ------------- Total current liabilities.......................................... 518,355 410,323 Long-Term Debt Revolving credit facility............................................ 175,897 248,000 Senior subordinated notes............................................ 166,134 170,562 Other debt........................................................... 1,293 1,311 Convertible subordinated debentures.................................. 238 238 Senior debentures.................................................... 144,013 129,109 ------------- ------------- 487,575 549,220 Other Liabilities Deferred compensation................................................ 522 701 Other................................................................ 5,918 740 ------------- ------------- 6,440 1,441 Stockholders' Equity Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued Common stock, $.01 par value: Class A (Voting and convertible): 30,000,000 shares authorized; 532,143 shares issued............................................ 5 5 Class B (Non-voting and convertible): 30,000,000 shares authorized; 12,980,885 shares issued......................................... 130 130 Class C (Non-voting and convertible): 2,000,000 shares authorized; 1,475,000 shares issued.......................................... 15 15 Capital in excess of par value....................................... 4,676 4,676 Retained earnings (deficit).......................................... (304,984) (97,313) Cost of common stock in treasury..................................... (568) (553) ------------- ------------- (300,726) (93,040) ------------- ------------- $ 711,644 $ 867,944 ============ ============
See notes to consolidated financial statements. F-5 63 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SEPTEMBER 30 ------------------------------------ 1994 1993 1992 ---------- ---------- ---------- Revenues................................................... $4,301,832 $3,719,025 $3,329,909 Costs and Expenses Cost of goods sold....................................... 4,066,641 3,509,587 3,130,186 Selling and administrative............................... 146,644 135,805 131,245 Environmental remediation................................ 4,075 Depreciation............................................. 6,640 5,809 5,384 Write-off of excess of cost over net assets acquired..... 179,824 Interest................................................. 62,611 66,696 71,025 Non-recurring charges.................................... 2,223 2,244 ---------- ---------- ---------- 4,466,435 3,720,120 3,340,084 ---------- ---------- ---------- (Loss) Before Taxes, Extraordinary Items and Cumulative Effects of Accounting Changes............................ (164,603) (1,095) (10,175) Taxes on Income............................................ 7,814 6,379 2,649 ---------- ---------- ---------- (Loss) Before Extraordinary Items and Cumulative Effects of Accounting Changes................................. (172,417) (7,474) (12,824) Extraordinary Charge -- early retirement of debt, net of income tax benefit....................................... (656) (11,890) Extraordinary Credits: Settlement of litigation................................. 4,486 Reduction of income tax provision from carryforward of prior year operating losses........................... 746 1,862 Cumulative effect of change in accounting for postretirement benefits other than pensions.............. (1,199) Cumulative effect of change in accounting for income taxes.................................................... (33,399) ---------- ---------- ---------- Net (Loss)....................................... $ (207,671) $ (18,618) $ (6,476) ========= ========= ========= (Loss) per share (Loss) Before Extraordinary Items and Cumulative Effects of Accounting Changes................................. $ (11.69) $ (.51) $ (.87) Extraordinary Items...................................... (.04) (.75) .43 Cumulative effect of change in accounting for postretirement benefits other than pensions........... (.08) Cumulative effect of change in accounting for income taxes................................................. (2.27) ---------- ---------- ---------- Net (Loss)....................................... $ (14.08) $ (1.26) $ (.44) ========= ========= =========
See notes to consolidated financial statements. F-6 64 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
CAPITAL COMMON COMMON STOCK IN EXCESS RETAINED STOCK --------------------------- OF PAR EARNINGS IN CLASS A CLASS B CLASS C VALUE (DEFICIT) TREASURY TOTAL ------- ------- ------- --------- --------- -------- --------- September 30, 1991............. $ 5 $ 130 $15 $ 4,348 $ (72,219) $(550) $ (68,271) Net (loss)................... (6,476) (6,476) -- ------ ------- --------- --------- ------ --------- September 30, 1992............. 5 130 15 4,348 (78,695) (550) (74,747) Net (loss)................... (18,618) (18,618) Repurchase of stock options................... (18) (18) Purchase of 3,503 shares of Class A Common Stock...... (3) (3) Capital contribution......... 346 346 -- ------ ------- --------- --------- ------ --------- September 30, 1993............. 5 130 15 4,676 (97,313) (553) (93,040) Net (loss)................... (207,671) (207,671) Purchase of 44,250 shares of Class A Common Stock...... (15) (15) -- ------ ------ --------- --------- ----- --------- September 30, 1994............. $ 5 $ 130 $15 $ 4,676 $(304,984) $(568) $(300,726) ====== ====== ====== ======= ========= ===== =========
See notes to consolidated financial statements. F-7 65 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30 --------------------------------------- 1994 1993 1992 --------- ----------- --------- OPERATING ACTIVITIES Net (loss)........................................... $(207,671) $ (18,618) $ (6,476) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation...................................... 6,640 5,809 5,384 Amortization...................................... 8,120 9,407 11,510 Provision for losses on accounts receivable....... 4,612 3,186 3,443 Loss on disposal of property and equipment........ 185 2,267 332 Write-off of excess of cost over net assets acquired........................................ 179,824 Provision for deferred income taxes............... (5,055) Loss on early retirement of debt.................. 679 16,658 Gain on settlement of litigation.................. (4,486) Cumulative effects of accounting changes.......... 34,598 Changes in operating assets and liabilities: Accounts receivable............................. (24,894) (6,115) (31,130) Merchandise inventories......................... (5,305) (10,346) (65,048) Prepaid expenses................................ (465) (33) 377 Accounts payable, accrued expenses and income taxes........................................ 76,847 77,102 57,080 Payments to settle litigation................... (5,250) Debentures issued in lieu of payment of interest..................................... 14,904 20,378 17,231 Other long-term liabilities..................... 4,075 Miscellaneous........................................ (3,083) (520) (974) --------- ----------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................ 84,011 99,175 (18,007) INVESTING ACTIVITIES Capital expenditures................................. (8,483) (7,571) (8,297) Proceeds from sales of property and equipment........ 457 1,500 642 --------- ----------- --------- NET CASH (USED IN) INVESTING ACTIVITIES........... (8,026) (6,071) (7,655) FINANCING ACTIVITIES Long-term debt borrowings............................ 854,661 993,864 882,000 Long-term debt repayments............................ (931,857) (1,060,303) (873,197) Deferred financing costs............................. (589) (13,660) (3,131) Capital contribution................................. 346 Repurchase of stock options.......................... (10) (18) Purchases of treasury stock.......................... (15) (3) --------- ----------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............................ (77,810) (79,774) 5,672 --------- ----------- --------- (DECREASE) INCREASE IN CASH............................ (1,825) 13,330 (19,990) Cash at beginning of year.............................. 27,136 13,806 33,796 --------- ----------- --------- CASH AT END OF YEAR.................................... $ 25,311 $ 27,136 $ 13,806 ========= ========== =========
See notes to consolidated financial statements. F-8 66 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation AmeriSource Distribution Corporation (formerly Alco Health Distribution Corporation) ("Distribution") is a Delaware corporation organized by an affiliate of 399 Venture Partners Inc. ("VPI"), and other investors, including members of management of AmeriSource Corporation ("AmeriSource") (formerly Alco Health Services Corporation). Distribution was formed in November 1988 to acquire AmeriSource in a leveraged buyout transaction (the "Acquisition"). The accompanying financial statements present the consolidated financial position, results of operations and cash flows of Distribution and its wholly-owned subsidiary, AmeriSource Corporation (collectively, the "Company") as of the dates and for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Pro Forma Share Presentation The Company's (loss) per share and share data in the financial statements have been retroactively restated to reflect the pro forma effect of the 2.95-for-1 stock split to be declared in connection with the proposed public offering by the Company of its Common Stock discussed in Note 12. The pro forma (loss) per share and share information will be the historical amounts as presented when the 2.95-for-1 stock split becomes effective. Business The Company is a wholesale distributor of pharmaceuticals and related health care products. Concentrations of Credit Risk The Company sells its merchandise inventories to a large number of customers in the health care industry including independent drug stores, chain drug stores, hospitals, mass merchandisers, clinics and nursing homes. The Company's trade accounts receivable are exposed to credit risk, however, the risk is limited due to the diversity of the customer base and the customer base's wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial conditions. The Company maintains reserves for potential bad debt losses and such bad debt losses have been historically within the Company's expectations. Merchandise Inventories Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method, which results in a matching of current costs and revenues. On a supplemental basis, if the first-in, first-out (FIFO) method of valuation had been used for determining costs, inventories would have been approximately $88,327,000 and $83,022,000 higher than the amounts reported at September 30, 1994 and 1993, respectively. Depreciation The cost of property and equipment is depreciated over the estimated useful lives of the related assets by the straight-line method. Deferred Financing Costs Deferred financing fees and related expenses are being amortized over 3 to 12 years. F-9 67 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Pension Plans Pension costs, which are primarily computed using the projected unit credit cost method, are funded based on the minimum required contribution under the Employee Retirement Income Security Act of 1974. Revenue Recognition The Company recognizes revenues at the point at which product is shipped. Earnings Per Share Earnings per share are based on 14,750,000 shares, (as adjusted for the 2.95-for-1 stock split as discussed in Note 12) representing the weighted average shares outstanding during the periods presented including the effect of the Distribution Plan and the 1991 Option Plan stock options (Note 6), since all of the options outstanding under these plans will be satisfied with shares purchased or to be purchased from VPI at $.34 per share, pursuant to a prior agreement. NOTE 2 -- EXCESS OF COST OVER NET ASSETS ACQUIRED The excess of cost over net assets acquired ("goodwill") was recorded at the time of the Acquisition in 1988. Since the Acquisition, the Company has been unable to achieve the operating results projected at the time of the Acquisition. The projections at the time of the Acquisition were developed based on historical experience, industry trends and management's estimates of future performance. These projections assumed significant growth rates in revenues, stable gross profit margins and cash flow from operations to reduce Acquisition indebtedness and did not anticipate long-term losses or indicate an inability to recover the value of goodwill. Due to persistent competitive pressures and a shift in the customer mix to larger volume, lower margin customers, gross profit margins have declined from 7.10% in fiscal 1989 to 5.63% in fiscal 1993 and 5.47% in fiscal 1994, resulting in: operating results which are substantially below the projections made at the time of the Acquisition; an increase in the Company's indebtedness; and an accumulated deficit in retained earnings at June 30, 1994 before the goodwill write-off of $126.4 million. During the period since the Acquisition, the Company has been affected by price competition for market share within the industry, health care industry consolidation and the impact of group purchasing organizations, managed care and health care reform on drug prices. Until fiscal 1994, the Company believed the results since the Acquisition were not indicative of long-term market conditions affecting pricing within the industry. In fiscal 1994, the Company determined its poor operating results since the Acquisition and its expectations for future operating results were being significantly affected by fundamental changes in the market place in which the Company operates. As these factors became clear and in conjunction with the increases in interest rates, a detailed comprehensive evaluation of the Company's future prospects was prepared. The evaluation determined the Company's financial losses were and continue to be significantly affected by price sensitivity, aggressive pricing by better capitalized competitors, consolidations in the wholesale drug distribution industry and the impact of larger buying groups. Based on current industry trends, interest rate trends and the health care reform environment, in the third quarter of fiscal 1994, the Company concluded that the projected operating results (the "Projection") would not support the future recovery of the remaining goodwill balance. The methodology employed to assess the recoverability of the Company's goodwill was to project results of operations forward 36 years, which approximated the remaining amortization period of the goodwill balance at June 30, 1994. The Company then evaluated the recoverability of goodwill on the basis of the Projection. The Projection reflects significant cumulative losses indicating that the carrying value of goodwill is not recoverable. Unless the Company is able to develop successful strategic, operating or financing initiatives F-10 68 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- EXCESS OF COST OVER NET ASSETS ACQUIRED -- (CONTINUED) which would change the assumptions used in the Projection, the projected future operating results based on these assumptions is the best estimate of the Company's projected performance given the Company's existing high leverage and industry trends. As a result, the Company concluded that the carrying value of goodwill could not be recovered from expected future operations. Accordingly, the Company wrote off its remaining goodwill balance of $179.8 million in the third quarter of fiscal 1994. More importantly, while the Company believes the reliability of any projection over such an extended period is highly uncertain, the Projection also indicates that the Company's long-term viability will require modification of its current capital structure to reduce its indebtedness and increase its equity in the near to mid-term future. While the Projection indicates that in fiscal 1998 cash flow from operations will not be sufficient to satisfy required interest and principal payments on its current debt obligations, the Company believes and the Projection indicates, that cash flow generated from operations in the near-term (fiscal years 1995 through 1997) is sufficient to service its current debt obligations. No assurance can be given that the Company will be successful in efforts to restructure or recapitalize in order to be able to operate in a profitable manner for the long-term. NOTE 3 -- TAXES ON INCOME The income tax provision (benefit) is as follows (in thousands):
FISCAL YEAR ENDED SEPTEMBER 30 ----------------------------- 1994 1993 1992 ------- ------ ------ Current provision Federal.................................................... $12,147 $4,633 $2,574 State and local............................................ 853 1,746 75 ------- ------ ------ 13,000 6,379 2,649 ------- ------ ------ Deferred provision (benefit) Federal.................................................... (5,625) State and local............................................ 439 ------- ------ ------ (5,186) -- -- ------- ------ ------ Provision for income taxes...................................... $ 7,814 $6,379 $2,649 ======= ====== ======
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
FISCAL YEAR ENDED SEPTEMBER 30 ----------------------------- 1994 1993 1992 ------ ------- ------ Statutory federal income tax rate............................... 35.0% 34.8% 34.0% State and local income tax rate, net of federal tax benefit..... (.3) (104.1) (.5) Tax effect of operating loss carryover.......................... 6.1 (13.5) Amortization of difference in book and tax bases of net assets acquired...................................................... (39.2) (168.6) (20.3) Alternative minimum tax......................................... (274.2) (20.3) Other........................................................... (6.3) (70.5) (5.4) ------ ------- ------ Effective income tax rate....................................... (4.7)% (582.6)% (26.0)% ====== ======= ======
Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109), which requires a change in the method of accounting for income taxes from the deferred method to the liability method. In accordance with Statement 109, the Company recorded an adjustment of $33.4 million for the cumulative effect of adopting Statement 109 as of October 1, 1993. As permitted under Statement 109, prior period financial statements have not been restated. F-11 69 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- TAXES ON INCOME -- (CONTINUED) The cumulative effect adjustment relates principally to the provision of deferred income taxes to reflect the tax consequences on future years of the difference between the tax and financial reporting basis of merchandise inventories. Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts. Significant components of the Company's deferred tax liabilities (assets) as of September 30, 1994 are as follows (in thousands): Inventory......................................................................... $ 35,712 Fixed assets...................................................................... 4,654 Other............................................................................. 351 -------- Gross deferred tax liabilities............................................... 40,717 -------- Net operating losses and tax credit carryovers.................................... (11,554) Allowance for doubtful accounts................................................... (3,748) Accrued expenses.................................................................. (3,524) Other postretirement benefits..................................................... (497) Other............................................................................. (3,173) -------- Gross deferred tax assets.................................................... (22,496) -------- Valuation allowance for deferred tax assets....................................... 10,350 -------- Net deferred tax liabilities................................................. $ 28,571 ========
The valuation allowance for deferred tax assets was $17.6 million at October 1, 1993. For the fiscal years ended September 30, 1993 and 1992, the deferred income tax provision (benefit) resulted from timing differences in the recognition of certain expenses for tax and financial reporting purposes. Due to limitations on the utilization of tax losses, the Company did not recognize any deferred income tax (benefit) in 1993 or 1992. The principal components of deferred taxes are as follows (in thousands):
FISCAL YEAR ENDED SEPTEMBER 30 ----------------- 1993 1992 ------ ------ Bad debts.................................................................. $ (254) $ 360 Deferred compensation...................................................... 164 (31) Interest................................................................... (491) Inventory.................................................................. (725) (492) Insurance.................................................................. 113 (207) Fixed assets............................................................... (970) Other...................................................................... (138) (149) Amount not recognized...................................................... 1,810 1,010 ------ ------ $ -- $ -- ====== ======
An unused tax net operating loss carry-over of $6,910,000 expiring in 2008, is available to offset future taxable income. The Company was subject to the alternative minimum tax for the fiscal years ended September 30, 1994 and September 30, 1992. The alternative minimum tax is imposed at a 20% rate on the Company's alternative minimum taxable income which is determined by making statutory adjustments to the Company's regular taxable income. Net operating loss carryforwards were used to offset up to 90% of the Company's alternative F-12 70 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- TAXES ON INCOME -- (CONTINUED) minimum taxable income. For 1992, the effect of utilizing the net operating loss carryforward is represented for financial reporting purposes as an extraordinary credit. The alternative minimum tax paid is allowed as an indefinite credit carryover against the Company's regular tax liability in the future when the Company's regular tax liability exceeds the alternative minimum tax liability. As of September 30, 1994, the Company has a $7,142,000 alternative minimum tax credit carryforward. Income tax payments (refunds) amounted to $3,891,000, $395,000 and $(1,089,000) in the years ended September 30, 1994, 1993 and 1992, respectively. NOTE 4 -- LONG-TERM DEBT On March 30, 1993, AmeriSource entered into a credit agreement (the "Credit Agreement") with a syndicate of financial institutions providing senior secured facilities of up to $425 million. The Credit Agreement provides for initial borrowings based on commitments of $380 million, consisting of a term loan of $20 million and a revolving credit loan of up to $360 million. The maximum amount that may be borrowed under the Credit Agreement is limited to the extent of a sufficient borrowing base, which is essentially 85% of eligible accounts receivable and 60% of eligible inventory. Under the terms of the Credit Agreement, AmeriSource has pledged substantially all its assets to secure its borrowings under the Credit Agreement and AmeriSource's parent, Distribution, has pledged the common stock of AmeriSource. The term loan matures, and the commitment of the syndicate to make revolving credit loans expires, on April 1, 1996. The term loan and the revolving credit loan bear interest at a rate per annum equal to, at AmeriSource's option, LIBOR plus 3% or the prime rate plus 1 1/2%. AmeriSource has entered into a two-year interest rate cap of 12% with respect to $100 million in borrowings under the revolving credit loan for the purpose of limiting AmeriSource's exposure to an increase in interest rates. In addition, AmeriSource is required to pay a fee of 1/2% per annum on the average unused portion of the revolving credit loan commitment plus a $200,000 annual administration fee. The Credit Agreement, as amended, contains certain restrictive covenants and requires AmeriSource, among other things, to maintain minimum defined net worth levels, satisfy certain financial ratios and places certain limitations on investments, capital expenditures, additional debts, changes in capital structure and dividend payments. At September 30, 1994, the $20 million outstanding under the term loan and the $156 million outstanding under the revolving credit loan bore interest at the rate of 8.10% per annum. Initial borrowings under the Credit Agreement were used to extinguish the obligations outstanding under AmeriSource's former revolving credit facility, which was due to expire in December, 1993. An extraordinary loss of $3.3 million, net of a tax benefit of $1.3 million, was recorded during the fiscal year ended September 30, 1993 representing the write-off of the unamortized financing fees relating to the former revolving credit facility. In connection with the Credit Agreement, the Company incurred approximately $7.7 million in financing fees which have been deferred and are being amortized on a straight-line basis over the three year term of the indebtedness. The 14 1/2% Senior Subordinated Notes (the "Notes") were sold on September 15, 1989 in a public offering and are due September 15, 1999. The Notes are unsecured obligations and are subordinated to the Credit Agreement and certain other indebtedness, and may be redeemed at the option of the Company at a premium, together with accrued and unpaid interest to the redemption date, at any time on or after September 15, 1994. If, for the twelve-month period ending on each of August 31, 1996 and 1997, the Company's consolidated fixed charge ratio (as defined) exceeds 1.5 to 1, the Company shall be required to redeem or otherwise repurchase in the open market and retire 5% and 10%, respectively, of the principal amount of the Notes. The Company shall not be required to make such redemption or repurchase until such time, and to the extent, funds become available under the Credit Agreement or any successor or replacement facility. In addition, the Company is required to redeem on August 31, 1998, 50% of the aggregate principal F-13 71 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- LONG-TERM DEBT -- (CONTINUED) amount of the Notes originally issued, reduced by any prior redemptions or repurchases. During the fiscal year ended September 30, 1993, the Company purchased and retired $4.4 million of the Notes. Premiums on the fiscal 1993 purchases resulted in an extraordinary loss of $549,000, net of a tax benefit of $222,000. During the fiscal year ended September 30, 1994, the Company purchased and retired an additional $4.4 million of Notes, resulting in an extraordinary charge of $679,000, net of a tax benefit of $23,000, consisting of the write-off of related unamortized financing fees and premiums paid on redemption. During the fiscal year ended September 30, 1994, the Company completed an exchange of $40,329,000 principal amount of 14 1/2% Senior Subordinated Notes due 1999, Series A (the "New Notes") and $101,000 in cash for $40,329,000 principal amount of its Notes. The only material difference between the terms of the New Notes and the terms of the Notes is that the indenture of the New Notes does not have the minimum consolidated net worth provisions set forth in the indenture of the Notes. The indenture of the Notes requires the Company to maintain a consolidated net worth (as defined) of $80 million. If the Company's consolidated net worth, as defined in the indenture of the Notes, is less than $80 million at the end of each of any two consecutive fiscal quarters, the Company is required to offer to purchase (the "Offer") an amount of Notes equal to 20% of the principal amount of Notes outstanding at the time the Offer is made. The purchase price in any Offer is equal to 100% of the principal amount purchased plus accrued interest to the date of purchase. The Offer required could be triggered if the Company generated losses from operations, had charges or expenses relating to a restructuring or recapitalization, or reductions in the book value of tangible or intangible assets, if in each case the losses or charges are of a sufficient magnitude. As a result of the elimination of the minimum consolidated net worth provision in the indenture of the New Notes, the Company would not be required to make an Offer to holders of the New Notes, even in the event of a material decrease in the Company's consolidated net worth. In addition to the exchange noted above, the Company paid the holders of an aggregate of $125,388,000 in principal amount of Notes cash consideration of $520,000 in exchange for each holder's agreement not to tender any of the Notes as a result of any required Company Offer or to exercise any rights they have or may have with respect to the consolidated net worth provision of the indenture of the Notes. The total cash consideration of $621,000 noted above as well as related fees and expenses of $600,000 were recognized as interest expense during the fiscal year ended September 30, 1994. On July 26, 1993, Distribution issued $126.5 million principal amount of 11 1/4% Senior Debentures ("Senior Debentures") due 2005 in a public offering. Interest on the Senior Debentures will be payable semi-annually on January 15 and July 15 of each year, commencing January 15, 1994. Through and including the semi-annual interest payment due July 15, 1998, Distribution may elect, at its option, to issue additional Senior Debentures in satisfaction of its interest payment obligations. The Senior Debentures are senior unsecured obligations of Distribution and rank pari passu in right of payment with all senior borrowings of Distribution and senior in right of payment to all subordinated indebtedness of Distribution. As indebtedness of Distribution, the Senior Debentures are structurally subordinated to all indebtedness and other obligations of AmeriSource. Substantially all the net proceeds of the offering (approximately $122 million) were applied to redeem the 18% Senior Subordinated Debentures, 18 1/2% Merger Debentures and 19 1/2% Junior Subordinated Debentures of Distribution at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of redemption. The indenture relating to the Senior Debentures contains restrictions relating to, among other things, the payment of dividends, the repurchase of stock and the making of certain other restricted payments, the incurrence of additional indebtedness and the issuance of preferred stock, the creation of certain liens, certain asset sales, transactions with subsidiaries and other affiliates, dividends and other payment restrictions affecting subsidiaries, and mergers and consolidations. The debt refinancing resulted in an extraordinary charge of $12.8 million during the fiscal year ended September 30, 1993 relating to the redemption of the Merger Debentures and the write-off of deferred financing costs, net of a tax benefit of $3.2 million. In connection with the Senior Debentures, the Company incurred F-14 72 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- LONG-TERM DEBT -- (CONTINUED) approximately $5.1 million in financing fees which have been deferred and are being amortized on a straight-line basis over the twelve year life of the indebtedness. The indentures governing the Credit Agreement, the Notes, the New Notes and the Senior Debentures contain restrictions and covenants, as amended, which include limitations on incurrence of additional indebtedness, prohibition of indebtedness senior to the Notes and New Notes and junior to the Credit Agreement, restrictions on distributions and dividends to stockholders, including Distribution, transactions with affiliates and certain corporate acts such as mergers, consolidations and the sale of substantially all assets. Additional covenants require compliance with financial tests, including current ratio, leverage, interest coverage ratio, fixed charge coverage and maintenance of minimum net worth. Interest paid on the above indebtedness during the fiscal years ended September 30, 1994, 1993 and 1992 amounted to $46.1 million, $39.7 million and $52.2 million, respectively. Financing fees and expenses incurred with respect to the above indebtedness have been capitalized and are being amortized over the terms of the related indebtedness. Total amortization of these fees and expenses (included in interest expense) for the fiscal years ended September 30, 1994, 1993 and 1992 was $4.0 million, $3.9 million and $4.0 million, respectively. The carrying amount of the Company's revolving credit facility approximates fair value. The combined fair value of the Notes and New Notes is approximately $176 million and is based on quoted market prices. The fair value of the Senior Debentures is approximately $145 million and is based on quotes from brokers. It was not practicable to estimate the fair value of the other debt or convertible subordinated debentures. NOTE 5 -- COMMON STOCK The holders of the Class A common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of Distribution. Except as otherwise required by law, holders of the Class B common stock and Class C common stock generally do not possess the right to vote on any matters to be voted upon by the stockholders of Distribution. The holders of the Class A common stock may elect at any time to convert any or all such shares into the Class B common stock on a share-for-share basis. Holders of the Class B common stock may elect at any time to convert any or all of such shares into the Class A common stock, on a share-for-share basis, to the extent the holder thereof is not prohibited from owning additional voting securities by virtue of regulatory restrictions. The Class C common stock is subject to substantial restrictions on transfer and has certain registration and "take-along" rights. A share of Class C common stock will automatically be converted into a share of Class A common stock (a) immediately prior to its sale in a subsequent public offering or (b) at such time as such share of Class C common stock has been sold publicly after a subsequent public offering in a transaction that complies with any maximum quantity limitations applicable to such sale. Once a share of Class C common stock has been converted into Class A common stock it will no longer be subject to any restrictions on transfer nor will it be entitled to the benefits of registration and take-along rights. During fiscal 1992, the Company increased the number of shares of Class A common stock and Class B common stock authorized to be issued from 10,000,000 each to 30,000,000 each and increased the number of shares of Class C common stock authorized to be issued from 500,000 to 2,000,000. During fiscal 1993, 3,503 shares of Class A common stock were purchased as treasury stock. During fiscal 1994, 44,250 shares of Class A common stock were purchased as treasury stock. F-15 73 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- PENSION AND OTHER BENEFIT PLANS AmeriSource provides a benefit for the majority of its employees under noncontributory defined benefit pension plans. For each employee, the benefits are based on years of service and average compensation. A summary of the components of net periodic pension cost charged to expense for the company-sponsored defined benefit pension plans together with contributions charged to expense for a multi-employer union administered defined benefit pension plan the Company participates in follows (in thousands):
FISCAL YEAR ENDED SEPTEMBER 30 --------------------------- 1994 1993 1992 ------- ------- ------- Service cost...................................................... $ 2,198 $ 1,912 $ 1,669 Interest cost on projected benefit obligation..................... 2,165 2,034 1,879 Actual return on plan assets...................................... (13) (2,842) (3,090) Net amortization and deferral..................................... (2,038) 979 1,490 ------- ------- ------- Net pension cost of defined benefit plans......................... 2,312 2,083 1,948 Net pension cost of multi-employer plan........................... 142 110 91 ------- ------- ------- Total pension expense............................................. $ 2,454 $ 2,193 $ 2,039 ======= ======= =======
The following table sets forth (in thousands) the funded status and amount recognized in the consolidated balance sheets for the company-sponsored defined benefit pension plans:
1994 1993 ------------------------- ------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ----------- ----------- ----------- ----------- Plan assets at fair value....................... $24,457 $ 333 $24,155 $ 280 Actuarial present value of benefit obligations: Vested..................................... 22,420 1,168 20,898 603 Accumulated, not vested.................... 421 210 576 171 ----------- ----------- ----------- ----------- Accumulated benefit obligations................. 22,841 1,378 21,474 774 Effect of future pay increases............. 8,559 17 7,987 113 ----------- ----------- ----------- ----------- Projected benefit obligation.................... 31,400 1,395 29,461 887 ----------- ----------- ----------- ----------- Plan assets (less than) projected benefit obligation.................................... (6,943) (1,062) (5,306) (607) Unrecognized net transition asset............... (996) (1,167) Unrecognized prior service cost................. 3,380 733 3,680 357 Adjustment to recognize minimum liability....... (813) (372) Unrecognized net loss related to assumptions.... 4,013 149 2,117 128 ----------- ----------- ----------- ----------- Pension (liability) recognized in balance sheet......................................... $ (546) $ (993) $ (676) $(494) ========= ========= ========= =========
Assumptions used in computing the funded status of the plans were as follows:
1994 1993 1992 ------ ------ ----- Discount rate............................................ 7.75% 7.25% 8.0% Rate of increase in compensation levels.................. 6.25% 5.75% 6.5% Expected long-term rate of return on assets.............. 10.00% 10.00% 10.0%
Plan assets at September 30, 1994 are invested principally in listed stocks, corporate and government bonds and cash equivalents. F-16 74 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- PENSION AND OTHER BENEFIT PLANS -- (CONTINUED) Additionally, the Company sponsors the Employee Investment Plan, a defined contribution 401(k) plan, which covers salaried and certain hourly employees. Eligible participants may contribute to the plan up to 2% to 6% of their regular compensation before taxes. The Company matches the employee contributions in an amount equal to 50% of the participants' contributions. An additional discretionary Company contribution in an amount not to exceed 50% of the participants' contributions may also be made depending upon the Company's performance. All contributions are invested at the direction of the employee in one or more funds. Employer contributions vest over a five-year period depending upon an employee's years of service. Costs of the plan charged to expense for the fiscal years ended September 30, 1994, 1993 and 1992 amounted to $1,093,000, $792,000 and $926,000, respectively. Distribution adopted the AmeriSource Distribution Corporation and Subsidiaries Employee Stock Purchase Plan (the "Distribution Plan") to enable key members of management of AmeriSource to participate in the equity ownership of Distribution. The securities subject to the Distribution Plan are Distribution's Class A common stock. The purchase price for shares of Distribution was $.34 per share. Eligible management participants with prior AmeriSource options were required to defer the purchase of some or all of the Distribution Class A common stock allocated to them. Pursuant to the Distribution Plan, management investors, on November 3, 1989, purchased options on 1,716,347 shares of Distribution's Class A common stock which became exercisable in 20% annual increments commencing on January 1, 1990 and expire five years after the date of grant, or if Distribution has not gone public or been sold within that five-year period, at the earlier of (i) 10 years from the date of grant, (ii) the date Distribution is sold or (iii) 90 days after the date Distribution goes public. During fiscal 1991 and 1993, respectively, 62,872 and 121,872 options purchased by management investors in fiscal 1990 were extinguished. No options were exercised during fiscal 1994 or 1993 and no additional options will be issued under the Distribution Plan. As of September 30, 1994, there were 1,531,603 options outstanding under the Distribution Plan, all of which were exercisable. Distribution adopted the AmeriSource Distribution Corporation Partners Stock Option Plan (the "Partners Plan") to enable other employees of AmeriSource to participate in the equity ownership of Distribution. On March 2, 1991, options to acquire 368,160 shares of Distribution Class A common stock were granted at an exercise price of $.34 per share. The options under the Partners Plan became exercisable when they vested on September 30, 1994 and expire on December 31, 1994. If an option terminates or expires without having been exercised, no new options may be granted covering the shares subject to such option, and such shares shall cease to be reserved for future issuance under the Partners Plan. No additional options will be granted under the Partners Plan. During fiscal 1991, 9,440 options were canceled and during fiscal 1992 an additional 18,880 options were canceled, leaving 339,840 options outstanding under the Partners Plan as of September 30, 1994. Distribution adopted the AmeriSource Distribution Corporation 1991 Stock Option Plan (the "1991 Option Plan") for the granting of non-qualified stock options to acquire up to an aggregate of 1,069,375 shares of Distribution Class A common stock. The options granted to certain members of the Company's management under the 1991 Stock Option Plan represented the shares unallocated under the Distribution Plan and options never granted under a performance stock option plan originally announced by Distribution in 1989 and reflect achievement in the Company's operating performance through fiscal year ended September 30, 1991. The options granted under the 1991 Option Plan are not subject to forfeiture, exercisable at the rate of 50% per year on each of January 1, 1993 and January 1, 1994 and expire on November 3, 1994, or if prior to November 3, 1994, Distribution has not gone public or been sold, then at the earlier of (i) November 3, 1999, (ii) the date Distribution is sold or (iii) 90 days after the date Distribution goes public. During fiscal 1994, 29,500 options were extinguished, leaving 1,039,875 options outstanding at an exercise price of $.34 per share under the 1991 Option Plan as of September 30, 1994. F-17 75 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- PENSION AND OTHER BENEFIT PLANS -- (CONTINUED) The Company's 1992 Stock Option Plan (the "1992 Option Plan"), which was adopted by the Board of Directors on March 31, 1992 and approved by the stockholders on April 7, 1992, provides for the granting over time of non-qualified stock options to acquire up to approximately 5 million shares of Distribution Class A common stock to employees of the Company. Such options will be granted based upon performance and with vesting schedules to be determined at the time of grant. Under the 1992 Option Plan, the exercise price of options will not be less than the fair market value of the Class A common stock on the date of the grant. Options granted to employees will not be exercisable after the expiration of six years from the date of the grant or such sooner date as determined. No options have been granted under the 1992 Option Plan. As a result of special termination benefit packages previously offered, the Company provides medical, dental and life insurance benefits to certain retirees and their dependents. These benefit plans are unfunded. Prior to October 1, 1993, the Company recognized the expenses for these plans on the cash basis. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (Statement 106), which requires that the cost of postretirement health care benefits be recognized on the accrual basis as employees render service to earn the benefit instead of on the cash basis when the benefits are paid. As of October 1, 1993, the Company adopted Statement 106 by recognizing the accumulated obligation related to these benefits. The cumulative effect of this change in accounting principle resulted in a non-cash charge to net income of $1.2 million. In addition to the cumulative effect adjustment, the expense for postretirement benefits other than pensions for the fiscal year ended September 30, 1994, was $80,000, approximately equal to the cash payments. The cash payments for such benefits in fiscal years 1993 and 1992, respectively, were approximately the same as fiscal 1994. Since the plans are unfunded and relate only to certain retirees, the fiscal 1994 expense accrual for these benefits consisted solely of an interest cost component. The accumulated postretirement benefit obligation was $1.1 million as of September 30, 1994. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7.75% at October 1, 1993 and September 30, 1994, respectively. A health care cost trend rate of 11.4% was assumed for fiscal 1995, gradually declining to an ultimate level of 5.5% over 15 years. Increasing the assumed health care cost trend rates by 1% in each year and holding all other assumptions constant, would increase the accumulated postretirement benefit obligation as of September 30, 1994 by $77,500 and increase the postretirement benefit cost in fiscal 1994 by $7,000. NOTE 7 -- LEASES The costs of capital leases are included in property and equipment and the obligations therefor in other debt. Related amortization is included in depreciation. At September 30, 1994, future minimum payments totaling $21,346,000 under noncancelable operating leases with remaining terms of more than one year were due as follows: 1995 -- $6,214,000; 1996 -- $5,197,000; 1997 -- $3,390,000; 1998 -- $1,885,000; 1999 -- $1,281,000; thereafter (through 2004) -- $3,379,000. In the normal course of business, operating leases are generally renewed or replaced by other leases. Total rental expense was $6,168,000 in 1994, $6,034,000 in 1993 and $5,647,000 in 1992. NOTE 8 -- LEGAL MATTERS AND CONTINGENCIES In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust, environmental, product liability and regulatory agency matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. The Company does not believe that these matters, individually or in the aggregate, will have a material adverse effect on its business or financial condition. F-18 76 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- LEGAL MATTERS AND CONTINGENCIES -- (CONTINUED) In November 1993, the Company was named a defendant, along with six other wholesale distributors and twenty-four pharmaceutical manufacturers, in fourteen civil actions filed by independent retail pharmacies in the United States District Court for the Southern District of New York. Plaintiffs seek to establish these lawsuits and over thirty-four others (to which the Company is not a party) filed by other pharmacies as class actions. In essence, these lawsuits all claim that the manufacturer and wholesaler defendants have combined, contracted and conspired to fix the prices charged to plaintiffs and class members for prescription brand name pharmaceuticals. Specifically, plaintiffs claim that the defendants use "chargeback agreements" to give some institutional pharmacies discounts that are not made available to retail drug stores. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and costs. These actions have been transferred to the United States District Court for the Northern District of Illinois for consolidated and coordinated pretrial proceedings. Effective October 26, 1994, the Company entered into a Judgment Sharing Agreement with other wholesaler and pharmaceutical manufacturer defendants. Under the Judgment Sharing Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler defendants for litigation costs incurred, up to an aggregate of $9 million; and (b) if a judgment is entered into against both manufacturers and wholesalers, the total exposure for joint and several liability of the Company is limited to the lesser of 1% of such judgment or one million dollars. In addition, the Company has released any claims which it might have had against the manufacturers for the claims presented by the plaintiffs in these lawsuits. The Judgment Sharing Agreement covers the federal court litigation as well as the cases which have been filed in various state courts. The Company believes it has meritorious defenses to the claims asserted in these lawsuits and intends to vigorously defend itself in all of these cases. The Company has become aware that its former Charleston, South Carolina distribution center was previously owned by a fertilizer manufacturer and that there is evidence of residual soil contamination remaining from the fertilizer manufacturing process operated on that site over thirty years ago. The Company engaged an environmental consulting firm to conduct a soil survey and initiated a groundwater study during fiscal 1994. The preliminary results of the groundwater study indicate that there is lead in the groundwater at levels requiring further investigation and response. A preliminary engineering analysis was prepared by outside consultants during the third quarter of fiscal 1994, and indicated that, if both soil and groundwater remediation are required, the most likely cost of remediation efforts at the Charleston site is estimated to be $4.1 million. Accordingly, a liability of $4.1 million was recorded during the third quarter of fiscal 1994 to cover future consulting, legal and remediation and ongoing monitoring costs. The Company has notified the appropriate state regulatory agency from whom approval must be received before proceeding with any further tests or with the actual site remediation. The approval process and remediation could take several years to accomplish and the actual costs may differ from the liability which has been recorded. The accrued liability, which is reflected in other long-term liabilities on the accompanying consolidated balance sheet, is based on an estimate of the extent of contamination and choice of remedy, existing technology and presently enacted laws and regulations, however, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time, although the Company intends to vigorously enforce its rights and remedies. The Company has been named as a defendant in several lawsuits based upon alleged injuries and deaths attributable to the product L-Tryptophan. The Company did not manufacture L-Tryptophan; however, prior to an FDA recall, the Company did distribute products containing L-Tryptophan from several of its vendors. The Company believes that it is entitled to full indemnification by its suppliers and the manufacturer of L-Tryptophan with respect to these lawsuits and any other lawsuits involving L-Tryptophan in which the Company may be named in the future. To date, the indemnity to the Company in such suits has not been in dispute and, although the Company believes it is unlikely it will incur any loss as a result of such lawsuits, the F-19 77 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- LEGAL MATTERS AND CONTINGENCIES -- (CONTINUED) Company believes that its insurance coverage and supplier indemnification are adequate to cover any losses should they occur. The Company has received Notices of Proposed Adjustment from the Internal Revenue Service in connection with an audit of the Company's federal income tax returns for the taxable years 1987 through 1991. The proposed adjustments indicate a net increase to taxable income for these years of approximately $23 million and relate principally to the deductibility of costs incurred with respect to the Acquisition. The Company has analyzed these matters with tax counsel, believes it has meritorious defenses to the adjustments proposed by the Internal Revenue Service and any amounts assessed will not have a material effect on the financial statements of the Company. At September 30, 1994, there were contingent liabilities with respect to taxes, guarantees of borrowings by certain customers, lawsuits and environmental and other matters occurring in the ordinary course of business. On the basis of information furnished by counsel and others, management believes that none of these contingencies will materially affect the Company. On December 3, 1991, AmeriSource entered into a settlement agreement with Bear Stearns & Co., Inc. ("Bear Stearns") resolving a civil action that had been filed on August 14, 1989 and Bear Stearns' interest in an appraisal action arising from the Acquisition. AmeriSource paid Bear Stearns $7,235,000 in 1992 and will pay $2,500,000 in November 2001, without interest and subject in certain circumstances to earlier payment. The Delaware Chancery Court approved the settlement of Bear Stearns' interest in the appraisal action and the settlement of the remaining claims (representing less than 5% of the shares in the original action) on similar terms. Payments of $600,000 were made during fiscal 1992 in settlement of a portion of the remaining claims. These settlements with Bear Stearns and the other dissenters resulted in an extraordinary gain in 1992 of $4,486,000 from the extinguishment of the associated debt. NOTE 9 -- NON-RECURRING CHARGES The non-recurring charges in 1993 consisted of $1,254,000 in losses on the disposal of three warehouses and charges of $969,000 for the write-down to net realizable value of two additional warehouses no longer in operation which were designated for sale. The non-recurring charges in 1992 consisted of a loss of $287,000 incurred on the sale of a warehouse no longer in operation and the write off of $1,957,000 in professional fees incurred in connection with a public offering attempted during 1992 which was later abandoned due to market conditions. NOTE 10 -- RELATED PARTY TRANSACTIONS On October 21, 1991, an involuntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code was filed against RDS Acquisition Corp. ("RDS"), which was a customer of the Company. Affiliates of VPI had substantial equity and debt interests in RDS and related entities. VPI indemnified AmeriSource for $5,800,000 of the amounts owed by RDS to AmeriSource on October 25, 1991, for which AmeriSource did not otherwise recover the amount owed. NOTE 11 -- SUBSEQUENT EVENTS In December 1994, the Company sold substantially all of its trade accounts and notes receivable (the "Receivables") to AmeriSource Receivables Corporation ("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade receivables securitization program (the "Receivables Program"). As contemplated by the Receivables Program, the Company formed and capitalized ARC through a contribution of $40 million. Contemporaneously, the Company entered into a Receivables Purchase Agreement with ARC, whereby ARC agreed to purchase on a continuous basis Receivables originated by the Company. Pursuant to the Receivables Program, ARC transfers such Receivables to a master trust in exchange for, among other things, certain trade F-20 78 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) receivables-backed certificates (the "Certificates"). Contemporaneously, Certificates in an aggregate principal amount of up to $230 million face amount were sold to investors. The Company will account for the transactions contemplated by the terms of the Receivables Purchase Agreement as a sale of Receivables from AmeriSource to ARC and as a financing transaction by ARC on the Company's consolidated financial statements. During the five year term of the Receivables Program, the cash generated by collections on the Receivables will be used to purchase, among other things, additional Receivables originated by the Company. The Certificates bear interest at a rate selected by the Company equal to (i) the higher of (a) the prime lending rate and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis points. In addition, during the first seventy five days of the Receivables Program, the Company may select an interest rate equal to the federal funds rate plus 125 basis points. The interest rates for the Certificates are subject to the following step-ups: (i) with respect to the ABR tranche (based on the higher of the prime rate or federal funds rate plus 50 basis points), an additional 50 basis points beginning one year after the closing date (December 13, 1994) and (ii) with respect to the LIBOR tranche, an additional 12 1/2 basis points beginning six months after the closing date, an additional 12 1/2 basis points beginning nine months after the closing date, and an additional 75 basis points beginning one year after the closing date. At the same time that it entered into the Receivables Program, the Company and its senior lenders amended its existing Credit Agreement. Among other things, the Amended and Restated Credit Agreement: (i) extended the term of the Credit Agreement until January 3, 2000; (ii) established the amount the Company may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR plus 225 basis points and provided for further interest rate stepdowns upon the occurrence of certain events; (iv) modified the borrowing base availability from inventory and receivable based to inventory based; and (v) increased the Company's ability to make acquisitions and pay dividends. Contemporaneously with the consummation of the Receivables Program and the execution of the Amended and Restated Credit Agreement, the Company called for optional redemption all of the outstanding Notes and New Notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date of January 12, 1995. NOTE 12 -- SUBSEQUENT EQUITY TRANSACTIONS In January 1995, the Company filed a registration statement with respect to a proposed public offering by the Company of up to 7,590,000 shares of Class A common stock, including an over-allotment option of up to 990,000 shares. The net proceeds to the Company will be applied to fund the redemption of one-half of the 11 1/4% senior debentures outstanding for 110% of the principal amount plus accrued interest through date of redemption which will result in an estimated extraordinary charge of $9.8 million. The balance of the net proceeds will be used to fund internal growth and further expansion and for working capital and other general corporate purposes. Prior to the sale of common stock contemplated by the public offering, AmeriSource Distribution Corporation intends to amend its certificate of incorporation to change its corporate name to AmeriSource Health Corporation. In conjunction with the sale of common stock, the Company intends to authorize a 2.95-for-1 stock split. All references to earnings per share data in the financial statements have been restated to give effect to the stock split. In conjunction with the proposed public offering described above, the Company anticipates that the company will issue 2,571,478 shares of common stock upon the exercise of the options issued under The Distribution Plan and the 1991 Option Plan which expire 90 days after the closing of the offering. Also pursuant to a prior agreement, the Company expects to repurchase 1,338,894 shares of common stock from VPI upon the exercise of the Distribution Plan and the 1991 Option Plan at a price of $.34 per share. In F-21 79 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- SUBSEQUENT EQUITY TRANSACTIONS -- (CONTINUED) December 1994, 336,448 options under the Partners Plan were exercised resulting in the issuance of 336,448 shares of Class A Common Stock and the buyback of 107,085 shares of Class A Common Stock to satisfy minimum tax withholdings. The Company expects to adopt the 1995 Option Plan and the Directors Plan which will provide for the granting over time of stock options to acquire shares of Class A Common Stock. In conjunction with the Offering, the Company intends to eliminate all authorized shares of preferred stock and to reduce the authorized number of shares of Class A Common Stock and Class B Common Stock. NOTE 13 -- OTHER INFORMATION (UNAUDITED) QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED(1) ------------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1993 1994 1994 1994 ------------ ---------- ---------- ------------- Revenues....................................... $1,045,776 $1,067,112 $1,079,302 $ 1,109,642 Gross Profit................................... 53,999 58,480 57,455 65,257 Income (Loss) Before Extraordinary Items and Cumulative Effects of Accounting Changes..... 2,579 3,822 (180,057) 1,239 Extraordinary Charge -- Early Retirement of Debt......................................... (656) Cumulative Effects of Accounting Changes....... (34,598) Net Income (Loss).............................. (32,675) 3,822 (180,057) 1,239 Per Share: Income (Loss) Before Extraordinary Items and Cumulative Effects of Accounting Changes..... .18 .26 (12.21) .08 Extraordinary Items............................ (.04) Cumulative Effects of Accounting Changes....... (2.35) Net Income (Loss).............................. (2.21) .26 (12.21) .08
THREE MONTHS ENDED ------------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1992 1993 1993 1993 ------------ ---------- ---------- ------------- Revenues....................................... $ 917,681 $ 920,195 $ 918,499 $ 962,650 Gross Profit................................... 51,378 53,385 50,302 54,373 (Loss) Before Extraordinary Items.............. (2,895) (1,308) (2,257) (1,014) Extraordinary Charge -- Early Retirement of Debt......................................... (2,635) (9,255) Extraordinary Credit -- Income Taxes........... 100 150 60 436 Net (Loss)..................................... (2,795) (3,793) (2,197) (9,833) Per Share: (Loss) Before Extraordinary Items.............. (.20) (.08) (.16) (.07) Extraordinary Items............................ .01 (.17) .01 (.60) Net (Loss)..................................... (.19) (.25) (.15) (.67)
- --------------- (1) December 31, 1993 amounts reflect the cumulative effect of the accounting changes for postretirement benefits other than pensions and income taxes. June 30, 1994 amounts reflect the write-off of goodwill discussed in Note 2. F-22 80 [This Page Intentionally Left Blank] F-23 81 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, SEPTEMBER 30, 1994 1994 ------------ ------------- (UNAUDITED) Current Assets Cash.............................................................. $ 29,325 $ 25,311 Restricted cash................................................... 6,748 Accounts receivable less allowance for doubtful accounts: 12/94 -- $11,986; 9/94 -- $9,370............................... 302,765 272,281 Merchandise inventories........................................... 514,480 351,676 Prepaid expenses and other........................................ 2,549 2,442 ----------- ------------- Total current assets...................................... 855,867 651,710 Property and Equipment, at cost..................................... 68,832 67,598 Less accumulated depreciation..................................... 27,618 26,416 ----------- ------------- 41,214 41,182 Deferred financing costs and other, less accumulated amortization: 12/94 -- $1,434; 9/94 -- $7,239................................... 18,646 18,752 ----------- ------------- $ 915,727 $ 711,644 ========= ==========
See notes to consolidated financial statements. F-24 82 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30, 1994 1994 ------------ ------------- (UNAUDITED) Current Liabilities Current portion of other debt.................................... $ 116 $ 133 Accounts payable................................................. 473,757 449,991 Accrued expenses................................................. 43,932 27,485 Accrued income taxes............................................. 10,305 11,488 Deferred income taxes............................................ 29,258 29,258 ------------ ------------- Total current liabilities..................................... 557,368 518,355 Long-Term Debt Revolving credit facility........................................ 147,041 175,897 Receivables securitization financing............................. 202,000 Senior subordinated notes........................................ 166,134 166,134 Other debt....................................................... 1,308 1,293 Convertible subordinated debentures.............................. 238 238 Senior debentures................................................ 147,970 144,013 ------------ ------------- 664,691 487,575 Other Liabilities Deferred compensation............................................ 528 522 Other............................................................ 5,885 5,918 ------------ ------------- 6,413 6,440 Stockholders' Equity Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued Common Stock, $.01 par value: Class A (Voting and convertible): 30,000,000 shares authorized; issued 12/94 -- 868,591 shares; 9/94 -- 532,143 shares...... 8 5 Class B (Non-voting and convertible): 30,000,000 shares authorized; 12,980,885 shares issued......................... 130 130 Class C (Non-voting and convertible): 2,000,000 shares authorized; 1,475,000 shares issued.......................... 15 15 Capital in excess of par value................................... 4,787 4,676 Retained earnings (deficit)...................................... (315,847) (304,984) Cost of common stock in treasury................................. (1,838) (568) ------------ ------------- (312,745) (300,726) ------------ ------------- $ 915,727 $ 711,644 ========== ==========
See notes to consolidated financial statements. F-25 83 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- (UNAUDITED) Revenues............................................................ $1,157,100 $1,045,776 Costs and expenses Cost of goods sold................................................ 1,093,863 991,777 Selling and administrative........................................ 39,598 34,410 Depreciation...................................................... 1,700 1,589 Interest.......................................................... 17,323 15,233 ---------- ---------- 1,152,484 1,043,009 Income before taxes, extraordinary items and cumulative effects of accounting changes................................................ 4,616 2,767 Taxes on income..................................................... 3,730 188 ---------- ---------- Income before extraordinary items and cumulative effects of accounting changes................................................ 886 2,579 Extraordinary charges -- early retirement of debt, net of income tax benefits.......................................................... (11,749) (656) Cumulative effect of change in accounting for postretirement benefits other than pensions...................................... (1,199) Cumulative effect of change in accounting for income taxes.......... (33,399) ---------- ---------- Net (loss)................................................ $ (10,863) $ (32,675) ========= ========= Earnings (loss) per share Income before extraordinary items and cumulative effects of accounting changes............................................. $ .06 $ .18 Extraordinary items............................................... (.80) (.04) Cumulative effect of change in accounting for postretirement benefits other than pensions................................... (.08) Cumulative effect of change in accounting for income taxes........ (2.27) ---------- ---------- Net (loss)................................................ $ (.74) $ (2.21) ========= =========
See notes to consolidated financial statements. F-26 84 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, ------------------------- 1994 1993 ----------- --------- (UNAUDITED) OPERATING ACTIVITIES Net (loss)......................................................... $ (10,863) $ (32,675) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Depreciation.................................................... 1,700 1,589 Amortization.................................................... 812 2,242 Provision for losses on accounts receivable..................... 2,737 961 (Gain) on disposal of property and equipment.................... (26) (8) Deferred income taxes........................................... (184) (782) Loss on early retirement of debt................................ 15,426 679 Cumulative effects of accounting changes........................ 34,598 Changes in operating assets and liabilities: Restricted cash............................................... (6,748) Accounts receivable........................................... (33,221) (34,080) Merchandise inventories....................................... (162,804) (51,104) Prepaid expenses.............................................. (107) 429 Accounts payable, accrued expenses and income taxes........... 29,062 30,037 Debentures issued in lieu of payment of interest.............. 3,957 3,558 Miscellaneous................................................... 307 (637) ----------- --------- NET CASH (USED IN) OPERATING ACTIVITIES....................... (159,952) (45,193) INVESTING ACTIVITIES Capital expenditures............................................... (3,364) (1,946) Proceeds from sales of property and equipment...................... 1,627 73 ----------- --------- NET CASH (USED IN) INVESTING ACTIVITIES....................... (1,737) (1,873) ----------- --------- FINANCING ACTIVITIES Long-term debt borrowings.......................................... 593,505 244,400 Long-term debt repayments.......................................... (420,393) (205,893) Deferred financing costs........................................... (6,253) (55) Exercise of stock options.......................................... 114 Purchases of treasury stock........................................ (1,270) ----------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 165,703 38,452 ----------- --------- Increase (decrease) in cash.......................................... 4,014 (8,614) Cash at beginning of period.......................................... 25,311 27,136 ----------- --------- CASH AT END OF PERIOD................................................ $ 29,325 $ 18,522 ========= =========
See notes to consolidated financial statements. F-27 85 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION AmeriSource Distribution Corporation ("Distribution"), is a Delaware corporation organized by an affiliate of 399 Venture Partners, Inc. ("VPI"), and other investors, including members of management of AmeriSource Corporation ("AmeriSource"). Distribution was formed in November, 1988 to acquire AmeriSource in a leveraged buyout transaction (the "Acquisition"). The accompanying financial statements present the consolidated financial position, results of operations and cash flows of Distribution and its wholly-owned subsidiary AmeriSource Corporation (collectively, the "Company") as of the dates and for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary to present fairly the financial position as of December 31, 1994, the results of operations for the three months ended December 31, 1994 and 1993 and the cash flows for the three months ended December 31, 1994 and 1993 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. The Company's (loss) per share and share data in the financial statements have been retroactively restated to reflect the pro forma effect of the 2.95-for-1 stock split to be declared in connection with the proposed public offering by the Company of its Common Stock discussed in Note 6. The pro forma (loss) per share and share information will be the historical amounts as presented when the 2.95-for-1 stock split becomes effective. NOTE 2 -- INDEBTEDNESS AND FINANCIAL ARRANGEMENTS In December 1994, the Company sold substantially all of its trade accounts and notes receivable (the "Receivables") to AmeriSource Receivables Corporation ("ARC"), a special purpose wholly-owned subsidiary, pursuant to a trade receivables securitization program (the "Receivables Program"). Contemporaneously, the Company entered into a Receivables Purchase Agreement with ARC, whereby ARC agreed to purchase on a continuous basis Receivables originated by the Company. Pursuant to the Receivables Program, ARC will transfer such Receivables to a master trust in exchange for, among other things, certain trade receivables-backed certificates (the "Certificates"). Contemporaneously, Certificates in an aggregate principal amount of up to $230 million face amount were sold to investors. During the five year term of the Receivables Program, the cash generated by collections on the Receivables will be used to purchase, among other things, additional Receivables originated by the Company. The Certificates bear interest at a rate selected by the Company equal to (i) the higher of (a) the prime lending rate and (b) the federal funds rate plus 50 basis points or (ii) LIBOR plus 50 basis points. In addition, during the first seventy five days of the Receivables Program, the Company may select an interest rate equal to the federal funds rate plus 125 basis points (7.05% at December 31, 1994). The interest rates for the Certificates are subject to the following step-ups: (i) with respect to the ABR tranche (based on the higher of the prime rate or federal funds rate plus 50 basis points), an additional 50 basis points beginning one year after the closing date (December 13, 1994) and (ii) with respect to the LIBOR tranche, an additional 12 1/2 basis points beginning six months after the closing date, an additional 12 1/2 basis points beginning nine months after the closing date, and an additional 75 basis points beginning one year after the closing date. Pursuant to the Receivables Program, on December 13, 1994, the Company sold $305 million in Receivables to ARC in exchange for cash of $201 million and a subordinated note. ARC in turn transferred the Receivables to the master trust for the Certificates and a residual interest in the master trust. The Company has accounted for the transactions contemplated by the terms of the F-28 86 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 2 -- INDEBTEDNESS AND FINANCIAL ARRANGEMENTS -- (CONTINUED) Receivables Purchase Agreement as a sale of Receivables from AmeriSource to ARC and as a financing transaction by ARC on the Company's consolidated financial statements. The Certificates represent fractional undivided interests in the Receivables and other assets of the master trust, and do not otherwise represent recourse obligations of the Company. The assets and liabilities of the master trust have been consolidated with the Company at December 31, 1994. According to its terms, the Receivables Program is expected to liquidate beginning in October 1999, whereupon the payment of the then-outstanding principal of the Certificates will commence. The Certificates are also subject to early liquidation upon the occurence of certain events. In the event of a liquidation, losses on Receivables will first be absorbed by the residual certificate held by ARC and collections on Receivables will first be allocated to make payments of outstanding principal of the Certificates in accordance with their ratable interests in the assets of the master trust, after giving effect to the allocation of losses to the residual interest. Fees of $706,000 incurred through December 31, 1994 in connection with establishing the Receivables Program have been deferred and are being amortized on a straight-line basis over five years. Interest expense on the Certificates during the three months ended December 31, 1994 was $752,000. The $202 million in Certificates outstanding at December 31, 1994 bore interest at 7.05%. Restricted cash of $6,748,000 at December 31, 1994, represents amounts deposited in the master trust from collections on the Receivables, which are designated for specific purposes pursuant to the Receivables Program. At the same time that it entered into the Receivables Program, the Company and its senior lenders amended its existing Credit Agreement. Among other things, the Amended and Restated Credit Agreement: (i) extended the term of the Credit Agreement until January 3, 2000; (ii) established the amount the Company may borrow at $380 million; (iii) reduced the initial borrowing rate to LIBOR plus 225 basis points from LIBOR plus 300 basis points and provided for further interest rate stepdowns upon the occurrence of certain events; (iv) modified the borrowing base availability from inventory and receivable based to inventory based; and (v) increased the Company's ability to make acquisitions and pay dividends. Contemporaneously with the consummation of the Receivables Program and the execution of the Amended and Restated Credit Agreement, the Company called for optional redemption all of the outstanding 14 1/2% senior subordinated notes at a redemption price of 106% of the principal amount plus accrued interest through the redemption date of January 12, 1995. In connection with the amendment of the Credit Agreement and the redemption of the 14 1/2% senior subordinated notes, the Company recorded an extraordinary charge of $11,749,000 during the three months ended December 31, 1994 relating to the write-off of unamortized financing fees and premiums to be paid on the redemption of the 14 1/2% senior subordinated notes, net of tax benefits. NOTE 3 -- EXCESS OF COST OVER NET ASSETS ACQUIRED During the third quarter of the fiscal year ended September 30, 1994, the Company concluded that the carrying value of its excess of cost over net assets acquired ("goodwill") could not be recovered from expected future operations and accordingly wrote off its remaining goodwill balance of $179.8 million. See Management's Discussion and Analysis of Financial Condition and Results of Operations. NOTE 4 -- LEGAL MATTERS AND CONTINGENCIES In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings and governmental investigations, including antitrust, environmental, product liability and regulatory agency matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. The Company does not believe that these matters, individually or in the aggregate, will have a material adverse effect on its business or financial condition. F-29 87 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 4 -- LEGAL MATTERS AND CONTINGENCIES -- (CONTINUED) In November 1993, the Company was named a defendant, along with six other wholesale distributors and twenty-four pharmaceutical manufacturers, in fourteen civil actions filed by independent retail pharmacies in the United States District Court for the Southern District of New York. Plaintiffs seek to establish these lawsuits and over thirty-four others (to which the Company is not a party) filed by other pharmacies as class actions. In essence, these lawsuits all claim that the manufacturer and wholesaler defendants have combined, contracted and conspired to fix the prices charged to plaintiffs and class members for prescription brand name pharmaceuticals. Specifically, plaintiffs claim that the defendants use "chargeback agreements" to give some institutional pharmacies discounts that are not made available to retail drug stores. Plaintiffs seek injunctive relief, treble damages, attorneys' fees and costs. These actions have been transferred to the United States District Court for the Northern District of Illinois for consolidated and coordinated pretrial proceedings. Effective October 26, 1994, the Company entered into a Judgement Sharing Agreement with other wholesaler and pharmaceutical manufacturer defendants. Under the Judgement Sharing Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler defendants for litigation costs incurred, up to an aggregate of $9 million; and (b) if a judgement is entered into against both manufacturers and wholesalers, the total exposure for joint and several liability of the Company is limited to the lesser of 1% of such judgement or one million dollars. In addition, the Company has released any claims which it might have had against the manufacturers for the claims presented by the plaintiffs in these lawsuits. The Judgement Sharing Agreement covers the federal court litigation as well as the cases which have been filed in various state courts. The Company believes it has meritorious defenses to the claims asserted in these lawsuits and intends to vigorously defend itself in all of these cases. The Company has become aware that its former Charleston, South Carolina distribution center was previously owned by a fertilizer manufacturer and that there is evidence of residual soil contamination remaining from the fertilizer manufacturing process operated on that site over thirty years ago. The Company engaged an environmental consulting firm to conduct a soil survey and initiated a groundwater study during fiscal 1994. The preliminary results of the groundwater study indicate that there is lead in the groundwater at levels requiring further investigation and response. A preliminary engineering analysis was prepared by outside consultants during the third quarter of fiscal 1994, and indicated that, if both soil and groundwater remediation are required, the most likely cost of remediation efforts at the Charleston site is estimated to be $4.1 million. Accordingly, a liability of $4.1 million was recorded during the third quarter of fiscal 1994 to cover future consulting, legal and remediation and ongoing monitoring costs. The Company has notified the appropriate state regulatory agency from whom approval must be received before proceeding with any further tests or with the actual site remediation. The approval process and remediation could take several years to accomplish and the actual costs may differ from the liability which has been recorded. The accrued liability, which is reflected in other long-term liabilities on the accompanying consolidated balance sheet, is based on an estimate of the extent of contamination and choice of remedy, existing technology and presently enacted laws and regulations, however, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect the estimated liability in the future. The Company is investigating the possibility of asserting claims against responsible parties for recovery of these costs. Whether or not any recovery may be forthcoming is unknown at this time, although the Company intends to vigorously enforce its rights and remedies. The Company has been named as a defendant in a lawsuit based upon alleged injuries and deaths attributable to the product L-Tryptophan. The Company did not manufacture L-Tryptophan; however, prior to an FDA recall, The Company did distribute products containing L-Tryptophan obtained from several of its vendors. The Company believes that it is entitled to full indemnification by its suppliers and the manufacturer of L-Tryptophan with respect to this lawsuit and any other lawsuits involving L-Tryptophan in which the Company may be named in the future. To date, the indemnity to the Company in similar suits has not been in F-30 88 AMERISOURCE DISTRIBUTION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 4 -- LEGAL MATTERS AND CONTINGENCIES -- (CONTINUED) dispute and, the Company believes it is unlikely it will incur any loss as a result of such lawsuits. The Company further believes that its insurance coverage and supplier indemnification are adequate to cover any losses should they occur. The Company has recently been informed that this matter has been settled, without cost to the Company. The Company has received notices from the Internal Revenue Service asserting deficiencies in federal corporate income taxes for the Company's taxable years 1987 through 1991. The notices indicate an aggregate increase in net taxable income for these years of approximately $24 million and relate principally to the deductibility of costs incurred with respect to the Acquisition. The Company has analyzed these matters with tax counsel and believes it has meritorious defenses to the deficiencies asserted by the Internal Revenue Service. The Company will contest the asserted deficiencies through the administrative appeals process and, if necessary, litigation. The Company believes that any amounts assessed will not have a material effect on the financial statements of the Company. At December 31, 1994, there were contingent liabilities with respect to taxes, guarantees of borrowings by certain customers, lawsuits and environmental and other matters occurring in the ordinary course of business. On the basis of information furnished by counsel and others, management believes that none of these contingencies will materially affect the Company. NOTE 5 -- EARNINGS PER SHARE For the three months ended December 31, 1994 and December 31, 1993, earnings (loss) per share are based on 14,750,000 shares (as adjusted for the 2.95-for-1 stock split as discussed in Note 6), representing the weighted average number of shares of all classes of Distribution's common stock outstanding during those periods including the effect of stock options. Substantially all of the options outstanding will be satisfied with shares purchased or to be purchased from VPI at $.34 per share, pursuant to a prior agreement. NOTE 6 -- SUBSEQUENT EQUITY TRANSACTIONS In January 1995, the Company filed a registration statement with respect to a proposed public offering by the Company of up to 7,590,000 shares of Class A common stock, including an over-allotment option of up to 990,000 shares. The net proceeds to the Company will be applied to fund the redemption of one-half of the 11 1/4% senior debentures outstanding for 110% of the principal amount plus accrued interest through date of redemption which will result in an estimated extraordinary charge of $9.8 million. The balance of the net proceeds will be used to fund internal growth and further expansion and for working capital and other general corporate purposes. Prior to the sale of common stock contemplated by the public offering, AmeriSource Distribution Corporation intends to amend its certificate of incorporation to change its corporate name to AmeriSource Health Corporation. In conjunction with the sale of common stock, the Company intends to authorize a 2.95-for-1 stock split. All references to earnings per share and share data in the financial statements have been restated to give effect to the stock split. In conjunction with the proposed public offering described above, the Company anticipates that the Company will issue 2,571,478 shares of common stock upon the exercise of the options issued under the Distribution Plan and the 1991 Option Plan which expire 90 days after the closing of the offering. Also pursuant to a prior agreement, the Company expects to repurchase 1,338,894 shares of common stock from VPI upon the exercise of the Distribution Plan and the 1991 Option Plan at a price of $.34 per share. The Company expects to adopt the 1995 Option Plan and the Directors Plan which will provide for the granting over time of stock options to acquire shares of Class A Common Stock. In conjunction with the offering, the Company intends to eliminate all authorized shares of preferred stock and to reduce the authorized number of shares of Class A Common stock and Class B Common Stock. F-31 89 INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
PAGE ---- Consolidated Statement of Operations for the year ended September 30, 1994 (unaudited).......................................................................... P-3 Consolidated Statement of Operations for the three months ended December 31, 1994 (unaudited)..................................................................... P-4 Consolidated Statement of Operations for the three months ended December 31, 1993 (unaudited).......................................................................... P-5 Consolidated Balance Sheet as of December 31, 1994 (unaudited)......................... P-6
P-1 90 UNAUDITED PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The unaudited pro forma statements of operations for the fiscal year ended September 30, 1994 and for the three months ended December 31, 1994 and 1993 set forth below give effect to the Refinancing, the Option Exercises and the use of the proceeds from the Offering of $125,400 assuming the sale of 6,600,000 shares of Common Stock offered by this Prospectus assuming an offering price of $19.00 per share (the midpoint of the range as set forth on the cover of this Prospectus), less estimated issuance costs of $8,838 as if such transactions had occurred as of the beginning of the periods presented. The unaudited pro forma balance sheet as of December 31, 1994 set forth below gives effect to the Refinancing, the Option Exercises and the Offering as if such transactions had occurred on December 31, 1994. The unaudited pro forma financial statements are not necessarily indicative of what the Company's results of operations and balance sheet would have been had the Refinancing, the Option Exercises and the Offering been consummated at the assumed dates, nor are they necessarily indicative of the Company's results of operations and balance sheet for any future period. The unaudited pro forma financial statements should be read in conjunction with the consolidated financial statements and related notes thereto, "The Refinancing," "The Offering" and "Use of Proceeds" included elsewhere in this Prospectus. P-2 91 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED SEPTEMBER 30, 1994 --------------------------------------------------------------- PRO FORMA ADJUSTMENTS ------------------------------- OPTION EXERCISES AND AS HISTORICAL REFINANCING OFFERING ADJUSTED Revenues.............................. $4,301,832 $ -- $ -- $4,301,832 Cost of goods sold.................... 4,066,641 4,066,641 Selling and administrative expenses... 142,497 142,497 Environmental remediation............. 4,075 4,075 Depreciation.......................... 6,640 6,640 Amortization of intangibles........... 4,147 4,147 Write-off of excess of cost over net assets acquired..................... 179,824 179,824 ---------- ---------- Operating income (loss)............... (101,992) (101,992) Interest expense...................... 62,611 (19,095)(1) (9,821)(2) 33,695 ---------- ----------- ------------- ---------- (Loss) before taxes, extraordinary items and cumulative effects of accounting changes.................. (164,603) 19,095 9,821 (135,687) Taxes on income....................... 7,814 5,380(3) 2,767(3) 15,961 ---------- ----------- ------------- ---------- (Loss) before extraordinary items and cumulative effects of accounting changes(4).......................... $ (172,417) $ 13,715 $ 7,054 $ (151,648) ========= ======== ========== ========= (Loss) before extraordinary items and cumulative effects of accounting changes per share(4)................ $ (11.69) $ (7.15) ========= ========= Weighted average common shares outstanding(5)...................... 14,750 21,212 ========= =========
- --------------- (1) Adjusted for interest savings consisting of: (i) a $24,712 reduction due to the redemption of the 14 1/2% senior subordinated notes; and (ii) a $3,539 reduction in amortization of deferred financing fees related to the senior subordinated notes and the old revolving credit facility, offset by additional interest of $7,605 associated with the amended and restated revolving credit facility and Receivables Program and $1,551 of amortization of deferred financing fees. The Receivables Program is assumed to bear a cost of 5.9% per annum (representative of historical rates on fixed principal certificates) on the assumed $201,000 in Certificates sold to investors. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 6.1% per annum, which is representative of historical interest rates. (2) Adjusted for interest savings consisting of: (i) a $7,452 reduction due to the redemption of one-half of the 11 1/4% senior debentures; (ii) a $217 reduction in amortization of deferred financing fees related to the senior debentures and (iii) a $2,152 reduction due to an assumed pay down of $41,335 in borrowings under the amended and restated revolving credit facility. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 6.1% per annum, which is representative of historical interest rates. (3) Tax provision arising from the pro forma adjustments. (4) Does not reflect an extraordinary charge of $656, net of tax benefits, representing the write-off of unamortized financing fees relating to the purchase and retirement of a portion of the senior subordinated notes, the cumulative effect of $1,199 for the change in the accounting for postretirement benefits other than pensions, the cumulative effect of $33,399 for the change in the accounting for income taxes or a pro forma extraordinary charge due to the Refinancing and Offering, consisting of $16,293 from the early extinguishment of debt and a $11,613 write-off of deferred financing fees. (5) The historical weighted average common shares outstanding have been restated for the 2.95-for-1 stock split to be declared in connection with the Offering. The pro forma weighted average common shares outstanding reflects the additional number of shares to be issued in connection with the Offering and the Option Exercises. P-3 92 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31, 1994 --------------------------------------------------------------- PRO FORMA ADJUSTMENTS ------------------------------- OPTION EXERCISES AND AS HISTORICAL REFINANCING OFFERING ADJUSTED Revenues.............................. $1,157,100 $ -- $ -- $1,157,100 Cost of goods sold.................... 1,093,863 1,093,863 Selling and administrative expenses... 39,598 39,598 Depreciation.......................... 1,700 1,700 ---------- ---------- Operating income...................... 21,939 21,939 Interest expense...................... 17,323 (3,864)(1) (2,616)(2) 10,843 ---------- ----------- ------------- ---------- Income before taxes and extraordinary items............................... 4,616 3,864 2,616 11,096 Taxes on income....................... 3,730 1,388(3) 939(3) 6,057 ---------- ----------- ------------- ---------- Income before extraordinary items(4)............................ $ 886 $ 2,476 $ 1,677 $ 5,039 ========= ======== ========== ========= Income before extraordinary items per share(4)............................ $ .06 $ .24 ========= ========= Weighted average common shares outstanding(5)...................... 14,750 21,212 ========= =========
- --------------- (1) Adjusted for interest savings consisting of: (i) a $6,876 reduction due to the redemption of the 14 1/2% senior subordinated notes; and (ii) a $599 reduction in amortization of deferred financing fees related to the senior subordinated notes and the old revolving credit facility, offset by additional interest of $3,289 associated with the amended and restated revolving credit facility and Receivables Program and $322 of amortization of deferred financing fees. The Receivables Program is assumed to bear a cost of 8.1% per annum (representative of historical rates on fixed principal certificates) on the assumed $201,000 in Certificates outstanding. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 8.2% per annum, which is representative of historical interest rates. (2) Adjusted for interest savings consisting of: (i) a $1,979 reduction due to the redemption of one-half of the 11 1/4% senior debentures; (ii) a $54 reduction in amortization of deferred financing fees related to the senior debentures and (iii) a $583 reduction due to an assumed pay down of $33,175 in borrowings under the amended and restated revolving credit facility. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 8.2% per annum, which is representative of historical interest rates. (3) Tax provision arising from the pro forma adjustments. (4) Does not reflect an extraordinary charge of $11,749, net of tax benefits, relating to the amendment of the revolving credit facility and the redemption of the 14 1/2% senior subordinated notes or a pro forma extraordinary charge due to the Offering, consisting of $7,034 from the early extinguishment of debt and a $2,341 write-off of deferred financing fees. (5) The historical weighted average common shares outstanding have been restated for the 2.95-for-1 stock split to be declared in connection with the Offering. The pro forma weighted average common shares outstanding reflects the additional number of shares to be issued in connection with the Offering and the Option Exercises. P-4 93 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31, 1993 --------------------------------------------------------------- PRO FORMA ADJUSTMENTS ------------------------------- OPTION EXERCISES AND AS HISTORICAL REFINANCING OFFERING ADJUSTED Revenues.............................. $1,045,776 $ -- $ -- $1,045,776 Cost of goods sold.................... 991,777 991,777 Selling and administrative expenses... 33,034 33,034 Depreciation.......................... 1,589 1,589 Amortization of intangibles........... 1,376 1,376 ---------- ---------- Operating income...................... 18,000 18,000 Interest expense...................... 15,233 (4,460)(1) (2,343)(2) 8,430 ---------- ----------- ------------- ---------- Income before taxes, extraordinary items and cumulative effects of accounting changes.................. 2,767 4,460 2,343 9,570 Taxes on income....................... 188 1,287(3) 676(3) 2,151 ---------- ----------- ------------- ---------- Income before extraordinary items and cumulative effects of accounting changes(4).......................... $ 2,579 $ 3,173 $ 1,667 $ 7,419 ========= ======== ========== ========= Income before extraordinary items and cumulative effects of accounting changes per share(4)................ $ .18 $ .35 ========= ========= Weighted average common shares outstanding(5)...................... 14,750 21,212 ========= =========
- --------------- (1) Adjusted for interest savings consisting of: (i) a $6,022 reduction due to the redemption of the 14 1/2% senior subordinated notes; and (ii) a $758 reduction in amortization of deferred financing fees related to the senior subordinated notes and the old revolving credit facility, offset by additional interest of $1,932 associated with the amended and restated revolving credit facility and Receivables Program and $388 of amortization of deferred financing fees. The Receivables Program is assumed to bear a cost of 5.9% per annum (representative of historical rates on fixed principal certificates) on the assumed $201,000 in Certificates outstanding. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 5.7% per annum, which is representative of historical interest rates. (2) Adjusted for interest savings consisting of: (i) a $1,779 reduction due to the redemption of one-half of the 11 1/4% senior debentures; (ii) a $54 reduction in amortization of deferred financing fees related to the senior debentures and (iii) a $510 reduction due to an assumed pay down of $41,335 in borrowings under the amended and restated revolving credit facility. The amended and restated revolving credit facility is assumed to bear a weighted average interest rate of 5.7% per annum, which is representative of historical interest rates. (3) Tax provision arising from the pro forma adjustments. (4) Does not reflect an extraordinary charge of $656, net of tax benefits, representing the write-off of unamortized financing fees relating to the purchase and retirement of a portion of the senior subordinated notes, the cumulative effect of $1,199 for the change in the accounting for postretirement benefits other than pensions, the cumulative effect of $33,399 for the change in the accounting for income taxes or a pro forma extraordinary charge due to the Refinancing and Offering, consisting of $16,293 from the early extinguishment of debt and a $11,613 write-off of deferred financing fees. (5) The historical weighted average common shares outstanding have been restated for the 2.95-for-1 stock split to be declared in connection with the Offering. The pro forma weighted average common shares outstanding reflects the additional number of shares to be issued in connection with the Offering and the Option Exercises. P-5 94 UNAUDITED PRO FORMA BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, 1994 ---------------------------------------------------------- PRO FORMA ADJUSTMENTS ------------------------------- OPTION EXERCISES AND AS HISTORICAL REFINANCING(1) OFFERING(2) ADJUSTED ASSETS Current assets Cash...................................... $ 29,325 $ -- $ -- $ 29,325 Restricted cash........................... 6,748 6,748 Accounts receivable....................... 302,765 302,765 Merchandise inventories................... 514,480 514,480 Prepaid expenses.......................... 2,549 2,549 ---------- -------------- --------- Total current assets............... 855,867 855,867 Property and equipment, net................. 41,214 41,214 Deferred financing costs and other.......... 18,646 (2,287) 16,359 ---------- -------------- ------------- --------- Total assets....................... $ 915,727 $ -- $ (2,287) $ 913,440 =========== ============= ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of other debt............. $ 116 $ -- $ -- $ 116 Accounts payable.......................... 473,757 473,757 Accrued expenses.......................... 43,932 (17,848) (5,490) 20,594 Accrued income taxes...................... 10,305 (3,374) 6,931 Deferred income taxes..................... 29,258 29,258 ---------- -------------- ------------- --------- Total current liabilities.......... 557,368 (17,848) (8,864) 530,656 Long-term debt Revolving credit facility................. 147,041 183,982 (32,352) 298,671 Receivables securitization financing...... 202,000 202,000 14 1/2% Senior subordinated notes......... 166,134 (166,134) -- Other debt................................ 1,308 1,308 6 1/4% Convertible subordinated debentures.............................. 238 238 11 1/4% Senior debentures................. 147,970 (73,985) 73,985 ---------- -------------- ------------- --------- 664,691 17,848 (106,337) 576,202 Other liabilities........................... 6,413 6,413 Stockholders' equity (deficit) Common stock.............................. 153 92 245 Capital in excess of par value............ 4,787 122,416 127,203 Retained earnings (deficit)............... (315,847) (5,947) (321,794) Cost of common stock in treasury.......... (1,838) (3,647) (5,485) ---------- -------------- ------------- --------- Total stockholders' equity (deficit)........................ (312,745) 112,914 (199,831) ---------- -------------- ------------- --------- Total liabilities and stockholders' equity (deficit)................. $ 915,727 $ -- $ (2,287) $ 913,440 =========== ============= ============ ===========
- --------------- (1) The Refinancing assumes the redemption of the 14 1/2% senior subordinated notes for $183,982 representing a price equal to 106% of the principal amount plus accrued interest through the date of redemption. (2) Reflects the issuance of 2,571,478 shares of Common Stock upon the exercise of options under the Purchase Plan and the 1991 Option Plan and buyback of 168,045 shares of Common Stock valued at $3,193 to satisfy minimum tax withholding obligations; and the repurchase from VPI of 1,338,894 shares of Common Stock for $454 upon the exercise of options under the Purchase Plan and the 1991 Option Plan. Assumes the Company would have used the net proceeds of $116,562 from the Offering to redeem one-half of the 11 1/4% senior debentures for $81,019 representing a price equal to 110% of the principal amount plus accrued interest through the date of redemption and to pay down borrowings under the amended and restated revolving credit facility by $32,352. Pro forma adjustments to retained earnings (deficit) include extraordinary charges due to the Offering of $7,034 from the early extinguishment of debt, $2,287 from the write-off of deferred financing costs, net of a $3,374 tax benefit. Pro forma adjustments to common stock and capital in excess of par value include: $116,562 of net proceeds from the Offering; reclassification of $5,490 in accrued expenses associated with the 1991 Option Plan and $456 of cash proceeds from the Option exercises. Pro forma adjustments to the cost of common stock in treasury includes $3,193 related to the buyback of shares to satisfy minimum tax withholding obligations related to the Option Exercises and $454 related to common stock repurchased from VPI. Pro forma adjustments to stockholders' equity (deficit) do not include estimated tax benefits of $13,857 related to the exercise of the non-qualified options under the option plans noted above, which will be recorded as an addition to capital in excess of par value when realized by the Company. P-6 95 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, AMERI-SOURCE CORPORATION OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR AMERISOURCE CORPORATION SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE Prospectus Summary........................ 3 Risk Factors.............................. 9 The Refinancing........................... 12 Use of Proceeds........................... 13 Dividend Policy........................... 13 Dilution.................................. 13 Capitalization............................ 14 Selected Financial Data................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Business.................................. 26 Management................................ 34 Certain Relationships and Transactions.... 40 Principal Stockholders.................... 42 Description of Capital Stock.............. 43 Description of Indebtedness and Securitization Program.................. 45 Shares Eligible for Future Sale........... 48 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................ 49 Underwriting.............................. 51 Legal Matters............................. 53 Experts................................... 53 Additional Information.................... 54 Incorporation of Certain Documents by Reference............................... 54 Index to Financial Statements............. F-1 Index to Unaudited Pro Forma Financial Statements.............................. P-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 6,600,000 SHARES [AMERISOURCE LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BT SECURITIES CORPORATION APRIL , 1995 - ------------------------------------------------------ - ------------------------------------------------------ 96 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, AMERI-SOURCE CORPORATION OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR AMERISOURCE CORPORATION SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE Prospectus Summary........................ 3 Risk Factors.............................. 9 The Refinancing........................... 12 Use of Proceeds........................... 13 Dividend Policy........................... 13 Dilution.................................. 13 Capitalization............................ 14 Selected Financial Data................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Business.................................. 26 Management................................ 34 Certain Relationships and Transactions.... 40 Principal Stockholders.................... 42 Description of Capital Stock.............. 43 Description of Indebtedness and Securitization Program.................. 45 Shares Eligible for Future Sale........... 48 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................ 49 Underwriting.............................. 51 Legal Matters............................. 53 Experts................................... 53 Additional Information.................... 54 Incorporation of Certain Documents by Reference............................... 54 Index to Financial Statements............. F-1 Index to Unaudited Pro Forma Financial Statements.............................. P-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 6,600,000 SHARES [AMERISOURCE LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BANKERS TRUST INTERNATIONAL PLC APRIL , 1995 - ------------------------------------------------------ - ------------------------------------------------------ 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an estimate of the expenses that will be incurred in connection with the distribution of the Common Stock being registered hereby. SEC registration fee.................................................... $ 52,345 NASD filing fee......................................................... 15,680 Nasdaq National Market listing fee...................................... 50,000 Blue Sky fees and expenses.............................................. 25,000 Printing and engraving expenses......................................... 250,000 Legal fees and expenses................................................. 275,000 Accounting fees and expenses............................................ 235,000 Transfer Agent and Registrar fees and expenses.......................... 6,800 Miscellaneous........................................................... 90,175 ----------- $ 1,000,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation, as amended (the "Charter") provides that directors of the Company shall be entitled to all limitations on the liability of directors available under the Delaware General Corporation Law (the "DGCL"). Further, the Charter provides that a director shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) acts described under Section 174 of the DGCL relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL or (iv) for any transaction from which a director derived an improper personal benefit. In addition, Section 145 of the DGCL and Article IV of the Company's Bylaws under certain circumstances, provide for the indemnification of the Company's officers and directors against liabilities which they may incur in such capacities. In general, any officer or director of the Company shall be indemnified by the Company against expenses including attorneys' fees, judgments, fines and settlements actually and reasonably incurred by that person in connection with a legal proceeding as a result of such relationship, whether or not the indemnified liability arises from an action by or in the right of the Company, if the officer or director acted in good faith, and in the manner believed to be in or not opposed to the Company's best interest, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. Such indemnity is limited to the extent that (i) such person is not otherwise indemnified and (ii) such indemnification is not prohibited by the DGCL or any other applicable law. Any indemnification under the previous paragraph (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon the determination that indemnification of the director or officer is proper in the circumstances because that person has met the applicable standard of conduct set forth above. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum of disinterested directors who are not parties to such action or (ii) if such quorum is not obtainable or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion. To the extent that a director or officer of the Company shall be successful in prosecuting an indemnity claim, the reasonable expenses of any such person and the fees and expenses of any special legal counsel engaged to determine the possibility of indemnification shall be borne by the Company. Expenses incurred by a director or officer of the Company in defending a civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding II-1 98 upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized by the Bylaws. The indemnification and advancement of expenses provided by, or granted pursuant to Article IV of the Bylaws is not deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled, both as to action in that person's official capacity and as to action in another capacity while holding such office. The Board of Directors has the power to authorize the Company to purchase and maintain insurance on behalf of the Company and others to the extent that power to do so has not been prohibited by the DGCL, create any fund to secure any of its indemnification obligations and give other indemnification to the extent permitted by law. The obligations of the Company to indemnify a director or officer under Article IV of the Bylaws is a contract between the Company and such director or officer, and no modification or repeal of the Bylaws shall detrimentally affect such officer or director with regard to that person's acts or omissions prior to such amendment or repeal. The Company has also purchased insurance for its directors and officers for certain losses arising from claims or charges made against them in their capacities as directors and officers of the Company. Reference is made to Section 7 of the form Underwriting Agreement filed as Exhibit 1.1 hereto for additional indemnification provisions. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement, dated April , 1995 between AmeriSource Distribution Corporation ("Issuer") and the Underwriters. 2 Not Applicable. 4.1 Indenture, dated as of May 30, 1986, between AmeriSource and Bankers Trust Company, as trustee relating to the 6 1/4% Convertible Subordinated Debentures due 2001 of AmeriSource (the "Convertible Debentures") including the form of Convertible Debenture (incorporated by reference to Exhibit 4 to AmeriSource's Current Report, dated July 1, 1986, on Form 8-K). 4.2 First Supplemental Indenture, dated as of October 31, 1989, to Indenture, dated as of May 30, 1986 (incorporated by reference to Exhibit 4.23 to Issuer's and AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1989). 4.3 Second Supplemental Indenture, dated as of October 31, 1989, to Indenture, dated as of May 30, 1986 (incorporated by reference to Exhibit 4.24 to Issuer's and AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1989). 4.4 Indenture dated July 15, 1993 between Issuer and Security Trust Company, N.A., as trustee relating to the 11 1/4% Senior Debentures due 2005 (the "Senior Debentures") of Issuer including the form of the Senior Debentures (incorporated by reference to Exhibit 4 to Issuer's and AmeriSource's Form 10-Q for the quarter ended June 30, 1993). 4.5 Amended and Restated Credit Agreement, dated as of December 13, 1994 (the "Amended and Restated Credit Agreement") among AmeriSource, General Electric Capital Corporation individually and as agent, Bankers Trust Company, as co-agent, and the banks and other financial institutions named therein (incorporated by reference to Exhibit 4.10 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.6 First Amendment dated as of February 10, 1995 to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 2.6 to Issuer's Form 8-A (No. 000-20485), filed with the Securities and Exchange Commission on March 24, 1995).
II-2 99
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 4.7 Receivables Purchase Agreement, dated as of December 13, 1994 between AmeriSource, as Seller and AmeriSource Receivables Corporation, as Purchaser (incorporated by reference to Exhibit 4.11 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.8 AmeriSource Receivables Master Trust Pooling and Servicing Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, as transferor, AmeriSource, as the initial Servicer, and Manufacturers and Traders Trust Company, as Trustee. 4.9 Revolving Certificate Purchase Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, AmeriSource, The Revolving Purchasers and Bankers Trust Company, as Agent and Revolving Purchaser (incorporated by reference to Exhibit 4.13 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.10 Series 1994-1 Supplement to Pooling and Servicing Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, as transferor, AmeriSource, as initial Servicer, and Manufacturers and Traders Trust Company, as Trustee (incorporated by reference to Exhibit 4.14 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.11 Form of Certificate of Issuer's Class A Common Stock, $0.01 par value per share (incorporated by reference to Exhibit 1 to Issuer's Form 8-A (No. 000-20485), filed with the Securities Exchange Commission on March 24, 1995). *5.1 Opinion and Consent of Dechert Price & Rhoads. 6 Not Applicable. 7 Not Applicable. 8 Not Applicable. 10.1 Stock Purchase and Stockholders' Agreement, dated December 29, 1988, among Drexel Burnham Lambert Incorporated, the other purchasers named therein, Distribution and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 Registration No. 33-27835, filed March 29, 1989). 10.2 Stock Purchase Agreement, dated as of December 29, 1988, among Issuer, Anthony C. Howkins, The NTC Group, Inc., Barton J. Winokur and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.3 AmeriSource Master Pension Plan (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.4 AmeriSource 1988 Supplemental Retirement Plan (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.5 AmeriSource 1985 Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1985). 10.6 Issuer and Subsidiaries Employee Stock Purchase Plan ("Stock Purchase Plan") (incorporated by reference to Exhibit 10.13 to Amendment No. 1, filed August 15, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.7 Form of Amendment No. 1 to Stock Purchase Plan (incorporated by reference to Exhibit No. 10.35 to Issuer's Registration Statement on Form S-1, Amendment No. 2, Registration No. 33-44244). 10.8 Form of Securities Purchase and Holders Agreement among Issuer, Citicorp Venture Capital Ltd. and a Management Investor (incorporated by reference to Exhibit 10.14 to Amendment No. 1, filed August 15, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.9 Form of Non-qualified Stock Option Plan Agreement between Issuer and a Management Investor (incorporated by reference to Exhibit (c)(4) to Amendment No. 1, filed August 15, 1989, to the Schedule 13E-3).
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EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 10.10 Form of Take-Along and Registration Rights Agreement between Issuer and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 4.19 to Amendment No. 2, filed September 7, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.11 Issuer's Partners Stock Option Plan ("Partners Plan") (incorporated by reference to Exhibit 10.29 to Issuer's Registration Statement on Form S-1, Amendment No. 1, Registration No. 33-44244). 10.12 Form of Amendment No. 1 to Partners Plan (incorporated by reference to Exhibit 10.36 to Issuer's Registration Statement on Form S-1, Amendment No. 2, Registration No. 33-44244). 10.13 Amendment No. 2 to Partners Plan. 10.14 Issuer 1991 Stock Option Plan (incorporated by reference to Exhibit 10.33 to Issuer's Registration Statement on Form S-1, Amendment No. 1, Registration No. 33-44244). 10.15 Agreement, dated October 14, 1994, among certain manufacturers and wholesalers of prescription products, including AmeriSource (incorporated by reference to Exhibit 10.13 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 10.16 Issuer 1995 Stock Option Plan. 10.17 Issuer Non-Employee Directors Stock Option Plan. 10.18 Registration Rights Agreement dated as of March 30, 1995 among Issuer and 399 Venture Partners, Inc. 11 Not Applicable. 12 Not Applicable. 13 Not Applicable. 15 Not Applicable. 16 Not Applicable. 23.1 Consent of Ernst & Young LLP (contained on page II-8). 23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1). *24.1 Power of Attorney. 25 Not Applicable. 26 Not Applicable. 27 Financial Data Schedules (incorporated by reference to Exhibit 27 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 28 Not Applicable.
- --------------- * Previously filed. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 101 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 102 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on April 3, 1995. AmeriSource Health Corporation By: /s/ KURT J. HILZINGER ------------------------------------ Kurt J. Hilzinger Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE Chairman of the Board, April 3, 1995 JOHN F. MCNAMARA* President and Chief Executive - ------------------------------------------ Officer (Principal Executive John F. McNamara Officer) Vice President, Chief Financial April 3, 1995 /s/ KURT J. HILZINGER Officer and Treasurer (Principal - ------------------------------------------ Financial Officer) Kurt J. Hilzinger Vice President, Controller April 3, 1995 JOHN A. KURCIK* and Assistant Treasurer - ------------------------------------------ (Principal Accounting Officer) John A. Kurcik BRUCE C. BRUCKMANN* Director April 3, 1995 - ------------------------------------------ Bruce C. Bruckmann Director April 3, 1995 MICHAEL DELANEY* - ------------------------------------------ Michael Delaney Director April 3, 1995 RICHARD C. GOZON* - ------------------------------------------ Richard C. Gozon Director April 3, 1995 LAWRENCE C. KARLSON* - ------------------------------------------ Lawrence C. Karlson Director April 3, 1995 GEORGE H. STRONG* - ------------------------------------------ George H. Strong
II-6 103
SIGNATURES TITLE DATE Director April 3, 1995 JAMES A. URRY* - ------------------------------------------ James A. Urry Director April 3, 1995 BARTON J. WINOKUR* - ------------------------------------------ Barton J. Winokur
*By: /s/ TERESA T. CICCOTELLI ------------------------------ Teresa T. Ciccotelli Attorney-in-Fact, Pursuant to Power of Attorney II-7 104 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 2, 1994, in Amendment No. 2 to the Registration Statement (Form S-2 No. 33-57513) and related Prospectus of AmeriSource Distribution Corporation for the registration of 7,590,000 shares of its Common Stock and to the incorporation by reference therein of our reports dated November 2, 1994, with respect to the consolidated financial statements and schedules of AmeriSource Distribution Corporation and AmeriSource Corporation included in their Form 10-K for the year ended September 30, 1994, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Philadelphia, Pennsylvania April 3, 1995 II-8 105 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - ------- ------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement, dated April , 1995 between AmeriSource Distribution Corporation ("Issuer") and the Underwriters. 2 Not Applicable. 4.1 Indenture, dated as of May 30, 1986, between AmeriSource and Bankers Trust Company, as trustee relating to the 6 1/4% Convertible Subordinated Debentures due 2001 of AmeriSource (the "Convertible Debentures") including the form of Convertible Debenture (incorporated by reference to Exhibit 4 to AmeriSource's Current Report, dated July 1, 1986, on Form 8-K). 4.2 First Supplemental Indenture, dated as of October 31, 1989, to Indenture, dated as of May 30, 1986 (incorporated by reference to Exhibit 4.23 to Issuer's and AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1989). 4.3 Second Supplemental Indenture, dated as of October 31, 1989, to Indenture, dated as of May 30, 1986 (incorporated by reference to Exhibit 4.24 to Issuer's and AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1989). 4.4 Indenture dated July 15, 1993 between Issuer and Security Trust Company, N.A., as trustee relating to the 11 1/4% Senior Debentures due 2005 (the "Senior Debentures") of Issuer including the form of the Senior Debentures (incorporated by reference to Exhibit 4 to Issuer's and AmeriSource's Form 10-Q for the quarter ended June 30, 1993). 4.5 Amended and Restated Credit Agreement, dated as of December 13, 1994 (the "Amended and Restated Credit Agreement") among AmeriSource, General Electric Capital Corporation individually and as agent, Bankers Trust Company, as co-agent, and the banks and other financial institutions named therein (incorporated by reference to Exhibit 4.10 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.6 First Amendment dated as of February 10, 1995 to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 2.6 to Issuer's Form 8-A (No. 000-20485), filed with the Securities and Exchange Commission on March 24, 1995). 4.7 Receivables Purchase Agreement, dated as of December 13, 1994 between AmeriSource, as Seller and AmeriSource Receivables Corporation, as Purchaser (incorporated by reference to Exhibit 4.11 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.8 AmeriSource Receivables Master Trust Pooling and Servicing Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, as transferor, AmeriSource, as the initial Servicer, and Manufacturers and Traders Trust Company, as Trustee. 4.9 Revolving Certificate Purchase Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, AmeriSource, The Revolving Purchasers and Bankers Trust Company, as Agent and Revolving Purchaser (incorporated by reference to Exhibit 4.13 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994).
106
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - ------- ------------------------------------------------------------------- ----------- 4.10 Series 1994-1 Supplement to Pooling and Servicing Agreement, dated as of December 13, 1994 among AmeriSource Receivables Corporation, as transferor, AmeriSource, as initial Servicer, and Manufacturers and Traders Trust Company, as Trustee (incorporated by reference to Exhibit 4.14 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 4.11 Form of Certificate of Issuer's Class A Common Stock, $0.01 par value per share (incorporated by reference to Exhibit 1 to Issuer's Form 8-A (No. 000-20485), filed with the Securities Exchange Commission on March 24, 1995). *5.1 Opinion and Consent of Dechert Price & Rhoads. 6 Not Applicable. 7 Not Applicable. 8 Not Applicable. 10.1 Stock Purchase and Stockholders' Agreement, dated December 29, 1988, among Drexel Burnham Lambert Incorporated, the other purchasers named therein, Distribution and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 Registration No. 33-27835, filed March 29, 1989). 10.2 Stock Purchase Agreement, dated as of December 29, 1988, among Issuer, Anthony C. Howkins, The NTC Group, Inc., Barton J. Winokur and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.3 AmeriSource Master Pension Plan (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.4 AmeriSource 1988 Supplemental Retirement Plan (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1, Registration No. 33-27835, filed March 29, 1989). 10.5 AmeriSource 1985 Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to AmeriSource's Annual Report on Form 10-K for the fiscal year ended September 30, 1985). 10.6 Issuer and Subsidiaries Employee Stock Purchase Plan ("Stock Purchase Plan") (incorporated by reference to Exhibit 10.13 to Amendment No. 1, filed August 15, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.7 Form of Amendment No. 1 to Stock Purchase Plan (incorporated by reference to Exhibit No. 10.35 to Issuer's Registration Statement on Form S-1, Amendment No. 2, Registration No. 33-44244). 10.8 Form of Securities Purchase and Holders Agreement among Issuer, Citicorp Venture Capital Ltd. and a Management Investor (incorporated by reference to Exhibit 10.14 to Amendment No. 1, filed August 15, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.9 Form of Non-qualified Stock Option Plan Agreement between Issuer and a Management Investor (incorporated by reference to Exhibit (c)(4) to Amendment No. 1, filed August 15, 1989, to the Schedule 13E-3).
107
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - ------- ------------------------------------------------------------------- ----------- 10.10 Form of Take-Along and Registration Rights Agreement between Issuer and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 4.19 to Amendment No. 2, filed September 7, 1989, to the Registration Statement on Form S-1, Registration No. 33-27835). 10.11 Issuer's Partners Stock Option Plan ("Partners Plan") (incorporated by reference to Exhibit 10.29 to Issuer's Registration Statement on Form S-1, Amendment No. 1, Registration No. 33-44244). 10.12 Form of Amendment No. 1 to Partners Plan (incorporated by reference to Exhibit 10.36 to Issuer's Registration Statement on Form S-1, Amendment No. 2, Registration No. 33-44244). 10.13 Amendment No. 2 to Partners Plan. 10.14 Issuer 1991 Stock Option Plan (incorporated by reference to Exhibit 10.33 to Issuer's Registration Statement on Form S-1, Amendment No. 1, Registration No. 33-44244). 10.15 Agreement, dated October 14, 1994, among certain manufacturers and wholesalers of prescription products, including AmeriSource (incorporated by reference to Exhibit 10.13 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 10.16 Issuer 1995 Stock Option Plan. 10.17 Issuer Non-Employee Directors Stock Option Plan. 10.18 Registration Rights Agreement dated as of March 30, 1995 among Issuer and 399 Venture Partners, Inc. 11 Not Applicable. 12 Not Applicable. 13 Not Applicable. 15 Not Applicable. 16 Not Applicable. 23.1 Consent of Ernst & Young LLP (contained on page II-8). 23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1). *24.1 Power of Attorney. 25 Not Applicable. 26 Not Applicable. 27 Financial Data Schedules (incorporated by reference to Exhibit 27 to Issuer's and AmeriSource's Form 10-K for the year ended September 30, 1994). 28 Not Applicable.
- --------------- * Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 6,600,000 Shares AmeriSource Distribution Corporation Class A Common Stock UNDERWRITING AGREEMENT March , 1995 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BT SECURITIES CORPORATION As representatives of the several U.S. underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 140 Broadway New York, New York 10005 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BANKERS TRUST INTERNATIONAL PLC As representatives of the several international managers named in Schedule II hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation Jupiter House Trinton Court 14 Finsbury Square London EC2A 1BR, England 2 -2- Dear Sirs: AmeriSource Distribution Corporation, a Delaware corporation (the "Company") proposes to issue and sell to the several Underwriters (as defined below) an aggregate of 6,600,000 shares of its Class A Common Stock (par value $0.01 per share) ("Common Stock"). The 6,600,000 shares of Common Stock to be issued and sold by the Company are hereinafter called the Firm Shares. It is understood that, subject to the conditions hereinafter stated, 5,280,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. Underwriters and International Managers of even date herewith), and 1,320,000 Firm Shares (the "International Shares") will be sold to the several International Managers named in Schedule II hereto (the "International Managers") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and BT Securities Corporation shall act as representatives (the "U.S. Representatives") of the several U.S. Underwriters, and Donaldson Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and Bankers Trust International PLC shall act as representatives (the "International Representatives") of the several International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively referred to as the Underwriters. The Company also proposes to issue and sell to the several U.S. Underwriters not more than an additional 990,000 shares of its Common Stock, (the "Additional Shares"), if requested by the U.S. Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are herein collectively called the Shares. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Act"), a registration statement on Form S-2 including a 3 -3- prospectus relating to the Shares, which may be amended. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front and back cover pages. The registration statement as amended at the time when it becomes effective, including information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the Registration Statement; and the U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of Shares are hereinafter referred to as the Prospectus. 2. Agreements to Sell and Purchase. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company hereby agrees to issue and sell the U.S. Firm Shares to the several U.S. Underwriters, and each of the U.S. Underwriters agrees, severally and not jointly, to purchase from the Company at a price per share of $[ ] (the "Purchase Price"), the number of U.S. Firm Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company hereby agrees to issue and sell the International Shares to the International Managers named in Schedule II hereto, and each of the International Managers agrees, severally and not jointly, to purchase from the Company at the Purchase Price the respective number of Firm Shares set forth opposite the name of such International Manager in Schedule II hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell to the U.S. Underwriters the Additional Shares and the U.S. Underwriters shall have the right to purchase, severally and not jointly, up to 990,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the 4 -4- offering of the Firm Shares. The U.S. Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. The U.S. Representatives shall give any such notice on behalf of the U.S. Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each U.S. Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of U.S. Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of U.S. Firm Shares. The Company hereby agrees and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company who own capital stock of the Company and (ii) each stockholder listed on Annex I hereto, pursuant to which each such person agrees, not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any common stock of the Company or any securities convertible into or exercisable or exchangeable for such common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such common stock, except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Notwithstanding the foregoing, during such period (i) the Company may grant options for shares of its Common Stock pursuant to the Company's existing stock option plans, (ii) the Company may issue shares of its common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and (iii) 399 Venture Partners Inc. ("VPI"), members of the Company's Board of Directors and members of the Company's management may offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of from time to time without the consent of DLJ or the several Underwriters (a) all or a portion of its capital 5 -5- stock of the Company to one or more persons in private transactions (i.e., transactions not involving a public sale, public distribution or other public disposition of shares of capital stock of the Company, nor any sale pursuant to Rule 144 or Rule 144A promulgated under the Act) and (b) such amount of the Company's capital stock to the Company as contemplated by the Registration Statement. 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. Each U.S. Underwriter hereby makes to and with the Company the representations and agreements of such U.S. Underwriter contained in the fifth paragraph of Section 3 of the Agreement Between U.S. Underwriters and International Managers of even date herewith. Each International Manager hereby makes to and with the Company the representations and agreements of such International Underwriter contained in the seventh, eighth, ninth and tenth paragraphs of Section 3 of such Agreement. 4. Delivery and Payment. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on the fifth business day (the "Closing Date") following the date of the initial public offering, at Cahill Gordon & Reindel, 80 Pine Street, New York, New York. The Closing Date and the location of delivery of and the form of payment for the Firm Shares may be varied by agreement between you and the Company. Delivery to the U.S. Underwriters of and payment for any Additional Shares to be purchased by the U.S. Underwriters shall be made at such place as the U.S. Representatives shall designate at 10:00 A.M., New York City time, on the date specified in the exercise notice given by you pursuant to Section 2 (an "Option Closing Date"). Any such Option Closing Date and the location of delivery of and the form of payment for such Additional Shares may be varied by agreement between the U.S. Representatives and the Company. Certificates for the Shares shall be registered in such names and issued in such denominations as you shall request in writing not later than two full business days prior 6 -6- to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to you for inspection not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or an Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to you on the Closing Date or an Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company, for the respective accounts of the several Underwriters, against payment of the Purchase Price therefor by certified or official bank checks payable in New York Clearing House (next day) funds to the order of the applicable Sellers. 5. Agreements of the Company. The Company agrees with you: (a) To use its best efforts to cause the Registration Statement to become effective at the earliest possible time. (b) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment to it becomes effective, (ii) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, and (iv) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to you, without charge, four signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all 7 -7- exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) Not to file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object in writing within five business days after being given a copy thereof; and to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (f) If during the period specified in paragraph (e) any event shall occur as a result of which, in the judgment of the Company or in the opinion of its counsel or in the opinion of counsel for the Underwriters it becomes necessary to amend or supplement the Prospectus in order to make the statements of material facts therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements of material facts in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or dealers may reasonably request. 8 -8- (g) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may reasonably request, to continue such qualification in effect so long as required for distribution of the Shares and to file documents as may be necessary in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) To mail and make generally available to its stockholders as soon as reasonably practicable an earnings statement which need not be audited covering a period of at least twelve months after the effective date of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act, and to advise you in writing when such statement has been so made available. (i) During the period of five years after the date of this Agreement, (i) to mail as soon as reasonably practicable after the end of each fiscal year to the record holders of its Common Stock a financial report of the Company and its subsidiaries on a consolidated basis (and a similar financial report of all unconsolidated subsidiaries, if any), all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by independent certified public accountants, and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows (and similar financial reports of all unconsolidated subsidiaries, if any) as of the end of and 9 -9- for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (j) During the period referred to in paragraph (i), to furnish to you as soon as reasonably practicable a copy of each report or other publicly available information of the Company mailed to the holders of Common Stock or filed with the Commission and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (k) To pay all costs, expenses, fees and taxes incident to (i) the preparation, printing, filing and distribution under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus included in the Registration Statement (each a "Preliminary Prospectus") and all amendments and supplements to any of them prior to or during the period specified in paragraph (e), (ii) the printing and delivery of the Prospectus and all amendments or supplements to it during the period specified in paragraph (e), (iii) the typing, printing, reproduction and delivery of this Agreement, the Blue Sky Survey and all other agreements, memoranda, correspondence and other documents prepared, printed and delivered by you or your counsel with the consent of the Company in connection with the offering of the Shares (including in each case any disbursements of counsel for the Underwriters relating to such typing, printing, reproduction and delivery), (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including in each case the fees and disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto), (v) filings and clearance with the National Association of Securities Dealers, Inc. ("NASD") in connection with the offering (including fees and disbursements of counsel for the Underwriters relating thereto not to exceed $5,000), (vi) the listing of the Shares on the Nasdaq National Market, (vii) furnishing such copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be requested for use in connection with the offering or sale of the Shares by the Underwriters or by dealers to whom Shares may be sold. Except as expressly provided in this Section (k), the Underwriters agree to 10 -10- pay all of their costs and expenses, including fees and disbursements of their counsel. (l) To use the proceeds from the sale of the Shares in the manner described in the Prospectus under the caption "Use of Proceeds." (m) To use its best efforts to maintain the listing of the Common Stock on the Nasdaq National Market for a period of five years after the effective date of the Registration Statement. (n) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or to the Company's knowledge, threatened by the Commission. (b) (i) Each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain as of the date of such amendment or supplement any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and (iii) the Prospectus, when filed with the Commission, will not contain and, as amended or supplemented, if applicable, will not contain, as of the date of such amendment or supplement, any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (b) do not apply to statements or omissions in the Registration Statement or the 11 -11- Prospectus (or any supplement or amendment to them) based upon information relating to any Underwriter furnished to the Company in writing by or on behalf of such Underwriter expressly for use therein. (c) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424(a) under the Act, complied when so filed in all material respects with the Act; and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Company and each of its subsidiaries has been duly incorporated, each is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and corporate authority to carry on its respective business as it is currently being conducted and to own, lease and operate its properties as described in the Prospectus, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (e) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company enforceable in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity), and except that rights to indemnity and contribution hereunder may be limited by applicable law or public policy related thereto. (f) Except as described in the Prospectus, all of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries 12 -12- have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company or a subsidiary thereof, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (g) All the outstanding shares of capital stock of the Company and of each subsidiary have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (h) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus. (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in violation of or in breach of or in default in (nor has any event occurred which with notice or lapse or time, or both, would be a breach or of a default in) the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound, which breach or default would have a material adverse effect on the Company and its subsidiaries, taken as a whole. (j) The execution, delivery and performance of this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or securities or Blue Sky laws of the various states) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the 13 -13- charter or by-laws of the Company or any of its subsidiaries or any agreement, indenture or other instrument to which it or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound, or assuming compliance with all applicable state securities or Blue Sky laws, violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective property, which breach, default, violation or conflict would result in a material adverse change in the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (k) Except as otherwise set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective property is the subject, except such that would not result in a material adverse change in the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (l) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case might result in a material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. (m) The Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), 14 -14- including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its respective properties and to conduct its business except where the failure to have any such permit would not result in any material adverse change in the business prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, except where the failure to have any such permit would not result in any material adverse change in the business prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company and its subsidiaries, taken as a whole. (n) The Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its respective properties and to conduct its business except where the failure to have any such permit would not result in any material adverse change in the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit except where such failure or events would not result in any material adverse change in the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; and except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries. (o) Except as otherwise set forth in the Prospectus or such as are not material to the business, prospects, 15 -15- financial condition or results of operation of the Company and its subsidiaries, taken as a whole, the Company and each of its subsidiaries has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Registration Statement as being owned by it. All leases to which the Company or any of its subsidiaries is a party are valid and binding and no default has occurred or is continuing thereunder, which might result in any material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries taken as a whole, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use of such leased property made by the Company or such subsidiary. (p) The Company and each of its subsidiaries maintains reasonably adequate insurance. (q) Ernst & Young LLP are independent public accountants with respect to the Company as required by the Act. (r) The financial statements, together with related schedules and notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply in accordance with generally accepted accounting principles; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. 16 -16- (s) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (t) Except as described in the Prospectus, no holder of any security of the Company has any right to require inclusion of shares of Common Stock or any other security of the Company in the Registration Statement. (u) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (v) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or any subsidiary thereof except as otherwise disclosed in the Registration Statement. (w) Except as disclosed in the Prospectus, there are no business relationships or related party transactions required to be disclosed therein by Item 404 of Regulation S-K of the Commission. (x) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed or properly extended, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (y) The Shares have been approved for listing on the Nasdaq National Market subject to official notice of issuance. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities and judgments 17 -17- caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission (i) based upon information relating to any Underwriters furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use therein or (ii) made in any preliminary prospectus if (A) a copy of the Prospectus (as amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Underwriters to the person asserting any such loss, claim, damage or liability or obtaining such judgment at or prior to the written confirmation of the sale of the Shares as required by the Act and (B) such untrue statement or omission has been corrected in the Prospectus (as so amended or supplemented). (b) In case any action shall be brought against any Underwriter or any person controlling such Underwriter, based upon any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and with respect to which indemnity may be sought against the Company, such Underwriter shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses. Any Underwriter or any such controlling person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both such Underwriter or such controlling person and the Company, and such Underwriter or such controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company, (in which case the Company shall not have the right to assume the defense of such action on behalf of such 18 -18- Underwriter or such controlling person, it being understood, however, that the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Underwriters and controlling persons, which firm shall be Cahill Gordon & Reindel or such other firm which shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation and that all such fees and expenses shall be reimbursed as they are incurred). The Company shall not be liable for any settlement of any such action effected without the written consent of the Company but if settled with the written consent of the Company, the Company agrees to indemnify and hold harmless any Underwriter and any such controlling person from and against any loss or liability by reason of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter but only with reference to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus. In case any action shall be brought against the Company, any of its directors or any such officer or any person controlling the Company, based upon the Registration Statement, the Prospectus or any preliminary prospectus and in respect of which indemnity may be sought against any Underwriter, the Underwriter shall have the rights and duties given to the Company (except that if any Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), and the Company, its directors, any such officers and 19 -19- any person controlling the Company shall have the rights and duties given to the Underwriter, by Section 7(b) hereof. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with 20 -20- investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) The Registration Statement shall have become effective not later than 5:00 P.M., New York City time, on the date of this Agreement or at such later date and time as you may approve in writing, and at the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or, to the knowledge of the Company, contemplated by the Commission. (c) (i) Since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there shall not have been any material adverse change, or any development that might result in a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, affairs or business prospects, whether or not arising in the ordinary course of business, of the Company and its subsidiaries, taken as a whole, (ii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus there shall not have been any change, or any development that 21 -21- might result in a prospective material adverse change, in the capital stock or in the long-term debt of the Company from that set forth in the Registration Statement and Prospectus, (iii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus, the Company and its subsidiaries shall have not incurred a liability or obligation, direct or contingent, which is material to the Company and its subsidiaries, taken as a whole, other than those reflected in the Registration Statement and the Prospectus and (iv) on the Closing Date you shall have received a certificate dated the Closing Date, signed by Kurt J. Hilzinger and John A. Kurcik, in their capacities as the Vice President, Finance and Treasurer and Vice President and Controller of the Company, respectively, confirming the matters set forth in paragraphs (a), (b), and (c) of this Section 8. (d) You shall have received on the Closing Date opinions (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of (i) Dechert Price & Rhoads, counsel for the Company, in the form attached hereto as Exhibit A, and (ii) Teresa Ciccotelli, General Counsel of the Company, in the form attached hereto as Exhibit B. (e) You shall have received on the Closing Date an opinion, dated the Closing Date, of Cahill Gordon & Reindel, counsel for the Underwriters, to such effect with respect to legal matters relating to this Agreement and the sale of the Shares as you may require and such counsel shall have received such papers and information as they request to enable them to pass upon such matters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, counsel for the Company, representatives of the independent public accountants of the Company and your representatives at which the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the Company), no facts have come to the attention of such counsel which lead them to believe that the Registration Statement or any amendment 22 -22- thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any supplement thereto as of its date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no comment with respect to the financial statements and schedules and other financial and statistical data included in the Registration Statement or Prospectus or the exhibits to the Registration Statement). (f) You shall have received a letter on and as of the Closing Date, in form and substance satisfactory to you, from Ernst & Young LLP, independent public accountants, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus and substantially in the form and substance of the letter delivered to you by Ernst & Young LLP on the date of this Agreement. (g) The Company shall have delivered to you the agreements specified in Paragraph 4 of Section 2 hereof. (h) (i) The Company shall have complied in all material respects with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. The several obligations of the U.S. Underwriters to purchase any Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. 9. Effective Date of Agreement and Termination. This Agreement shall become effective upon the later of (i) execution of this Agreement and (ii) when notification of the effectiveness of the Registration Statement has been released by the Commission. 23 -23- This Agreement may be terminated at any time prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any change or development involving a prospective change in the condition, financial or otherwise, of the Company and its subsidiaries, taken as a whole, or the earnings, affairs, or business of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, which would, in your judgment, materially impair the investment quality of the Shares on the terms and in the manner contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (iii) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System or limitation on prices for securities on any such exchange or National Market System, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business or operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on the applicable Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the 24 -24- non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date or on an Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case may be, and the aggregate number of Firm Shares or Additional Shares, as the case may be, with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date by all Underwriters and arrangements satisfactory to you for purchase of such Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter. In any such case which does not result in termination of this Agreement, you shall have the right to postpone the Closing Date or the applicable Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. 10. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (a) if to the Company: to AmeriSource Distribution Corporation, 300 Chester Field Parkway, Malvern, Pennsylvania 19355, ATTENTION: Teresa T. Ciccotelli, and (b) if to any Underwriter or to you, to you: c/o Donaldson, Lufkin & Jenrette Securities Corporation, 140 Broadway, New York, New York 10005, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, its officers and directors and its controlling persons and of the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and 25 -25- effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Company, the officers or directors of the Company or any controlling person of the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) reasonably incurred by them. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of law thereof. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 26 -26- Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, AMERISOURCE DISTRIBUTION CORPORATION By: ------------------------------- Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BT SECURITIES CORPORATION Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: -------------------------- 27 -27- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. BANKERS TRUST INTERNATIONAL PLC Acting severally on behalf of themselves and the several International Managers named in Schedule II hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: -------------------------- 28 SCHEDULE I Number of Firm Shares U.S. Underwriters to be Purchased --------------------- Donaldson, Lufkin & Jenrette Securities Corporation Smith Barney Inc. BT Securities Corporation --------------------------------- Total 29 SCHEDULE II Number of Firm Shares International Underwriters to be Purchased --------------------- Donaldson, Lufkin & Jenrette Securities Corporation Smith Barney Inc. Bankers Trust International PLC --------------------------------- Total 30 ANNEX I Required Stockholder Lock-ups 399 Venture Partners Inc. .............................. 10,021,073 shares EX-4.8 3 AMERISOURCE RECEIVABLE POOLING & SERVICING AGREE. 1 EXHIBIT 4.8 ================================================================================ AMERISOURCE RECEIVABLES MASTER TRUST POOLING AND SERVICING AGREEMENT dated as of December 13, 1994 among AMERISOURCE RECEIVABLES CORPORATION, as transferor, AMERISOURCE CORPORATION, as the initial Servicer, and MANUFACTURERS AND TRADERS TRUST COMPANY, as Trustee ================================================================================ 2 || TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II CONVEYANCE OF CERTAIN ASSETS; ISSUANCE OF CERTIFICATES SECTION 2.01 Creation of the Trust; Conveyance of Certain Assets . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2.02 Acceptance by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.03 Representations and Warranties of ARC Relating to the Trust Assets . . . . . . . . . . . . . . . . . 3 SECTION 2.04 No Assumption of Obligations Relating to Receivables, Related Transferred Assets or Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.05 Conveyance of Receivables by the Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES SECTION 3.01 Acceptance of Appointment and Other Matters Relating to the Servicer . . . . . . . . . . . . . . . . 6 SECTION 3.02 Duties of the Servicer and ARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 3.03 Lockbox Accounts; Concentration Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 3.04 Servicing Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 3.05 Records of the Servicer and Reports to be Prepared by the Servicer . . . . . . . . . . . . . . . . . 13 SECTION 3.06 Monthly Servicer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 3.07 Annual Servicing Report of Independent Public Accountants; Forms 10-Q and 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 3.08 Rights of the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 3.09 Ongoing Responsibilities of AmeriSource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 3.10 Further Action Evidencing Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS SECTION 4.01 Rights of Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 4.02 Establishment of Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 4.03 Daily Calculations and Funds Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.04 Investment of Funds in Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.05 Attachment of Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 ARTICLE V DISTRIBUTIONS AND REPORTS TO CERTIFICATEHOLDERS SECTION 5.01 Distributions to Holders of Investor Certificates and Purchasers . . . . . . . . . . . . . . . . . . 35 SECTION 5.02 Distributions on the ARC Revolving Certificate and the Residual Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 5.03 Information to Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 5.04 Notice of Early Liquidation at Seller Election . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE VI THE CERTIFICATES SECTION 6.01 The Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.02 Authentication of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 6.03 Registration of Transfer and Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 6.04 Mutilated, Destroyed, Lost or Stolen Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 6.05 Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 6.06 Appointment of Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 6.07 Access to List of Certificateholders' Names and Addresses . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.08 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.09 Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.10 Issuance of Additional Series of Certificates and Sales of Purchased Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.11 Changes in Amount of Investor Revolving Certificates . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.12 Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 6.13 Notices to Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 6.14 Definitive Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 6.15 Letter of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE VII ARC SECTION 7.01 Representations and Warranties of ARC Relating to ARC and the Transaction Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 7.02 Covenants of ARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 7.03 Indemnification by ARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE VIII THE SERVICER SECTION 8.01 Representations and Warranties of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 8.02 Covenants of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
-ii- 4 SECTION 8.03 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 8.04 Indemnification by the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 8.05 Servicer Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 8.06 Limitation on Liability of the Servicer and Others . . . . . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE IX LIQUIDATION EVENTS SECTION 9.01 Liquidation Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 9.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 9.03 Additional Rights Upon the Occurrence of Certain Events . . . . . . . . . . . . . . . . . . . . . . . 79 ARTICLE X SERVICER DEFAULTS SECTION 10.01 Servicer Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 10.02 Trustee to Act; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 10.03 Notification of Servicer Default; Notification of Appointment of Successor Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE XI THE TRUSTEE SECTION 11.01 Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 11.02 Certain Matters Affecting the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 11.03 Limitation on Liability of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 11.04 Trustee May Deal with Other Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 SECTION 11.05 Servicer To Pay Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 SECTION 11.06 Eligibility Requirements for Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 11.07 Resignation or Removal of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 11.08 Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 SECTION 11.09 Merger or Consolidation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 SECTION 11.10 Appointment of Co-Trustee or Separate Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 SECTION 11.11 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 SECTION 11.12 Trustee May Enforce Claims Without Possession of Certificates . . . . . . . . . . . . . . . . . . . 94 SECTION 11.13 Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 SECTION 11.14 Rights of Investor Certificateholders To Direct Trustee . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 11.15 Representations and Warranties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 11.16 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
-iii- 5 ARTICLE XII TERMINATION SECTION 12.01 Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 SECTION 12.02 Final Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 SECTION 12.03 Rights Upon Termination of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01 Amendment, Waiver, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 SECTION 13.02 Actions by Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 SECTION 13.03 Limitation on Rights of Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 SECTION 13.04 Limitation on Rights of Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 SECTION 13.05 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 SECTION 13.06 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 SECTION 13.07 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 SECTION 13.08 Certificates Nonassessable and Fully Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 SECTION 13.09 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 13.10 Nonpetition Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 13.11 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 13.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 13.13 Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 13.14 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 SECTION 13.15 Binding Effect; Assignability; Survival of Provisions . . . . . . . . . . . . . . . . . . . . . . . 106 SECTION 13.16 Recourse to ARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 SECTION 13.17 Recourse to Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 SECTION 13.18 Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 SECTION 13.19 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 SECTION 13.20 Certain Partial Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 SECTION 13.21 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 || EXHIBITS EXHIBIT A Form of Lockbox Account Letter Agreement EXHIBIT B Form of Concentration Account Letter Agreement EXHIBIT C-1 Form of Daily Report (Pre-Liquidation EXHIBIT C-2 Form of Daily Report (Liquidation) EXHIBIT D-1 Form of Settlement Statement (Pre-Liquidation) EXHIBIT D-2 Form of Settlement Statement (Liquidation) EXHIBIT E Form of Monthly Servicer's Certificate
-iv- 6 EXHIBIT F Form of Monthly Report to Certificateholders EXHIBIT G Form of ARC Revolving Certificate EXHIBIT H Form of Residual Certificate EXHIBIT I Form of Owner Regulation S Certification EXHIBIT J Form of Transferee Regulation S Certification EXHIBIT K Form of Depositary Regulation S Certification EXHIBIT L Form of Transfer to Regulation S Certification EXHIBIT M Form of Placement Agent Exchange Instructions EXHIBIT N Form of Restrictive Legends EXHIBIT O-1 Form of Phase I Intercreditor Agreement EXHIBIT O-2 Form of Phase II Intercreditor Agreement SCHEDULES SCHEDULE 1 Offices of the Transferor, the Servicer and the Seller Where Records are Maintained SCHEDULE 2 Account Banks APPENDIX APPENDIX A Definitions
-v- 7 This POOLING AND SERVICING AGREEMENT, dated as of December 13, 1994 (this "Agreement"), is made among AMERISOURCE RECEIVABLES CORPORATION, a Delaware corporation ("ARC"), as transferor, AMERISOURCE CORPORATION, a Delaware corporation ("AmeriSource"), as initial Servicer, and Manufacturers and Traders Trust Company, a New York banking corporation, as Trustee. In consideration of the mutual agreements herein, each party agrees as follows for the benefit of the other parties and the Certificateholders to the extent provided herein: ARTICLE I DEFINITIONS SECTION 1.01 Definitions. Whenever used in this Agreement, capitalized terms, unless otherwise defined herein, have the meanings that Appendix A assigns to them, and this Agreement shall be interpreted in accordance with the conventions set forth in Parts B, C and D of Appendix A. ARTICLE II CONVEYANCE OF CERTAIN ASSETS; ISSUANCE OF CERTIFICATES SECTION 2.01 Creation of the Trust; Conveyance of Certain Assets. (a) By execution and delivery of this Agreement, ARC does hereby transfer, assign, set over and otherwise convey to the Trust, for the benefit of the Certificateholders, all its right, title and interest in, to and under, without recourse except as expressly provided otherwise herein, (i) each Receivable and any Notes Receivable that is or have been transferred by the Seller to ARC, pursuant to the Purchase Agreement or the Subscription Agreement, from and including the date on which the first Purchases occur under the Purchase Agreement to but excluding the Purchase Termination Date, (ii) all Related Assets, (iii) the Seller Transaction Documents (excluding the Subscription Agreement) (all of ARC's right, title and interest in, to and under such Seller Transaction Documents and the Related Assets being called the "Related Transferred Assets"), (iv) all funds from time to time on deposit in each of the Trust Accounts and all funds from time to time on deposit in each of the Bank Accounts representing Collections on, or other proceeds of, the foregoing and, in each case, all certificates and instruments, if any, from time to time evidencing such funds, all investments made with such funds, all claims thereunder or in connection therewith and all interest, dividends, monies, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing, (v) funds in an amount, if positive, equal to, as of the First Issuance Date, (A) the 8 Investor Initial Invested Amount minus (B) the Base Amount (which funds the Trustee is directed to deposit into the Equalization Account on the date hereof), and (vi) all moneys due or to become due and all amounts received or receivable with respect to any of the foregoing and all proceeds of the foregoing. Such property shall constitute the assets of the Trust (collectively, the "Trust Assets"). The foregoing transfer, assignment, setover and conveyance to the Trust shall be made to the Trustee, on behalf of the Trust, and each reference in this Agreement to such transfer, assignment, setover and conveyance shall be construed accordingly. (b) In connection with the transfer described in subsection (a), ARC and the Servicer have recorded and filed or caused to be recorded and filed, in connection with the First Issuance Date, as an expense of the Servicer paid out of the Servicing Fee, financing statements (and continuation statements with respect to such financing statements when applicable) with respect to the Trust Assets (whether now existing or hereafter created) meeting the requirements of applicable state law in such manner and in such jurisdictions as the Servicer reasonably determined were necessary or desirable to perfect, and maintain perfection of, the transfer and assignment of the Trust Assets to the Trust. The Trustee shall be under no obligation whatsoever to file such financing statements, or continuation statements to such financing statements, or to make any other filing under the UCC in connection with such transfer. In connection with the transfer described in subsection (a), ARC and the Servicer further agree to deliver to the Trustee each Trust Asset (including any original documents or instruments included in the Trust Assets as are necessary to effect such transfer) in which the transfer of an interest is perfected under the UCC or otherwise by possession. ARC or the Servicer shall deliver each such Trust Asset to the Trustee, as an expense of the Servicer paid out of the Servicing Fee, immediately upon the transfer of any such Trust Asset to the Trustee pursuant to subsection (a). (c) In connection with the transfer described above in subsection (a), the Servicer shall, on behalf of ARC, as an expense of the Servicer paid out of the Servicing Fee, on or prior to the Closing Date, mark the master data processing records evidencing the Receivables with the following legend: "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO AMERISOURCE RECEIVABLES CORPORATION PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF DECEMBER 13, 1994, AMONG AMERISOURCE CORPORATION, AS SELLER, AND AMERISOURCE RECEIVABLES CORPORATION, AS PURCHASER; AND SUCH RECEIVABLES HAVE BEEN TRANSFERRED TO THE AMERISOURCE RECEIVABLES MASTER TRUST PURSUANT TO A POOLING AND SERVICING AGREEMENT, DATED AS OF DECEMBER 13, 1994, AMONG AMERISOURCE RECEIVABLES CORPORATION, AS TRANSFEROR, AMERISOURCE CORPORATION, AS THE page 2 9 INITIAL SERVICER, AND MANUFACTURERS AND TRADERS TRUST COMPANY, AS TRUSTEE." (d) Upon the request of ARC, the Trustee will cause Certificates in authorized denominations evidencing the entire interest in the Trust to be duly authenticated and delivered to or upon the order of ARC pursuant to Section 6.02. SECTION 2.02 Acceptance by Trustee. The Trustee hereby acknowledges its acceptance on behalf of the Trust of all right, title and interest to the property, now existing and hereafter created, conveyed to the Trust pursuant to Section 2.01(a) and declares that it shall maintain such right, title and interest, upon the trust herein set forth, for the benefit of all Certificateholders, on the terms and subject to the conditions hereinafter set forth. SECTION 2.03 Representations and Warranties of ARC Relating to the Trust Assets. (a) Representations and Warranties. At the time that any Receivable or Related Asset is sold or transferred by ARC to the Trust, ARC hereby represents and warrants that: (i) Valid Transfer. Each transfer made by ARC pursuant to this Agreement constitutes a valid transfer and assignment of all of its right, title and interest in, to and under the Receivables and the Related Transferred Assets to the Trust that is perfected and of first priority under the UCC and otherwise, enforceable against creditors of, and purchasers from, ARC and the Seller and free and clear of any Adverse Claim (other than any Permitted Adverse Claim and any Adverse Claim arising solely as a result of any action taken by the Trustee under this Agreement). (ii) Quality of Title. (A) Immediately before each transfer to be made by ARC hereunder, each Receivable and Related Transferred Asset that was then to be transferred to the Trust hereunder was owned by ARC free and clear of any Adverse Claim (other than any Permitted Adverse Claim and any Adverse Claim arising solely as a result of any action taken by the Trustee under this Agreement); and, in connection with the First Issuance Date, ARC and the Servicer made, or caused to be made, all filings and took all other action under applicable law in each relevant jurisdiction in order to protect and perfect the Trust's interest in such Receivables, such Related Transferred Assets and the funds in the Trust Accounts against all creditors of, and purchasers from, ARC and the Seller. (B) Each transfer of Receivables and Related Transferred Assets by ARC to the Trust pursuant to this Agreement constitutes a valid transfer and assignment to the Trust of all right, title and interest of ARC in the Receivables and the Related Transferred Assets, free and clear of any Adverse Claim (other than any Permitted Adverse Claim and any Adverse Claim arising solely as the result of any action taken by the Trustee under this Agreement), and constitutes either an absolute transfer of page 3 10 such property to the Trust or a grant of a first priority perfected security interest in such property to the Trust. Whenever the Trust accepts a transfer of a Receivable or a Related Transferred Asset hereunder, it shall have acquired a valid and perfected first priority interest in such Receivable or Related Transferred Asset free and clear of any Adverse Claim (other than any Permitted Adverse Claim and any Adverse Claim arising solely as a result of any action taken by the Trustee under this Agreement). (C) No effective financing statement or other instrument similar in effect that covers all or part of any Receivable, any Related Transferred Asset, any other Trust Asset or any interest in any thereof is on file in any recording office except financing statements as to which termination statements or releases are filed on the Closing Date or the day after the Closing Date and except such as may be filed (1) in favor of the Seller in accordance with the Contracts, (2) in favor of ARC pursuant to the Purchase Agreement or the Subscription Agreement, and (3) in favor of the Trustee, for the benefit of the Certificateholders, in accordance with this Agreement or otherwise filed by or at the direction of the Trustee. No effective financing statement or instrument similar in effect relating to perfection that covers any inventory of the Seller that might give rise to Receivables is on file in any recording office except for (so long as the Intercreditor Agreement is in effect) financing statements or instruments in favor of the Seller Agent. (D) No acquisition of any Receivable or Related Transferred Asset by ARC or the Trust constitutes a fraudulent transfer or fraudulent conveyance under the United States Bankruptcy Code or applicable state bankruptcy or insolvency laws or is otherwise void or voidable or subject to subordination under similar laws or principles or for any other reason. (E) The transfer of the Receivables and Related Transferred Assets by the Seller to ARC constitutes a true and valid assignment and transfer for consideration of such Receivables and Related Transferred Assets under applicable state law (and not merely a pledge of such Receivables and Related Transferred Assets for security purposes), enforceable against the creditors of the Seller, and any Receivables and Related Transferred Assets so transferred do not constitute property of the Seller. (iii) Governmental Approvals. With respect to each Receivable and Related Transferred Asset, all consents, licenses, approvals or authorizations of, or notices to or registrations, declarations or filings with, any Governmental Authority required to be obtained, effected or made by the Seller, the Servicer or ARC in connection with the conveyance of the Receivable and Related Transferred Asset by the Seller to ARC, or by ARC to the Trust, have been duly obtained, effected or given and are in full force and effect, except, in respect of enforceability against a Federal Obligor, for any consents or filings referred to in 31 U.S.C. Sections 3727(b) and (c) (the "Assignment of Claims Act") and any consents required by states with respect to any page 4 11 Receivables arising from State and Local Obligors so long as such Receivables are not reported as Eligible Receivables. (iv) Eligible Receivables. (A) On the date on which the Seller transfers a Receivable to ARC, and ARC transfers such Receivable to the Trust, unless otherwise identified by the Servicer in the Daily Report for such date, such Receivable is an Eligible Receivable, and (B) on the date of each Daily Report or Settlement Statement that identifies a Receivable as an Eligible Receivable, such Receivable is an Eligible Receivable. (b) Notice of Breach. The representations and warranties set forth in subsection (a) shall survive the transfer and assignment of the Receivables and the Related Transferred Assets to the Trust. Upon discovery by ARC, the Servicer or the Trustee of a breach of any of the representations and warranties set forth in this subsection (a), the party discovering the breach shall give written notice to the other parties to this Agreement within four Business Days following the discovery. The Trustee's obligations in respect of discovering any breach are limited as provided in Section 11.02(g). SECTION 2.04 No Assumption of Obligations Relating to Receivables, Related Transferred Assets or Contracts. The transfer, assignment, setover and conveyance described in Section 2.01 does not constitute and is not intended to result in a creation or an assumption by the Trust, the Trustee or any Investor Certificateholder of any obligation of the Servicer, ARC, the Seller or any other Person in connection with the Receivables or the Related Transferred Assets or under the related Contracts or any other agreement or instrument relating thereto, including any obligation to any Obligors. None of the Trustee, the Trust or any Investor Certificateholder shall have any obligation or liability to any Obligor or other customer or client of the Seller (including any obligation to perform any of the obligations of the Seller to any Obligor under any such Receivables, related Contracts or any other related purchase orders or other agreements or otherwise). No such obligation or liability is intended to be assumed by the Trustee, the Trust or any Investor Certificateholder hereunder, and any such assumption is hereby expressly disclaimed. SECTION 2.05 Conveyance of Receivables by the Trust. Pursuant to the terms of a PI Agreement, the Trustee, on behalf of the Trust, from time to time may sell, transfer, assign, set over and otherwise convey Purchased Interests to a Purchaser or the Purchaser Agent for the account of a Purchaser; and the Trustee, on behalf of the Trust, is authorized and directed (subject to the applicable terms of Section 6.10), upon the written request of the Seller, to enter into one or more PI Agreements in the form annexed to each such written request. Pursuant to a PI Agreement, Collections allocated to Purchased Interests may be reinvested and such Purchased Interests may be recomputed, each from time to time as provided therein. Each Purchased Interest shall be equally and ratably entitled as provided herein to the benefits of this Agreement without preference, priority or distinction, all in page 5 12 accordance with the terms and provisions of this Agreement except as otherwise expressly provided herein. ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES SECTION 3.01 Acceptance of Appointment and Other Matters Relating to the Servicer. (a) Designation of Servicer. The servicing, administering and collection of the Receivables and the Related Transferred Assets shall be conducted by the Person designated as Servicer hereunder from time to time in accordance with this section. Until the Trustee gives a Termination Notice to AmeriSource pursuant to Section 10.01, AmeriSource is hereby designated as, and AmeriSource hereby agrees to act as, the Servicer under this Agreement and the other Transaction Documents with respect to the Receivables and the Related Transferred Assets, and the Certificateholders and the Purchasers by their acceptance of the Certificates and Purchased Interests consent to AmeriSource acting as the Servicer. (b) Delegation of Certain Servicing Activities. In the ordinary course of business, the Servicer may at any time delegate its duties hereunder with respect to the Receivables and the Related Transferred Assets to any Person. Each Person to whom any such duties are delegated in accordance with this subsection is herein called a "Sub-Servicer". Notwithstanding any such delegation by the Servicer (including any such delegation by the Servicer to a Seller), the Servicer shall remain liable for the performance of all duties and obligations of the Servicer pursuant to the terms of this Agreement and the other Transaction Documents and such delegation shall not relieve the Servicer of its liability and responsibility with respect to its duties. The fees and expenses of any Sub-Servicers shall be as agreed between the Servicer and the Sub-Servicers from time to time and none of the Trust, the Trustee or the Certificateholders shall have any responsibility therefor. Upon any termination of a Servicer pursuant to Section 10.01, all Sub-Servicers designated pursuant to this subsection by such Servicer shall automatically also be terminated. (c) Termination. The designation of the Servicer (and each Sub-Servicer) under this Agreement (and, in the case of any Sub-Servicer, under the agreement or other document in which the Servicer makes a delegation of servicing duties to the Sub-Servicer) shall automatically cease and terminate upon termination of the Trust pursuant to Section 12.01. (d) Resignation of the Servicer. The Servicer shall not resign from the obligations and duties hereby imposed on it except upon its determination that (i) the performance of its duties is no longer permissible under applicable law and (ii) there is no reasonable action that page 6 13 it could take to make the performance of its duties permissible under applicable law. If the Servicer makes a determination that it must resign for the reasons stated above, it shall, prior to the tendering of its resignation, deliver to the Trustee an Opinion of Counsel for the Servicer, in form and substance reasonably satisfactory to the Trustee, confirming the satisfaction of the conditions set forth in clause (i) of the preceding sentence. No resignation by the Servicer shall become effective until the Trustee or a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 10.02. If the Servicer has tendered its resignation and no Successor Servicer has been appointed, the Trustee may appoint, or may petition a court of competent jurisdiction to appoint, a Successor Servicer hereunder. The Trustee shall give prompt notice to the Applicable Rating Agencies of the appointment of any Successor Servicer. SECTION 3.02 Duties of the Servicer and ARC. (a) Duties of the Servicer in General. The Servicer shall service and administer the Receivables and the Related Transferred Assets and, subject to the terms and provisions of this Agreement, shall have full power and authority, acting alone or through any of its Sub-Servicers, to do any and all things in connection with such servicing and administration that it may deem necessary or appropriate. The Trustee shall execute and deliver to the Servicer any powers of attorney or other instruments or documents that are prepared by the Servicer and stated in an Officer's Certificate to be, and shall furnish the Servicer with any documents in its possession, necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties. The Servicer shall exercise the same care and apply the same policies with respect to the collection, administration and servicing of the Receivables and the Related Transferred Assets that it would exercise and apply if it owned such Receivables and the Related Transferred Assets, all in substantial compliance with applicable law and in accordance with the Credit and Collection Policy. The Servicer shall take or cause to be taken all such actions as it deems necessary or appropriate to collect each Receivable and Related Transferred Asset (and shall cause each of its Sub-Servicers (if any) to take or cause to be taken all such actions as the Servicer deems necessary or appropriate to collect each Receivable and Related Transferred Asset for which a Sub-Servicer is responsible in its capacity as Sub-Servicer) from time to time, all in accordance with applicable law and the Credit and Collection Policy. Without limiting the generality of the foregoing and subject to the next preceding paragraph and Section 10.01, the Servicer or its designee is hereby authorized and empowered, unless such power and authority is revoked by the Trustee on account of the occurrence of a Servicer Default, (i) to instruct the Trustee to make withdrawals and payments from the Trust Accounts as set forth in this Agreement, (ii) to execute and deliver, on behalf of the Trust for the benefit of the Certificateholders, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Receivables and the Related Transferred Assets, page 7 14 (iii) to make any filings, reports, notices, applications and registrations with, and to seek any consents or authorizations from, the Securities and Exchange Commission and any state securities authority on behalf of the Trust as may be necessary or appropriate to comply with any federal or state securities laws or reporting requirements or other laws or regulations, and (iv) after the delinquency of any Receivable or any default in connection with a Related Transferred Asset and to the extent permitted under and in compliance with the Credit and Collection Policy and with all applicable laws, rules, regulations, judgments, orders and decrees of courts and other governmental authorities (whether federal, state, local or foreign) and all other tribunals, to commence or settle collection proceedings with respect to such Receivable and otherwise to enforce the rights and interests of the Trust and the Certificateholders in, to and under such Receivable or Related Transferred Asset (as applicable). The Trustee shall promptly comply with the instructions of the Servicer to withdraw funds and make payments from the Trust Accounts pursuant to the terms of this Agreement. (b) Identification and Transfer of Collections. The Servicer shall cause Collections and all other Trust Assets that consist of cash or cash equivalents to be deposited into the Bank Accounts and the Trust Accounts pursuant to the terms and provisions of Section 3.03 and Article IV. Following notification from the Seller to the Servicer or discovery by the Servicer that collections of any receivable or other asset that is not a Collection of a Receivable or a Related Transferred Asset have been deposited into a Bank Account or the Master Collection Account, the Servicer shall cause all such collections to be segregated, apart and in different accounts, from the Bank Accounts and the Trust Accounts. The Servicer and, to the extent applicable, the Trustee shall hold all such funds in trust, separate and apart from such Person's other funds. On each Business Day, after such misapplied collections have been reasonably identified by the Servicer to the Trustee, the Servicer shall instruct the Trustee to, and the Trustee shall, turn over to the appropriate Lockbox Bank, Seller or other applicable AmeriSource Person (or their designees) all such misapplied collections less all reasonable and appropriate out-of-pocket costs and expenses, if any, incurred by the Servicer in collecting such receivables. All payments made by an Obligor that is obligated to make payments with respect to both Transferred Receivables and other Receivables shall be applied against the specified Receivables, if any, that are designated by such Obligor by reference to the applicable invoice as the Receivables with respect to which such payments should be applied. In the absence of such designation, such payments shall be applied against the oldest outstanding Receivables owed by such Obligor. Following notification from a Lockbox Bank that any item has been returned or is uncollected and that such Lockbox Bank has not been otherwise reimbursed pursuant to the terms of the applicable Lockbox Agreement for any amounts it credited to the relevant Lockbox Account (and then transferred to the Master Collection Account), the Servicer shall page 8 15 instruct the Trustee to, and the Trustee shall, turn over to such Lockbox Bank Collections in such amount from Collections on deposit in the Master Collection Account. (c) Modification of Receivables, Etc. So long as no Servicer Default shall have occurred and be continuing, the Servicer may adjust, and may permit each Sub-Servicer appointed by it to adjust, in accordance with Section 3.02(a) and the Credit and Collection Policy, the outstanding unpaid balance of any Receivable, or otherwise modify the terms of any Receivable or amend, modify or waive any term or condition of any Contract related thereto, all as it may determine to be appropriate to maximize collection thereof. The Servicer shall, or shall cause the applicable Sub-Servicer to, write off Receivables from time to time in accordance with the terms of this Agreement (including Section 7.02(g)) and the Credit and Collection Policy. (d) Documents and Records. At any time when AmeriSource shall not be the Servicer, ARC, to the extent that it is entitled to do so under the Purchase Agreement, shall, upon the request of the then-acting Servicer, cause the Seller to deliver to the Servicer, and the Servicer shall hold in trust for ARC and the Trustee in accordance with their respective interests, all Records that evidence or relate to the Receivables and Related Transferred Assets of the Seller. (e) Certain Duties to the Seller. The Servicer, if other than AmeriSource, shall, as soon as practicable after a demand by the Seller, deliver to the Seller all documents, instruments and records in its possession that evidence or relate to accounts receivable of the Seller or other AmeriSource Persons that are not Receivables or Related Transferred Assets, and copies of all documents, instruments and records in its possession that evidence or relate to Receivables and Related Transferred Assets. (f) Identification of Eligible Receivables. The initial Servicer will (i) establish and maintain such procedures as are necessary for determining no less frequently than each Business Day whether each Receivable qualifies as an Eligible Receivable, and for identifying, on any Business Day, all Receivables that are not Eligible Receivables, and (ii) include in each Daily Report information that shows whether, and to what extent, the Receivables described in such Daily Report are Eligible Receivables. (g) Authorization to Act as ARC's Agent. Without limiting the generality of subsection (a), ARC hereby appoints the Servicer as its agent for the following purposes: (i) specifying accounts to which payments are to be made to ARC, (ii) making transfers among, and deposits to and withdrawals from, all deposit accounts of ARC for the purposes described in the Transaction Documents, and (iii) arranging payment by ARC of all fees, expenses and other amounts payable by ARC pursuant to the Transaction Documents. ARC irrevocably agrees that (A) it shall be bound by all actions taken by the Servicer pursuant to the preceding sentence, and (B) the Trustee and the banks holding all deposit accounts of page 9 16 ARC are entitled to accept submissions, determinations, selections, specifications, transfers, deposits and withdrawal requests, and payments from the Servicer on behalf of ARC. (h) Grant of Power of Attorney. ARC and the Trustee hereby each grant to the Servicer a power of attorney, with full power of substitution, to take in the name of ARC and the Trustee all steps that are necessary or appropriate to endorse, negotiate, deposit or otherwise realize on any writing of any kind held or transmitted by ARC or transmitted or received by the Trustee (whether or not from ARC) in connection with any Receivable or Related Transferred Asset. The power of attorney that ARC and the Trustee have granted to the Servicer may be revoked by the Trustee, and shall be revoked by ARC, on the date on which the Trustee shall be entitled to exercise the powers granted to the Trustee pursuant to Section 3.08(b). In exercising its power granted hereby, the Servicer shall take directions from the Trustee, if any, arising out of the exercise of the rights granted under Section 11.14. (i) Turnover of Collections. If the Servicer, ARC or any of their respective agents or representatives shall at any time receive any cash, checks or other instruments constituting Collections (including any payments received by ARC on account of any Seller Noncomplying Receivables Adjustment or Seller Dilution Adjustment), such recipient shall segregate such payments and hold such payments in trust for, and in a manner acceptable to, the Trustee and shall, promptly upon receipt (and in any event within two Business Days following receipt), remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to a Bank Account or the Master Collection Account; provided, however, that post-dated checks received by the Servicer in the ordinary course of business and not aggregating at any one time in the possession of the Servicer more than $50,000 may be held by the Servicer for deposit on the date appearing on each such check. In the event that the aggregate principal amount of post-dated checks held by the Servicer in this manner at any one time exceeds $50,000, the Servicer shall promptly make arrangements for such checks to be transferred to and held by the Trustee or a co-trustee or separate trustee appointed pursuant to Section 11.10. SECTION 3.03 Lockbox Accounts; Concentration Accounts. (a) Each Lockbox Account shall be subject to a Lockbox Agreement substantially in the form of Exhibit A. Unless instructed otherwise by the Servicer (or, after the occurrence and continuance of a Liquidation Event, the Trustee), each Lockbox Bank shall be instructed by the Servicer to remit, on a daily basis (but subject to the Lockbox Bank's customary funds availability schedule), all amounts deposited in the Lockbox Accounts maintained with it to a Concentration Account or the Master Collection Account. Any Concentration Account shall be maintained in the name of the Trustee on behalf of the Trust pursuant to a Concentration Account Agreement substantially in the form of Exhibit B. Except as expressly provided in this Agreement and the applicable Account Agreements, none of the Seller, ARC, the Servicer, or any Person claiming by, through or under the Seller, ARC or the Servicer shall have any control over the use of, or any right to withdraw any item or amount from, any page 10 17 Lockbox Account or Concentration Account. The Servicer and the Trustee are each hereby irrevocably authorized and empowered, as ARC's attorney-in-fact, to endorse any item deposited in a lockbox or presented for deposit in any Lockbox Account or Concentration Account requiring the endorsement of ARC, which authorization is coupled with an interest and is irrevocable. Each Lockbox Account shall be maintained with a Lockbox Bank that has a short-term debt rating of at least A-1 or its equivalent by the Applicable Rating Agency or shall be a segregated trust account at a national bank with a long-term debt rating of at least BBB by S&P or otherwise approved by the Applicable Rating Agency. (b) The Servicer shall instruct (or shall cause the Seller to instruct) all Obligors to make all payments due to ARC or the Seller relating to or constituting Collections (or any proceeds thereof) (i) to lockboxes maintained at the Lockbox Banks for deposit in a Lockbox Account or a Concentration Account or (ii) directly to a Lockbox Account. If ARC or the Seller receives any Collections or any other payment of proceeds of any other Related Transferred Asset, the Servicer shall cause such recipient to (x) segregate such payment and hold it in trust for the benefit of the Trustee and the Certificateholders, and (y) as soon as practicable, but no later than the second Business Day following receipt of such item by such Person, deposit such payment in a Bank Account or the Master Collection Account. The Servicer shall, and shall cause ARC and the Seller to, use reasonable efforts to prevent the deposit of any amounts other than Collections in any Lockbox Account or Concentration Account. In the event that the Servicer is notified by the Seller that any amount other than Collections has been deposited in any Lockbox Account or Concentration Account, the Servicer shall promptly instruct the appropriate Account Bank and the Trustee to segregate such amount, and shall direct such Account Bank or the Trustee (as appropriate) to turn over such amounts to the Seller or other AmeriSource Person (or their designees) to whom such amounts are owed. (c)(i) The Servicer may, from time to time after the Closing Date, designate a new account as a Lockbox Account or a Concentration Account, and such account shall become a Lockbox Account or Concentration Account (and the bank at which such account is maintained shall become a Lockbox Bank or a Concentration Account Bank for purposes of this Agreement); provided, however, that the Trustee shall have received not less than 15 Business Days' prior written notice of the account and/or the bank that are proposed to be added as a Bank Account or an Account Bank (as applicable) and, not less than ten Business Days prior to the effective date of any such proposed addition, the Trustee shall have received (x) counterparts of a Lockbox Agreement or a Concentration Account Agreement, as applicable, with each new Account Bank, duly executed by such new Account Bank and all other parties thereto and (y) copies of all other agreements and documents signed by the new Account Bank or such other parties with respect to any new Lockbox Account or Concentration Account, as applicable. (ii) The Servicer may, from time to time after the Closing Date, terminate an account as a Lockbox Account or a Concentration Account or a bank as an Account Bank; provided, page 11 18 however, that (x) no such termination shall occur unless the Trustee shall have received not less than ten Business Days' prior written notice of the account and/or the bank that are proposed to be terminated as a Bank Account or an Account Bank (as applicable) and, not less than ten Business Days prior to the effective date of any such proposed termination, the Trustee shall have received counterparts of an agreement, duly executed by the applicable Account Bank and reasonably satisfactory in form and substance to the Trustee, pursuant to which such Account Bank agrees that, if it receives any funds or items that constitute Collections on or after the effective date of the termination of the applicable Bank Account or the effective date of its termination as an Account Bank (as the case may be), such Account Bank or former Account Bank (as applicable) shall cause such funds and items to be delivered in the form received to another lockbox or transferred to another Lockbox Account, Concentration Account or the Master Collection Account promptly after such Account Bank or former Account Bank (as applicable) discovers that it has received any such funds or items, and (y) notwithstanding clause (x), ARC and the Servicer may at any time establish alternative collection procedures that do not require the use of Lockbox Accounts with the consent of each Purchaser Agent and any Enhancement Provider and upon satisfaction of the Rating Agency Condition. (d) The Servicer shall instruct each Concentration Account Bank (if any), to transfer on a daily basis in same day funds to the Master Collection Account all collected funds on deposit in the Concentration Account maintained with such Concentration Account Bank. All such transfers shall be made in accordance with the relevant Concentration Account Agreement. SECTION 3.04 Servicing Compensation. ARC hereby agrees to pay to the Servicer, as full compensation for servicing activities performed under the Transaction Documents, a servicing fee (the "Servicing Fee") in respect of each Calculation Period (or portion thereof) prior to the termination of the Trust pursuant to Section 12.01, payable in arrears on each Settlement Date. The Servicing Fee shall be paid out of funds in the Master Collection Account as more fully described in Article IV, and shall be payable to the Servicer solely to the extent amounts are available for payment pursuant to Article IV. In no event shall the Trust, the Trustee or the Certificateholders be liable for payment of the Servicing Fee. At any time when AmeriSource or any of its Affiliates is the Servicer, the Servicing Fee for any Calculation Period shall be equal to one-twelfth of the product of (a) 2%, multiplied by (b) the aggregate Unpaid Balance of the Receivables as measured on the first Business Day of the most recently ended Calculation Period. If AmeriSource ceases to be the Servicer, the Servicing Fee for a Successor Servicer that is not an Affiliate of AmeriSource shall be an amount equal to the greater of (i) the amount calculated pursuant to the preceding sentence and (ii) an alternative amount specified by such Servicer not exceeding the sum of (x) 110% of the aggregate reasonable costs and expenses incurred by such Servicer during such Calculation Period in connection with the performance of its obligations under this Agreement and the other Transaction Documents, and (y) the other page 12 19 costs and expenses that are to be paid out of the Servicing Fee, as described in the next sentence; provided, however, that the amount provided for in clause (x) shall not exceed one-twelfth of 2.5% of the aggregate Unpaid Balance of the Receivables as measured on the last Business Day of the most recently ended Calculation Period. The fees, costs and expenses of the Trustee, the Paying Agent, any authenticating agent, the Lockbox Banks, the Concentration Account Banks and the Transfer Agent and Registrar, and certain other costs and expenses payable from the Servicing Fee pursuant to other provisions of this Agreement, and all other fees and expenses that are not expressly stated in this Agreement, any Series Supplement or any PI Agreement to be payable by the Trust or ARC, other than Federal, ]state, local and foreign income and franchise taxes, if any, or any interest or penalties with respect thereto, of the Trust, shall be paid out of the Servicing Fee and shall be paid by the Servicer from the funds that constitute the Servicing Fee. The Servicing Fee shall be paid to the Servicer solely to the extent that funds are available to make such payment pursuant to Sections 4.03(g) or (h) (as the case may be), and there shall be no recourse to ARC for all or any part of the Servicing Fee that is payable from time to time if such funds are at any time insufficient to pay the Servicing Fee. SECTION 3.05 Records of the Servicer and Reports to be Prepared by the Servicer. (a) Keeping of Records and Books of Account. The Servicer shall maintain at all times accurate and complete books, records and accounts relating to the Receivables, Related Transferred Assets and Contracts of each Seller and all Collections thereon in which timely entries shall be made. The Servicer shall maintain and implement administrative and operating procedures (including an ability to generate duplicates of Records evidencing Receivables and the Related Transferred Assets in the event of the destruction of the originals thereof), and shall keep and maintain all documents, books, records and other information that the Servicer deems reasonably necessary, consistent with Section 3.02(a), for the collection of all Receivables and Related Transferred Assets. Without limiting the generality of the foregoing, the Servicer shall back up the receivables data every night and store the back-up off site. The Servicer shall further (i) implement a "hot site" disaster recovery program with a third party vendor for all of its processing locations within 150 days of the Closing Date, and (ii) maintain all such "hot site" disaster programs at all times thereafter. (b) Receivables Reviews. The Servicer shall provide the Trustee access to the documentation regarding the Receivables when the Trustee is required, in connection with the enforcement of the rights of Certificateholders or the Purchasers or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon reasonable request, (ii) during normal business hours, (iii) subject to the Servicer's normal security and confidentiality procedures, (iv) at reasonably accessible offices in the continental United States of America designated by the Servicer and (v) upon five Business Days' prior notice; provided, however, that no notice shall be required if a page 13 20 Liquidation Event shall have occurred and be continuing. The Servicer, the Seller and the Trustee shall provide each Purchaser Agent with such information, access, audit and inspection rights as shall be specified in each Receivables Purchase Agreement. (c) Daily Reports. Prior to 11:00 a. m., New York City time, on each Business Day, the Servicer shall prepare and deliver to the Trustee and any Agent a report substantially in the form of Exhibit C (as the same may be supplemented in accordance with any Supplement or PI Agreement) or in such other form as is reasonably acceptable to the Trustee and the Servicer (each such report being a "Daily Report"); provided, that if, on any Business Day, the Servicer is unable to prepare and deliver a Daily Report to the Trustee because of acts of God or the public enemy, riots, acts of war, acts of terrorism, epidemics, fire, failure of communication lines, equipment or power failure, computer systems failure, flood, embargoes, weather, earthquakes or other unanticipated disruptions of the Servicer's ability to monitor the origination and/or preparation of Receivables, then the Base Amount used in preparation of the Daily Report shall be the lowest Base Amount shown in the Daily Reports delivered during the immediately preceding month (such amount, an "Estimated Base Amount"). The Servicer may use an Estimated Base Amount to prepare the Daily Report until the earlier to occur of (i) the disruption no longer prevents the Servicer from preparing the Daily Report using the actual data required by the Daily Report and delivering it to the Trustee, and (ii) the sixth Business Day following the commencement of such disruption. No later than 11:15 a. m. on the 2nd Business Day of the Look Back Period, the Servicer shall deliver to the Trustee a modified Daily Report for the Determination Date, reflecting the exclusion of the Affected Receivables from the Base Amount. With respect to each other Business Day falling in the Look Back Period (including such 2nd Business Day), two Daily Reports shall be prepared and delivered to the Trustee pursuant to Section 3.05(c) (and clearly marked to distinguish between them); (1) one reflecting exclusion of Affected Receivables in the Base Amount; and (2) another including the Affected Receivables in the Base Amount (to the extent permitted by other terms of the Transaction Documents). (d) Settlement Statement. On each Report Date, the Servicer shall prepare and deliver to the Trustee and the Applicable Rating Agencies a report substantially in the form of Exhibit D (as the same may be supplemented in accordance with any Supplement or PI Agreement) or in such other form as is reasonably acceptable to the Trustee and the Servicer (each such report being a "Settlement Statement"). (e) Notice of Seller Change Events; Supplements to Settlement Statements. Sections 1.7 and 1.8 of the Purchase Agreement describe circumstances under which (i) Subsidiaries of AmeriSource may be added to the Program as a Seller and (ii) the Seller may terminate its status as Seller under the Program (each event being herein called a "Seller Change Event"). Those Sections of the Purchase Agreement require AmeriSource to give written notice to ARC of the occurrence of a Seller Change Event not less than 30 days prior to the occurrence thereof, and ARC hereby agrees to give prompt written notice of its receipt page 14 21 of any such notice to the Trustee and the Applicable Rating Agencies. If the notice is given to the Trustee, within five Business Days after the receipt of the notice by the Trustee (or such later date, as specified in the notice, on which the applicable Seller Change Event shall become effective), the Servicer shall deliver to the Trustee and the Applicable Rating Agencies a supplement to the Settlement Statement then in effect, which supplement shall show (A) the calculation or recalculation of the Required Reserves and the Discount Rate Reserve (if necessary) to reflect the addition of accounts receivable originated by any such Subsidiary that is being added to the Program as a Seller, and the exclusion of any Receivables originated by any such Subsidiary that is terminating its status as a Seller (as applicable), and (B) the Loss Discount and the Purchase Discount Reserve Ratio for any such Subsidiary that is being added to the Program as a Seller. For purposes of all calculations hereunder and under the Purchase Agreement, the Required Reserves and (if applicable) the Loss Discount and the Purchase Discount Reserve Ratio for the relevant Subsidiary of AmeriSource shown in such supplement shall supersede and/or supplement the calculation of such items in the then outstanding Settlement Statement, effective as of the fifth Business Day following the Trustee's receipt of such notice (or such later date, as specified in such notice, on which the applicable Seller Change Event shall become effective). SECTION 3.06 Monthly Servicer's Certificate. On each Report Date, the Servicer shall deliver to the Trustee, the Paying Agent, ARC and the Applicable Rating Agencies a certificate of an Authorized Officer of the Servicer substantially in the form of Exhibit E, with such additions as may be required by any Supplement. ARC will join in each certificate delivered with respect to a Cut-Off Date that is the end of a calendar quarter for purposes of confirming that ARC, AmeriSource and the Seller shall not have any obligations to any Restricted Federal Obligor or State Obligor that (a) are due and payable, (b) could be set off against the Unpaid Balance of the Receivable owed by such Obligor, except for obligations that are being contested in good faith and by appropriate proceedings and against which ARC, AmeriSource and/or the Seller (as applicable) maintain reserves in accordance with GAAP and (c) the method for calculating tax reserves reflected in the books and records of AmeriSource and ARC complies with GAAP and fairly presents estimated tax liabilities to the best of AmeriSource's and ARC's knowledge. SECTION 3.07 Annual Servicing Report of Independent Public Accountants; Forms 10-Q and 10-K. (a)(i) On or before 120 days after the end of each fiscal year of ARC, beginning with the fiscal year ending September 30, 1994, the Servicer shall, as an expense of the Servicer paid out of the Servicing Fee, cause Ernst & Young or another firm of nationally recognized independent public accountants (which may also render other services to the Servicer, the Seller or ARC) to furnish a report to the Trustee, the Servicer, the Applicable Rating Agencies and ARC (which report shall be addressed to the Trustee and shall relate to ARC's most recently ended fiscal year). The accountants' report shall set forth the results of their performance of certain procedures that will have been agreed upon prior to the First Issuance Date by the Servicer and ARC with respect to the Settlement page 15 22 Statements and Daily Reports delivered to the Trustee pursuant to Section 3.05 during the prior fiscal year. (ii) Each accountants' report shall state that the accountants have compared the amounts contained in the Settlement Statements and a sample randomly selected from all Daily Reports delivered to the Trustee during the period covered by the report with the records (including computer records) from which the amounts were derived and that, on the basis of such comparison, the amounts are in agreement with the documents and records, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in the report. Except as provided otherwise in a Supplement, a copy of the report may be obtained by any Investor Certificateholder by a request in writing to the Trustee addressed to the Corporate Trust Office. (b) Promptly after the filing of such reports with the Securities and Exchange Commission, the Servicer shall provide each of the Applicable Rating Agencies with copies of each Quarterly Report on Form 10-Q and each Annual Report on Form 10-K of the Servicer. SECTION 3.08 Rights of the Trustee. (a) The Trustee has (for the benefit of the Certificateholders) the exclusive dominion and control over the Bank Accounts, and ARC shall take any action that the Trustee may reasonably request to effect or evidence such dominion and control. At any time following the occurrence of a Servicer Default, the Trustee is hereby authorized to give notice to the Account Banks, as provided in the Account Agreements, of the revocation of the Servicer's authority to give instructions or take any other actions with respect to the Bank Accounts that the Servicer would otherwise be authorized to give or to take pursuant to Sections 3.02 and 3.03. (b) At any time following the designation of a Servicer other than AmeriSource until a Successor Servicer (if other than the Trustee) has been appointed: (i) The Trustee may direct any Obligors of Receivables to pay all amounts payable under any Receivable or any Related Transferred Assets directly to the Trustee or its designee; provided, however, that the Trustee shall provide the Seller with a copy of such notice at least one Business Day prior to sending it to any Obligor and consult in good faith with the Seller as to the text of the notice. (ii) The Trustee may direct the Seller to make payment of all amounts payable to ARC under any Transaction Document to which the Seller is a party directly to the Trustee or its designee. (iii) ARC and the Servicer shall, at the Trustee's request and as an expense of the Servicer paid out of the Servicing Fee, give notice of the Trust's ownership of the page 16 23 Receivables and the Related Transferred Assets to each Obligor and direct that payments be made directly to the Trustee or its designee. (iv) ARC shall, and shall cause the Seller to, at the Trustee's request, (A) assemble all of the Records that are necessary or appropriate to collect the Receivables and Related Transferred Assets, and shall make the same available to the Trustee at one or more places selected by the Trustee or its designee, (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections in a manner acceptable to the Trustee and shall, promptly upon receipt (and, subject to Section 3.02(i), in no event later than the first Business Day following receipt), remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Trustee or its designee and (C) permit, upon not less than two Business Days' prior written notice, any Successor Servicer and its agents, employees and assignees access to their respective facilities and their respective Records. (c) Each of ARC and the Servicer hereby authorizes the Trustee, from time to time after the designation of a Servicer other than AmeriSource, to take any and all steps in ARC's name and on behalf of ARC and the Servicer that are necessary or appropriate, in the reasonable determination of the Trustee, to collect all amounts due under any and all Receivables or Related Transferred Assets, including endorsing the name of ARC or the Seller on checks and other instruments representing Collections and enforcing such Receivables and the Related Transferred Assets. (d) ARC hereby irrevocably appoints the Trustee to act as ARC's attorney-in-fact, with full authority in the place and stead of ARC and in the name of ARC or otherwise, from time to time after the designation of a Servicer other than AmeriSource, to take (subject to Section 11.14 hereof) any action and to execute any instrument or document that the Trustee, in its reasonable determination, may deem necessary to accomplish the purposes of this Agreement, including: (i) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any Receivable or any Related Transferred Asset, (ii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (i), (iii) to file any claims or take any action or institute any proceedings that the Trustee in its reasonable determination may deem necessary or appropriate for the collection of any of the Receivables or any Related Transferred Asset or otherwise to enforce the rights of the Trustee and the Certificateholders with respect to any of the Receivables or any Related Transferred Asset, and page 17 24 (iv) to perform the affirmative obligations of ARC under any Transaction Document. ARC hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this subsection is irrevocable and coupled with an interest. SECTION 3.09 Ongoing Responsibilities of AmeriSource. Anything herein to the contrary notwithstanding: (a) If at any time AmeriSource shall not be the Servicer, it shall deliver all Collections received or deemed received by it or its Subsidiaries to the Trustee no later than two Business Days after receipt or deemed receipt thereof and the Trustee shall distribute such Collections to the same extent as if such Collections had actually been received from the related Obligor on the applicable dates. So long as AmeriSource or any of its Subsidiaries shall hold any Collections or deemed Collections required to be paid to the Trustee, each of them shall hold such amounts in trust (and separate and apart from its own funds) and shall clearly mark its records to reflect such trust. AmeriSource hereby grants to the Trustee an irrevocable power of attorney, with full power of substitution, coupled with an interest, upon the occurrence of a Servicer Default, to take in the name of AmeriSource all steps necessary or appropriate to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by AmeriSource or transmitted and received by the Trustee (whether or not from AmeriSource) in connection with any Receivable or Related Transferred Asset. (b) AmeriSource hereby irrevocably agrees that, if at any time it shall cease to be the Servicer, it shall act (if the then current Servicer so requests) as the data processing agent of the Servicer and, in such capacity, AmeriSource shall conduct (and shall cause any other necessary Persons to conduct) the data processing functions of the administration of the Receivables, the Related Transferred Assets and the Collections thereon in substantially the same way that AmeriSource (or its Sub-Servicers) conducted such data processing functions while AmeriSource acted as the Servicer. AmeriSource and each such other Person shall be entitled to reasonable compensation for such service to be paid from the Servicing Fee. (c) Notwithstanding any termination of AmeriSource as Servicer hereunder, AmeriSource shall continue to indemnify the Trustee on the terms set out in Section 11.05 with respect to circumstances existing, or actions taken or omitted, prior to such termination. SECTION 3.10 Further Action Evidencing Transfers. (a) Each of ARC and the Servicer agrees that from time to time, as an expense of the Servicer paid out of the Servicing Fee, it will promptly execute and deliver (or cause the relevant Sub-Servicer to page 18 25 execute and deliver) all further instruments and documents, and will promptly take all further action (or cause the relevant Sub-Servicer to take all further action) that the Trustee may reasonably request, in order to perfect, protect or more fully evidence the conveyances hereunder, or to enable the Investor Certificateholders or the Trustee to exercise or enforce any of their respective rights under any Transaction Documents. Without limiting the generality of the foregoing, upon the Trustee's request, ARC (or, in the case of clause (ii) below, the Servicer) will, or will cause the Servicer to: (i) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be required from time to time pursuant to Section 7.02(c) or as the Trustee reasonably determines necessary or desirable, and (ii) mark its master data processing records that evidence or list Receivables or Related Transferred Assets as described in Section 2.01(d). The Servicer shall cause all financing statements and continuation statements and any other necessary documents relating to the right, title and interest of the Trustee (for the benefit of the Certificateholders) in and to the Trust Assets to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the right, title and interest of the Trustee hereunder (for the benefit of the Certificateholders) in and to all property comprising the Trust Assets. The Servicer shall deliver to the Trustee file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. ARC shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents that are reasonably required to fulfill the intent of this section. (b) If (i) ARC or the Servicer fails to perform any of its agreements or obligations under any Transaction Document and does not remedy such failure within the applicable cure period, if any, and (ii) the Trustee in good faith reasonably believes that the performance of such agreements and obligations is necessary or appropriate to protect the interests of the Certificateholders under this Agreement, then the Trustee or its designee may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the reasonable expenses of the Trustee or its designee incurred in connection therewith shall be payable by the Servicer as provided in Section 11.05 and (if applicable) by ARC as provided in Section 7.03. If, at any time, ARC or the Servicer fails to file any financing statement or continuation statement, or amendment thereto or assignment thereof, that is required to be filed pursuant to this Agreement or any of the other Transaction Documents, the Trustee may (but shall not be required to), and ARC and the Servicer hereby authorize the Trustee to, file such financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Receivables or the Related Transferred page 19 26 Assets now existing or hereafter arising in the name of ARC or the Servicer as an expense of the Servicer paid out of the Servicing Fee. ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS SECTION 4.01 Rights of Certificateholders. Each Fixed Principal Certificate shall represent a fractional undivided interest in the Trust, consisting of the right to receive Collections, funds on deposit in the Trust Accounts and other Trust Assets, to the extent and at the times provided herein and in the relevant Supplement, in payment of the principal amount of such Fixed Principal Certificate, interest accrued on such principal amount from time to time at the applicable Certificate Rate, and other Obligations owed to the Holder of such Fixed Principal Certificate (all such undivided interests being collectively called the "Fixed Principal Interest"). Each Revolving Certificate shall represent a fractional undivided interest in the Trust, consisting of a right to receive Collections, funds on deposit in the Trust Accounts and other Trust Assets, to the extent and at the times provided herein, in payment of the principal amount of such Revolving Certificate (which principal amount shall vary from time to time in accordance with the terms of this Agreement) and interest accrued on the principal amount of any Investor Revolving Certificate from time to time at the applicable Certificate Rate, and other Obligations owed to the Holder of an Investor Revolving Certificate (all such undivided interests being collectively called the "Revolving Certificate Interest"). The Residual Certificate shall represent the ownership interest in the remainder of the Trust Assets not allocated pursuant to this Agreement to the Fixed Principal Interest or the Revolving Certificate Interest, including the right to receive payments at the times and in the amounts specified in this Article IV to be paid to ARC in respect of the Residual Certificate (the "Residual Interest"). The Residual Certificate will not bear interest. SECTION 4.02 Establishment of Trust Accounts. (a) The Trustee shall establish and maintain in the name of the Trustee, on behalf of the Trust and for the benefit of the Certificateholders, the segregated trust accounts referred to in subsections (b) through (g) below (and such additional accounts as may be required by any Supplement). Each of the Trust Accounts shall be established and maintained in the corporate trust department of the Trustee and shall bear a designation clearly indicating that funds deposited therein are held for the benefit of the Certificateholders and the Purchasers. (b) All Collections and all other Trust Assets consisting of cash or cash equivalents shall be transferred from the Bank Accounts and deposited in a segregated trust account page 20 27 maintained with the Trustee (the "Master Collection Account"). In addition, on the first day of the Liquidation Period, any funds in the Equalization Account will be transferred to the Master Collection Account. Funds on deposit in the Master Collection Account will be allocated as provided in Section 4.03. As described in Section 4.03(g), certain funds in the Master Collection Account shall be allocated from time to time prior to commencement of the Liquidation Period to an administrative sub-account of the Master Collection Account or to a separate trust account created by the Trustee at the direction of ARC (such sub-account or separate account being referred to herein as the "Carrying Cost Account"). Funds shall be withdrawn from the Carrying Cost Account to pay interest on the Fixed Principal Certificates and the Revolving Certificates, yield on Purchased Interests and other Carrying Costs when due. If on any day funds allocated to the Carrying Cost Account are not sufficient to pay all amounts of such Carrying Costs then due, then in the event that there are any funds on deposit in the Equalization Account or the Defeasance Account, such funds shall be withdrawn (in an amount equal to the lesser of the amount of the deficiency and the amount of such funds) and transferred to the Carrying Cost Account. On the first day of the Liquidation Period, the Carrying Cost Account shall be closed and thereafter funds that had been allocated thereto shall be distributed in the same manner as other funds in the Master Collection Account, as provided in Section 4.03(h). (c) From time to time prior to the commencement of the Liquidation Period, funds will be deposited into a segregated trust account maintained by the Trustee (the "Equalization Account") from the Master Collection Account, and withdrawn from the Equalization Account for deposit into the Master Collection Account, to compensate for fluctuations in the Base Amount or to segregate funds that would otherwise be remitted by the Trustee to ARC during a Look Back Period, as provided in Sections 4.03(c), (f) and (g). On the first day of the Liquidation Period, all funds in the Equalization Account shall be transferred to the Master Collection Account for disposition in the same manner as other funds in the Master Collection Account, as provided in Section 4.03(h). (d) Any Trust Accounts established pursuant to any Supplement shall be held by the Trustee for the benefit of only such Series of Certificates as are indicated in that Supplement. The Master Collection Account, Carrying Cost Account and Equalization Account shall be held by the Trustee for the benefit of all Certificateholders and Purchasers, except to the extent indicated in any Supplement with respect to the Series issued pursuant to that Supplement. Each Trust Account shall be a segregated account maintained in the corporate trust department of the Trustee, the corporate trust department of a bank that has a long-term debt rating of at least "BBB" by S&P or with an Eligible Institution. (e) At the times specified in Section 4.03(g), the Servicer shall allocate funds pursuant to clauses Second, Fifth and Sixth of Section 4.03(g) to an administrative sub-account of the Master Collection Account or to a separate trust account created by the Trustee at the direction of ARC (such sub-account or separate account being the "Defeasance Account"). If the Defeasance Account is a separate trust account, it shall be established and page 21 28 maintained in the name of the Trustee in the corporate trust department of the Trustee and shall bear a designation clearly indicating that funds deposited therein are held for the benefit of the Investor Certificateholders and the Purchasers. Funds shall be withdrawn from the Defeasance Account to make the payments described in Section 4.03(g) to Holders of the relevant Series of Investor Certificates or Purchased Interests. If the Liquidation Commencement Date occurs, at any time when funds are being allocated to the Defeasance Account, the Servicer shall in the Daily Report reallocate all funds that are on deposit or would otherwise be allocated to the Defeasance Account to the Master Collection Account, within one Business Day after the occurrence of the Liquidation Commencement Date, for allocation pursuant to Section 4.03(h). Notwithstanding anything to the contrary provided herein, ARC may in no event deposit its own funds into the Defeasance Account. On each Settlement Date after the commencement of the Accumulation Period for a particular Series, the Trustee shall withdraw from the Defeasance Account and deposit into a segregated trust account maintained by the Trustee (the "Principal Funding Account") an amount equal to the lesser of (i) the applicable Principal Accumulation Amount for such Settlement Date and (ii) the applicable Controlled Deposit Amount for such Settlement Date to be applied to the repayment of the Invested Amount of such Series on the Expected Final Payment Date for such Series as provided in Section 4.03(g). The Principal Funding Account shall be established and maintained in the name of the Trustee in the corporate trust department of the Trustee and shall bear a designation clearly indicating that funds deposited therein are held for the benefit of the Investor Certificateholders and the Purchasers. Upon the occurrence and continuance of an Unmatured Liquidation Event, no further payments shall be made from the Principal Funding Account. If the Liquidation Commencement Date occurs at any time when funds are being allocated to the Principal Funding Account, the Servicer shall in the Daily Report reallocate all funds that are on deposit or would otherwise be allocated to the Principal Funding Account to the Master Collection Account, within one Business Day after the occurrence of the Liquidation Commencement Date, for allocation pursuant to Section 4.03(h). (f) From time to time prior to the commencement of the Liquidation Period, funds will be allocated to an administrative sub-account of the Master Collection Account or to a separate trust account created by the Trustee at the direction of ARC (such sub-account or separate account being the "Set-Aside Account") for the purposes described in Section 4.03(c)(iii). If the Set-Aside Account is a separate trust account, it shall be established and maintained in the name of the Trustee in the corporate trust department of the Trustee and shall bear a designation clearly indicating that funds deposited therein are held for the benefit of the Investor Certificateholders and the Purchasers. (g) From time to time after the commencement of the Liquidation Period, funds that would otherwise be remitted by the Trustee to ARC in respect of the ARC Revolving Amount will be deposited to a segregated trust account maintained by the Trustee (the "Accumulation Account"). Until the earlier to occur of (i) the date that falls twelve months after the Liquidation Commencement Date, (ii) the day on which Investor Certificates, Purchased Interests and other Obligations shall have been paid in full and (iii) the first page 22 29 Business Day on or after the Liquidation Commencement Date on which (A) the amount of funds then held in the Trust Accounts that are allocated to pay the Investor Repayment Amount equals or exceeds (B) the Investor Repayment Amount (the earliest of such dates being the "Accumulation Account Termination Date"), all amounts payable to ARC in respect of the ARC Revolving Amount pursuant to clause Second of Section 4.03(h) shall be deposited in the Accumulation Account instead of being paid to ARC. If at any time prior to the Accumulation Account Termination Date, the amount of funds in the Accumulations Account exceeds the difference of (1) the Investor Repayment Amount minus (2) the amount of funds then held in the Trust Accounts that are allocated to pay the Investor Repayment Amount, then the amount of such excess funds shall be released from the Accumulation Account and shall be paid to ARC. No funds shall be allocated to the Accumulation Account from and after the Accumulation Account Termination Date. On such date, the Servicer (or, after the occurrence and during the continuance of a Servicer Default, the Trustee) shall calculate, or shall cause to be calculated, an amount equal to (x) the aggregate amount of funds held in the Accumulation Account in respect of the ARC Revolving Amount, minus (y) the Seller Adjustments accrued during the Liquidation Period which have not yet been paid. The amount of such difference, if positive, will be paid to ARC. The funds remaining in the Accumulation Account after the payment of such amount to ARC shall be transferred to the Master Collection Account and applied to the items listed in Section 4.03(h), in the order of priority specified therein. (h) The Trustee shall possess (for its benefit and for the benefit of the Certificateholders) all right, title and interest in and to all funds on deposit from time to time in each of the Trust Accounts and in all proceeds thereof. The Trust Accounts shall be under the sole dominion and control of the Trustee for the benefit of the applicable Certificateholders. The Servicer agrees that it shall have no right of setoff against, and no right otherwise to deduct from, any funds held in any of the Trust Accounts or the Bank Accounts for any amount owed to it by the Trustee, the Trust or any Certificateholder. Pursuant to the authority granted to the Servicer in Section 3.02, the Servicer shall have the power, revocable after the occurrence and during the continuance of a Servicer Default by the Trustee or by the Trustee at the direction of the Majority Investors, to make withdrawals and payments from the Bank Accounts and to instruct the Trustee to make withdrawals and payments from the Trust Accounts for the purposes of carrying out the Servicer's or the Trustee's duties hereunder. SECTION 4.03 Daily Calculations and Funds Allocations. (a) Calculation of Carrying Cost Reserve. On each Business Day prior to the Liquidation Commencement Date, the Servicer will calculate an amount equal to the Carrying Cost Reserve for such Business Day. "Carrying Cost Reserve" means an amount equal to (i) the Accrued Carrying Costs (as defined below), plus (ii) an amount equal to (A) the aggregate outstanding principal amount of all Investor Certificates and Purchased Interests multiplied by (B) the weighted average of the interest rates per annum on the then- page 23 30 issued Series of Investor Certificates and Purchased Interests as of the most recent Cut-Off Date; provided, however, that if any Investor Certificate or Purchased Interest bears interest at a variable rate calculated by reference to an interest index rate (such as LIBO or prime), and ARC may elect to change the index from time to time, then the index resulting in the highest interest rate payable on such Investor Certificates or Purchased Interest shall be deemed to have applied on the Cut-Off Date and such highest interest rate shall be multiplied by 1.52, multiplied by (C) the greater of (i) 1/4 and (ii) a fraction the numerator of which is the product of 1.75 and the number of Turnover Days and the denominator of which is 360. "Accrued Carrying Costs" means, at any time, the sum of the then accrued and unpaid Carrying Costs, plus the amount of Carrying Costs that will, or are estimated to, have accrued by the next Settlement Date. (b) Calculation of the Base Amount. On each Business Day prior to the Liquidation Commencement Date, the Servicer will calculate the Base Amount for such day. On any Business Day, the "Base Amount" will equal the result of (i) the Net Eligible Receivables as reported in the Daily Report for that Business Day, minus (ii) the Required Reserves for that Business Day, minus (iii) the Discount Rate Reserve as of the opening of business on that Business Day, minus (iv) any other amount required to be subtracted by any Supplement or PI Agreement on that Business Day. (c) Variable Amount. (i) Calculation of Variable Amount. On each Business Day prior to the Liquidation Commencement Date, the Servicer shall calculate an amount (whether positive or negative, the "Variable Amount") equal to (A) the Base Amount at the opening of business on such day, minus (B) the Certificate Calculation Amount, minus (C) the PI Calculation Amount, plus (D) the balance on deposit in the Equalization Account; provided, that for purposes of this calculation (but without double counting), the Certificate Calculation Amount shall be reduced by the aggregate amount of reductions to the ARC Revolving Certificate made pursuant to subsection (d), and such reductions shall be given effect for purposes of all calculations required by this subsection or by subsection (f). The Variable Amount will be allocated in the manner described hereinafter and will be reported by the Servicer in the Daily Report for such day. (ii) Allocation of Positive Variable Amount. On any Business Day when the Variable Amount is zero or a positive number, the Servicer shall, if so directed by ARC, take one or more of the following actions: (A) If there are funds on deposit in the Set-Aside Account, then the Servicer shall, before taking any of the other actions referred to below, transfer all such funds to the Master Collection Account for application along with other funds on deposit in the Master Collection Account on that day in page 24 31 such manner that there would not be a negative Variable Amount after giving effect to such transfer and such application(s). (B) If the positive Variable Amount exceeds the amount on deposit in the Set-Aside Account (or there are no funds on deposit in the Set-Aside Account), ARC may direct the Servicer to (1) transfer funds (if any) on deposit in the Equalization Account into the Master Collection Account for application along with other funds on deposit in the Master Collection Account on that day and/or (2) increase the principal amount of one or more Revolving Certificates or Purchased Interests specified by ARC such that the sum of the amount of any such transfer and the amount(s) of any such increase(s) equals not more than the remaining (or total) positive Variable Amount; provided, however, that (x) any such allocation to any Investor Revolving Certificate shall be subject to Section 6.11(b), and any such allocation to any Purchased Interest shall be subject to the applicable PI Agreement, (y) no such allocation to any Investor Revolving Certificate or Purchased Interest shall be made during a Look Back Period, and (z) no funds shall be released from the Equalization Account during a Look Back Period. (iii) Allocation of Negative Variable Amount. On any Business Day when the Variable Amount is a negative number, the Servicer, at the direction of ARC, shall take one or more of the following actions with Collections available in the Master Collection Account for applications on such day: (A) allocate the Collections to one or more Revolving Certificates or Purchased Interests in reduction of the principal amounts of the Revolving Certificates or Purchased Interests or to the Defeasance Account in accordance with clause Second of subsection (g), and/or (B) transfer a portion of the Collections to the Equalization Account, pursuant to clause Fourth of subsection (g), such that the aggregate amount of the transfer, the reduction(s) and the allocations to the Defeasance Account equals the absolute value of the Variable Amount; provided, that if the amount of Collections available for such purposes on such day, after any required deposits to the Carrying Cost Account, is less than the absolute value of the Variable Amount, then (x) any such allocation to any Revolving Certificate or Purchased Interest or to the Defeasance Account shall not exceed an amount equal to the applicable Revolving Certificateholder's, Purchaser's or Series' Allocable Daily Collections on such day (less any amount of such Allocable Daily Collections transferred to the Carrying Cost Account in accordance with subsection (g)) and (y) if any allocation is made to any Revolving Certificate or Purchased Interest, or to the Defeasance Account, then the remainder of such available Collections shall be page 25 32 transferred to the Set-Aside Account for the benefit of any holder who may be entitled to receive such Collections pursuant to Section 5.01(i). In addition, on any Business Day when the Variable Amount is a negative number and the amount of Collections available for application on such day (after making deposits to the Carrying Cost Account) equals or exceeds the absolute value of such negative number, ARC may direct the Servicer to remove all or part of the funds then on deposit in the Set-Aside Account and allocate the funds to one or more Revolving Certificates or Purchased Interests in reduction of the outstanding principal amount of such Revolving Certificates or Purchased Interests or to allocate the funds to the Equalization Account. If, at any time when funds are being allocated to or are on deposit in the Set-Aside Account, the Liquidation Commencement Date occurs, all funds then allocated to or on deposit in the Set-Aside Account shall be paid to the holders of the then-issued and outstanding Certificates and Purchased Interests on the next Settlement Date in the manner described in Section 5.01(i). (iv) Reallocation of ARC Revolving Amount. On any Business Day prior to the Liquidation Commencement Date, ARC may direct the Servicer to reallocate all or a portion of the principal amount of the ARC Revolving Certificate to an Investor Revolving Certificate (subject to the requirements of Section 6.11(b)) or a Purchased Interest (subject to the requirements of the related PI Agreement). In addition, ARC may (subject to the terms of any Supplement or PI Agreement) direct the Servicer to direct the Trustee, pursuant to clause Eighth in subsection (g), to pay to a holder of an Investor Revolving Certificate or a Purchaser, in reduction of the principal amount of such Investor Revolving Certificate or the applicable Purchased Interest, Collections that would otherwise be payable to ARC. (d) Calculation of Seller Adjustments; Related Adjustments to ARC Revolving Amount. On each Business Day, the Servicer shall calculate and report the aggregate amount of Noncomplying Receivables and Dilution Adjustments for the day and shall report the aggregate amount of payments actually made by the Seller to ARC on the day in respect of Noncomplying Receivables and Dilution Adjustments. The ARC Revolving Amount shall be reduced by an amount equal to the lesser of (x) the Noncomplying Receivables and Dilution Adjustments for such Business Day, less the aggregate amount of cash payments in respect of Noncomplying Receivables and Dilution Adjustments made by the Seller to ARC and by ARC to the Trustee on such day (such difference being a "Seller Adjustment"), (y) the ARC Revolving Amount, and (z) on any Business Day prior to the Liquidation Commencement Date, the amount by which (1) the sum of the Base Amount plus the balance on deposit in the Equalization Account is less than (2) the sum of the Certificate Calculation Amount plus the PI Calculation Amount. The foregoing reduction in the ARC Revolving page 26 33 Amount shall occur without any payment in respect thereof being made to ARC, and shall be made (on each Business Day prior to the Liquidation Commencement Date) before giving effect to the adjustments to the ARC Revolving Amount made pursuant to subsection (c). (e) Certain Calculations in the Liquidation Period. (i) On the Liquidation Commencement Date and on each Settlement Date thereafter, the Servicer shall calculate an amount (the "Available Subordinated Amount"), which shall equal: (A) on the Liquidation Commencement Date, the result of (w) the Unpaid Balance of Receivables held by the Trust at the opening of Business on the next preceding Business Day, minus (x) the sum of the Certificate Calculation Amount and the PI Calculation Amount, as of the next preceding Business Day (but after giving effect to all allocations and other adjustments made pursuant to this section on such next preceding Business Day), plus (y) the balance on deposit in the Equalization Account at the end of the next preceding Business Day, minus (z) the Discount Rate Reserve as of the next preceding Business Day, and (B) on each Settlement Date thereafter, the result (but not less than zero nor greater than the initial Available Subordinated Amount) of (x) the Available Subordinated Amount as calculated on the next preceding Settlement Date (or on the Liquidation Commencement Date, in the case of the first Settlement Date falling after the Liquidation Commencement Date) minus (y) the Charged-Off Amount (if positive) with respect to the most recently ended Calculation Period plus (z) (so long as the Available Subordinated Amount has not been reduced to zero) the amount of the Net Recoveries (if positive) with respect to the most recently ended Calculation Period. (ii) On each Settlement Date after the Liquidation Commencement Date, the Servicer shall calculate an amount (the "Allocable Charged-Off Amount"), which shall equal: (A) zero, so long as the Available Subordinated Amount is greater than zero, (B) on the first Settlement Date on which the Available Subordinated Amount is reduced to zero, the excess (if any) of (x) the Charged-Off Amount for the most recently ended Calculation Period, over (y) the Available Subordinated Amount as of the next preceding Settlement Date (or as of the Liquidation Commencement Date, if this occurs on the first Settlement Date falling after the Liquidation Commencement Date), and page 27 34 (C) on each subsequent Settlement Date, the Charged-Off Amount (if positive) for the most recently ended Calculation Period. (iii) If the Allocable Charged-Off Amount calculated on any Settlement Date is greater than zero, the Allocable Charged-Off Amount shall be allocated on the Settlement Date among the various outstanding Classes of Investor Certificates, outstanding Purchased Interests and the ARC Revolving Certificate as follows: (A) a portion of the Allocable Charged-Off Amount equal to the product of the Allocable Charged-Off Amount multiplied by the ARC Allocation Percentage shall be allocated to the ARC Revolving Certificate, (B) the remainder of the Allocable Charged-Off Amount shall be allocated to the various outstanding Classes of Investor Certificates and Purchased Interests in the following priority: First, to the various Subordinated Classes and Subordinated Purchased Interests, in accordance with their respective Class Allocation Percentages, until their respective Class Invested Amounts and PI Invested Amounts have been reduced to zero, and Second, any remaining Allocable Charged-Off Amount to the Senior Classes and Senior Purchased Interests, in accordance with their respective Class Allocation Percentages, until their respective Class Invested Amounts and PI Invested Amounts have been reduced to zero. (iv) Any Net Recoveries (if positive) with respect to any Calculation Period ending after the Available Subordinated Amount has been reduced to zero shall be allocated among the various outstanding Classes of Investor Certificates, outstanding Purchased Interests and the ARC Revolving Certificate as follows: (A) a portion of such Net Recoveries equal to the product of such Net Recoveries multiplied by the ARC Allocation Percentage shall be allocated to the ARC Revolving Certificate, (B) the remainder of such Net Recoveries shall be allocated to the various outstanding Classes of Investor Certificates and Purchased Interests in the following priority: First, to the various Senior Classes and Senior Purchased Interests, in accordance with their respective Class Allocation Percentages, until all previous reductions to their respective Class page 28 35 Invested Amounts and PI Invested Amounts on account of Allocable Charged-Off Amounts have been reinstated, and Second, any remaining Net Recoveries to the Subordinated Classes and Subordinated Purchased Interests, in accordance with their respective Class Allocation Percentages, until all previous reductions to their respective Class Invested Amounts and PI Invested Amounts on account of Allocable Charged-Off Amounts have been reinstated. (v) No Class or Purchased Interest will be deemed to be "outstanding" for purposes of clause (iii) or (iv) after its Class Invested Amount or PI Invested Amount has been reduced to zero. The portion of the Allocable Charged-Off Amount allocated to any Class or Purchased Interest (as to such Class or Purchased Interest, its "Investor Allocable Charged-Off Amount") or to the ARC Revolving Certificate will reduce the invested amount and the outstanding principal amount of such Class or Purchased Interest or the ARC Revolving Amount for all purposes. The portion of the Net Recoveries allocated to any Class or Purchased Interest (as to such Class or Purchased Interest, its "Investor Net Recoveries") or to the ARC Revolving Certificate will increase the invested amount and the outstanding principal amount of such Class or Purchased Interest or the ARC Revolving Amount for all purposes. (f) Withdrawals from Equalization Account and Set-Aside Account. Subject to the last paragraph of this Section 4.03(f), on any Business Day prior to the Liquidation Commencement Date, the Servicer may instruct the Trustee in writing to withdraw funds from the Set-Aside Account and/or the Equalization Account and allocate such funds to (i) the reduction of the principal amount of the ARC Revolving Certificate and/or one or more Investor Revolving Certificates (subject to the requirements of Section 6.11(b)) or Purchased Interests (subject to the requirements of the related PI Agreement), and/or (ii) the Defeasance Account, so long as (x) there would not be a negative Variable Amount after giving effect to such transfer and such application(s) and (y) in the case of any such withdrawal from the Equalization Account, no funds are on deposit in the Set-Aside Account (including as a result of transfers made on that day). In addition, on any Business Day when there is a negative Variable Amount and funds are on deposit in the Equalization Account, subject to the last paragraph of this Section 4.03(f), the Servicer may instruct the Trustee in writing to withdraw funds from the Equalization Account and apply them as described in clause (i) above; provided, that (x) any such allocation to any Revolving Certificate or Purchased Interest shall not exceed an amount equal to the applicable Revolving Certificateholder's or Purchaser's pro rata share of such funds (prorating on the basis of such Revolving Certificateholder's or Purchaser's Ratable Principal Amount as a percentage of the sum of the Ratable Principal Amounts of the ARC Revolving Certificate and of all then-outstanding Investor Certificates and Purchased Interests) and (y) if any such allocation is made to any Revolving Certificate or Purchased page 29 36 Interest, then the remainder of such funds in the Equalization Account shall be transferred to the Set-Aside Account. No funds shall under any circumstances be withdrawn from the Equalization Account during a Look Back Period. If on any Business Day the Trustee has received (or is deemed to have received) a Confirmation Notice, the Servicer may instruct the Trustee in writing to withdraw the Segregated Cash (calculated prior to giving effect to the purchase of Receivables at the end of the related Look Back Period) from the Equalization Account and remit such funds to ARC on such Business Day. (g) Daily Allocation of Funds in the Master Collection Account Prior to the Liquidation Commencement Date. On each Business Day prior to the Liquidation Commencement Date, the Servicer shall allocate all collected funds (including Collections attributable to all Receivables, whether or not such Receivables are Eligible Receivables or constitute Excess Concentration Balances) then on deposit in the Master Collection Account (other than funds that are required to be returned to AmeriSource Persons (or their designees) pursuant to Section 3.02(b)) to the following items, in the following order of priority, each of which (except as expressly provided otherwise below) shall be paid on the next Settlement Date: First, to the Carrying Cost Account until the amount allocated to the Carrying Cost Account equals the Carrying Cost Reserve calculated pursuant to subsection (a); provided, that the amount allocated pursuant to this clause First to ordinary course expenses as described in Section 7.02(m) shall not exceed $50,000 in any Calculation Period, Second, to the Defeasance Account in respect of any Series of Investor Certificates or Purchased Interest as to which an Accumulation Period, Pay-Out Period or Prepayment Accumulation Period has commenced until the amount on deposit therein in respect of such Series or Purchased Interest equals: (x) in the case of a Series or Purchased Interest in an Accumulation Period, the Controlled Deposit Amount for such Series or Purchased Interest, (y) in the case of a Series or Purchased Interest in a Pay-Out Period, the outstanding principal amount of such Series or Purchased Interest, and (z) in the case of a Series in a Prepayment Accumulation Period, the amount of principal to be prepaid with respect to such Series or Purchased Interest, page 30 37 in an amount on each Business Day equal to the product of (i) the balance of collected funds on deposit in the Master Collection Account after allocation to clause First above and (ii) the applicable Defeasance Allocation Percentage, Third, to make payments on such Business Day (i) to the Revolving Certificateholders or Purchasers in respect of one or more of the Revolving Certificates or Purchased Interests to reduce the outstanding principal amount of such Revolving Certificates or Purchased Interests, to the extent such reduction is required or permitted by subsection (c) or (f) and (ii) under the circumstances described in subsections (c) and (f), to the Set-Aside Account; provided that if a Look Back Period exists, funds that would otherwise be remitted to ARC pursuant to this clause shall be deposited to the Equalization Account, Fourth, to fund the Equalization Account, to the extent such funding is required or permitted by subsection (c), Fifth, to the Defeasance Account in respect of any repayment or prepayment of any Series of Investor Certificates that is to occur during an Accumulation Period, a Pay-Out Period or a Prepayment Accumulation Period in an amount equal to any amounts (other than in respect of Carrying Costs and principal and amounts assigned to the following clause Sixth by the related Supplements) owed to the Holders of Investor Certificates of such Series in connection with the Program, Sixth, to the Defeasance Account in respect of any other amounts that are required to be paid as a result of repayments or prepayments of any Series of Investor Certificates or Purchased Interests during an Accumulation Period, a Pay-Out Period or a Prepayment Accumulation Period in accordance with the related Supplements, Seventh, to pay on the next Settlement Date (i) other accrued and unpaid expenses of the Program (including indemnification payments to be made pursuant to Section 7.03 and ordinary course expenses not covered by clause First above but excluding, during a Look Back Period, amounts owed to the Seller or AmeriSource, as Servicer), and (ii) all other amounts payable to Investor Certificateholders or Holders of a Purchased Interest pursuant to the related Supplements, and Eighth, to make payments to ARC on such Business Day in respect of the Residual Certificate; provided, however, that ARC may, from time to time, direct the Trustee to set aside all or any part of the funds to be paid pursuant to this clause Eighth in order to (i) pay all or part of the funds to the Holders of one or more Investor Revolving Certificates or Purchasers in order to effect the allocations described in subsection (c), or (ii) hold the funds in the Master Collection Account until the Trustee receives instructions from ARC concerning the application of the funds; and provided, further, that if a Look Back Period exists, funds that would page 31 38 otherwise would be remitted to ARC pursuant to this clause shall be deposited in the Equalization Account. If, on any day, the amount of Collections that is then allocated to the Carrying Cost Account exceeds the amount of Collections that are then required to be allocated to the Carrying Cost Account, the Servicer shall reallocate such Collections on such day to one or more of the obligations described above in clauses Second through Eighth in that order of priority. Collections in the Master Collection Account that are allocated to the priority described in clause Seventh shall be paid on the next Settlement Date; provided, however, that, if the Collections available on such Settlement Date to pay the amount required to be paid pursuant to clause Seventh are insufficient to pay the full amount thereof, the portion of such amount that is not paid on such Settlement Date shall be paid on each Business Day following such Settlement Date on which Collections are available to pay such remaining amount until it is paid in full. Payments to be made during a Pay-Out Period will commence on the Settlement Date that occurs in the month following the month in which the first day of the Pay-Out Period occurs, and will be made on each Settlement Date that occurs thereafter until the Investor Certificates that are being paid during such Pay-Out Period have been paid in full. During a Pay-Out Period, the Holders of the Series of Investor Certificates that are being paid out during such Pay-Out Period shall receive the amounts allocated to the Defeasance Account pursuant to clause Second in payment of the outstanding principal amount of such Series, pursuant to clause Fifth in payment of certain other amounts that are payable with respect to such Series, and pursuant to clause Sixth in payment of any other amounts that are payable with respect to such Series. On the Expected Final Payment Date with respect to any Series, all funds that have been deposited in the Principal Funding Account pursuant to Section 4.02(e) with respect to such Series prior to the end of the most recently ended Calculation Period shall be applied to the repayment of the principal amount of the Certificates of such Series. If, on any day prior to the Liquidation Commencement Date, funds on deposit in the Master Collection Account and available for allocation under any of clauses First through Seventh above are less than the amount of the obligations described in such clause, then the available Collections shall be allocated by the Servicer to the holders of such obligations pro rata according to the respective amounts of such obligations held by them (in the case of Investor Certificate holders and Purchasers, as weighted in accordance with any adjustment factors used in determining their respective Ratable Principal Amounts). All other obligations in lower priority categories shall remain unsatisfied until the obligations in the preceding category have been satisfied. page 32 39 (h) Allocation of Funds in the Master Collection Account During Liquidation. On the Liquidation Commencement Date, the outstanding principal amount of each of the then-issued and outstanding Revolving Certificates shall cease to fluctuate, and the outstanding principal amount of each Revolving Certificate and Purchased Interest shall be fixed as of such day (except as reduced by the application of Collections hereunder). On each Business Day on and after the Liquidation Commencement Date, the Servicer shall allocate all collected funds (including Collections attributable to all Receivables whether or not such Receivables are Eligible Receivables or constitute Excess Concentration Balances) then on deposit in the Master Collection Account (other than funds that are required to be returned to AmeriSource Persons (or their designees) or Lockbox Banks pursuant to Section 3.02(b)) as follows; provided, however, that funds so allocated shall be held in trust by the Trustee and, based upon and in accordance with the related Settlement Statement, paid to the relevant Certificateholders or other specified payees on the next Settlement Date (commencing with the first Settlement Date falling after the Calculation Period during which the Liquidation Period commences, except that distributions will be made pursuant to clause First below on each Settlement Date in the Liquidation Period): First, to pay accrued Carrying Costs; provided, however, that if AmeriSource is the Servicer, then the allocation to be made pursuant to this clause First to pay the Servicing Fee shall equal only the portion of the Servicing Fee that is to be paid to Persons other than an AmeriSource Person, Second, to make payments of the Principal Distribution Amounts with respect to (x) each outstanding Senior Class and Senior Purchased Interest (ratably in accordance with their respective Class Allocation Percentages) until (and only until) the outstanding principal amounts thereof have been repaid in full, (y) to each outstanding Subordinated Class and Subordinated Purchased Interest (ratably in accordance with their respective Class Allocation Percentages) until the outstanding principal amounts thereof have been repaid in full, and (z) the ARC Revolving Certificate until the outstanding principal amount thereof has been paid in full; provided that prior to the Accumulation Account Termination Date, amounts payable to ARC pursuant to this clause Second shall be deposited in the Accumulation Account, Third, to pay other Obligations owed to the Investor Certificateholders (as set forth in the related Supplement) or Purchasers (as set forth in the related PI Agreement), Fourth, to pay the accrued and unpaid Servicing Fee that has not been paid pursuant to clause First, and page 33 40 Fifth, to pay (x) other accrued and unpaid expenses of the Program (including indemnification payments to be made pursuant to Section 7.03, but excluding any such expenses that have been paid pursuant to clause Third) and (y) all other amounts payable to the Investor Certificateholders pursuant to the related Supplements (including, without limitation, any non-usage fees). If, on any day during the Liquidation Period, funds on deposit in the Master Collection Account and available for allocation under any of clauses First through Fifth above are less than the amount of the obligations described in such clause, then the available Collections shall be allocated by the Servicer to the holders of such obligations pro rata according to the respective amounts of such obligations held by them (in the case of Investor Certificateholders and Purchasers, as weighted in accordance with any adjustment factors used in determining their respective Ratable Principal Amounts and subject to the following paragraph of this Section). All other obligations in lower priority categories shall remain unsatisfied until the obligations in the preceding category have been satisfied. If, on any day during the Liquidation Period, the amount of funds on deposit in the Master Collection Account and available for allocation to Investor Certificateholders and Purchasers under any of clauses First through Third is less than the amount of the obligations to such Persons described in such clause, then the available Collections shall be allocated by the Servicer (1) to the Holders of such obligations relating to any Senior Class or Senior Purchased Interest until the same have been paid in full and (2) thereafter to the holders of such obligations relating to any Subordinated Class or Subordinated Purchased Interest. The allocation among holders within each of clauses (1) and (2) shall be made pro rata according to the respective amounts of such obligations held by them (as weighted in accordance with any adjustment factors used in determining their respective Ratable Principal Amounts). After the payment in full of all amounts described in priority clauses First through Fifth, ARC shall surrender the Residual Certificate to the Trustee for cancellation and the Trustee shall make the payments and other transfers required by Section 12.03 to ARC in respect of the ARC Revolving Certificate and the Residual Certificate. The Trust shall terminate pursuant to Section 12.01 after such payments and other transfers have been made to ARC in respect of the Residual Certificate. SECTION 4.04 Investment of Funds in Trust Accounts. On any day when funds on deposit in any Trust Account shall exceed $10,000 (after giving effect to the allocations of such funds required by this Article IV), and at such other times as investment is practicable, the Trustee, at the direction of the Servicer, shall invest and reinvest monies on deposit in such Trust Account (in the name of the Trustee) in such Eligible Investments as are specified in a notice from the Servicer, subject to the restrictions set forth hereinafter. The Trustee shall, at the direction of the Servicer, invest the funds in the Equalization Account, the Carrying Cost Account and all other Trust Accounts in Eligible Investments. All Eligible Investments made from funds in any Trust Account, and the interest, dividends and income page 34 41 received thereon and therefrom and the net proceeds realized on the sale thereof, shall be deposited in such Trust Account. The Trustee may liquidate an Eligible Investment prior to maturity if such liquidation would not result in a loss of all or part of the principal portion of such Eligible Investment or if, prior to the maturity of such Eligible Investment, a default occurs in the payment of principal, interest or any other amount with respect to such Eligible Investment. In the absence of negligence of the Trustee or willful misconduct by the Trustee, the Trustee shall have no liability in connection with investment losses incurred on Eligible Investments. It is intended for income tax purposes that the income earned through investment of funds in the Trust Accounts shall be treated as income of ARC. SECTION 4.05 Attachment of Trust Accounts. If the Trustee receives written notice that any account designated as a Trust Account has or will become subject to any writ, judgment, warrant of attachment, execution or similar process, the Trustee shall (notwithstanding any other provision of the Transaction Documents) promptly notify ARC, the Servicer and the Certificateholders thereof, and shall not deposit or transfer funds into such Trust Account but shall cause funds otherwise required to be deposited into such Trust Account to be held in another account pending distribution of such funds in the manner required by the Transaction Documents. ARTICLE V DISTRIBUTIONS AND REPORTS TO CERTIFICATEHOLDERS Payments on the Certificates and Purchased Interests shall be made as provided in Sections 5.01 and 5.02, except as otherwise provided in the applicable Supplement or PI Agreement. All payments made by the Trustee or the Paying Agent pursuant to Sections 5.01 and 5.02 shall be made based upon the information set forth in and pursuant to the applicable Daily Report or Settlement Statement delivered to the Trustee. SECTION 5.01 Distributions to Holders of Investor Certificates and Purchasers. (a) On each Settlement Date, the Paying Agent shall distribute, in respect of the period from the preceding Settlement Date to (but excluding) the then-current Settlement Date, to each Fixed Principal Certificateholder of record on the Report Date immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share (based on the aggregate amount of accrued and unpaid interest on the Fixed Principal Certificates held by such Certificateholder) of the amounts that (i) prior to the Liquidation Commencement Date, are allocated to the Carrying Cost Account with respect to Fixed Principal Yield pursuant to clause First of Section 4.03(g), and (ii) on and after the Liquidation Commencement Date, are on deposit in the Master Collection Account and allocated to Fixed Principal Yield pursuant to clause First of Section 4.03(h). page 35 42 (b)(i) On each Settlement Date that occurs during a Pay-Out Period in which one or more Series of Fixed Principal Certificates is/are being repaid or during the Liquidation Period (commencing with the first Settlement Date falling after the Calculation Period during which the Pay-Out Period or Liquidation Period commences), the Paying Agent shall distribute to each Holder of record of Fixed Principal Certificates of such Series as of the Report Date immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share (based on the aggregate outstanding principal amount of Fixed Principal Certificates held by such Certificateholder) of (A) in the case of Settlement Dates that occur during a Pay-Out Period, the amounts on deposit in the Defeasance Account that are allocated to the Principal Distribution Amount of the related Series pursuant to clause Second of Section 4.03(g) during the most recently ended Calculation Period, (B) in the case of Settlement Dates that occur during the Liquidation Period, the amounts on deposit in the Master Collection Account that are allocated to the Principal Distribution Amount of the related Series pursuant to clause Second of Section 4.03(h), and (C) in the case of the first Settlement Date on which such distributions are made in any Pay-Out Period, and provided that no Liquidation Event or Unmatured Liquidation Event has occurred and is continuing, in addition to the amount described in clause (A) or (B) above, as applicable, the amounts on deposit in the Principal Funding Account that are allocated to the Fixed Principal Invested Amount of the related Series. (ii) On the Expected Final Payment Date with respect to any Series of Fixed Principal Certificates, unless the Liquidation Period shall have commenced the Paying Agent shall distribute, to each Holder of record of Fixed Principal Certificates of such Series as of the Report Date immediately prior to the then-current Settlement Date such Fixed Principal Certificateholder's pro rata share (based on the aggregate outstanding principal amount of Fixed Principal Certificates held by such Certificateholder) of the amounts on deposit in the Principal Funding Account that are allocated to the Fixed Principal Invested Amount of the related Series. (iii) On each Settlement Date during the Revolving Period for any Series of Fixed Principal Certificates on which any full or partial prepayment of the principal amount of the Investor Certificates of that Series is to be made in accordance with the related Supplement, the Paying Agent shall distribute, to each Holder of record of Fixed Principal Certificates of such Series as of the Report Date immediately prior to the then-current Settlement Date such Fixed Principal Certificateholder's pro rata share (based on the aggregate outstanding principal amount of Fixed Principal Certificates held by such Certificateholder) of the amounts on deposit in the Defeasance Account that are allocated to the Fixed Principal Invested amount of, and any other amounts (including any Prepayment Premium) payable to, the related Series. page 36 43 (c) On each Settlement Date, the Paying Agent shall distribute to each Investor Revolving Certificateholder of record on the Report Date immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share of the sum of the amounts, if any, that (i) prior to the Liquidation Commencement Date, are allocated to the Carrying Cost Account with respect to Investor Revolving Yield payable on such Settlement Date, pursuant to clause First of Section 4.03(g), and (ii) on and after the Liquidation Commencement Date, are on deposit in the Master Collection Account and are allocated to Investor Revolving Yield payable on such Settlement Date pursuant to clause First of Section 4.03(h). Also, on each Business Day prior to the Liquidation Commencement Date, the Paying Agent shall distribute to each such Investor Revolving Certificateholder the amounts, if any, that are allocated to reduce the portion of the Investor Revolving Invested Amount represented by the related Investor Revolving Certificate pursuant to Section 4.03(c) or (f) and clause Third of Section 4.03(g) or are due as interest on the Investor Revolving Certificate in accordance with the applicable Supplement. (d) On each Settlement Date that occurs during a Pay-Out Period in which one or more Series of Investor Revolving Certificates is/are being repaid or during the Liquidation Period (commencing with the first Settlement Date falling after the Calculation Period during which the Pay-Out Period or Liquidation Period commences), the Paying Agent shall distribute to each Holder of record of Investor Revolving Certificates of such Series as of the Report Date immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share (based on the aggregate outstanding principal amount of Investor Revolving Certificates held by the Certificateholder) of (i) in the case of Settlement Dates that occur during a Pay-Out Period, the amounts on deposit in the Defeasance Account that are allocated to the Investor Revolving Invested Amount of the related Series pursuant to clause Second or Third of Section 4.03(g) during the most recently ended Calculation Period and (ii) in the case of Settlement Dates that occur during the Liquidation Period, the amounts on deposit in the Master Collection Account that are allocated to the Investor Revolving Invested Amount of the related Series pursuant to clause Second of Section 4.03(h). In addition, on each Business Day during such a Pay-Out Period, the Paying Agent shall distribute to each such Holder of Investor Revolving Certificates such amounts as shall be directed by the Servicer in the applicable Daily Report from amounts allocated to such Series as described in the preceding sentence. On each Business Day during such a Pay-Out Period or during the Liquidation Period, the Paying Agent shall distribute to each such holder such amounts as shall be directed by the Servicer in the Daily Report as being due on an Investor Revolving Certificate as interest pursuant to the related Supplement. (e) On each Settlement Date that occurs during a Pay-Out Period with respect to one or more Series of Investor Certificates, the Paying Agent shall distribute, in respect of the period from the preceding Settlement Date to (but excluding) the then-current Settlement Date, to each Holder of record of Investor Certificates of such Series as of the Report Date page 37 44 immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share (based on the aggregate outstanding amount of Obligations owed to the Investor Certificateholder, other than Obligations constituting the outstanding principal amount of or interest on the Investor Certificates, but giving effect to the priorities set forth in clauses Fifth and Sixth of Section 4.03(g)) of the amounts on deposit in the Defeasance Account allocable to the Obligations owed to such Investor Certificateholders (other than obligations in respect of principal of or interest on the Investor Certificates) pursuant to clauses Fifth and Sixth of Section 4.03(g). (f) On each Settlement Date that occurs during the Liquidation Period, the Paying Agent shall distribute, in respect of the period from the preceding Settlement Date to (but excluding) the then-current Settlement Date, to each Investor Certificateholder of record on the Report Date immediately prior to the then-current Settlement Date (other than as provided in Section 12.02 respecting a final distribution) its pro rata share (based on the aggregate outstanding amount of Obligations owed to such Investor Certificateholder pursuant to clauses Third and Fifth of Section 4.03(h)) of the amounts on deposit in the Master Collection Account allocable to the Obligations owed to Investor Certificateholders pursuant to clauses Third and Fifth of Section 4.03(h). (g) On each Settlement Date, the Paying Agent shall distribute to each Purchaser the amounts required pursuant to the applicable PI Agreement. (h) Each distribution to Investor Certificateholders shall be made by the Paying Agent (i) by wire transfer of immediately available funds on the date on which such distribution is required to be made, to an account at a bank or other entity having appropriate facilities therefor that the Person entitled thereto specifies in a written notice given to the Trustee on or prior to the Report Date immediately preceding the Settlement Date on which such payment is to be made, if such Person is the Holder of Investor Certificates in an aggregate Stated Amount or principal amount equal to or in excess of $1,000,000, and (ii) in all other cases, by check mailed to each such other Certificateholder at its address appearing in the Certificate Register, in either case without presentation or surrender of any Investor Certificate held by the Certificateholder or the making of any notation thereon; provided, however, that, except as expressly provided otherwise in Section 6.04, the final principal payment to be made on any Certificate in connection with the retirement of a Series of Certificates will be made to each Holder of a Certificate of such Series only upon presentation and surrender by such Holder of each of its Certificates of such Series at the office or offices specified in a notice of such final principal payment that the Trustee delivers or causes to be delivered to each Holder not less than 15 Business Days prior to such final principal payment date. (i) On the first Settlement Date that occurs after the Calculation Period during which the Liquidation Commencement Date occurs, the Paying Agent shall distribute to each Certificateholder and Purchaser of record on the Record Date immediately prior to such page 38 45 Settlement Date, its pro rata share (based on the Ratable Principal Amount of such Certificateholder or Purchaser) of amounts on deposit in the Set-Aside Account as of the Liquidation Commencement Date in repayment of the principal amount owed to such Certificateholder; provided, however, that (i) such pro rata shares shall be calculated by including in the aggregate amount to be distributed amounts that were distributed to any Holder of an Investor Revolving Certificate or Purchaser in connection with the deposit of such amounts into the Set-Aside Account and (ii) the amounts previously so distributed to such Holders or Purchasers shall be deducted from the amounts distributable to them pursuant to this paragraph (i). SECTION 5.02 Distributions on the ARC Revolving Certificate and the Residual Certificate. (a) On each Business Day prior to the Liquidation Commencement Date, the Paying Agent shall distribute to ARC in respect of the ARC Revolving Certificate the amount to be paid, if any, to reduce the ARC Revolving Amount pursuant to clause Third of Section 4.03(g); provided, that if a Look Back Period exists, amounts otherwise payable to ARC pursuant to this Section shall be deposited in the Equalization Account. (b) On each Business Day prior to the Liquidation Commencement Date, the Paying Agent shall distribute to ARC in respect of the Residual Certificate the amount payable to ARC in respect of the Residual Certificate pursuant to clause Eighth of Section 4.03(g) to the extent that funds are available to make such payments; provided, that if a Look Back Period exists, amounts otherwise payable to ARC pursuant to this Section shall be deposited in the Equalization Account. (c) Distributions to ARC in respect of the ARC Revolving Certificate and the Residual Certificate hereunder shall be made by the Paying Agent on the date on which the distribution is required to be made by wire transfer of immediately available funds, no later than 2:00 p. m., New York City time (or later, to the extent delayed by any circumstance outside of the Paying Agent's reasonable control), on the date on which the distribution is required to be made, to an account at a bank or other entity having appropriate facilities therefor that ARC specifies in a written notice given to the Trustee on or prior to the Report Date immediately preceding the Settlement Date on which the payment is to be made. SECTION 5.03 Information to Certificateholders. (a) Monthly Report. Within seven days after each Settlement Date, the Paying Agent, on behalf of the Trustee, shall send to each Investor Certificateholder a copy of a monthly report prepared by the Servicer in the form of Exhibit F, and shall send to the Applicable Rating Agencies without any request therefor by any of them, each Settlement Statement by first-class mail, postage prepaid, to the address of such Investor Certificateholder that is indicated in the Certificate Register. page 39 46 (b) Annual Tax Information. On or before February 15, of each calendar year, beginning with calendar year 1995, the Servicer, on behalf of the Trustee, shall furnish or cause to be furnished to each Person who at any time during the preceding calendar year was an Investor Certificateholder the information for the preceding calendar year, or the applicable portion thereof during which the Person was a Holder of record of an Investor Certificate, as is required to be provided by an issuer of indebtedness under the Internal Revenue Code to the Holders of the issuer's indebtedness and such other customary information as is necessary to enable the Investor Certificateholders to prepare their federal income tax returns. Such obligation of the Servicer shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Paying Agent to the Investor Certificateholder pursuant to this Agreement or any requirements of the Internal Revenue Code as from time to time in effect. Notwithstanding anything to the contrary contained in this Agreement, the Trustee shall, to the extent required by applicable law, from time to time furnish to the appropriate Persons a Form 1099-INT within the period required by applicable law. SECTION 5.04 Notice of Early Liquidation at Seller Election. If ARC shall receive a notice from a Seller, pursuant to Section 8.1 of the Purchase Agreement, to the effect that the Seller desires to terminate its agreement to sell Receivables to ARC, ARC shall deliver a copy of the notice to the Trustee, and the Trustee shall deliver a copy to each Investor Certificateholder and to the Applicable Rating Agencies, as soon as practicable, which notice shall become effective at the time, and subject to the conditions, specified in the notice and in Section 8.1 of the Purchase Agreement. ARTICLE VI THE CERTIFICATES SECTION 6.01 The Certificates. The Investor Certificates in each Series shall be substantially in the forms contemplated by the Supplements pursuant to which the Investor Certificates are issued, and the ARC Revolving Certificate and the Residual Certificate shall be substantially in the forms of Exhibit G and Exhibit H, respectively. Upon issuance, all Certificates shall be executed and delivered by ARC to the Trustee for authentication and redelivery as provided in Section 6.02. Except to the extent provided otherwise in an applicable Supplement, Investor Certificates shall be issued in minimum denominations of $1,000,000 and in integral multiples of $1,000,000. Each Series of Fixed Principal Certificates initially shall be issued as one or more Series of Fixed Principal Certificates in an aggregate original principal amount equal to the Fixed Principal Initial Invested Amount for the Series. Each Series of Investor Revolving Certificates initially shall be issued as one or more Series of Investor Revolving Certificates in an aggregate original principal amount equal to the Investor Revolving Initial Invested Amount for the Series and with an initial aggregate Stated Amount in the amount set out in the related Supplement. The ARC page 40 47 Revolving Certificate and the Residual Certificate each shall be a single certificate. The Investor Revolving Certificates and the ARC Revolving Certificate together shall represent the Revolving Certificate Interest. The Residual Certificate shall represent the Residual Interest. Each Certificate issued as a Definitive Certificate shall be executed by manual or facsimile signature on behalf of ARC by its President or any Vice President or by any attorney-in-fact duly authorized to execute the Definitive Certificate on behalf of any such officer. The Definitive Certificates shall be authenticated on behalf of the Trust by manual signature of a duly authorized signatory of the Trustee. Definitive Certificates bearing the manual or facsimile signature of the individual who was, at the time when the signature was affixed, authorized to sign on behalf of ARC or the Trust (as applicable) shall be valid and binding obligations of the Trust, notwithstanding that the individuals or any of them ceased to be so authorized prior to the authentication and delivery of the Definitive Certificates or does not hold such office on the date of issuance of such Definitive Certificates. No Definitive Certificates shall be entitled to any benefit under this Agreement, or be valid for any purpose, unless there appears on the Definitive Certificate a certificate of authentication substantially in the form provided for herein executed by or on behalf of the Trustee by the manual signature of a duly authorized signatory, and the certificate of authentication upon any Definitive Certificate shall be conclusive evidence, and the only evidence, that the Definitive Certificate has been duly authenticated and delivered hereunder and is entitled to the benefits of this Agreement. Except as otherwise provided in the applicable Supplement, all Definitive Certificates shall be dated the date of their authentication. As provided in any Supplement, Investor Certificates of any Series may be issued and sold pursuant to an exemption from the Securities Act. Any Series sold pursuant to Rule 144A, Regulation S or another exemption under the Securities Act, including Rule 144 (as enacted under the Securities Act), may be delivered in book-entry form as provided in Sections 6.12 and 6.13. SECTION 6.02 Authentication of Certificates. (a) Contemporaneously with the assignment and transfer of the Receivables and the other Trust Assets to the Trust, the Trustee shall authenticate and deliver the ARC Revolving Certificate and the Residual Certificate to ARC. (b) On each Subsequent Issuance Date, upon the order of ARC, the Trustee shall authenticate and deliver to ARC the Series of Certificates that are to be issued originally on such Subsequent Issuance Date (the "Subsequent Issuance Investor Certificates") pursuant to the applicable Supplement. Upon the issuance of the Subsequent Issuance Investor Certificates on each Subsequent Issuance Date, the ARC Revolving Amount automatically shall be reduced by an amount equal to the portion of the ARC Revolving Amount allocated to the new Series pursuant to the related Supplement. The Subsequent Issuance Investor Certificates shall be duly authenticated by or on behalf of the Trustee, in authorized page 41 48 denominations equal, in the aggregate, to (i) the portion of the Fixed Principal Invested Amount that is attributable to the Series, in the case of a Series of Fixed Principal Certificates or (ii) the aggregate Stated Amounts of the Certificates, in the case of a Series of Investor Revolving Certificates. SECTION 6.03 Registration of Transfer and Exchange of Certificates. (a) The Trustee, as agent for ARC, shall keep, or shall cause to be kept, at the office or agency to be maintained in accordance with the provisions of Section 11.16, a register in written form or capable of being converted into written form within a reasonable time (the "Certificate Register") in which, subject to such reasonable regulations as it may prescribe, a transfer agent and registrar (which may be the Trustee) (the "Transfer Agent and Registrar") shall provide for the registration of the Certificates and of transfers and exchanges of the Certificates as herein provided. ARC hereby appoints the Trustee as the initial Transfer Agent and Registrar. ARC, or the Trustee as agent for ARC, may revoke the appointment as Transfer Agent and Registrar and remove the then-acting Transfer Agent and Registrar if the Trustee or ARC (as applicable) determines in its sole discretion that the then-acting Transfer Agent and Registrar has failed to perform its obligations under this Agreement in any material respect. The then-acting Transfer Agent and Registrar shall be permitted to resign as Transfer Agent and Registrar upon 30 days' prior written notice to the Trustee, ARC and the Servicer; provided, however, that such resignation shall not be effective and the then-acting Transfer Agent and Registrar shall continue to perform its duties as Transfer Agent and Registrar until the Trustee has appointed a successor Transfer Agent and Registrar reasonably acceptable to ARC and the Person so appointed has given the Trustee written notice that it accepts the appointment. The provisions of Sections 11.01 through 11.05 shall apply to the Transfer Agent and Registrar as if all references to "the Trustee" in the applicable provisions of Sections 11.01 through 11.05 were references to the Transfer Agent and Registrar. It is intended that the registration of Certificates that is described in this subsection comply with the registration requirements contained in Section 163 of the Internal Revenue Code. (b) In connection with each issuance of a Series of Certificates, ARC will determine whether such Certificates may be purchased by employee benefit plans (as defined in ERISA) and shall cause the Certificates evidencing the Series to bear a legend describing any restrictions on the purchases. (c) No transfer of all or any part of the ARC Revolving Certificate shall be made unless (i) ARC shall have given the Applicable Rating Agencies and the Trustee prior written notice of the proposed transfer, (ii) the Rating Agency Condition shall have been satisfied in connection with the proposed transfer and (iii) ARC shall have delivered to the Trustee a Tax Opinion with respect to such transfer. page 42 49 (d) ARC shall not transfer, assign, exchange or otherwise convey or pledge, hypothecate or otherwise grant a security interest in the Residual Certificate or any interest represented thereby, and any attempt to transfer, assign, exchange, convey, pledge, hypothecate or grant a security interest in the Residual Certificate or any interest represented thereby shall be void and of no effect. (e) Subject to the requirements of subsection (b) and, if applicable, subsection (c) having been fulfilled, upon surrender for registration of transfer of any Certificate, and, in the case of Investor Certificates, at any office or agency of the Transfer Agent and Registrar maintained for such purpose, ARC shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Certificates of the appropriate Class and Series that (i) in the case of the Fixed Principal Certificates, are in authorized denominations of like aggregate fractional interest in the Fixed Principal Interest and (ii) in the case of the Investor Revolving Certificates, are in authorized denominations of like aggregate fractional interest in the Revolving Certificate Interest, and, in the case of each Investor Certificate, that bear numbers that are not contemporaneously outstanding. At the option of an Investor Certificateholder, its Investor Certificates may be exchanged for other Investor Certificates of the same Class and Series (and bearing the same interest rate as the Investor Certificate surrendered for registration of exchange) of authorized denominations of like aggregate fractional interests in the Fixed Principal Interest or the Revolving Certificate Interest (as applicable) and bearing numbers that are not contemporaneously outstanding, upon surrender of the Investor Certificates to be exchanged at any such office or agency. Whenever any Investor Certificates are so surrendered for exchange, ARC shall execute, and the Trustee shall authenticate and deliver, the appropriate number of Investor Certificates of the Class and Series that the Investor Certificateholder making the exchange is entitled to receive. Every Investor Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in a form satisfactory to the Trustee or the Transfer Agent and Registrar duly executed by the Certificateholder thereof or his attorney-in-fact duly authorized in a writing delivered to the Transfer Agent and Registrar. No service charge shall be made for any registration of transfer or exchange of Certificates, but the Transfer Agent and Registrar or any co-transfer agent and co-registrar may require the Certificateholder to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Investor Certificates. All Certificates surrendered for registration of transfer and exchange shall be cancelled and disposed of in a manner satisfactory to the Trustee. (f) Certificates may be surrendered for registration of transfer or exchange at the office of the Transfer Agent and Registrar designated in Section 13.06. page 43 50 (g) Transfers of Book-Entry Certificates, in whole or in part, issued in accordance with Section 6.12 and the Series Supplements shall be made in accordance with this subsection. Subject to clauses (i) through (iv) below, transfers of a Book-Entry Certificate shall be limited to transfers of the Book-Entry Certificate in whole, but not in part, to nominees of the Clearing Agency or to a successor of the Clearing Agency or such successor's nominee. (i) For transfers within a Regulation S Temporary Book-Entry Certificate, if the Certificateholder of a Regulation S Temporary Book-Entry Certificate wishes at any time to transfer their interest to a Person who wishes to take delivery thereof in the form of a beneficial interest in the Regulation S Temporary Book-Entry Certificate, the transfer may be effected in accordance with this clause. Upon delivery (A) by a Certificateholder of an interest in a Regulation S Temporary Book-Entry Certificate to Euroclear or Cedel, as the case may be, of a certification in the form set forth in Exhibit I (the "Owner Regulation S Certification"), (B) by the transferee of the beneficial interest in the Regulation S Temporary Book-Entry Certificate to Euroclear or Cedel, as the case may be, of a written certification in the form set forth in Exhibit J (the "Transferee Regulation S Certification"), and (C) by Euroclear or Cedel, as the case may be, to the Transfer Agent and Registrar of a certification in the form set forth in Exhibit K (the "Depositary Regulation S Certification"), the Transfer Agent and Registrar may direct either Euroclear or Cedel, as the case may be, to reflect on its records the transfer of a beneficial interest in the Regulation S Temporary Book-Entry Certificate from the Certificateholder providing the Owner Regulation S Certification to the Person providing the Transferee Regulation S Certification. (ii) For transfer of an interest in an Unrestricted Book-Entry Certificate for an interest in the 144A Book-Entry Certificate, if the Certificateholder of a beneficial interest in Unrestricted Book-Entry Certificate deposited with the Clearing Agency wishes at any time to exchange its interest in the Unrestricted Book-Entry Certificate, or to transfer its interest in the Unrestricted Book-Entry Certificate to a Person who wishes to take delivery thereof in the form of an interest in the 144A Book-Entry Certificate, the Certificateholder may, subject to the rules and procedures of Euroclear or Cedel and the Clearing Agency, as the case may be, give directions for the Transfer Agent and Registrar to exchange or cause the exchange or transfer or cause the transfer of the interest for an equivalent beneficial interest in the 144A Book-Entry Certificate. Upon receipt by the Transfer Agent and Registrar of instructions from Euroclear or Cedel (based on instructions from a Member Organization) or from a Clearing Agency Participant, as applicable, or the Clearing Agency, as the case may be, directing the Transfer Agent and Registrar to credit or cause to be credited a beneficial interest in the 144A Book-Entry Certificate equal to the beneficial interest in the Unrestricted Book-Entry Certificate to be exchanged or transferred (such instructions to contain information regarding the Clearing Agency page 44 51 Participant account to be credited with the increase, and, with respect to an exchange or transfer of an interest in the Unrestricted Book-Entry Certificate, information regarding the Clearing Agency Participant account to be debited with the decrease), the Transfer Agent and Registrar shall instruct the Clearing Agency to reduce the Unrestricted Book-Entry Certificate by the aggregate principal amount of the beneficial interest in the Unrestricted Book-Entry Certificate to be exchanged or transferred, and the Transfer Agent shall instruct the Clearing Agency, concurrently with the reduction, to increase the principal amount of the 144A Book-Entry Certificate by the aggregate principal amount of the beneficial interest in the Unrestricted Book-Entry Certificate to be so exchanged or transferred, and to credit or cause to be credited to the account of the Person specified in the instructions a beneficial interest in the 144A Book-Entry Certificate equal to the reduction in the principal amount of the Unrestricted Book-Entry Certificate. (iii) For transfers of an interest in the 144A Book-Entry Certificate for an interest in the Regulation S Book-Entry Certificate, if the Certificateholder of a beneficial interest in the 144A Book-Entry Certificate wishes at any time to exchange its interest in the 144A Book-Entry Certificate for an interest in a Regulation S Book-Entry Certificate, or to transfer its interest in the 144A Book-Entry Certificate to a Person who wishes to take delivery thereof in the form of an interest in the Regulation S Book- Entry Certificate, the Certificateholder may, subject to the rules and procedures of the Clearing Agency, give directions for the Transfer Agent and Registrar to exchange or cause the exchange or transfer or cause the transfer of the interest for an equivalent beneficial interest in the Regulation S Book-Entry Certificate. Upon receipt by the Transfer Agent and Registrar of (A) instructions given in accordance with the Clearing Agency's procedures from a Clearing Agency Participant directing the Transfer Agent and Registrar to credit or cause to be credited a beneficial interest in the Regulation S Book-Entry Certificate in an amount equal to the beneficial interest in the 144A Book-Entry Certificate to be exchanged or transferred, (B) a written order given in accordance with the Clearing Agency's procedures containing information regarding the account of the depositaries for Euroclear or Cedel or another Clearing Agency Participant, as the case may be, to be credited with the increase and the name of the account and (C) a certificate in the form of Exhibit L attached hereto given by the Certificateholder of the beneficial interest, the Transfer Agent and Registrar shall instruct the Clearing Agency to reduce the 144A Book-Entry Certificate by the aggregate principal amount of the beneficial interest in the 144A Book-Entry Certificate to be so exchanged or transferred and the Transfer Agent and Registrar shall instruct the Clearing Agency, concurrently with the reduction, to increase the principal amount of the Regulation S Book-Entry Certificate by the aggregate principal amount of the beneficial interest in the 144A Book-Entry Certificate to be so exchanged or transferred, and to credit or cause to be credited to the account of the Person specified in the instructions a beneficial interest page 45 52 in the Regulation S Book-Entry Certificate equal to the reduction in the principal amount of the 144A Book-Entry Certificate. (iv) Notwithstanding any other provisions of this section, a placement agent for the Investor Certificates may exchange beneficial interests in the Regulation S Temporary Book-Entry Certificate held by it for interests in the 144A Book-Entry Certificate only after delivery by the placement agent of instructions for the exchange substantially in the form of Exhibit M. Upon receipt of the instructions provided in the preceding sentence, the Transfer Agent and Registrar shall instruct the Clearing Agency to reduce the principal amount of the Regulation S Temporary Book-Entry Certificate to be so transferred and shall instruct the Clearing Agency to increase the principal amount of the 144A Book-Entry Certificate and credit or cause to be credited to the account of the placement agent a beneficial interest in the 144A Book-Entry Certificate having a principal amount equal to the amount by which the principal amount of the Regulation S Temporary Book-Entry Certificate was reduced upon the transfer pursuant to the instructions provided in the first sentence of this subclause. (v) In the event that a Book-Entry Certificate is exchanged for a Definitive Certificate, the Certificates may be exchanged or transferred for one another only in accordance with such procedures as are substantially consistent with the provisions of clauses (i) through (iii) above (including the certification requirements intended to ensure that the exchanges or transfers comply with Rule 144 or Regulation S under the Securities Act, as the case may be) and as may be from time to time adopted by the Trustee. (h) Certificateholders holding Definitive Certificates shall not sell, transfer or otherwise dispose of the Certificates unless the sale is to a transferee to whom the sale, transfer or disposition is being made pursuant to an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws and, prior to the proposed sale, transfer or disposition, the Certificateholder and the proposed transferee each provide the Trustee and ARC with representations and, if requested by the Trustee or ARC, an opinion of counsel (which may be in-house counsel), in each case satisfactory in form and substance to the Trustee, concerning the proposed sale, transfer or disposition and the availability of the exemption. (i) Certificateholders shall not use any means of general solicitation or distribution in connection with the marketing, sale, transfer or other disposition of any Certificates. None of the Certificates may be issued, sold, transferred or otherwise disposed of in a transaction registered under the Securities Act. The Certificates shall bear restrictive legends substantially as set forth in Exhibit N. page 46 53 SECTION 6.04 Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificate is surrendered to the Transfer Agent and Registrar, or the Transfer Agent and Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Certificate and (b) there is delivered to the Transfer Agent and Registrar and the Trustee such security or indemnity as may be required by them and ARC to hold each of them, the Trust and ARC harmless, then, in the absence of notice to the Trustee that such Certificate has been acquired by a bona fide purchaser, ARC shall execute and, upon the request of ARC, the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like Class, Series, tenor, terms and principal amount and bearing a number that is not contemporaneously outstanding. In connection with the issuance of any new Certificate under this section, the Trustee or the Transfer Agent and Registrar may require the payment by the Certificateholder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the reasonable fees and expenses of the Trustee and Transfer Agent and Registrar) connected therewith. Any duplicate Certificate issued pursuant to this section shall constitute conclusive and indefeasible evidence of ownership of an interest in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be enforceable by anyone, and shall be entitled to all the benefits of this Agreement equally and proportionately with any and all Certificates of the same Class and Series that are duly issued hereunder. SECTION 6.05 Persons Deemed Owners. Prior to due presentation of a Certificate for registration of transfer, ARC, the Trustee, the Paying Agent, the Transfer Agent and Registrar and any agent of any of them may treat the Person in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving distributions pursuant to Sections 5.01 and 5.02 and for all other purposes whatsoever, and none of ARC, the Trustee, the Paying Agent, the Transfer Agent and Registrar or any agent of any of them shall be affected by any notice to the contrary; provided, however, that, in determining whether the Holders of the requisite principal amount or Stated Amount (as applicable) of Certificates or Purchased Interests have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Certificates and Purchased Interests owned by ARC, the Servicer or any Affiliate thereof shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Certificates and Purchased Interests that the Trustee knows to be so owned shall be so disregarded. Certificates and Purchased Interests so owned that have been pledged in good faith shall not be disregarded and may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Certificates or Purchased Interests and that the pledgee is not ARC, the Servicer or an Affiliate thereof. SECTION 6.06 Appointment of Paying Agent. The Paying Agent initially shall be the Trustee. ARC hereby appoints the Paying Agent as its agent to make distributions to Certificateholders and Purchasers from the Master Collection Account pursuant to Sections page 47 54 5.01 and 5.02 and to report the amounts of the distributions to the Trustee. Any Paying Agent shall have the revocable power to withdraw funds from the Master Collection Account for the purpose of making the distributions. The Trustee or, at any time when the Trustee is also the Paying Agent, ARC may revoke such power of the Paying Agent and remove the Paying Agent if the Trustee or ARC (as applicable) determines in its sole discretion that the Paying Agent shall have failed to perform its obligations under this Agreement in any material respect. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' prior written notice to the Trustee, ARC, the Servicer and the Applicable Rating Agencies. Any resignation or removal of the Paying Agent, and appointment of a successor Paying Agent, shall not become effective until the appointment has been accepted by the successor Paying Agent. If no successor Paying Agent shall have been appointed and shall have accepted appointment within 30 days after the giving of the notice of resignation, the resigning Paying Agent may petition any court of competent jurisdiction to appoint a successor Paying Agent. In the event that the Trustee shall no longer be the Paying Agent, the Trustee shall appoint a successor Paying Agent (which shall be a bank or trust company) reasonably acceptable to ARC, which appointment shall be effective on the date on which the Person so appointed gives the Trustee written notice that it accepts the appointment. The Trustee shall cause the successor Paying Agent or any additional Paying Agent appointed by the Trustee to execute and deliver to the Trustee an instrument in which it shall agree with the Trustee that, as Paying Agent, it will hold all sums, if any, held for payment to the Certificateholders and Purchasers in trust for the benefit of the Certificateholders and Purchasers entitled thereto until the sums shall be paid to the Certificateholders and Purchasers. The Paying Agent shall return all unclaimed funds to the Trustee, and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Trustee. The provisions of Sections 11.01 through 11.05 shall apply to the Paying Agent as if all references in the applicable provisions thereof to "the Trustee" were references to the Paying Agent. SECTION 6.07 Access to List of Certificateholders' Names and Addresses. The Trustee will furnish or cause to be furnished by the Transfer Agent and Registrar to ARC, the Servicer, the Seller or the Paying Agent, within two Business Days after receipt by the Trustee of a written request therefor from the Servicer or the Paying Agent, a list in the form the Servicer or the Paying Agent may reasonably require of the names and addresses of the Certificateholders as of the most recent Settlement Date. If any Holder or group of Holders of Investor Certificates in any Series evidencing not less than 10% of the aggregate unpaid principal amount of the Series (the "Applicant") applies in writing to the Trustee, and the application states that the Applicant desires to communicate with other Certificateholders with respect to their rights under this Agreement, any Supplement or the Certificates and is accompanied by a copy of the communication that the Applicant proposes to transmit, then the Trustee, after having been adequately indemnified by the Applicant for its costs and expenses, shall afford or shall cause the Transfer Agent and Registrar to afford the Applicant access during normal business hours to the most recent list of Certificateholders held by the Trustee, within five Business Days after the receipt of the application and indemnification. page 48 55 The list shall be as of a date no more than 45 days prior to the date of receipt of the Applicant's request. Every Certificateholder, by receiving and holding a Certificate, agrees with the Trustee that neither the Trustee, the Transfer Agent and Registrar, ARC, the Servicer, the Seller nor any of their respective agents shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Certificateholders hereunder, regardless of the sources from which the information was derived. SECTION 6.08 Authenticating Agent. (a) The Trustee may appoint one or more authenticating agents with respect to the Certificates that shall be authorized to act on behalf of the Trustee in authenticating the Certificates in connection with the issuance, delivery, registration of transfer, exchange or repayment of the Certificates. Either the Trustee or the authenticating agent, if any, then appointed and acting on behalf of the Trustee shall authenticate the Certificates. Whenever reference is made in this Agreement to the authentication of Certificates by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication on behalf of the Trustee by an authenticating agent and a certificate of authentication executed on behalf of the Trustee by an authenticating agent. Each authenticating agent must be acceptable to ARC. (b) Any institution succeeding to the corporate agency business of an authenticating agent shall continue to be an authenticating agent without the execution or filing of any document or any further act on the part of the Trustee, the authenticating agent or any other Person. (c) An authenticating agent may at any time resign by giving written notice of resignation to the Trustee and ARC. The Trustee may at any time terminate the agency of an authenticating agent by giving notice of termination to the authenticating agent and ARC. Upon receiving a notice of resignation or upon a termination, or in case at any time an authenticating agent shall cease to be acceptable to the Trustee or ARC, the Trustee may promptly appoint a successor authenticating agent. Any successor authenticating agent, upon acceptance of its appointment, shall become vested with all the rights, powers and duties of its predecessor, with like effect as if originally named as an authenticating agent. No successor authenticating agent shall be appointed unless acceptable to the Trustee and ARC. (d) The Servicer agrees to pay to each authenticating agent (if any), as an expense of the Servicer paid out of the Servicing Fee, reasonable compensation from time to time for services performed under this section. (e) The provisions of Sections 11.01, 11.02 and 11.03 shall be applicable to any authenticating agent as if the references in the applicable provisions thereof to "the Trustee" were references to the authenticating agent. page 49 56 (f) Pursuant to an appointment made under this section, the Certificates may have endorsed thereon, in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication in substantially the following form: "This is one of the Certificates described in the Supplement dated as of __________ ___, 199_. Manufacturers and Traders Trust Company, as Trustee By: -------------------------- as Authenticating Agent for the Trustee, By: -------------------------- Authorized Officer." SECTION 6.09 Tax Treatment. It is the intent of ARC and the Investor Certificateholders that, for purposes of Federal, state and local income and franchise taxes and for other taxes measured by or imposed on income, the Investor Certificates will be treated as evidence of indebtedness secured by the Trust Assets and the Trust will not be characterized as an association taxable as a corporation. ARC, by entering into this Agreement, and each Investor Certificateholder, by its acceptance of its Investor Certificate, agree to treat the Investor Certificates for purposes of Federal, state and local income and franchise taxes and for any other taxes measured by or imposed on income as indebtedness. The provisions of this Agreement and all related Transaction Documents shall be construed to further these intentions of the parties. In accordance with the foregoing, ARC agrees that it will report its income for purposes of Federal, state and local income or franchise taxes, or for purposes of any other taxes measured by or imposed on income, on the basis that it is the owner of the Receivables. Except to the extent otherwise required by applicable law or any Governmental Authority, or to the extent the Trustee is otherwise advised by counsel, the Trustee hereby agrees to treat the Trust as a security device only, and shall not file tax returns or obtain an employer identification number on behalf of the Trust. SECTION 6.10 Issuance of Additional Series of Certificates and Sales of Purchased Interests. (a) ARC may from time to time direct the Trustee to issue to it one or more Classes of any newly issued Series of Investor Certificates and either (i) allocate to the Series a portion of the ARC Revolving Amount or (ii) deposit an amount of funds equal to the initial Invested Amount of the Certificates to the Defeasance Account (an "Unfunded Certificate") or (iii) take a combination of the actions specified in clauses (i) and (ii); provided, that the sum of the portion of the ARC Revolving Amount that is transferred under clause (i) and the amount to be paid to the Defeasance Account under clause (ii) equals the page 50 57 Initial Invested Amount of the Investor Certificates delivered to ARC (any such event under clauses (i), (ii) or (iii), a "New Issuance"). In addition, to the extent permitted for any Series of Investor Certificates as specified in the related Supplement, the Investor Certificateholders of the Series may tender their Investor Certificates to the Trustee, and ARC may allocate a portion of the ARC Revolving Amount pursuant to the terms and conditions set forth in the Supplement, in exchange for one or more newly issued Series of Investor Certificates (an "Investor Exchange"). New Issuances and Investor Exchanges collectively are referred to as "Subsequent Issuances". (b) ARC may direct the Trustee to effect a Subsequent Issuance by notifying the Trustee, in writing, at least five Business Days (or such shorter period as shall be acceptable to the Trustee) in advance (a "Subsequent Issuance Notice") of the date upon which the Subsequent Issuance is to occur (a "Subsequent Issuance Date"). Any Subsequent Issuance Notice shall state the designation of any Series to be issued on the Subsequent Issuance Date and, with respect to each Class or Series: (i) its Initial Invested Amount (or the method for calculating the Initial Invested Amount), (ii) its Certificate Rate (or the method for allocating interest payments or other cash flows to the Series), if any, and (iii) the Enhancement Provider, if any, with respect to the Series. (c) On the Subsequent Issuance Date, ARC shall deliver to the Trustee for authentication under Section 6.02, and the Trustee shall authenticate and deliver any such Class or Classes of Series of Investor Certificates only upon delivery to it of the following: (i) a Supplement satisfying the criteria set forth in subsection (d) and in form reasonably satisfactory to the Trustee executed by ARC and the Servicer and specifying the Principal Terms of the Series, (ii) the applicable Enhancement, if any, (iii) the agreement, if any, pursuant to which the Enhancement Provider agrees to provide the Enhancement, if any, (iv) a Tax Opinion with respect to such Subsequent Issuance, (v) evidence that the Rating Agency Condition has been satisfied with respect to such Subsequent Issuance, (vi) an Officer's Certificate of ARC that on the Subsequent Issuance Date, after giving effect to the Subsequent Issuance (and the repayment, on the date of the Subsequent Issuance Date, of any existing Investor Certificates with funds (including proceeds of sale of the new Series) on deposit in the Defeasance Account), any requirements set out in the Supplement with respect to any then- outstanding Series page 51 58 with respect to the amount of Certificates that may not, by their terms, be transferred has been satisfied, (vii) an Officer's Certificate of the Servicer stating that no Liquidation Event, Unmatured Liquidation Event or Pay-Out Event has occurred and is continuing and that the Subsequent Issuance is not reasonably expected to result in a Liquidation Event or Pay-Out Event at any time in the future, (viii) in the case of an Investor Exchange, any Investor Certificates that are being exchanged in connection therewith, (ix) any other documents, certificates and Opinions of Counsel as may be required by the applicable Supplement, and (x) an Officer's Certificate of the Servicer to the effect that all conditions specified in clauses (i) through (ix) have been satisfied. Upon satisfaction of the conditions, the Trustee shall cancel any applicable Investor Certificates and issue, as provided above, the new Series of Investor Certificates dated the Subsequent Issuance Date. Any such Series of Investor Certificates shall be substantially in the form specified in the related Supplement and shall bear, upon its face, the designation for the Series to which it belongs, as selected by ARC. There is no limit to the number of Subsequent Issuances that may be performed under this Agreement. (d) In conjunction with a Subsequent Issuance, the parties hereto shall execute a Supplement, which shall specify the relevant terms with respect to any newly issued Series of Investor Certificates, which may include: (i) its name or designation, (ii) the Initial Invested Amount or the method of calculating the Initial Invested Amount, (iii) the Certificate Rate (or formula for the determination thereof), (iv) the Subsequent Issuance Date, (v) the rating agency or agencies rating the Series, (vi) the name of the Clearing Agency, if any, (vii) the portion of the ARC Revolving Amount that has been transferred to the Holders of the Series pursuant to the Subsequent Issuance, (viii) the interest payment date or dates and the date or dates from which interest shall accrue, (ix) the method of allocating Collections with respect to Receivables for the Series and, if applicable, with respect to any Paired Series and the method by which the principal amount of Investor Certificates of the Series shall amortize or accrete and the method for allocating charge-offs, (x) the names of any accounts to be used by the Series and the terms governing the operation of any such account, (xi) the Ratable Principal Amount of the Series and related terms, (xii) the Expected Final Payment Date, (xiii) the terms of any Enhancement with respect to the Series, (xiv) the Enhancement Provider, if applicable, (xv) the base rate applicable to the Series, (xvi) the terms on which the Certificates of the Series may be repurchased or remarketed to other investors, (xvii) any deposit into any account provided for the Series, (xviii) the number of Classes of the Series, and if more than one Class, the rights and priorities of each Class, (xix) whether any fees, page 52 59 breakage payments or early termination payments will be included in the funds available to be paid for the Series, (xx) the subordination of the Series to any other Series, (xxi) whether the Series will be a part of a group or subject to being paired with any other Series, (xxii) whether the Series will be prefunded and (xxiii) any other relevant terms of the Series (including whether or not the Series will be pledged as collateral for an issuance of any other securities, including commercial paper). The terms of the Supplement may modify or amend the terms of this Agreement solely as applied to the new Series. (e) Except as specified in any Supplement for a related Series, all Investor Certificates of any Series shall rank pari passu and be equally and ratably entitled as provided herein to the benefits hereof (except that the Enhancement provided for any Series shall not be available for any other Series) without preference, priority or distinction on account of the actual time or times of authentication and delivery, all in accordance with the terms and provisions of this Agreement and the related Supplement. (f) ARC may from time to time direct the Trustee, on behalf of the Trust, to sell one or more Purchased Interests pursuant to a PI Agreement. No Purchased Interest shall represent any interest in any Enhancement for the benefit of any Series, any Class of Investor Certificates or any other Purchased Interest, any Trust Account established pursuant to any Supplement or any Purchaser Account established in respect of any other Purchased Interest except to the extent set forth in the PI Agreement with respect to such other Purchased Interest. Each PI Agreement may provide that no Investor Certificateholder, Purchaser under any other PI Agreement or Enhancement Provider shall be a third-party beneficiary thereof or have any benefit or any legal or equitable right, remedy or claim under the PI Agreement. (g) On or before the date of the initial sale of a Purchased Interest pursuant to a particular PI Agreement, the parties hereto and the related Purchaser will execute and deliver a PI Agreement that will specify the terms of the Purchased Interest. The terms of the PI Agreement may modify or amend the terms of this Agreement solely as applied to the Purchased Interest. The obligation of the Trustee to execute and deliver the related PI Agreement is subject to the satisfaction of the following conditions: (i) on or before the tenth Business Day (or a shorter period as shall be acceptable to the parties) immediately preceding the related closing date, ARC shall have given the Trustee, the Servicer, each Applicable Rating Agency (if any rated Investor Certificates are outstanding), each Purchaser and each Enhancement Provider (if any) written notice of the sale of the Purchased Interest and the closing date, (ii) ARC shall have delivered to the Trustee the related PI Agreement, in form satisfactory to the Trustee, each executed by each party thereto other than the Trustee, page 53 60 (iii) the Rating Agency Condition shall have been satisfied with respect to the sale (if any rated Investor Certificates are outstanding), (iv) the sale will not (A) contravene any provision of this Agreement, any Supplement, any agreement pursuant to which any Enhancement is provided or any PI Agreement (or any agreement related thereto) or (B) constitute, or result in (or reasonably be expected to result, at any time in the future, in) the occurrence of, a Liquidation Event, an Unmatured Liquidation Event or a Pay-Out Event, (v) ARC shall have delivered to the Trustee, each Applicable Rating Agency (if any rated Investor Certificates are outstanding), each Purchaser and any Enhancement Provider, a Tax Opinion, dated the closing date, with respect to the sale, and (vi) ARC shall have delivered to the Trustee an Officer's Certificate, dated the Closing Date for such Purchased Interest, to the effect that each of the conditions set forth in this subsection for the sale of the Purchased Interest and the execution and delivery of the related PI Agreement has been satisfied. Upon satisfaction of the above conditions, the Trustee shall execute and, at the written direction of ARC, deliver the related PI Agreement and any related documents that ARC shall reasonably request. (h) ARC may from time to time direct the Trustee, on behalf of the Trust, to extend any PI Agreement. The obligation of the Trustee to execute and deliver all agreements, certificates, documents and filings required in connection therewith, is subject to the satisfaction of the following conditions: (i) on or before the tenth Business Day (or a shorter period as shall be acceptable to the parties) immediately preceding the date of the extension, ARC shall have given the Trustee, the Servicer, the Rating Agency (if any rated Investor Certificates are outstanding) and any Enhancement Provider written notice of the extension and the date on which the extension shall occur, (ii) ARC shall have delivered to the Trustee the required agreements, certificates, documents and filings, in form satisfactory to the Trustee, executed by each party thereto other than the Trustee, (iii) the extension will not (A) contravene any provision of this Agreement, any Supplement, any agreement pursuant to which any Enhancement is provided or any PI Agreement (or any agreement related thereto) or (B) constitute, or result in the occurrence of, a Liquidation Event, an Unmatured Liquidation Event or a Pay-Out Event, page 54 61 (iv) ARC shall have delivered to the Trust, the Rating Agency (if any rated Investor Certificates are outstanding) and any Enhancement Provider a Tax Opinion, dated the date of the extension, with respect to the extension, (v) ARC shall have delivered to the Trustee an Officer's Certificate, dated the date of the extension, to the effect that each of the conditions set forth in this subsection for the extension of such PI Agreement and the execution and delivery of the related documents has been satisfied, and (vi) the Rating Agency Condition shall have been satisfied. (i) Prior to the execution by the Trustee of any Supplement or PI Agreement that allocates to any Certificate or Purchased Interest a Ratable Principal Amount in excess of its outstanding principal amount, the Trustee shall receive from the Servicer an Officer's Certificate to the effect that the allocation will not dilute the benefit of the required dilution and loss reserves to which any pre-existing Series or Purchased Interest is entitled prior to the effectiveness of the Supplement or PI Agreement. SECTION 6.11 Changes in Amount of Investor Revolving Certificates. (a) The outstanding principal amount of an Investor Revolving Certificate shall at no time exceed the Stated Amount then applicable to such Investor Revolving Certificate. The Stated Amount of an Investor Revolving Certificate may be increased or decreased from time to time by ARC, with the prior written consent of the Holder of the Investor Revolving Certificate, if the following conditions each shall have been satisfied on or prior to the effective date of the proposed increase or decrease (as the case may be): (i) ARC shall have delivered to the Trustee a Tax Opinion with respect to the proposed increase, and (ii) the Rating Agency Condition shall have been satisfied with respect to the increase. (b) ARC may, pursuant to the Supplement that applies to a particular Investor Revolving Certificate, request the Holder of the Investor Revolving Certificate to provide funds to the Trustee in respect of the Holder's Investor Revolving Certificate in order to increase the then-outstanding principal amount of the Investor Revolving Certificate, which requested increase shall be subject to the further provisions of this subsection and to the provisions of the Supplement. Except as otherwise provided in the related Supplement, all the increases to be made on any day shall be in an aggregate amount not to exceed the sum, if positive, of (i) the Variable Amount on the day on which the increase takes effect and (ii) the ARC Revolving Amount as of the opening of business on the day (after giving effect to any reduction in the amount of the ARC Revolving Certificate as a result of any Seller Adjustments on the day). No such increase may be requested or (even if previously page 55 62 requested) implemented during a Look Back Period, the Liquidation Period or the Pay-Out Period for the Investor Revolving Certificate. ARC may make such a request at any time prior to the earlier of (x) the Liquidation Commencement Date and (y) the Pay-Out Period Commencement Date for the Investor Revolving Certificate, and shall make any such request in a writing that is substantially in the form required by the applicable Supplement, appropriately completed, and that is delivered to the Holder of the Investor Revolving Certificate at the time required by the applicable Supplement. The outstanding principal amount of the Holder's Investor Revolving Certificate shall be increased on the Business Day on which the Holder provides to ARC immediately available funds in the amount of the requested increase by an amount equal to the amount of the funds. SECTION 6.12 Book-Entry Certificates. (a) If provided in any Supplement, the Investor Certificates of any Series, upon original issuance, will be issued in the form of one or more Book-Entry Certificates, to be delivered to the applicable Clearing Agency, by, or on behalf of, ARC. The Investor Certificates of the Series initially shall be registered on the Certificate Register in the name of the nominee of the Clearing Agency, and no Certificate Owner will receive a Definitive Certificate representing such Certificate Owner's interest in the Investor Certificates, except as provided in Section 6.14. Unless and until Definitive Certificates have been issued to Certificate Owners pursuant to Section 6.14: (i) the provisions of this section shall be in full force and effect, (ii) ARC, the Servicer, the Paying Agent, the Transfer Agent and Registrar and the Trustee may deal with the Clearing Agency and the Clearing Agency Participants for all purposes (including the making of distributions on the Investor Certificates) as the authorized representatives of the Certificate Owners, (iii) to the extent that the provisions of this section conflict with any other provisions of this Agreement, the provisions of this section shall control, and (iv) the rights of Certificate Owners shall be exercised only through the Clearing Agency and the Clearing Agency Participants and shall be limited to those established by law and agreements between the Certificate Owners and the Clearing Agency and/or the Clearing Agency Participants. Unless and until Definitive Certificates are issued pursuant to Section 6.14, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit distributions of principal and interest on the Investor Certificates to the Clearing Agency Participants. (b) Certificates sold to Qualified Institutional Buyers in reliance on Rule 144A under the Securities Act shall be represented by one or more Book-Entry Certificates (the "144A Book-Entry Certificates"), in registered form, without coupons, which will be deposited upon page 56 63 the order of ARC on the Closing Date with the Trustee as custodian for and registered in the name of Cede & Co., as nominee of the Clearing Agency. (c) Certificates sold in offshore transactions in reliance on Regulation S shall be represented initially by temporary Book-Entry Certificates (the "Regulation S Temporary Book-Entry Certificates"). The Regulation S Temporary Book-Entry Certificates shall be exchanged on the later of (i) 40 days after the later of (A) the Closing Date and (B) the completion of the distribution of the Certificates, as certified by the Lead Placement Agent and (ii) the date on which the requisite certifications are due to and provided to the Trustee (the later of clauses (i) and (ii) is referred to as the "Exchange Date") for permanent Book-Entry Certificates (the "Unrestricted Book-Entry Certificates," and together with the Regulation S Temporary Book-Entry Certificates, the "Regulation S Book-Entry Certificates"). The Regulation S Book-Entry Certificates shall be issued in registered form, without coupons, and deposited upon the order of ARC with the Trustee as custodian for and registered in the name of a nominee of the Clearing Agency for credit to the account of the depositaries for Euroclear and Cedel, which depositaries shall, on behalf of Euroclear and Cedel, hold the interests on behalf of account holders (each a "Member Organization"), which have rights in respect of the Certificates credited to their securities accounts with Euroclear or Cedel from time to time. (d) A Certificateholder of the Regulation S Temporary Book-Entry Certificate may receive payments in respect of the Certificates on the Regulation S Temporary Book-Entry Certificate only after delivery to Euroclear or Cedel, as the case may be, of a written certification substantially in the form of the Owner Regulation S Certification, and upon delivery by Euroclear or Cedel, as the case may be, to the Transfer Agent and Registrar of a certification or certifications substantially in the form of the Depositary Regulation S Certification. The delivery by the Certificateholder of the Regulation S Temporary Book-Entry Certificate of the certification shall constitute irrevocable instructions by the Certificateholder to Euroclear or Cedel, as the case may be, to arrange for the exchange of the Certificateholder's interest in the Regulation S Temporary Book-Entry Certificate for a beneficial interest in the Unrestricted Book-Entry Certificate after the Exchange Date in accordance with the paragraph below. After (i) the Exchange Date and (ii) receipt by the Transfer Agent and Registrar of written instructions from Euroclear or Cedel, as the case may be, directing the Transfer Agent and Registrar to credit or cause to be credited to either Euroclear's or Cedel's, as the case may be, depositary's account a beneficial interest in the Unrestricted Book-Entry Certificate in a principal amount equal to that of the beneficial interest in the Regulation S Temporary Book-Entry Certificate, the Transfer Agent and Registrar shall instruct the Clearing Agency to reduce the principal amount of the Regulation S Book-Entry Certificate and increase the principal amount of the Unrestricted Book-Entry Certificate, by the principal amount of the beneficial interest in the Regulation S Temporary Book-Entry Certificate to be so transferred, and to credit or cause to be credited to the account of Euroclear, Cedel or a page 57 64 Person who has an account with the Clearing Agency (a "Clearing Agency Participant"), as the case may be, a beneficial interest in the Unrestricted Book-Entry Certificate having a principal amount of the Regulation S Temporary Book-Entry Certificate that was reduced upon the transfer. Upon return of the entire principal amount of the Regulation S Temporary Book-Entry Certificate to the Trustee in exchange for beneficial interests in the Unrestricted Book-Entry Certificate, the Trustee shall cancel the Regulation S Temporary Book-Entry Certificate by perforation and shall forthwith destroy it. SECTION 6.13 Notices to Clearing Agency. Whenever notice or other communication to the Investor Certificateholders of any Series represented by Global Certificates is required under this Agreement, unless and until Definitive Certificates shall have been issued to Certificate Owners pursuant to Section 6.14, the Trustee, the Servicer and the Paying Agent shall give all such notices and communications specified herein to be given to the Investor Certificateholders of the Series to the Clearing Agency. SECTION 6.14 Definitive Certificates. If (a)(i) ARC advises the Trustee in writing that the Clearing Agency is no longer willing or able to discharge its responsibilities under any Letter of Representations properly, and (ii) ARC is unable to locate a qualified successor, (b) ARC, at its option, advises the Trustee in writing that, with respect to any Series, it elects to terminate the Book-Entry system through the Clearing Agency or (c) after the occurrence of a Servicer Default, Certificate Owners representing beneficial interests aggregating not less than 50% of the Invested Amount of the Series advise the Trustee and the Clearing Agency through the Clearing Agency Participants in writing that the continuation of a Book-Entry system through the Clearing Agency is no longer in the best interests of the Certificate Owners of the Series, the Trustee shall notify the Clearing Agency of the occurrence of any such event and of the availability of Definitive Certificates of the Series to Certificate Owners of the Series requesting the same. Upon surrender to the Trustee of the Investor Certificates of the Series by the Clearing Agency accompanied by registration instructions from the Clearing Agency for registration, the Trustee shall authenticate and deliver Definitive Certificates of the Series. Neither ARC, the Transfer Agent and Registrar nor the Trustee shall be liable for any delay in delivery of the instructions and may conclusively rely on, and shall be protected in relying on, the instructions. Upon the issuance of Definitive Certificates of any Series, all references herein to obligations with respect to the Series imposed upon or to be performed by the Clearing Agency shall be deemed to be imposed upon and performed by the Trustee, to the extent applicable with respect to the Definitive Certificates and the Trustee shall recognize the Holders of the Definitive Certificates as Certificateholders hereunder. SECTION 6.15 Letter of Representations. Notwithstanding anything to the contrary in this Agreement or any Supplement, the parties hereto shall comply with the terms of each Letter of Representations. page 58 65 ARTICLE VII ARC SECTION 7.01 Representations and Warranties of ARC Relating to ARC and the Transaction Documents. On the date hereof and on each Subsequent Issuance Date, ARC hereby represents and warrants that: (a) Organization and Good Standing. ARC is a corporation duly organized and validly existing and in good standing under the laws of its jurisdiction of incorporation and has full power and authority to own its properties and to conduct its business as the properties presently are owned and the business presently is conducted. ARC had at all relevant times, and now has, all necessary power, authority and legal right to acquire, own and transfer the Receivables and the Related Transferred Assets. (b) Due Qualification. ARC is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements), and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires qualification, licenses or approvals and where the failure so to qualify, to obtain the licenses and approvals or to preserve and maintain the qualification, licenses or approvals would have a substantial likelihood of having a Material Adverse Effect. (c) Power and Authority; Due Authorization. ARC has (i) all necessary power and authority to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (B) perform its obligations under this Agreement and the other Transaction Documents to which it is a party, and (C) transfer, assign, set-over and convey its right, title and interest in, to and under the Receivables, the Related Transferred Assets and the funds in the Trust Accounts on the terms and subject to the conditions herein and therein provided and (ii) duly authorized by all necessary action the transfer, assignment, set-over and conveyance and the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the consummation of the transactions provided for in this Agreement and the other Transaction Documents to which it is a party. (d) Binding Obligations. This Agreement constitutes, and each other Transaction Document to which ARC is a party when executed and delivered will constitute, a legal, valid and binding obligation of ARC, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of page 59 66 creditors' rights generally and by general principles of equity, regardless of whether enforceability is considered in a proceeding in equity or at law. (e) No Conflict or Violation. The execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement and the other Transaction Documents to be signed by ARC and the fulfillment of the terms hereof and thereof will not (i) conflict with, violate, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, (A) its Certificate of Incorporation or Bylaws or (B) any indenture, loan agreement, mortgage, deed of trust or other material agreement or instrument to which ARC is a party or by which it or any of its properties is bound, (ii) result in the creation or imposition of any Adverse Claim upon any of its properties pursuant to the terms of any such contract, indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument, other than this Agreement and the other Transaction Documents, or (iii) conflict with or violate any federal, state, local or foreign law or any decision, decree, order, rule or regulation applicable to it or any of its properties of any court or of any federal, state, local or foreign regulatory body, administrative agency or other governmental instrumentality having jurisdiction over it or any of its properties, which conflict, violation, breach, default or Adverse Claim, individually or in the aggregate, would have a substantial likelihood of having a Material Adverse Effect. (f) Litigation and Other Proceedings. (i) There is no action, suit, proceeding or investigation pending or, to the best knowledge of ARC, threatened against it before any court, regulatory body, arbitrator, administrative agency or other tribunal or governmental instrumentality and (ii) it is not subject to any order, judgment, decree, injunction, stipulation or consent order of or with any court or other government authority that, in the case of clauses (i) and (ii), (A) asserts the invalidity of this Agreement or any other Transaction Document, (B) seeks to prevent the transfer of any Receivables or Related Transferred Assets to the Trust, the issuance of the Certificates or the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document, (C) seeks any determination or ruling that would materially and adversely affect the performance by ARC of its obligations under this Agreement or any other Transaction Document or the validity or enforceability of this Agreement or any other Transaction Document, (D) seeks to affect adversely the income tax attributes of the transfers hereunder or the Trust under the United States Federal income tax system or any state income tax system or (E) individually or in the aggregate for all such actions, suits, proceedings and investigations would have a substantial likelihood of having a Material Adverse Effect. (g) Governmental Approvals. All authorizations, consents, orders and approvals of, or other action by, any Governmental Authority that are required to be page 60 67 obtained by ARC, and all notices to and filings with any Governmental Authority, (other than, in respect of enforceability against a Federal Obligor, any consents or filings required by the Assignment of Claims Act and any consents required by states with respect to any Receivables arising from State and Local Obligors so long as such Receivables are not reported as Eligible Receivables) that are required to be made by it, in the case of each of the foregoing in connection with the transfer of Receivables and Related Transferred Assets to the Trust or the execution, delivery and performance by it of this Agreement and any other Transaction Documents to which it is a party and the consummation of the transactions contemplated by this Agreement, have been obtained or made and are in full force and effect (including the filing of the UCC financing statements referred to in Section 2.03(a)(ii)(A), all of which, at the time required in Section 2.03(a)(ii)(A), will be duly made), except where the failure to obtain or make any such authorization, consent, order, approval, notice or filing, individually or in the aggregate for all such failures, would not reasonably be expected to have a Material Adverse Effect. (h) Bulk Sales Acts. No transaction contemplated by this Agreement or by any other Transaction Document requires compliance with, or will be subject to avoidance under, any bulk sales act or similar law. (i) Offices. ARC's principal place of business and chief executive office is located at the address set forth under ARC's signature hereto, and the offices where ARC, the Servicer and the Seller keep all Records and all Contracts, purchase orders and agreements related to the Receivables and the Related Transferred Assets (and all original documents relating thereto) are located at the addresses specified in Schedule 1 (or at such other locations, notified to the Servicer and the Trustee in accordance with Section 7.02(c), in jurisdictions where all action required by Section 7.02(c) has been taken and completed). (j) Account Banks. The names and addresses of all the Account Banks are specified in Schedule 2 or, after the Closing Date, have been provided by the Servicer to the Trustee pursuant to Section 3.03(c), and the account numbers of the Bank Accounts at such Account Banks have been specified in a letter provided on or prior to the Closing Date to the Trustee or, after the Closing Date, have been provided by the Servicer to the Trustee pursuant to Section 3.03(c). The Account Agreements to which ARC is a party constitute the legal, valid and binding obligations of the parties thereto enforceable against such parties in accordance with their respective terms subject to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally and general equitable principles. (k) Investment Company Act. ARC is not, and is not controlled by, an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended. page 61 68 The representations and warranties set forth in this section shall survive the transfer and assignment of the Receivables and the other Trust Assets to the Trust. Upon discovery by ARC, the Servicer or the Trustee of a breach of any of the foregoing representations and warranties, the party discovering the breach shall give written notice to the other parties to this Agreement within three Business Days following the discovery. The Trustee's obligations in respect of discovering any breach are limited as provided in Section 11.02(g). SECTION 7.02 Covenants of ARC. From the Closing Date until the day following the Liquidation Commencement Date on which the Investor Invested Amount shall be reduced to zero and all Obligations of ARC and the Servicer to the Investor Certificateholders that have ever been outstanding shall have been finally and fully paid and performed, ARC hereby covenants that it will: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations, judgments, decrees and orders (including those relating to the Receivables, the Related Transferred Assets, the funds in the Trust Accounts and the related Contracts and any other agreements related thereto), in each case to the extent the failure to comply, individually or in the aggregate for all such failures, would have a substantial likelihood of having a Material Adverse Effect. (b) Preservation of Corporate Existence. Preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualifications would have a substantial likelihood of having a Material Adverse Effect. (c) Location of Records and Offices. Keep its principal place of business and chief executive office, and keep (and will cause the Servicer and the Seller to keep) substantially all Records, Contracts, purchase orders and other agreements related to the Receivables and the Related Transferred Assets (and all original documents relating thereto), at the addresses referred to in Schedule 7.01(i) or, upon not less than 30 days' prior written notice given by ARC to the Servicer and the Trustee, at such other locations in jurisdictions where all action required pursuant to Section 3.10 shall have been taken and completed. ARC will at all times maintain its chief executive offices within the United States of America, and will cause the Servicer to maintain at all times each office from which the Servicer services, collects or administers Receivables and Related Transferred Assets and the Servicer's chief executive offices within the United States of America. (d) Use of Funds. Apply all cash payments made to it hereunder to make payments in the order of priority set out in Section 3.3 of the Purchase Agreement. page 62 69 (e) Reporting Requirements of ARC. Unless the Trustee and the Required Investors shall otherwise consent in writing, furnish to the Trustee, the Investor Certificateholders and the Applicable Rating Agencies: (i) Liquidation Events. As soon as possible, and in any event within five Business Days after an Authorized Officer of ARC has obtained knowledge of the occurrence of any Liquidation Event or any Unmatured Liquidation Event, a written statement of an Authorized Officer of ARC describing the event and the action that ARC proposes to take with respect thereto, in each case in reasonable detail, (ii) Material Adverse Effect. As soon as possible and in any event within five Business Days after an Authorized Officer of ARC has knowledge thereof, written notice that describes in reasonable detail any Adverse Claim against the Trust Assets or any other event or occurrence that, individually or in the aggregate for all such events or occurrences, has had, or would have a substantial likelihood of having, in the reasonable, good faith judgment of ARC, a Material Adverse Effect, (iii) Proceedings. As soon as possible and in any event within five Business Days after an Authorized Officer of ARC has knowledge thereof, written notice of (A) any litigation, investigation or proceeding of the type described in Section 7.01(f) not previously disclosed to the Trustee and (B) any material adverse development that has occurred with respect to any such previously disclosed litigation, investigation or proceeding, and (iv) Other. Promptly, from time to time, any other information, documents, records or reports respecting the Receivables or the Related Transferred Assets or any other information respecting the condition or operations, financial or otherwise, of ARC, in each case as the Trustee may from time to time reasonably request in order to protect the interests of the Trustee, the Trust or the Investor Certificateholders under or as contemplated by this Agreement. (f) Adverse Claims Except for any conveyances under the Transaction Documents, not permit to exist any Adverse Claim (other than Permitted Adverse Claims) to or in favor of any Person upon or with respect to, or cause to be filed any financing statement or equivalent document relating to perfection that covers, any Receivable, related Contract, Related Transferred Asset or other Trust Asset, or any interest therein. ARC shall defend the right, title and interest of the Trust in, to and under the Trust Assets, whether now existing or hereafter created, against all claims of third parties claiming through or under ARC. page 63 70 In the event that ARC fails to keep any Trust Assets free and clear of any Adverse Claim (other than Permitted Adverse Claims, Adverse Claims arising hereunder and other Adverse Claims permitted by any other Transaction Document), the Trustee may (without limiting its other rights with respect to ARC's breach of its obligations hereunder) make reasonable expenditures necessary to release the Adverse Claim. The Trustee shall be entitled to indemnification for the expenditures pursuant to Section 7.03. Alternatively, the Trustee may deduct the expenditures as an offset to any amounts owed to ARC hereunder. (g) Extension or Amendment of Receivables; Change in Credit and Collection Policy or Contracts. Not (i) extend, amend or otherwise modify the terms of any Receivable or Contract (except as permitted by the Credit and Collection Policy) in a manner that would have a material adverse effect on the Investor Certificateholders or the Purchasers, or (ii) permit the Seller to make any change in the Credit and Collection Policy that would have a material adverse effect on the Investor Certificateholders or the Purchasers; provided, however, that ARC or the Servicer, as applicable, may change the terms and provisions of the Credit and Collection Policy if (A) with respect to any material change of collection policies, the change is made with the prior written approval of each Purchaser Agent and the Rating Agency Condition is satisfied with respect thereto, (B) with respect to any material change of collection procedures, the change is made with prior written notice to each Purchaser Agent and no material adverse effect on any Series or Purchased Interest would result, and (C) with respect to any material change in accounting policies relating to Receivables that become Charged-Off Receivables, the change is made in accordance with GAAP. (h) Mergers, Acquisitions, Sales, Etc. Not: (i)(A) be a party to any merger or consolidation, or directly or indirectly purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or (B) except pursuant to the Transaction Documents, directly or indirectly, sell, transfer, assign, convey or lease, whether in one transaction or in a series of transactions, all or substantially all of its assets, or sell or assign with or without recourse any Receivables or Related Transferred Assets (other than pursuant hereto) unless: (x)(1) the corporation formed by the consolidation or into which ARC is merged or the Person that acquires by conveyance or transfer the properties and assets of ARC substantially as an entirety shall be, if ARC is not the surviving entity, organized and existing under the laws of the United States of America or any state thereof or the District of Columbia, and shall expressly assume, by an agreement page 64 71 supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee and each Purchaser Agent, the performance of every covenant and obligation of ARC hereunder, including its obligations under Section 7.03, under each Supplement and under each PI Agreement, and (2) ARC has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel each stating that the consolidation, merger, conveyance or transfer and the supplemental agreement comply with this section, that the supplemental agreement is a valid and binding obligation of the surviving entity enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally from time to time in effect and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity), and that all conditions precedent herein provided for relating to the transaction have been complied with, (y) the Rating Agency Condition shall have been satisfied with respect to the consolidation, merger, conveyance or transfer, and (z) ARC shall have delivered to the Trustee, the Rating Agency and each Enhancement Provider a Tax Opinion, dated the date of the consolidation, merger, conveyance or transfer, with respect thereto, or (ii) except as contemplated in the Purchase Agreement in connection with ARC's purchases of Receivables and Related Assets from the Seller, (A) make, incur or suffer to exist an investment in, equity contribution to, or payment obligation in respect of the deferred purchase price of property or services from, any Person, or (B) make any loan or advance to any Person other than for reasonable and customary operating expenses; provided, however, that so long as AmeriSource Distribution Corporation's (the parent of AmeriSource) 11 1/4% Senior Debentures due 2005 or AmeriSource's 14 1/2% Senior Debentures and Senior Debentures, Series A due 1999 remain outstanding, this clause will not prohibit the making of any loan to AmeriSource. (i) Change in Name. Not change its corporate name or the name under or by which it does business, or permit either Seller to change its corporate name or the name under or by which it does business, unless ARC shall have given the Servicer and the Trustee 30 days' prior written notice thereof and unless, prior to the change in name, ARC shall have filed (or shall have caused to be filed) any financing statements or amendments as the Servicer or the Trustee determines may be necessary page 65 72 to continue the perfection of the Trust's interest in the Receivables, the Related Transferred Assets and the proceeds thereof. (j) Amendment of Certificate of Incorporation; Change in Business. Not amend Article 3,6,7,8 or 9 of its Certificate of Incorporation, or engage in any business other than as contemplated by the Transaction Documents, unless the Rating Agency Condition has been satisfied in connection with the amendment or change in ARC's business. (k) Amendments to Purchase Agreement. Except as expressly provided otherwise in this Agreement, make no amendment to the Purchase Agreement that would adversely affect in any material respect the interests of the Investor Certificateholders, the Purchasers or any Enhancement Provider. (l) Enforcement of Purchase Agreement. Perform all its obligations under and otherwise comply with the Purchase Agreement and, if requested by the Trustee, will enforce, for the benefit of the Trust, the covenants and agreements of the Seller in the Purchase Agreement. (m) Other Indebtedness. Not (i) create, incur or permit to exist any Indebtedness, Guaranty or liability or (ii) cause or permit to be issued for its account any letters of credit or bankers' acceptances, except for (A) Indebtedness incurred pursuant to the ARC Notes, (B) other liabilities specifically permitted to be created, incurred or owed by ARC pursuant to or in connection with the Transaction Documents and (C) liabilities for reasonable and customary operating expenses in an aggregate amount not to exceed $50,000 per Calculation Period. (n) Separate Corporate Existence. Hereby acknowledge that the Trustee and the Investor Certificateholders are, and will be, entering into the transactions contemplated by the Transaction Documents in reliance upon ARC's identity as a legal entity separate from the Seller, the Servicer and any other Person. Therefore, from and after the Closing Date, ARC shall take all reasonable steps to continue its identity as a separate legal entity and to make it apparent to third Persons that ARC is an entity with assets and liabilities distinct from those of the Servicer, the Seller and any other Person, and that ARC is not a division of the Servicer, the Seller or any other Person. Without limiting the generality of the foregoing, ARC shall take such actions as shall be required in order that: (i) ARC will be a limited purpose corporation whose primary activities will be substantially restricted in its Certificate of Incorporation to purchasing or accepting contributions of Receivables and Related Assets from the Seller, entering into agreements for the servicing of the Receivables and Related Assets, granting a security interest in the Receivables and Related Transferred page 66 73 Assets to the Trustee and conducting any other activities that it deems necessary or appropriate to carry out its primary activities. (ii) Not less than one member of ARC's Board of Directors (the "Independent Director") will be an individual who is not (and is not an Associate of) a direct, indirect or beneficial ten percent stockholder, officer, director, employee, affiliate, associate, or "major customer or supplier" (as the term is defined in ARC's certificate of incorporation) of any AmeriSource Person. ARC's Board of Directors will not approve, or take any other action to cause the filing of, a voluntary bankruptcy petition with respect to ARC unless the Independent Director and all other members of ARC's Board of Directors unanimously approve the taking of such action in writing prior to the taking of such action. (iii) ARC will restrict its Independent Director from at any time serving as a trustee in bankruptcy for any AmeriSource Person. (iv) ARC will compensate each of its employees, consultants and agents from its own funds for services provided to ARC, except as provided herein in respect of the Servicing Fee. ARC will engage no agents other than a Servicer for the Receivables, which Servicer will be fully compensated for its services to ARC by payment of the Servicing Fee, the other agents expressly provided for in Article VI of this Pooling Agreement whose compensation will be paid as part of the Servicing Fee, placement agents for the placement of Certificates and accountants and attorneys who, except to the extent provided otherwise in clause (v), will be compensated by ARC for their fees and other charges as agreed to by ARC and such placement agents, accountants or attorneys (as applicable). (v) ARC will contract with the Servicer to perform for ARC all operations required on a daily basis to service the Receivables. ARC will pay the Servicer a fee as described herein. ARC will not incur any material indirect or overhead expenses for items shared between ARC and any AmeriSource Person that are not reflected in the Servicing Fee, other than shared items of expenses not reflected in the Servicing Fee, such as legal, auditing and other professional services, that will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered, it being understood that AmeriSource will pay all expenses owing by ARC or any AmeriSource Person relating to the preparation, negotiation, execution and delivery of the Transaction Documents, including, without limitation, legal, commitment, agency and other fees. page 67 74 (vi) ARC's operating expenses or liabilities will not be paid by any AmeriSource Person, recognizing that certain organizational expenses of ARC and expenses of ARC relating to creation and initial implementation of the Program, however, have been or shall be paid by AmeriSource. (vii) ARC will conduct its business at an office segregated from the offices of each AmeriSource Person, which office of ARC may consist of office space shared with an AmeriSource Person, a portion of which is allocated solely to ARC. (viii) ARC will maintain corporate records and books of account separate from those of every AmeriSource Person and telephone numbers, mailing addresses, stationery and other business forms that are separate and distinct from those of every AmeriSource Person. (ix) Any annual financial statements of any AmeriSource Person that are provided to non-AmeriSource Persons (other than representatives or advisors of AmeriSource Persons) and which are consolidated to include ARC will contain footnotes stating that AmeriSource has entered into a sale of its accounts receivable to ARC (a separate corporate entity) and will summarize the terms of the transaction. (x) ARC's assets will be maintained in a manner that facilitates their identification and segregation from those of any AmeriSource Person. (xi) ARC will strictly observe corporate formalities in its dealings with each AmeriSource Person, and funds or other assets of ARC will not be commingled with those of any AmeriSource Person. ARC shall not maintain joint bank accounts or other depository accounts to which any AmeriSource Person (other than AmeriSource in its capacity as Servicer) has independent access. (xii) ARC shall not, directly or indirectly, be named and shall not enter into an agreement to be named as a direct or contingent beneficiary or loss payee on any insurance policy with respect to any loss relating to the property of an AmeriSource Person. (xiii) Any transaction between ARC and an AmeriSource Person will be fair and equitable to ARC, will be the type of transaction which would be entered into by a prudent Person in the position of ARC with an AmeriSource Person, and will be on terms that are at least as favorable as may be obtained from a Person that is not an AmeriSource Person (it being understood and page 68 75 agreed that the transactions contemplated in the Transaction Documents meet the requirements of this clause). (xiv) Any AmeriSource Person that renders or otherwise furnishes services to ARC will be compensated by ARC at market rates for such services (it being understood and agreed that the transactions contemplated in the Transaction Documents meet the requirements of this clause). (xv) Neither ARC nor any AmeriSource Person will be or will hold itself out to be responsible for the debts of the other. (xvi) The duly elected Board of Directors of ARC and ARC's duly appointed officers shall at all times have sole authority to control decisions and actions with respect to the daily business affairs of ARC. (o) Net Worth. Not permit its net worth (as calculated in accordance with GAAP) at any time to be less than 7.2% of the aggregate Unpaid Balance of the Receivables at such time. (p) Taxes. File or cause to be filed, and cause each Person with whom it shares consolidated tax liability to file, all Federal, state and local tax returns that are required to be filed by it, except where the failure to file such returns could not reasonably be expected to have an adverse effect, and pay or cause to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which ARC shall have set aside adequate reserves on its books in accordance with GAAP and which proceedings could not reasonably be expected to have a Material Adverse Effect. The covenants set forth in this section shall survive the transfer and assignment of the Receivables and the other Trust Assets to the Trust. Upon discovery by ARC, the Servicer or the Trustee of a breach of any of the foregoing covenants, the party discovering the breach shall give written notice to the other parties to this Agreement within three Business Days following such discovery. The Trustee's obligations in respect of discovering any breach are limited as provided in Section 11.02(g). SECTION 7.03 Indemnification by ARC. (a) Without limiting any other rights that any Indemnified Party may have hereunder or under applicable law, ARC hereby agrees to indemnify the Trust, the Trustee, each Investor Certificateholder and each of the successors, permitted transferees and assigns of any such Person and all officers, directors, shareholders, controlling Persons, employees and agents of any of the foregoing (each of the foregoing Persons individually being called an "Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims (whether on account of settlements or otherwise, page 69 76 and whether or not the relevant Indemnified Party is a party to any action or proceeding that gives rise to any Indemnified Losses (as defined below)), judgments, liabilities and related reasonable costs and expenses (including reasonable attorneys' fees and disbursements) (all of the foregoing collectively being called "Indemnified Losses") awarded against or incurred by any of them that arise out of or relate to this Agreement, any other Transaction Document or any of the transactions contemplated herein or therein or the use of proceeds herefrom or therefrom (including without limitation any Indemnified Losses (i) relating to any Adverse Claim, without regard to whether such Adverse Claim was a Permitted Adverse Claim or (ii) arising from any failure to make any filing or obtain any consent as required by the Assignment of Claims Act with respect to any Receivable). Payments to be made pursuant to this section shall be paid to the extent that funds are available to make the payments after all amounts to be paid to the Certificateholders pursuant to Section 4.03(g) or (h) (as applicable) shall have been paid, and there shall be no recourse to ARC for all or any part of any amounts payable pursuant to this section if the funds are at any time insufficient to make all or part of any such payments. Notwithstanding the foregoing (and with respect to clause (ii) below, without prejudice to the rights that the Trustee may have pursuant to the other provisions of this Agreement or the provisions of any of the other Transaction Documents), in no event shall any Indemnified Party be indemnified for any Indemnified Losses (i) resulting from gross negligence or willful misconduct on the part of such Indemnified Party (or the gross negligence or willful misconduct on the part of any of its officers, directors, employees or agents), (ii) to the extent they include Indemnified Losses in respect of Receivables and reimbursement therefor that would constitute credit recourse to ARC for the amount of any Receivable or Related Transferred Asset not paid by the related Obligor, (iii) to the extent they are or result from lost profits, (iv) to the extent they are or result from taxes (including interest and penalties thereon) asserted with respect to (A) distributions on the Investor Certificates, (B) franchise or withholding taxes imposed on any Indemnified Party other than the Trust or the Trustee in its capacity as Trustee, or (C) federal or other income taxes on or measured by the net income of such Indemnified Party and costs and expenses in defending against the same, or (v) to the extent they constitute consequential, special or punitive damages. If for any reason the indemnification provided in this section is unavailable to an Indemnified Party or is insufficient to hold an Indemnified Party harmless, then ARC shall contribute to the amount paid by the Indemnified Party as a result of any loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnified Party on the one hand and ARC on the other hand, but also the relative fault (if any) of the Indemnified Party and ARC and any other relevant equitable considerations. (b) Notwithstanding anything to the contrary herein, ARC shall be liable to all creditors of the Trust (but not to Holders of Investor Certificates) for all liabilities of the page 70 77 Trust to the same extent as it would be if the Trust constituted a partnership under Delaware law and ARC were a general partner thereof. Notwithstanding anything to the contrary herein, any such creditor shall be a third party beneficiary of this subsection. ARTICLE VIII THE SERVICER SECTION 8.01 Representations and Warranties of the Servicer. On the date hereof and on each Subsequent Issuance Date, the Servicer hereby makes, and any Successor Servicer also shall be deemed to make by its acceptance of its appointment hereunder, the following representations and warranties for the benefit of the Trustee and the Certificateholders: (a) Organization and Good Standing. The Servicer is a corporation duly organized and validly existing and in good standing under the laws of its jurisdiction of incorporation and has full power and authority to own its properties and to conduct its business as the properties presently are owned and as the business presently is conducted. (b) Due Qualification. The Servicer is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements), and has obtained all necessary licenses and approvals, in all jurisdictions in which the servicing of the Receivables and the Related Transferred Assets as required by this Agreement requires qualification, licenses or approvals and where the failure so to qualify, to obtain the licenses and approvals or to preserve and maintain the qualification, licenses or approvals would have a substantial likelihood of having a material adverse effect on its ability to perform its obligations as Servicer under this Agreement or a Material Adverse Effect. (c) Power and Authority; Due Authorization. The Servicer has (i) all necessary power and authority to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party, and (B) perform its obligations under this Agreement and the other Transaction Documents to which it is a party, and (ii) duly authorized by all necessary action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the consummation of the transactions provided for in this Agreement and the other Transaction Documents to which it is a party. (d) Binding Obligations. This Agreement constitutes, and each other Transaction Document to which the Servicer is a party when executed and delivered will constitute, a legal, valid and binding obligation of the Servicer, enforceable page 71 78 against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether enforceability is considered in a proceeding in equity or at law. (e) No Conflict or Violation. The execution and delivery by the Servicer of this Agreement and the other Transaction Documents to which it is a party, the performance by it of its obligations hereunder and thereunder and the fulfillment by it of the terms hereof and thereof that are applicable to it will not (i) conflict with, violate, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, (A) its Certificate of Incorporation or Bylaws or (B) any indenture, loan agreement, mortgage, deed of trust, or other material agreement or instrument to which it is a party or by which it or any of its properties is bound or (ii) conflict with or violate any federal, state, local or foreign law or any decision, decree, order, rule or regulation applicable to it or any of its properties of any court or of any federal, state, local or foreign regulatory body, administrative agency or other governmental instrumentality having jurisdiction over it or any of its properties, which conflict, violation, breach or default described, individually or in the aggregate, would have a substantial likelihood of having a Material Adverse Effect. (f) Governmental Approvals. All authorizations, consents, orders and approvals of, or other action by, any Governmental Authority that are required to be obtained by the Servicer, and all notices to and filings with any Governmental Authority that are required to be made by it, in the case of each of the foregoing in connection with the execution, delivery and performance by it of this Agreement and any other Transaction Documents to which it is a party and the consummation of the transactions contemplated by this Agreement, have been obtained or made and are in full force and effect (other than the filing of the UCC financing statements referred to in Section 2.03(a)(ii)(A), all of which, at the time required in Section 2.03(a)(ii)(A), will be duly made), except where the failure to obtain or make such authorization, consent, order, approval, notice or filing, individually or in the aggregate for all such failures, would not reasonably be expected to have a Material Adverse Effect. (g) Litigation and Other Proceedings. (i) There is no action, suit, proceeding or investigation pending or, to the best knowledge of the Servicer, threatened against it before any court, regulatory body, arbitrator, administrative agency or other tribunal or governmental instrumentality and (ii) it is not subject to any order, judgment, decree, injunction, stipulation or consent order of or with any court or other government authority that, in the case of clauses (i) and (ii), (A) seeks to affect adversely the income tax attributes of the transfers hereunder or the Trust under the United States federal income tax system or any state income tax system or (B) individually or in the aggregate for all such actions, suits, proceedings and page 72 79 investigations would have a substantial likelihood of having a Material Adverse Effect. The representations and warranties set forth in this section shall survive the transfer and assignment of the Receivables and the other Trust Assets to the Trust. Upon discovery by ARC, the Servicer or the Trustee of a breach of any of the foregoing representations and warranties, the party discovering the breach shall give written notice to the other parties to this Agreement within three Business Days following the discovery. The Trustee's obligations in respect of discovering any breach are limited as provided in Section 11.02(g). SECTION 8.02 Covenants of the Servicer. From the Closing Date until the day following the Liquidation Commencement Date on which the Investor Invested Amount shall be reduced to zero and all Obligations of ARC and the Servicer to the Investor Certificateholders that have ever been outstanding shall have been finally and fully paid and performed, the Servicer hereby covenants and agrees, and any Successor Servicer by its acceptance of its appointment hereunder shall be deemed to covenant and agree, as follows for the benefit of the Trust and the Certificateholders: (a) Compliance with Laws, Etc. The Servicer shall maintain in effect all qualifications required under applicable law in order to service properly the Receivables and shall comply in all material respects with all applicable laws, rules, regulations, judgments, decrees and orders, in each case to the extent the failure to comply, individually or in the aggregate for all such failures, would have a substantial likelihood of having a Material Adverse Effect. (b) Preservation of Corporate Existence. The Servicer shall preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would have a substantial likelihood of having a Material Adverse Effect. (c) Compliance with Transaction Documents. The Servicer will comply with the terms and provisions of each of the Transaction Documents to which it is a party. The covenants set forth in this section shall survive the transfer and assignment of the Trust Assets to the Trust. Upon discovery by ARC, the Servicer or the Trustee of a breach of any of the foregoing covenants, the party discovering the breach shall give written notice to the other parties to this Agreement within three Business Days following the discovery. The Trustee's obligations in respect of discovering any breach are limited as provided in Section 11.02(g). page 73 80 SECTION 8.03 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer. The Servicer shall not consolidate with or merge into any other Person or convey, transfer or sell all or substantially all of its properties and assets to any Person, unless: (a)(i) the Servicer is the surviving entity or, if it is not the surviving entity, the Person formed by the consolidation or into which the Servicer is merged or the Person that acquires by conveyance, transfer or sale all or substantially all of the properties and assets of the Servicer shall be a corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and such corporation shall expressly assume, by an agreement supplemental hereto, executed and delivered to the Trustee and in form and substance satisfactory to the Trustee, the performance of every covenant and obligation of the Servicer hereunder and under the other Transaction Documents to which the Servicer is a party, and (ii) the Servicer shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel for the Servicer each stating that the consolidation, merger, conveyance, transfer or sale and the supplemental agreement comply with this subsection, that the supplemental agreement is a valid and binding obligation of the surviving entity enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity, and that all conditions precedent in clause (i) that relate to the transaction have been complied with, and (b) the Trustee shall have received an Officer's Certificate of the Servicer to the effect that the conditions set forth in subsection (a) have been satisfied. SECTION 8.04 Indemnification by the Servicer. Without limiting any other rights that any Indemnified Party may have hereunder or under applicable law, the Servicer hereby agrees to indemnify the Trust, the Trustee, and the other Indemnified Parties forthwith on demand, from and against any and all Indemnified Losses awarded against or incurred by any of them that arise out of or relate to the Servicer's performance of, or failure to perform, any of its obligations under or in connection with any Transaction Document. Notwithstanding the foregoing (and with respect to subsection (b) below, without prejudice to the rights that such Indemnified Party may have pursuant to the other provisions of this Agreement or the provisions of any of the other Transaction Documents), in no event shall any Indemnified Party be indemnified against any Indemnified Losses (a) resulting from gross negligence or willful misconduct on the part of such Indemnified Party (or the gross negligence or willful misconduct on the part of any of its officers, directors, employees or agents), (b) to the extent they include Indemnified Losses in respect of Receivables and reimbursement therefore that would constitute credit recourse to the Servicer for the amount of any Receivable or Related Transferred Asset not paid by the related Obligor, (c) to the extent they are or result from lost profits, (d) to the extent they are or result from taxes page 74 81 (including interest and penalties thereon) asserted with respect to (i) distributions on the Investor Certificates, (ii) franchise or withholding taxes imposed on any Indemnified Party other than the Trust or the Trustee in its capacity as Trustee or (iii) federal or other income taxes on or measured by the net income of the Indemnified Party and costs and expenses in defending against the same, or (e) to the extent that they constitute consequential, special or punitive damages. If for any reason the indemnification provided in this section is unavailable to an Indemnified Party or is insufficient to hold it harmless, then the Servicer shall contribute to the amount paid by the Indemnified Party as a result of any loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnified Party on the one hand and the Servicer on the other hand, but also the relative fault of the Indemnified Party (if any) and the Servicer and any other relevant equitable consideration. SECTION 8.05 Servicer Liability. The Servicer shall be liable in accordance with this Agreement only to the extent of the obligations specifically undertaken by the Servicer in such capacity herein and as set forth herein. SECTION 8.06 Limitation on Liability of the Servicer and Others. No recourse under or upon any obligation or covenant of this Agreement, any Supplement, any Certificate or any other Transaction Document, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Servicer or of any successor corporation, either directly or through the Servicer, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Agreement, any Supplement, all other relevant Transaction Documents and the obligations incurred hereunder or thereunder are solely corporate obligations, and that no such personal liability whatsoever shall attach to, or is or shall be incurred by the incorporators, shareholders, officers or directors, as such, of the Servicer or of any successor corporation, or any of them, by reason of the obligations, covenants or agreements contained in this Agreement, any Supplement, any of the Certificates or any other Transaction Documents, or implied therefrom; and that any and all such personal liability of, either at common law or in equity or by constitution or statute, and any and all such rights and claims against, every such incorporator, shareholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations or covenants contained in this Agreement, any Supplement, any of the Certificates or any other Transaction Documents, or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Agreement and any Supplement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Servicer shall not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its duties page 75 82 to service the Receivables in accordance with this Agreement or any Supplement that in its reasonable opinion may involve it in any expense or liability. The Servicer may, in its sole discretion, undertake any legal action relating to the servicing, collection or administration of Receivables and Related Transferred Assets that it may reasonably deem necessary or appropriate for the benefit of the Certificateholders with respect to this Agreement and the rights and duties of the parties hereto and the interests of the Certificateholders hereunder. ARTICLE IX LIQUIDATION EVENTS SECTION 9.01 Liquidation Events. Any of the following events shall constitute a "Liquidation Event": (a)(i) failure on the part of ARC or the Servicer to make any payment of the principal amount of or any interest on any Investor Certificate or Purchased Interest or deposit required by the terms of any Transaction Document on or before five Business Days after the date the payment or deposit is required to be made herein, or to make any other payment required by the terms of any Transaction Document on or before fifteen Business Days after the date such payment is required to be made, (ii) failure on the part of the Seller to duly observe or perform Section 6.1(h), 6.3(a) or (c) of the Purchase Agreement or ARC to duly observe or perform Section 7.02(d), (f) or (g) or clause (i) or (ii) of Section 7.02(e) of this Agreement, which failure has a material adverse effect on the Investor Certificateholders of any Series or any Purchased Interest and continues unremedied for a period of five Business Days after the date on which written notice of such failure, requiring same to be remedied, shall have been given to ARC by the Trustee or to ARC and the Trustee by any Investor Certificateholder or Purchaser, (iii) failure on the part of ARC to duly observe or perform Section 7.02(o), which failure continues for a period of thirty days, or (iv) failure on the part of ARC to duly observe or perform any other covenant or agreement set forth in any Transaction Document, which failure has a material adverse effect on the Investor Certificateholders of any Series or any Purchased Interest and continues unremedied for a period of 30 days after the date on which written notice of the failure, requiring the same to be remedied, shall have been given to ARC by the Trustee or to ARC and the Trustee by any Investor Certificateholder or Purchaser, (b) any representation or warranty made by a Seller in Section 5.1(d) or clause (i), (ii) or (iii) of Section 5.1(k) of the Purchase Agreement or by ARC in Section 2.03(a)(i), (a)(ii)(A), (a)(ii)(B) or (a)(ii)(C) of this Agreement shall prove to have been incorrect in any material respect when made, and continues to be incorrect in any material respect for a period of five Business Days after the date on which page 76 83 written notice of the breach, requiring the same to be remedied, shall have been given to ARC by the Trustee or to ARC and the Trustee by any Investor Certificateholder or Purchaser, or any other representation or warranty made by a Seller in any Transaction Document or by ARC in any Transaction Document shall prove to have been incorrect in any material respect when made, and continues to be incorrect in any material respect for a period of 30 days after the date on which written notice of the breach, requiring the same to be remedied, shall have been given to ARC by the Trustee, or to ARC and the Trustee by any Investor Certificateholder or Purchaser; provided, however, that a mistake in representation of a Receivable as an Eligible Receivable shall not constitute a Liquidation Event unless and until a Seller has failed to make the cash payments (if any) owed under the Purchase Agreement in respect of the Noncomplying Receivables and Dilution Adjustment arising from the misrepresentation (it being understood that certain of such mistakes may result in a non-cash adjustment under the Purchase Agreement), (c) an Event of Bankruptcy shall occur with respect to ARC, the Servicer or the Seller or ARC shall become unable for any reason, other than the commencement or continuation of a Look Back Period, to transfer Receivables or Related Transferred Assets to the Trust in accordance with the provisions of this Agreement; provided, however, that if, at the time prior to the Liquidation Commencement Date, an Event of Bankruptcy occurs as a result of a bankruptcy proceeding being filed against ARC or the Seller, then, on and after the day on which the bankruptcy proceeding is filed until the earlier to occur of the dismissal of the proceeding and the Liquidation Commencement Date, ARC shall not purchase Receivables and the Related Purchased Assets from the Seller or transfer Receivables and Related Transferred Assets to the Trust, (d) the Trust shall become an "investment company" within the meaning of the Investment Company Act of 1940, as amended, (e)(i) the amount equal to the difference between (A) the sum of the Certificate Calculation Amount plus the PI Calculation Amount, and (B) the amount of funds then on deposit in the Equalization Account exceeds (ii) the Base Amount, for a period of five or more consecutive Business Days, (f) the occurrence and continuance of a Servicer Default, (g) AmeriSource shall cease to own 100% of the issued and outstanding capital stock of ARC, (h) the Internal Revenue Service or the PBGC shall file notice of one or more Involuntary Adverse Claims that relate to claims in an aggregate amount exceeding $2,000,000; provided, that if, within five Business Days after an Authorized officer of page 77 84 ARC obtains actual knowledge of the filing of one or more Involuntary Adverse Claims in an aggregate amount exceeding $2,000,000, AmeriSource has provided to ARC, and ARC has provided to the Trustee, one or more Acceptable Guarantee Instruments that has/have a term of not less than 60 days and that is/are in an aggregate amount equal to the lesser of (i) the aggregate amount of such Involuntary Adverse Claim(s) and (ii) the aggregate Unpaid Balance of the Receivable or Receivables encumbered by such Involuntary Adverse Claim(s), then the filing of such Involuntary Adverse Claim(s) shall not constitute a Liquidation Event under this subsection unless, at the expiration of a period of 60 days after the date on which the Involuntary Adverse Claim(s) was/were filed, the Involuntary Adverse Claim(s) still encumber(s) the Trust Assets; and provided further, that under no circumstances may the aggregate amount of Involuntary Adverse Claims for which Acceptable Guarantee Instruments are provided pursuant to the preceding proviso exceed $10,000,000 at any one time outstanding, (i) the Trustee shall have received a Stop Date Notice, (j) any foreclosure or similar proceedings in respect of any security interests in the ARC Note or the stock of ARC shall have been commenced, AmeriSource shall cease to have title to any such item, any remedies under or in connection with the Seller Credit Agreement shall have been exercised with respect to any such item, or AmeriSource shall take any corporate action acquiescing to any of the foregoing, it being understood that the grant of a security interest in the stock of ARC or the ARC Note to a creditor of AmeriSource that is party to an Intercreditor Agreement shall not be a Liquidation Event, (k) the cessation of, or the failure to create, a valid first-priority perfected ownership or security interest in favor of the Trustee in the Receivables and the rights of ARC under the Purchase Agreement, or (l) the Intercreditor Agreement shall cease to be effective at any time when the Seller's inventory shall be subject to Adverse Claims in favor of the Seller Agent. Upon the occurrence and continuance of any event described in subsection (c), (d), (i) or (j), the Liquidation Commencement Date shall occur without any notice or other action on the part of the Trustee, any Purchaser or the Investor Certificateholders, immediately upon the occurrence of such Liquidation Event. The Trustee shall give the Applicable Rating Agencies notice of any such event; provided, however, that failure to give any such notice will not result in any delay of the Liquidation Commencement Date. On the tenth day after ARC receives notice or otherwise becomes aware of the occurrence and continuance of any event described in subsection (a), (e), (h), or (k) the Liquidation Commencement Date shall occur without any notice or other action on the part of the Trustee, any Purchaser or the Investor Certificateholders, unless waived by the Majority Investors or otherwise cured prior page 78 85 to such tenth day. Upon the occurrence and continuance of any event described in any subsection above (including subsection (a), (c), (d), (e), (h), (k), (i) or (j)), after the applicable grace period, if any, set forth in such subsection, the Trustee may (and, at the direction of the Majority Investors, shall) by notice then given in writing to ARC, the Applicable Rating Agencies, and the Servicer, declare that the Liquidation Commencement Date shall have occurred as of the date of ARC's receipt of the notice. Notwithstanding the foregoing, a delay in or failure in performance referred to in subsection (a)(i) for a period of ten Business Days after the applicable grace period, or in subsections a(ii), a(iii) or (b) for a period of 30 Business Days after the applicable grace period, shall not constitute a Liquidation Event if the delay or failure could not have been prevented by the exercise of reasonable diligence by ARC or the Servicer and the delay or failure was caused by an act of God or the public enemy, riots, acts of war, acts of terrorism, epidemics, flood, embargoes, weather, landslides, fire, earthquakes or similar causes. The preceding sentence shall not relieve ARC or the Servicer from using its best efforts to perform its obligations in a timely manner in accordance with the terms of the Transaction Documents, and ARC and/or the Servicer, as applicable, shall promptly give the Trustee, the Applicable Rating Agencies, each Purchaser Agent and, in the case of any delay or failure in performance by the Servicer, ARC, an Officer's Certificate notifying them of the failure or delay by it. SECTION 9.02 Remedies. Upon the occurrence of a Liquidation Event, the Trustee shall have, in addition to all other rights and remedies available to the Trustee under this Agreement or otherwise, (a) the right to apply Collections to the payment of the Obligations of ARC and the Servicer under the Transaction Documents, as provided herein, and (b) all rights and remedies provided under all other applicable laws, which rights, in the case of each and all of the foregoing, shall be cumulative. The Trustee shall exercise the rights at the direction of the Investor Certificateholders pursuant to (and subject to the limitations specified in) Section 11.14. SECTION 9.03 Additional Rights Upon the Occurrence of Certain Events. (a) If an Event of Bankruptcy shall occur with respect to ARC, this Agreement and the Trust shall be deemed to have terminated on the day of the Event of Bankruptcy; provided, that within seven Business Days of the date of written notice to the Trustee of the Event of Bankruptcy, the Trustee shall: (i) publish a notice in an Authorized Newspaper that an Event of Bankruptcy has occurred with respect to ARC, that the Trust has terminated, and that the Trustee intends to sell, dispose of or otherwise liquidate the Receivables and the Related Transferred Assets pursuant to this Agreement in a commercially reasonable manner and on commercially reasonable terms, which shall include the solicitation of competitive bids (a "Disposition"), and page 79 86 (ii) send written notice to the Investor Certificateholders describing the provisions of this section and requesting each Investor Certificateholder to advise the Trustee in writing whether (A) it wishes the Trustee to instruct the Servicer not to effectuate a Disposition, (B) it refuses to advise the Trustee as to the specific action the Trustee shall instruct the Servicer to take or (C) it wishes the Servicer to effect a Disposition. If, after 60 days from the day notice pursuant to subsection (a)(i) is first published (the "Publication Date"), the Trustee shall not have received the written instruction described in subsection (a)(ii)(A) from Holders of Investor Certificates representing in excess of 50% of the Certificate Invested Amount, the Trustee shall instruct the Servicer to effectuate a Disposition, and the Servicer shall proceed to consummate a Disposition. If, however, Holders of Investor Certificates representing in excess of 50% of the Certificate Invested Amount instruct the Trustee not to effectuate a Disposition, the Trust shall be reconstituted and continue pursuant to the terms of this Agreement. (b) Notwithstanding the termination of this Agreement and the Trust pursuant to subsection (a), the proceeds from any Disposition of the Receivables and the Related Transferred Assets pursuant to subsection (a) shall be treated as Collections on the Receivables and shall be allocated and deposited in accordance with the provisions of Article IV. (c) The Trustee may appoint an agent or agents to assist with its responsibilities pursuant to this section with respect to competitive bids. (d) ARC or any of its Affiliates shall be permitted to bid for the Receivables and the Related Transferred Assets. The Trustee may obtain a prior determination from any bankruptcy trustee, receiver or liquidator that the terms and manner of any proposed Disposition are commercially reasonable. (e) Notwithstanding the termination of this Agreement and the Trust pursuant to subsection (a), the Trustee shall continue to have the rights described in Section 9.2 and Article XI, and be subject to direction on terms consistent with those set out in Section 11.14, pending the completion of any Disposition and/or the reconstitution of the Trust. ARTICLE X SERVICER DEFAULTS SECTION 10.01 Servicer Defaults. Any of the following events shall constitute a "Servicer Default": page 80 87 (a) any failure by the Servicer in its capacity as Servicer to make any payment, transfer or deposit required by any Transaction Document to be made by it or to give instructions or to give notice to the Trustee to make such payment, transfer or deposit, which failure continues unremedied (i) in the case of payments of Fixed Principal Yield, Investor Revolving Yield or PI Yield, for five Business Days and (ii) in the case of all payments not included in clause (i), for seven Business Days after the date on which an Authorized Officer of the Servicer has actual knowledge of the failure, (b) failure on the part of the Servicer in its capacity as Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement or any other Transaction Document, which failure has a material adverse effect on the Investor Certificateholders of any Series or any Purchased Interest and continues unremedied for a period of 30 days after the date on which written notice of the failure, requiring the same to be remedied, shall have been given to the Servicer by the Trustee, or to the Servicer and the Trustee by any Investor Certificateholder or Purchaser, (c) the Servicer shall assign its duties under this Agreement, except as permitted by Sections 3.01(b) and 8.03, (d) any representation, warranty or certification made by the Servicer in any Transaction Document or in any certificate or other document or instrument delivered pursuant to any Transaction Document shall prove to have been incorrect in any material respect when made or delivered, that has a material adverse effect on the Investor Certificateholders of any Series or any Purchased Interest and which material adverse effect continues unremedied for a period of 30 days after the date on which written notice of the failure, requiring the same to be remedied, shall have been given to the Servicer by the Trustee, or to the Servicer and the Trustee by any Investor Certificateholder or Purchaser, or (e) any Event of Bankruptcy shall occur with respect to the Servicer. In the event of any Servicer Default, so long as the Servicer Default shall not have been remedied, the Trustee may (and, at the direction of the Required Investors, shall), by notice then given in writing to the Servicer (a "Termination Notice"), terminate all (but not less than all) the rights and obligations of the Servicer as Servicer under this Agreement and in and to the Receivables, the Related Transferred Assets and the proceeds thereof. As soon as possible, and in any event within five Business Days, after an Authorized Officer of the Servicer has obtained knowledge of the occurrence of any Servicer Default, the Servicer shall furnish the Trustee, each Purchase Agent and the Applicable Rating page 81 88 Agencies, and the Trustee shall promptly furnish each Investor Certificateholder, notice of the Servicer Default. Notwithstanding the foregoing, a delay in or failure in performance referred to in subsection (a) for a period of ten Business Days after the applicable grace period, or in subsection (b) or (d) for a period of 30 Business Days after the applicable grace period, shall not constitute a Servicer Default if the delay or failure could not have been prevented by the exercise of reasonable diligence by the Servicer and the delay or failure was caused by an act of God or the public enemy, riots, acts of war, acts of terrorism, epidemics, flood, embargoes, weather, landslides, fire, earthquakes or similar causes. The preceding sentence shall not relieve the Servicer from using its best efforts to perform its obligations in a timely manner in accordance with the terms of the Transaction Documents, and the Servicer shall promptly give the Trustee, each Purchaser Agent and ARC an Officer's Certificate notifying them of its failure or delay. SECTION 10.02 Trustee to Act; Appointment of Successor. (a) On and after the Servicer's receipt of a Termination Notice pursuant to Section 10.01, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Termination Notice or otherwise specified by the Trustee in writing or, if no such date is specified in the Termination Notice, or otherwise specified by the Trustee, until a date mutually agreed upon by the Servicer and the Trustee. The Trustee shall, as promptly as possible after the giving of a Termination Notice, nominate an Eligible Servicer as successor servicer (the "Successor Servicer"); provided, however, that (a) in so appointing any Successor Servicer, the Trustee shall give due consideration to any Successor Servicer proposed by any Purchaser Agent and (b) the Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Trustee and each Purchaser Agent. Any Person who is nominated to be a Successor Servicer shall accept its appointment by a written assumption in form and substance acceptable to the Trustee. In the event that a Successor Servicer has not been appointed or has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Trustee without further action shall automatically be appointed the Successor Servicer. The Trustee may delegate any of its servicing obligations to an affiliate or agent in accordance with Section 3.01(b). If the Trustee is prohibited by applicable law from performing the duties of the Servicer hereunder, the Trustee may appoint, or may petition a court of competent jurisdiction to appoint, a Successor Servicer hereunder. The Trustee shall give prompt notice to the Applicable Rating Agencies and each Investor Certificateholder upon the appointment of a Successor Servicer. (b) After the Servicer's receipt of a Termination Notice, and on the date that a Successor Servicer shall have been appointed by the Trustee and shall have accepted the appointment pursuant to subsection (a), all authority and power of the Servicer under this Agreement shall pass to and be vested in the Successor Servicer (a "Service Transfer"); and, without limitation, the Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and instruments, page 82 89 and to do and accomplish all other acts or things that the Trustee reasonably determines are necessary or appropriate to effect the purposes of the Service Transfer. Upon the appointment of the Successor Servicer and its acceptance thereof, the Servicer agrees that it will terminate its activities as Servicer hereunder in a manner that the Trustee indicates will facilitate the transition of the performance of such activities to the Successor Servicer. The Servicer agrees that it shall use reasonable efforts to assist the Successor Servicer in assuming the obligations to service and administer the Receivables and the Related Transferred Assets, on the terms and subject to the conditions set forth herein, and to effect the termination of the responsibilities and rights of the Servicer to conduct servicing hereunder, including the transfer to such Successor Servicer of all authority of the Servicer to service the Receivables and Related Transferred Assets provided for under this Agreement and all authority over all cash amounts that shall thereafter be received with respect to the Receivables or the Related Transferred Assets. The Servicer shall, within five Business Days after the designation of a Successor Servicer, transfer its electronic records (including software) relating to the Receivables, the related Contracts and the Related Transferred Assets to the Successor Servicer in such electronic form as the Successor Servicer may reasonably request and shall promptly transfer to the Successor Servicer all other records, correspondence and documents necessary for the continued servicing of the Receivables and the Related Transferred Assets in the manner and at such times as the Successor Servicer shall request. To the extent that compliance with this subsection shall require the Servicer to disclose to the Successor Servicer information of any kind that the Servicer reasonably deems to be confidential, prior to the transfer contemplated by the preceding sentence the Successor Servicer shall be required to enter into such licensing and confidentiality agreements as the Servicer shall reasonably deem necessary to protect its interest. All reasonable costs and expenses (including attorneys' fees and disbursements) incurred in connection with transferring the Receivables, the Related Transferred Assets and all related Records (including the related Contracts) to the Successor Servicer and amending this Agreement and the other Transaction Documents to reflect the succession as Servicer pursuant to this subsection shall be paid by the predecessor Servicer (or, if the Trustee serves as Successor Servicer on an interim basis, the initial Servicer) within 15 days after presentation of reasonable documentation of the costs and expenses. (c) Upon its appointment and acceptance thereof, the Successor Servicer shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities and duties relating thereto placed on the Servicer by the terms and provisions hereof, and all references in this Agreement to the Servicer shall be deemed to refer to the Successor Servicer. (d) All authority and power granted to the Servicer or the Successor Servicer under this Agreement shall automatically cease and terminate upon termination of the Trust pursuant to Section 12.01, and shall pass to and be vested in ARC and, without limitation, ARC is hereby authorized and empowered, on and after the effective date of such termination, to execute and deliver, on behalf of the Successor Servicer, as attorney-in-fact page 83 90 or otherwise, all documents and other instruments and to do and accomplish all other acts or things that ARC reasonably determines are necessary or appropriate to effect the purposes of such transfer of servicing rights. The Successor Servicer agrees to cooperate with ARC in effecting the termination of the responsibilities and rights of the Successor Servicer to conduct servicing of the Receivables and the Related Transferred Assets. The Successor Servicer shall, within five Business Days after such termination, transfer its electronic records relating to the Receivables and the Related Transferred Assets to ARC in such electronic form as ARC may reasonably request and shall transfer all other records, correspondence and documents relating to the Receivables and the Related Transferred Assets to ARC in the manner and at such times as ARC shall reasonably request. To the extent that compliance with this subsection shall require the Successor Servicer to disclose to ARC information of any kind that the Successor Servicer deems to be confidential, ARC shall be required to enter into such customary licensing and confidentiality agreements as the Successor Servicer shall reasonably deem necessary to protect its interests. All reasonable costs and expenses (including attorneys' fees and disbursements) incurred by the Trustee, in its capacity as Successor Servicer, in connection with the termination shall be paid by ARC within 15 days after presentation of reasonable documentation of the costs and expenses. SECTION 10.03 Notification of Servicer Default; Notification of Appointment of Successor Servicer. Within four Business Days after an Authorized Officer of the Servicer becomes aware of any Servicer Default, the Servicer shall give written notice thereof to the Trustee and the Applicable Rating Agencies, and the Trustee shall, promptly upon receipt of the written notice, give notice to the Investor Certificateholders at their respective addresses appearing in the Certificate Register. Upon any termination or appointment of a Successor Servicer pursuant to this Article X, the Trustee shall give prompt written notice thereof to the Investor Certificateholders at their respective addresses appearing in the Certificate Register and to the Applicable Rating Agencies. ARTICLE XI THE TRUSTEE SECTION 11.01 Duties of Trustee. (a) The Trustee undertakes to perform the duties and only the duties as are specifically set forth in this Agreement. The provisions of this Article XI shall apply to the Trustee solely in its capacity as Trustee, and not to the Trustee in its capacity as Servicer if it is acting as the Servicer. Following the occurrence of a Servicer Default of which a Responsible Officer has actual knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Agreement and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; provided, however, that if the Trustee shall assume the duties of the Servicer pursuant to Section 10.02, the Trustee in performing the duties shall use the degree of skill and attention customarily exercised by a servicer with page 84 91 respect to trade receivables that it services for itself or others. The Trustee shall have no power to create, assume or incur indebtedness or other liabilities in the name of the Trust other than as contemplated in, or incidental to the performance of its duties under, this Agreement. (b) The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Trustee that are specifically required to be furnished pursuant to any provision of this Agreement, shall examine them to determine whether they are substantially in the form required by this Agreement. The Trustee shall give written notice to the Person who furnished any item of the type listed in the preceding sentence of any lack of substantial conformity of any such item to the applicable requirements of this Agreement. In addition, the Trustee shall give prompt written notice to the Investor Certificateholders and each Purchaser Agent of any lack of substantial conformity of any such instrument to the applicable requirements of this Agreement discovered by the Trustee that would entitle a specified percentage of the Fixed Principal Certificateholders or the Investor Revolving Certificateholders or the Holders of any Series of Fixed Principal Certificates or Investor Revolving Certificates or Purchasers or Purchaser Agents to take any action pursuant to this Agreement. (c) Subject to subsection (a), no provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct; provided, however, that: (i) the Trustee shall not be liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts, (ii) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction (as applicable) of the Majority Investors, the Required Investors, all Investors, any Purchaser Agent, or the Required Series Holders relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement, (iii) the Trustee shall not be charged with knowledge of (A) any failure by the Servicer to comply with the obligations of the Servicer referred to in subsections (a), (b) or (c) of Section 10.01, (B) any breach of the representations and warranties of ARC set forth in Section 2.03 or 7.01 or the representations and warranties of the Servicer set forth in Section 8.01, (C) any breach of the covenants of ARC set forth in Section 7.02 or the covenants of the Servicer set forth in Section 8.02 or (D) the ownership of any Certificate or Purchased Interest for purposes of Section 6.05, in each case unless a Responsible Officer of the Trustee obtains actual knowledge of the page 85 92 matter or the Trustee receives written notice of the matter from the Servicer or from any Holder, (iv) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement, the Trustee shall not be liable except for the performance of the duties and obligations that specifically shall be set forth in this Agreement, no implied covenants or obligations shall be read into this Agreement against the Trustee and, in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely on the truth of the statements and the correctness of the opinions expressed in any certificates or opinions that are furnished to the Trustee and that conform to the requirements of this Agreement, and (v) without limiting the generality of this section or Section 11.02, the Trustee shall have no duty (A) to see to any recording, filing, or depositing of this Agreement or any agreement referred to herein or any financing statement or continuation statement evidencing a security interest in the Receivables or the Related Transferred Assets, or to see to the maintenance of any such recording or filing or depositing or to any rerecording, refiling or redepositing of any thereof, (B) to see to the payment or discharge of any tax, assessment, or other governmental charge or any Adverse Claim or encumbrance of any kind owing with respect to, assessed or levied against, any part of the Trust, (C) to confirm or verify the contents of any reports or certificates of the Servicer delivered to the Trustee pursuant to this Agreement that are believed by the Trustee to be genuine and to have been signed or presented by the proper party or parties or (D) to ascertain or inquire as to the performance or observance of any of ARC's or the Servicer's representations, warranties or covenants or the Servicer's duties and obligations as Servicer. (d) The Trustee shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if the Trustee reasonably believes that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it, and none of the provisions contained in this Agreement shall in any event require the Trustee to perform, or be responsible for the manner of performance of, any obligations of the Servicer under this Agreement except during the time, if any, that the Trustee shall be the successor to, and be vested with the rights, duties, powers and privileges of, the Servicer in accordance with the terms of this Agreement. (e) Except for actions expressly authorized by this Agreement, the Trustee shall take no action reasonably likely to impair the interests of the Trust in any Trust Asset now existing or hereafter created or to impair the value of any Trust Asset now existing or hereafter created. page 86 93 (f) Except to the extent expressly provided otherwise in this Agreement, the Trustee shall have no power to vary the corpus of the Trust, including the power to (i) accept any substitute obligation for a Receivable initially transferred to the Trust under Section 2.01 hereof, (ii) add any other investment, obligation or security to the Trust, (iii) withdraw from the Trust any Trust Asset, except for a withdrawal permitted under Section 12.01 or a withdrawal that has been consented to by all of the Investor Certificateholders. (g) In the event that the Paying Agent or the Transfer Agent and Registrar shall fail to perform any obligation, duty or agreement in the manner or on the day on which such obligation, duty or agreement is required to be performed by the Paying Agent or the Transfer Agent and Registrar, as the case may be, under this Agreement, the Trustee shall be obligated, promptly upon its actual knowledge thereof, to perform the obligation, duty or agreement in the manner so required. (h) Without limiting any of the foregoing, the Trustee is hereby authorized to enter into the Intercreditor Agreement, and to perform its duties and obligations thereunder to bind the Investor Certificateholders and the Purchasers to the terms thereof. SECTION 11.02 Certain Matters Affecting the Trustee. Except as otherwise provided in Section 11.01: (a) the Trustee may rely on and shall be protected in acting on, or in refraining from acting in accordance with, any resolution, Officer's Certificate, opinion of counsel, certificate of auditors or any other certificate, statement, instrument, instruction, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document and any information contained therein believed by it to be genuine and to have been signed or presented to it pursuant to this Agreement by the proper party or parties including, but not limited to, reports and records required by Article III, (b) the Trustee may consult with counsel and any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or permitted or omitted by it hereunder in good faith and in accordance with such Opinion of Counsel, (c) the Trustee (including in its role as Successor Servicer, if it ever acts in that capacity) shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement, or to institute, conduct or defend any litigation or other proceeding hereunder or in relation hereto, at the request, order or direction of any of the Certificateholders, the Purchasers or any Purchaser Agent, pursuant to the provisions of this Agreement, unless such Certificateholders, the Purchasers or Purchaser Agent shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby; page 87 94 provided, however, that nothing contained herein shall relieve the Trustee of the obligations, upon the occurrence and continuance of a Servicer Default that has not been cured, to exercise such of the rights and powers vested in it by this Agreement and to use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs, (d) the Trustee shall not be personally liable for any action taken, permitted or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement, (e) the Trustee shall not be bound to make any investigation into the facts of matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Required Investors; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses, or liabilities likely to be incurred by it in connection with making such investigation shall be, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Agreement, the Trustee may require reasonable indemnity against such cost, expense, or liability as a condition to proceeding with the investigation. The reasonable expense of every examination shall be paid by the Servicer or, if paid by the Trustee, shall be reimbursed by the Servicer upon demand, (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, representatives, attorneys or a custodian, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, representative, attorney or custodian appointed with due care by it hereunder, (g) except as may be required by Section 11.01(b) hereof, the Trustee shall not be required to make any initial or periodic examination of any documents or records related to the Trust Assets for the purpose of establishing the presence or absence of defects or for any other purpose, (h) whether or not therein expressly so provided, every provision of this Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this section, (i) the Trustee shall have no liability with respect to the acts or omissions of the Servicer (except and to the extent the Servicer is the Trustee), including, but not limited to, acts or omissions in connection with: (A) the servicing, management or administration of the Receivables or the Related Transferred Assets, (B) calculations made by the Servicer whether or not reported to the Trustee, and (C) deposits into or page 88 95 withdrawals from any Bank Accounts or Trust Accounts established pursuant to the terms of this Agreement, and (j) in the event that the Trustee is also acting as Paying Agent or Transfer Agent and Registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article XI shall also be afforded to the Trustee acting as Paying Agent or as Transfer Agent and Registrar. SECTION 11.03 Limitation on Liability of Trustee. The Trustee shall at no time have any responsibility or liability for or with respect to the correctness of the recitals contained herein or in the Certificates (other than the certificate of authentication on the Certificates) or the Purchased Interests. Except as set forth in Section 11.15, the Trustee makes no representations as to the validity or sufficiency of this Agreement, any PI Agreement, any Supplement, the Certificates (other than the certificate of authentication on the Certificates) or the Purchased Interests, any other Transaction Document or any Trust Asset or related document. The Trustee shall not be accountable for the use or application by ARC of any of the Certificates or the Purchased Interests or of the proceeds of such Certificates or the Purchased Interests, or for the use or application of any funds paid to ARC or the Servicer in respect of the Trust Assets or deposited by the Servicer in or withdrawn by the Servicer from the Bank Accounts, the Trust Accounts or any other accounts hereafter established to effectuate the transactions contemplated herein or in the other Transaction Documents and in accordance with the terms hereof or thereof. The Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity, or enforceability of any ownership or security interest in any Trust Asset, or the perfection or priority of such a security interest or the maintenance of any such perfection or priority, or for or with respect to the efficacy of the Trust or its ability to generate the payments to be distributed to Certificateholders or Purchasers under this Agreement, including: (a) the existence and substance of any Trust Asset or any related Record or any computer or other record thereof, (b) the validity of the transfer of any Trust Asset to the Trust or of any preceding or intervening transfer, (c) the performance or enforcement of any Trust Asset, (d) the compliance by ARC or the Servicer with any warranty or representation made under this Agreement or in any other Transaction Document and the accuracy of any such warranty or representation prior to the Trustee's receipt of actual notice of any noncompliance therewith or any breach thereof, (e) any investment of monies pursuant to Section 4.04 or any loss resulting therefrom, (f) the acts or omissions of ARC, the Servicer or any Obligor, (g) any action of the Servicer taken in the name of the Trustee, or (h) any action by the Trustee taken at the instruction of the Servicer; provided, however, that the foregoing shall not relieve the Trustee of its obligation to perform its duties under the Agreement in accordance with the terms hereof. Except with respect to a claim based on the failure of the Trustee to perform its duties under this Agreement or based on the Trustee's negligence or willful misconduct, no page 89 96 recourse shall be had against the Trustee in its individual capacity for any claim based on any provision of this Agreement, any other Transaction Document, the Certificates, the Purchased Interests, any Trust Asset or any assignment thereof. The Trustee shall not have any personal obligation, liability, or duty whatsoever to any Certificateholder, any Purchaser or any other Person with respect to any such claim, and any such claim shall be asserted solely against the Trust or any indemnitor who shall furnish indemnity to the Trust or the Trustee as provided in this Agreement. Any obligation of the Trustee to give any notice or statement to any rating agency hereunder shall constitute only a best efforts obligation and the notice or statement shall be so provided only as a matter of courtesy and accommodation, the Trustee having no liability to any rating agency or any other Person for any failure to so provide the notice or statement. SECTION 11.04 Trustee May Deal with Other Parties. Subject to any restrictions that may otherwise be imposed by Section 406 of ERISA or Section 4975(e) of the Internal Revenue Code, the Trustee in its individual or any other capacity may deal with the other parties hereto (other than ARC) and their respective affiliates, with the same rights as it would have if it were not the Trustee. SECTION 11.05 Servicer To Pay Trustee's Fees and Expenses. (a) To the extent not paid by the Servicer to the Trustee from funds constituting the Servicing Fee, the Servicer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to receive, such reasonable compensation as is agreed upon in writing between the Trustee and the Servicer (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered by it in the execution of the trust hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Servicer will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of the Transaction Documents to which it is a party (including the reasonable fees and expenses of its agents, any co-trustee and counsel) except any expense, disbursement or advance that may arise from the Trustee's negligence or bad faith. (b) In addition, the Servicer agrees to indemnify the Trustee from, and hold it harmless against, any and all losses, liabilities, damages, claims or expenses incurred by the Trustee in the execution of the Trust or in the exercise or performance of any of the powers or duties of the Trustee hereunder, other than those resulting from the gross negligence or willful misconduct of the Trustee. (c) If the Trustee is appointed Successor Servicer pursuant to Section 10.02, the provisions of this section shall not apply to expenses, disbursements and advances made or incurred by the Trustee in its capacity as Successor Servicer, which shall be paid out of the Servicing Fee. The Servicer's covenant to pay the fees, expenses, disbursements and page 90 97 advances provided for in this section shall survive the resignation or removal of the Trustee and the termination of this Agreement. (d) The Trustee shall look solely to the Servicer for payment of amounts described in this Section 11.05, and the Trustee shall have no claim for payment of such amounts against ARC or the Trust Assets. SECTION 11.06 Eligibility Requirements for Trustee. The Trustee hereunder shall at all times: (a) be (i) a banking institution organized under the laws of the United States, (ii) a member bank of the Federal Reserve System or (iii) any other banking institution or trust company, incorporated and doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency, and that is supervised and examined by a state or federal authority having supervision over banks, (b) not be an Enhancement Provider or an Affiliate of BT Securities Corporation, and (c) have, in the case of an entity that is subject to risk-based capital adequacy requirements, risk-based capital of at least $50,000,000 or, in the case of an entity that is not subject to risk-based capital adequacy requirements, a combined capital and surplus of at least $50,000,000. If such corporation or association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then, for the purpose of this section, the combined capital and surplus of the corporation or association shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this section, the Trustee shall resign immediately in the manner and with the effect specified in Section 11.07. SECTION 11.07 Resignation or Removal of Trustee. (a) The Trustee may at any time resign and be discharged from the trust hereby created by giving 30 days' prior written notice thereof to ARC, the Servicer, the Applicable Rating Agencies, the Investor Certificateholders and the Purchaser Agents. Upon receiving the notice of resignation, ARC shall promptly appoint a successor trustee who meets the eligibility requirements set forth in Section 11.06 by written instrument, in duplicate, one copy of which shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after the giving of the notice of resignation, the resigning Trustee, upon notice to each Purchase Agent, may petition any court of competent jurisdiction to appoint a successor trustee. (b) If at any time the Trustee shall cease to be eligible to be the Trustee hereunder in accordance with the provisions of Section 11.06 hereof and shall fail to resign promptly after its receipt of a written request therefor by the Servicer, or if at any time the Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or if a receiver for the Trustee or of its property shall be appointed, or any public officer shall take charge or page 91 98 control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Servicer may remove the Trustee and, subject to the consent of each Purchaser Agent (which consent shall not be unreasonably withheld or delayed), promptly appoint a successor trustee by written instrument, in duplicate, one copy of which shall be delivered to the Trustee so removed and one copy to the successor trustee. (c) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this section shall not become effective until acceptance of appointment by the successor trustee as provided in Section 11.08 hereof. SECTION 11.08 Successor Trustee. (a) Any successor trustee appointed as provided in Section 11.07 shall execute, acknowledge and deliver to ARC, the Servicer, the Investor Certificateholders, the Purchasers and the predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall, upon payment of its fees and expenses and other amounts owed to it pursuant to Section 11.05, become effective and the successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Trustee herein. The predecessor Trustee shall deliver to the successor trustee, at the expense of the Servicer, all documents or copies thereof and statements held by it hereunder; and ARC and the predecessor Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully vesting and confirming in the successor trustee all such rights, powers, duties and obligations. The Servicer shall promptly give notice to the Applicable Rating Agencies upon the appointment of a successor trustee. (b) No successor trustee shall accept appointment as provided in this section unless at the time of the acceptance the successor trustee shall be eligible to become the Trustee under the provisions of Section 11.06. (c) Upon acceptance of appointment by a successor trustee as provided in this section, the successor trustee shall mail notice of the succession hereunder to all Investor Certificateholders at their addresses as shown in the Certificate Register. SECTION 11.09 Merger or Consolidation of Trustee. Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, if the Person meets the requirements of Section 11.06, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall promptly give notice to the Applicable Rating Agencies upon any merger or consolidation of the Trustee. page 92 99 SECTION 11.10 Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust may at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons (who may be an employee or employees of the Trustee) to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Certificateholders and the Purchasers, such title to the Trust, or any part thereof, and, subject to the other provisions of this section, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or appropriate; provided, that such appointment shall be subject to the prior written consent of ARC unless a Liquidation Event or Servicer Termination Event is continuing; and provided further, that in any event the Trustee will give ARC and the Servicer prior written notice of such appointment. No co-trustee or separate trustee shall be required to meet the terms of eligibility as a successor trustee under Section 11.06 and no notice to Certificateholders, Purchaser Agents or Purchasers of the appointment of any co-trustee or separate trustee shall be required under Section 11.08. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee and the separate trustee or co-trustee jointly (it being understood that the separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed (whether as the Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee, (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder, and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article XI. Each separate trustee and co-trustee, page 93 100 upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection or indemnity to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Servicer. (d) Any separate trustee or co-trustee may at any time constitute the Trustee, its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect to this Agreement or any other Transaction Document on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 11.11 Tax Returns. No Federal income tax return shall be filed on behalf of the Trust unless required by applicable law or any Governmental Authority or the Trustee has been advised otherwise by counsel. In the event the Trust shall be required to file tax returns, the Servicer shall prepare or shall cause to be prepared any tax returns required to be filed by the Trust and shall remit the returns to the Trustee for signature at least five Business Days before the returns are due to be filed. The Trustee shall promptly sign and deliver the returns to the Servicer and the Servicer shall promptly file the returns. Subject to the responsibilities of the Trustee set forth in Section 5.03(b), the Servicer, in accordance with that section, shall also prepare or shall cause to be prepared all tax information required by law to be made available to Certificateholders and Purchasers and shall deliver the information to the Trustee at least five Business Days prior to the date it is required by law to be made available to the Certificateholders and Purchasers. The Trustee, upon request, will furnish the Servicer with all the information known to the Trustee as may be reasonably required in connection with the preparation of all tax returns of the Trust and shall, upon request, execute such returns as the Trustee determines are appropriate. SECTION 11.12 Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Agreement, the Certificates, the Purchased Interests or the other Transaction Documents may be prosecuted and enforced by the Trustee without the possession of any of the Certificates or Purchased Interests or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee. Any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be distributed to the Certificateholders or Purchasers in respect of which such judgment has been obtained in the manner specified in Section 4.03(h). SECTION 11.13 Suits for Enforcement. If a Liquidation Event or a Servicer Default shall occur and be continuing, the Trustee, in its discretion may, subject to the provisions of page 94 101 Sections 11.01 and 11.14, proceed to protect and enforce its rights and the rights of the Certificateholders or Purchasers under this Agreement by suit, action or proceeding in equity or at law or otherwise, whether for the specific performance of any covenant or agreement contained in this Agreement or any other Transaction Document or in aid of the execution of any power granted in this Agreement or any other Transaction Document or for the enforcement of any other legal, equitable or other remedy as the Trustee, being advised by counsel, shall deem most effectual to protect and enforce any of the rights of the Trustee or the Certificateholders or Purchasers. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Certificateholder or Purchaser any plan of reorganization, arrangement, adjustment or composition affecting the Investor Certificates or the rights of any Holder thereof, or the Purchasers, or to authorize the Trustee to vote in respect of the claim of any Investor Certificateholder or Purchaser in any such proceeding. SECTION 11.14 Rights of Investor Certificateholders To Direct Trustee. The Required Investors shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that, subject to Section 11.01, the Trustee may decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not be taken lawfully, or if a Responsible Officer or Responsible Officers of the Trustee shall determine, in good faith, that the proceedings so directed would be illegal or involve the Trustee in personal liability or be unduly prejudicial to the rights of the Investor Certificateholders not giving such direction; and provided further, that nothing in this Agreement shall impair the right of the Trustee to take any action deemed proper by the Trustee and that is not inconsistent with such direction of the Required Investors. SECTION 11.15 Representations and Warranties of Trustee. The Trustee represents and warrants that: (a) it is a banking corporation organized, existing and in good standing under the laws of the State of New York, (b) it has full power, authority and right to execute, deliver and perform the Transaction Documents to which it is a party, and has taken all necessary action to authorize the execution, delivery and performance by it of the Transaction Documents, and (c) the Transaction Documents to which it is a party have been duly executed and delivered by the Trustee and, in the case of all such Transaction Documents, are legal, valid and binding obligations of the Trustee, enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of page 95 102 creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. SECTION 11.16 Maintenance of Office or Agency. The Trustee will maintain, at its address designated pursuant to Section 13.06, an office, offices, agency or agencies where notices and demands to or upon the Trustee in respect of the Certificates, the Purchased Interests and the Transaction Documents to which it is a party may be served. The Trustee will give prompt written notice to the Servicer and to the Certificateholders and Purchaser Agents of any change in the location of the Certificate Register or any such office or agency. SECTION 11.17 No Bond. The Trustee and each co-trustee and separate trustee from time to time appointed pursuant to this Agreement are relieved from giving any bond, surety or security, and from making any inventories, appraisals or accountings of the Trust Assets, in each case that would otherwise have been required under the laws of the State of New York merely on account of their acting in such capacities. ARTICLE XII TERMINATION SECTION 12.01 Termination of Trust. (a) The Trust and the respective obligations and responsibilities of ARC, the Servicer and the Trustee created hereby (other than the obligation of the Trustee to make payments to Certificateholders or Purchasers as hereinafter set forth and the obligations of the Servicer contained in Sections 5.03(b) and 11.11) shall terminate, except with respect to the duties and obligations described in Sections 3.09, 7.03, 8.04, 11.05, 12.02(b), 13.10, 13.13, 13.15, 13.16 and 13.17 upon the earliest to occur of (i) March 2, 2010 (the "Final Scheduled Payment Date"), (ii) the date that is 18 months after the Liquidation Commencement Date and (iii) the day on which the Certificateholders, the Purchasers and the Trustee shall have been paid all amounts required to be paid to them pursuant to this Agreement and the Trustee has disposed of all property held as part of the Trust (including pursuant to Section 12.03). (b) If, by the earlier to occur of (i) 30 days prior to the Final Scheduled Payment Date and (ii) seventeen months after the Liquidation Commencement Date, the Invested Amount (after giving effect to any distribution in respect of the Invested Amount to be made on such date) remains greater than zero, the Receivables and the Related Transferred Assets shall be sold, disposed and otherwise liquidated in a commercially reasonable manner and on commercially reasonable terms, which shall include the solicitation of competitive bids, by an institution acceptable to the Trustee and the Servicer. Such institution shall either be (A) a nationally recognized investment bank, (B) a nationally recognized commercial bank or (C) any other reputable institution whose regular business includes the sale of receivables and property similar to the Related Transferred Assets. The proceeds of any such sale, page 96 103 disposition or liquidation of the Receivables and the Related Transferred Assets will be treated as Collections on the Receivables and will be immediately deposited in the Master Collection Account. Notwithstanding the foregoing, the last payment of the principal of and interest on the Investor Certificates of any Series shall be due and payable no later than the Sale Date for the Series. If, from the earlier of clauses (i) and (ii) to the Sale Date for any Series, the Servicer determines that the Invested Amount for the Series on the applicable Sale Date (after giving effect to all changes therein on such date) will exceed zero, the Servicer shall solicit bids for the sale of interests in the Trust Assets in an amount equal to the sum of 110% of the Invested Amount for the Series on the Sale Date for the Series (after giving effect to all distributions required to be made on the Sale Date for the Series). ARC shall be entitled to participate in and to receive notice of each bid submitted in connection with the bidding process. Upon the expiration of the period, the Servicer shall determine (x) the Highest Bid and (y) the Available Final Distribution Amount for the Series. The Servicer shall sell the interests in the Trust Assets on the Sale Date for the applicable Series to the bidder with the Highest Bid and shall deposit the proceeds of such sale in the Master Collection Account for allocation (together with the Available Final Distribution Amount for such Series) to the Certificateholders of such Series. SECTION 12.02 Final Distribution. (a) The Servicer shall give the Trustee at least ten days' prior written notice of the date on which the Trust is expected to terminate in accordance with Section 12.01(a). The notice shall be accompanied by a certificate of an Authorized Officer of the Servicer setting forth the information specified in Section 3.06 covering the period during the then current calendar year through the date of the notice. Upon receiving the notification from the Servicer, the Trustee shall give the Fixed Principal Certificateholders, the Purchaser Agents or the Revolving Certificateholders (as applicable) written notice as soon as practicable after the Trustee's receipt of notice from the Servicer, which notice shall specify (i) the Settlement Date upon which final payment with respect to the Fixed Principal Certificates or the Revolving Certificates, as the case may be, is expected to be made and (ii) the amount of any such final payment. The Trustee shall give the notice to the Transfer Agent and Registrar and the Paying Agent at the time such notice is given to Fixed Principal Certificateholders and the Revolving Certificateholders. On the Settlement Date specified in the notice, the Trustee shall, based upon the Settlement Statement relating to the Settlement Date, cause to be distributed to the Fixed Principal Certificateholders, the holders of the Purchased Interests or the Revolving Certificateholders (as applicable) the amounts distributable to them on the Settlement Date pursuant to Article IV and Article V. Each Fixed Principal Certificateholder and Revolving Certificateholder shall present the Certificates owned by them to the Trustee and surrender the Certificates for cancellation at the address of the Trustee set forth in Section 13.06 not more than ten Business Days after the Settlement Date upon which final payment with respect to the Fixed Principal Certificates or the Revolving Certificates (as applicable) has been made. (b) Notwithstanding the termination of the Trust pursuant to Section 12.01(a), all funds then on deposit in the Master Collection Account shall continue to be held in trust for page 97 104 the benefit of the Certificateholders and the Purchasers and the Paying Agent or the Trustee shall pay such funds to the Fixed Principal Certificateholders, the Revolving Certificateholders and the Purchasers at the time set forth in Section 12.01(a). In the event that any of the Certificateholders shall not have received final payment with respect to their Certificates within six months after the date specified in the above-mentioned written notice from the Trustee, the Trustee shall give a second written notice to the remaining Certificateholders concerning payment of the final distribution with respect thereto and surrender of their Certificates for cancellation. If within one year after the second notice all the Certificates shall not have been surrendered for cancellation, the Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Certificates, and the cost thereof shall be paid out of the funds in the Master Collection Account held for the benefit of such Certificateholders. The Trustee and the Paying Agent shall pay to ARC any monies held by them for the payment of principal of or interest on the Certificates that remains unclaimed for two years after the termination of the Trust pursuant to Section 12.01(a). After payment of the monies to ARC, Certificateholders entitled to the money must look to ARC for payment as general creditors unless an applicable abandoned property law designates another Person. SECTION 12.03 Rights Upon Termination of the Trust. Upon the termination of the Trust pursuant to Section 12.01 and the surrender of the ARC Revolving Certificate and the Residual Certificate by ARC to the Trustee, the Trustee shall transfer, assign, set over and otherwise convey to ARC (without recourse, representation or warranty), all right, title and interest of the Trust in the Receivables, whether then existing or thereafter created, the Related Transferred Assets and all of the other property previously conveyed to the Trust pursuant to Section 2.01(b), except for amounts held by the Trustee pursuant to Section 12.02(b) and except for the rights of RPA Indemnified Parties (other than ARC and its officers, directors, shareholders, controlling Persons, employees and agents) to indemnification and contribution under Section 9.1 of the Purchase Agreement. The Trustee shall execute and deliver the instruments of transfer and assignment (including any document necessary to release the security interest in favor of the Trustee (for the benefit of the Certificateholders or the Purchasers) in such Receivables and Related Transferred Assets and to release any filing evidencing or perfecting such security interest), in each case without recourse, representation or warranty, that shall be reasonably requested by ARC to vest in ARC all right, title and interest that the Trust had in the Trust Assets. SECTION 12.04 Optional Repurchase of Investor Interests. Any Series Supplement may provide that on any Settlement Date occurring on or after the date that the Invested Amount of the related Series is reduced to 5% or less of the initial aggregate principal amount of the Investor Certificates of such Series, ARC shall have the option, upon the giving of ten days' prior written notice by ARC to the Servicer, the Trustee and the Applicable Rating Agencies, to repurchase the undivided interest of the Series in the Trust without any payment of a Prepayment Premium by depositing into the Principal Funding page 98 105 Account, on such Settlement Date, an amount equal to the unpaid Invested Amount of the Series plus accrued and unpaid interest on the unpaid principal amount of the Series (and accrued and unpaid interest with respect to interest amounts that were due but not paid on a prior Settlement Date) through the day preceding the Settlement Date at the Certificate Rate applicable to such Series. Upon tender of all outstanding Certificates of the Series by the Certificateholders, the Trustee shall then distribute such amounts, together with all other amounts on deposit in the Defeasance Account and the Principal Funding Account with respect to that Series to the Certificateholders of the Series on the next Settlement Date in repayment of the principal amount and all accrued and unpaid interest owing to the Certificateholders. Following any such repurchase, the Certificateholders of the Series shall have no further rights with respect to the Receivables and the Trustee shall execute and deliver the instruments of transfer and assignment (including any document necessary to release the security interest in favor of the Trustee (for the benefit of the Certificateholders) in the Receivables and Related Transferred Assets and to release any filing evidencing or perfecting the security interest), in each case without recourse, representation or warranty, as shall be reasonably requested by ARC to vest in ARC all right, title and interest that the Trust had in the Trust Assets. In the event that ARC fails for any reason to deposit the aggregate purchase price for the Invested Amount of any Series, payments shall continue to be made to the Certificateholders of the Series in accordance with the terms of this Agreement. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01 Amendment, Waiver, Etc. (a) This Agreement and any Supplement may be amended from time to time by the Servicer, ARC and the Trustee by a written instrument signed by each of them, without the consent of any of the Certificateholders, the Purchasers or the Purchaser Agents; provided, however, that such action shall not adversely affect in any material respect the interests of any Certificateholder or Purchaser; and provided further, that any amendment of this Agreement to effect any modification of the Lockbox Account arrangements pursuant to Section 3.03(c)(ii)(y) shall not require the consent of any of the Certificateholders, the Purchasers or the Purchaser Agents. This Agreement and any Supplement may not be amended unless ARC shall have delivered the proposed amendment to each Purchaser Agent and the Applicable Rating Agencies at least ten Business Days (or such shorter period as shall be acceptable to each of them) prior to the execution and delivery thereof and the Rating Agency Condition has been satisfied with respect to such amendment. If the terms of the Intercreditor Agreement require the Seller Agent to consent in writing to any amendment, modification or amendment of this Agreement, such amendment, modification or waiver shall not be effective unless the Trustee shall have received a copy of such consent. page 99 106 (b) Any PI Agreement may be amended from time to time by the parties thereto but without the consent of the Investor Certificateholders; provided, however, that any amendment will not adversely affect in any material respect the interests of the Certificateholders, as evidenced by an Officer's Certificate of the Servicer. (c) The provisions of this Agreement, any Supplement and any PI Agreement may also be amended, modified or waived from time to time by the Servicer, ARC and the Trustee with the consent of: (i) in the case of this Agreement or any Supplement, (A) the Required Series Holders of each affected Series and (B) if any Purchased Interest shall or would be adversely affected, each Purchaser Agent, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or any Supplement or of modifying in any manner the rights of the Certificateholders or the Purchasers; provided, however, that no amendment shall (w) reduce in any manner the amount of or delay the timing of any distributions to be made to Investor Certificateholders or deposits of amounts to be so distributed or the amount available under any Enhancement without the consent of each affected Certificateholder, (x) change the definition of or the manner of calculating the interest of any Investor Certificateholder without the consent of each affected Investor Certificateholder, (y) reduce the aforesaid percentage required to consent to any amendment without the consent of each Investor Certificateholder or (z) adversely affect the rating of any Series or Class by any Applicable Rating Agency without the consent of the Holders of Investor Certificates of the Series or Class evidencing not less than 66 2/3% of the aggregate unpaid principal amount of the Investor Certificates of the Series or Class or (ii) in the case of any PI Agreement, (A) each Purchaser Agent and the other parties thereto and (B) the Required Series Holders of each adversely affected Series. ARC or the Trustee shall establish a record date for determining which Certificateholders may give such waivers and consents. No waiver of any Liquidation Event or other default hereunder given at any time shall apply to any other prior or subsequent Liquidation Event or default. (d) Promptly after the execution of any amendment, consent or waiver described in subsection (b) or (c), the Trustee shall furnish written notification of the substance of the amendment or consent to each Investor Certificateholder, and the Servicer shall furnish written notification of the substance of the amendment or consent to the Rating Agency and each Enhancement Provider. (e) It shall not be necessary for any waiver or consent given by the Certificateholders under this section to approve the particular form of any proposed amendment, but it shall be sufficient if the consent shall approve the substance thereof. The manner of obtaining such waivers and consents and of evidencing the authorization of the execution thereof by the Certificateholders shall be subject to such reasonable requirements as the Trustee may prescribe. page 100 107 (f) Notwithstanding anything in this section to the contrary, no amendment may be made to this Agreement, any Supplement or any PI Agreement that would adversely affect in any material respect the interests of any Enhancement Provider without the consent of the Enhancement Provider. (g) Any Supplement or PI Agreement executed in accordance with the provisions of Section 6.10 shall not be considered an amendment to this Agreement for the purposes of this section. (h) Prior to the execution of any amendment to this Agreement, the Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of the amendment is authorized or permitted by this Agreement and that all conditions precedent to the execution and delivery have been satisfied. The Trustee may, but shall not be obligated to, enter into any amendment that affects the Trustee's own rights, duties or immunities under this Agreement. SECTION 13.02 Actions by Certificateholders and Purchasers. (a) By its acceptance of Certificates pursuant to this Agreement and the applicable Supplement, each Certificateholder (other than ARC and any AmeriSource Person) acknowledges and agrees that, wherever in this Agreement a provision states that an action may be taken or a notice, demand or instruction given by any Series of Investor Certificateholders, any Class of Investor Certificateholders or the Investor Certificateholders, the action, notice or instruction may be taken or given by any Holder of an Investor Certificate of the Series or Class or by any Investor Certificateholder, respectively, unless the provision requires a specific percentage of the Series or Class of Investor Certificateholders or of all Investor Certificateholders. (b) By its acceptance of Certificates pursuant to this Agreement and the applicable Supplement, each Certificateholder (other than ARC and any AmeriSource Person) acknowledges and agrees that any request, demand, authorization, direction, notice, consent, waiver or other act by the Holder of a Certificate shall bind the Holder and every subsequent Holder of the Certificate and of any Certificate issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or omitted to be done by the Trustee or the Servicer in reliance thereon, whether or not notation of the action is made upon such Certificate. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement, any Supplement or any PI Agreement to be given or taken by Certificateholders or any Purchaser Agent may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Certificateholders or any Purchaser Agent in person or by agent duly appointed in writing; and except as herein otherwise expressly provided, the action shall become effective when the instrument or instruments are delivered to the Trustee and, when required, to the Seller or the Servicer. page 101 108 Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement, any Supplement or any PI Agreement and conclusive in favor of the Trustee, the Seller and the Servicer, if made in the manner provided in this section. (d) The fact and date of the execution by any Certificateholder or any Purchaser Agent of any such instrument or writing may be proved in any reasonable manner that the Trustee deems sufficient. SECTION 13.03 Limitation on Rights of Certificateholders. (a) The death or incapacity of any Certificateholder shall not operate to terminate this Agreement or the Trust, nor shall the death or incapacity entitle such Certificateholder's legal representatives or heirs to claim an accounting or to take any action or commence any proceeding in any court for a partition or winding up of the Trust, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. (b) No Certificateholder shall have any right to vote (except as expressly provided otherwise in this Agreement) or in any manner otherwise to control the operation and management of the Trust, or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Certificates, be construed so as to constitute the Certificateholders from time to time as partners or members of an association, nor shall any Certificateholder be under any liability to any third Person by reason of any action taken by the parties to this Agreement pursuant to any provision hereof. (c) No Certificateholder shall have any right by virtue of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless the Certificateholder previously shall have given to the Trustee, and unless the Required Investors shall have made, written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by each Certificateholder with every other Certificateholder and the Trustee, that no one or more Certificateholders shall have any right in any manner whatever by virtue of, or by availing itself or themselves of, any provisions of this Agreement to affect, disturb or prejudice the rights of any other Investor Certificateholder or any Holder of any other Series of Investor Certificates, or to obtain or seek to obtain priority over or preference to any such other Investor Certificateholder or any such Holder of any other Series of Investor Certificates, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of, in the case of actions affecting the Investor Certificateholders as a class, all Investor Certificateholders or, in the case of actions affecting the Holders of any Series of Fixed Principal Certificates or page 102 109 Investor Revolving Certificates, the Holders of Fixed Principal Certificates or Investor Revolving Certificates (as the case may be) of such Series, as applicable. For the protection and enforcement of the provisions of this section, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. (d) By their acceptance of Certificates pursuant to this Agreement and the applicable Supplement, the Certificateholders (other than ARC and any AmeriSource Person) agree to the provisions of this section. SECTION 13.04 Limitation on Rights of Purchasers. (a) Except as expressly provided in this Agreement or a PI Agreement, neither any Purchaser nor any Purchaser Agent shall have any right to vote, or in any manner otherwise control the operation and management of the Trust, or the obligations of the parties hereto. (b) The Purchasers and any Purchaser Agent shall not have the right to institute any suit, action or proceeding in equity or at law against the Servicer or ARC for the enforcement of this Agreement, the Purchase Agreement or any PI Agreement, except to the extent that such PI Agreement creates independent and non-duplicative rights against ARC or the Servicer, unless any Purchaser Agent previously shall have (i) made a request in writing to the Trustee to institute such action, suit or proceeding and (ii) offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities to be incurred by it in compliance with such request, and the Trustee, shall either have refused to institute any such suit, action or proceeding or, for 15 days after the request and offer of security or indemnity, shall have neglected to institute any such action, suit or proceeding. (c) It is understood and intended, and upon the purchase of each Purchased Interest the related Purchaser Agent and the related Purchaser shall be deemed to have expressly covenanted and agreed with every other Purchaser and Investor Certificateholder and the Trustee, that neither such Purchaser Agent nor any Purchaser shall have any right hereunder or under a PI Agreement (i) to surrender, waiver, impair, disturb or prejudice the rights of the holders of any other of the Purchased Interests or the Investor Certificates, (ii) to obtain or seek to obtain priority over or preference to any other such Purchaser or Investor Certificateholder or (iii) to enforce any right under this Agreement or any PI Agreement against the Servicer or ARC, except in the manner herein provided and for the equal, ratable and common benefit of all Purchasers and Investors Certificateholders and except as otherwise expressly provided in this Agreement or any PI Agreement. For the protection and enforcement of the provisions of this section, each and every Purchaser and Investor Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 13.05 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES, AND THE page 103 110 OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 13.06 Notices. All demands, notices, instructions and communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, four Business Days after mailing if mailed by registered mail, return receipt requested, or sent by facsimile transmission (a) in the case of ARC, to its address set forth below its signature hereto, (b) in the case of AmeriSource, to its address set forth below its signature hereto, and (c) in the case of the Trustee, the Paying Agent or the Transfer Agent and Registrar, to the address of the Trustee set forth on the signature pages hereof; or, as to each party, at such other address or facsimile number as shall be designated by it in a written notice to each other party given in accordance with this section. Except to the extent expressly provided otherwise in an applicable Supplement, any notice required or permitted to be mailed to a Certificateholder shall be sent by first-class mail, postage prepaid, to the address of the Certificateholder as shown in the Certificate Register. Except to the extent expressly provided otherwise in an applicable Supplement, any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given on the fourth Business Day after the notice is so mailed, whether or not the Certificateholder receives the notice. The Servicer shall deliver or make available to the Applicable Rating Agencies each certificate and report required to be prepared, forwarded or delivered pursuant to Section 3.05 (excluding the Daily Reports) or 3.06 and a copy of any amendment, consent or waiver to this Agreement, at the address of the Rating Agency set forth above or at the other address as shall be designated by the Rating Agency in a written notice to the Servicer. SECTION 13.07 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement or any of the other Transaction Documents shall for any reason whatsoever be held invalid, then the unenforceable covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement or the other Transaction Documents (as applicable) and shall in no way affect the validity or enforceability of the other provisions of this Agreement, the Certificates, the Purchased Interests or any of the other Transaction Documents or the rights of the Certificateholders or the Purchasers. SECTION 13.08 Certificates Nonassessable and Fully Paid. Except to the extent otherwise expressly provided in Section 7.03 with respect to ARC, it is the intention of the parties to this Agreement that the Certificateholders shall not be personally liable for obligations of the Trust, that the interests in the Trust represented by the Certificates shall be nonassessable for any losses or expenses of the Trust or for any reason whatsoever and that Certificates upon authentication thereof by the Trustee pursuant to Section 6.02 are and shall be deemed fully paid. page 104 111 SECTION 13.09 Further Assurances. ARC and the Servicer agree to do and perform, from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by the Trustee more fully to effect the purposes of this Agreement, including the execution of any financing statements or continuation statements relating to the Receivables for filing under the provisions of the UCC or other applicable law of any applicable jurisdiction. SECTION 13.10 Nonpetition Covenant. Notwithstanding any prior termination of this Agreement, each of the Trustee, the Servicer, ARC, the Paying Agent, the Authenticating Agent and the Transfer Agent and Registrar (and each Investor Certificateholder or Purchaser by its acceptance of a Certificate or Purchased Interest) agrees that it shall not, with respect to the Trust or ARC, institute or join any other Person in instituting any proceeding of the type referred to in the definition of "Event of Bankruptcy" so long as any Certificates issued by the Trust shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such Certificates shall have been outstanding. The foregoing shall not limit the right of the Servicer, ARC, the Paying Agent, the Authenticating Agent and the Transfer Agent and Registrar to file any claim in or otherwise take any action with respect to any such insolvency proceeding that was instituted against ARC or the Trust by any Person other than the Servicer, ARC, the Paying Agent, the Authenticating Agent or the Transfer Agent and Registrar. In addition, each of the Servicer, the Paying Agent, the Authenticating Agent, the Transfer Agent and Registrar and (as to the Trust) ARC agree that all amounts owed to them by the Trust or ARC shall be payable solely from amounts that become available for such payment pursuant to this Agreement and the Receivables Purchase Agreement, and no such amounts shall constitute a claim against the Trust or ARC to the extent that they are in excess of the amounts available for their payment. SECTION 13.11 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Trustee, the Investor Certificateholders, the Purchasers or the Holders of any Series of Investor Certificates, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and are not exhaustive of any rights, remedies, powers and privileges provided by law. SECTION 13.12 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which together shall constitute one and the same instrument. SECTION 13.13 Third-Party Beneficiaries. This Agreement will inure to the benefit of and be binding upon the parties hereto and the Certificateholders, the Purchasers and their page 105 112 respective successors and permitted assigns. Except as otherwise expressly provided in this Agreement, nothing contained in this Agreement shall confer any rights upon any Person that is not a party to, or a permitted assignee of a party to, this Agreement. SECTION 13.14 Integration. This Agreement and the other Transaction Documents contain a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and thereof and shall together constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof, superseding all prior oral or written understandings. SECTION 13.15 Binding Effect; Assignability; Survival of Provisions. This Agreement shall be binding upon and inure to the benefit of ARC, the Servicer and the Trustee and their respective successors and permitted assigns; provided, that ARC shall not delegate any of its obligations hereunder. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the termination of the Trust pursuant to Section 12.01. The rights and remedies with respect to (a) any breach of any representation and warranty made by ARC in Section 2.03 or Section 7.01, (b) any breach of any representation and warranty made by the Servicer in Section 8.01 and (c) the indemnification and payment provisions in Sections 3.09, 7.03, 8.04, 11.05 and 12.02(b) shall be continuing and shall survive any termination of this Agreement. SECTION 13.16 Recourse to ARC. Except to the extent expressly provided otherwise in the Transaction Documents, the obligations of ARC under the Transaction Documents to which it is a party are solely the obligations of ARC, and no recourse shall be had for payment of any fee payable by or other obligation of or claim against ARC that arises out of any Transaction Document to which ARC is a party against any director, officer or employee of ARC. Payments to be made by ARC pursuant to this Agreement shall be paid to the extent that funds are available to make the payments after all amounts to be paid to the Certificateholders and the Purchasers pursuant to Section 4.03(g) or 4.03(h) (as applicable) shall have been paid, and there shall be no recourse to ARC for all or any part of any amounts payable pursuant to this Agreement if the funds are at any time insufficient to make all or part of any such payments. The provisions of this section shall survive the termination of this Agreement. SECTION 13.17 Recourse to Trust Assets. The Certificates do not represent an obligation of, or an interest in, ARC, the Seller, the Servicer, the Trustee or any Affiliate of any of them. Except as expressly provided otherwise in this Agreement, the Certificates and Purchased Interests are limited in right of payment to the Trust Assets. SECTION 13.18 Submission to Jurisdiction. EACH PARTY HERETO HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL COURT SITTING IN THE BOROUGH OF page 106 113 MANHATTAN IN THE CITY OF NEW YORK, NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE TRANSACTION DOCUMENTS, AND HEREBY (A) IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN THE STATE OR FEDERAL COURT, (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF THE ACTION OR PROCEEDING, AND (C) IN THE CASE OF ARC, IRREVOCABLY APPOINTS THE PROCESS AGENT AS ITS AGENT TO RECEIVE ON BEHALF OF IT AND ITS PROPERTY SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS THAT MAY BE SERVED IN ANY ACTION OR PROCEEDING. THE SERVICE MAY BE MADE BY MAILING OR DELIVERING A COPY OF THE PROCESS TO ARC IN CARE OF THE PROCESS AGENT AT THE PROCESS AGENT'S ADDRESS, AND ARC HEREBY IRREVOCABLY AUTHORIZES AND DIRECTS THE PROCESS AGENT TO ACCEPT THE SERVICE ON ITS BEHALF. AS AN ALTERNATIVE METHOD OF SERVICE, EACH OF ARC AND THE SERVICER ALSO IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY ACTION OR PROCEEDING BY THE MAILING OF COPIES OF THE PROCESS TO ARC OR THE SERVICER (AS APPLICABLE) AT ITS ADDRESS SPECIFIED HEREIN. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF ANY PARTY HERETO TO BRING ANY ACTION OR PROCEEDING AGAINST ANY OR ALL OF THE OTHER PARTIES HERETO OR ANY OF THEIR RESPECTIVE PROPERTIES IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 13.19 Waiver of Jury Trial. EACH PARTY HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR RELATING TO THE TRANSACTION DOCUMENTS, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR THAT MAY IN THE FUTURE BE DELIVERED IN CONNECTION THEREWITH OR ARISING FROM ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), ACTIONS OF ANY OF THE PARTIES HERETO OR ANY OTHER RELATIONSHIP EXISTING IN CONNECTION WITH THE TRANSACTION DOCUMENTS, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 13.20 Certain Partial Releases. (a) In the event that the Seller exercises its rights under Section 1.7 of the Purchase Agreement to terminate the sale of any or all of the categories of Receivables described in subsections (a) through (c) of that Section, the Trustee shall, upon the request (and at the expense) of the Seller, execute and deliver to the page 107 114 Seller such statements of partial release relating to the UCC-1 financing statements filed pursuant to the Purchase Agreement as shall be prepared by the Seller and provided to the Trustee to evidence the termination, provided, however, that the Trustee shall have received an Officer's Certificate of the Servicer to the effect that all conditions to the termination specified in such Section 1.7 have been satisfied (and shall not have received notice from any Investor Certificateholder or Purchaser Agent to the contrary). (b) In the event that any Seller is discontinued as a Seller pursuant to Section 1.8 of the Purchase Agreement, the Trustee shall, upon the request (and at the expense) of AmeriSource, execute and deliver to AmeriSource such statements of partial release and/or amendment relating to the UCC-1 financing statements filed against such Seller pursuant to the Purchase Agreement as shall be prepared by AmeriSource and provided to the Trustee to evidence such termination; provided, however, that the Trustee shall have received (i) an Officer's Certificate of the Servicer to the effect that all conditions to such termination specified in such Section 1.8 have been satisfied (and shall not have received notice from any Investor Certificateholder or Purchaser Agent to the contrary) and (ii) an Opinion of Counsel to the effect that the filing of such statements of partial release and/or amendment will not impair the validity, perfection or priority of ARC's or the Trust's rights in and to (A) any Receivables or Related Assets conveyed prior to the effective date of such termination or (B) any Receivables or Related Assets generated by AmeriSource on or after the effective date of such termination. In addition, after a termination that complies with the requirements set out in the preceding sentence, the Trustee shall, upon the request (and at the expense) of AmeriSource, execute and deliver to AmeriSource the termination statements relating to the UCC-1 financing statements filed against the Seller pursuant to the Purchase Agreement as shall be prepared by AmeriSource and provided to the Trustee to evidence the termination; provided, however, that the Trustee shall have received an Officer's Certificate of the Servicer to the effect that the Trust no longer holds any Receivables generated by the terminated Seller. SECTION 13.21 Confidentiality. The Trustee and the Servicer (if other than AmeriSource) acknowledge that all information concerning the Seller, ARC, any AmeriSource Person, the Receivables and the Related Transferred Assets (collectively the "Confidential Information") that has been, is being and will be delivered or made available by the Seller and ARC to the Trustee and the Servicer is highly confidential; provided, that the term "Confidential Information" shall not include any of the foregoing information that is or becomes generally available to the public or is or becomes available to the Trustee or the Servicer (as applicable) on a nonconfidential basis or was or becomes known to the Trustee or the Servicer (as applicable) on a nonconfidential basis without violation of the section. Each of the Trustee and the Servicer (if other than AmeriSource) hereby agrees to use their respective best efforts to hold in confidence all Confidential Information; provided, that nothing herein shall prevent the Trustee and the Servicer from delivering copies of any page 108 115 financial statements and other documents whether or not constituting Confidential Information, and disclosing other information, whether or not Confidential Information, to: (a) the respective directors, officers, employees, agents and professional consultants (each of which being a "Representative") of the Trustee and the Servicer who, in the case of each Representative, shall be subject to confidentiality arrangements at least substantially comparable hereto; provided, that Confidential Information shall be disclosed to or used by a Representative only for purposes of evaluating the transactions contemplated by the Transaction Documents and making any necessary business determinations with respect thereto or for any of the purposes set forth in the paragraph below clause (b), or (b) any federal or state regulatory authority having jurisdiction over the Trustee or the Servicer. Each of the Trustee and the Servicer (if other than AmeriSource) recognizes the competitive value and confidential nature of the Confidential Information and the irreparable damage that could result to the Seller, ARC or the other AmeriSource Persons if any Confidential Information is disclosed to any third party in violation of the requirements of this section. Each of the Trustee and the Servicer (if other than AmeriSource) recognizes that money damages would not be a sufficient remedy for any breach of the requirements of this section, and each of the foregoing severally agrees that the Seller, ARC and any other AmeriSource Person shall be entitled to equitable relief, including injunctive relief and specific performance, in the event of any breach or potential breach of the requirements of this section, in addition to all other remedies available to the Seller, ARC and the other AmeriSource Persons at law or in equity. None of the requirements of this section may be waived or amended except by prior written consent of the Seller, ARC or the other AmeriSource Person, as applicable, who provided the information to the Person who wishes to disclose it, which written consent shall expressly refer to the requirements of this section. [Remainder of page intentionally left blank.] page 109 116 IN WITNESS WHEREOF, ARC, the Servicer and the Trustee have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. AMERISOURCE RECEIVABLES CORPORATION, as the Transferor By: /s/ Kurt J. Hilzinger ----------------------------------------- Title: Vice President ------------------------------------- Address: P.O. Box 1735 Southeastern, Pennsylvania 19399- 1735 Attention: Kurt Hilzinger Telephone: (610) 296-4480 Facsimile: (610) 993-9085 AMERISOURCE CORPORATION, as initial Servicer By: /s/ Kurt J. Hilzinger ---------------------------------------- Title: Vice President, Finance and Treasurer ------------------------------------- Address: 300 Chester Field Parkway Malvern, Pennsylvania 19355 Attention: Vice President Finance and Treasurer Telephone: (610) 296-4480 Facsimile: (610) 993-9085 MANUFACTURERS AND TRADERS TRUST COMPANY, as the Trustee By: /s/ Stuart McFadden ---------------------------------------- Title: Trust Officer ------------------------------------- Address: One M&T Plaza Buffalo, New York 14203 Attention: Russell Whitley Telephone: (716) 842-5602 Facsimile: (716) 842-4474 117 STATE OF ) ---------- ) SS. COUNTY OF ) --------- On the __ day of December, 1994 before me personally came __________________, who, being by me duly sworn, did depose and say that he resides at ___________________; that he is the ____________ of AmeriSource Receivables Corporation, a Delaware corporation, the corporation described in and that executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of the corporation. Given under my hand and notarial seal, this __ day of December, 1994. ----------------------------- Notary Public Type or Print Name: ----------------- My commission expires: - --------------------- 118 STATE OF ) ---------- ) SS. COUNTY OF ) --------- On the __ day of December, 1994 before me personally came __________________, who, being by me duly sworn, did depose and say that he resides at ___________________; that he is the ____________ of AmeriSource Corporation, a Delaware corporation, the corporation described in and that executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of the corporation. Given under my hand and notarial seal, this __ day of December, 1994. ----------------------------- Notary Public Type or Print Name: ----------------- My commission expires: - --------------------- 119 STATE OF ) ---------- ) SS. COUNTY OF ) --------- On the __ day of December, 1994 before me personally came __________________, who, being by me duly sworn, did depose and say that he resides at ___________________; that he is the ____________ of Manufacturers and Traders Trust Company, a New York banking corporation, the corporation described in and that executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of the corporation. Given under my hand and notarial seal, this __ day of December, 1994. ----------------------------- Notary Public Type or Print Name: ----------------- My commission expires: - --------------------- 120 EXHIBIT A to Pooling Agreement FORM OF LOCKBOX ACCOUNT LETTER AGREEMENT , 1994 ------- -- [NAME OF LOCKBOX BANK] [ADDRESS OF LOCKBOX BANK] Ladies and Gentlemen: By this letter agreement, (a) AmeriSource Corporation ("AmeriSource") irrevocably transfers exclusive ownership and control of its lockbox[es] numbered ___________ ([each, a] [the] "Lockbox"[and collectively referred to herein as the "Lockboxes"]) and the corresponding demand deposit account[s] numbered __________ ([each, a] [the] "Lockbox Account" [and collectively referred to herein as the "Lockbox Accounts"]) maintained with you to AmeriSource Receivables Corporation ("ARC"), and (b) ARC irrevocably transfers all of its rights and title to and interest in the Lockbox[es] and the Lockbox Account[s] acquired hereby to Manufacturers and Traders Trust Company, as trustee (the "Trustee") for the benefit of certain holders of certificates issued by the Trustee under a Pooling and Servicing Agreement, dated as of December 13, 1994 (the "Pooling Agreement"), among ARC, AmeriSource, as initial Servicer, and the Trustee (collectively, the "Certificateholders") and of ARC (to the extent of ARC's residual interest in the Transferred Assets (as defined in the Pooling Agreement). AmeriSource acknowledges and agrees that ARC is transferring to the Trustee the rights, titles and interests transferred by AmeriSource to ARC as provided above, and each of AmeriSource and ARC agrees to cooperate fully with the Trustee and its agents and representatives (including, without limitation, the Servicer referred to hereinafter) in the exercise of such rights. The transfers described in this paragraph are effective on and as of the date of this letter agreement. By executing this letter agreement, you acknowledge the existence of the Trustee's right to dominion and control over the Lockbox[es] and the Lockbox Account[s] and its ownership of and security interest in the Lockbox[es], all moneys and instruments delivered to the Lockbox[es], the Lockbox Account[s] and the amounts from time to time on deposit therein, and agree that, from and after the date hereof, you shall maintain the Lockbox[es] and the Lockbox Account[s] and shall hold all such moneys and instruments and such amounts for the benefit and subject to the interests of the Trustee (for the benefit of itself, the Certificateholders and ARC (to the extent described above)). You also acknowledge that your execution of this letter agreement is a condition precedent to continued maintenance of 121 the Lockbox Account[s] with you. The Lockbox Account[s] [is] [are] to be maintained in the name of "Manufacturers and Traders Trust Company, as Trustee." AmeriSource and ARC hereby irrevocably instruct you, and the Trustee, by its acknowledgement hereof, hereby instructs you, at all times from and after the date hereof until your receipt of contrary and/or terminating instructions from the Trustee: (a) to collect mail from the Lockbox[es] on each of your business days at times that correspond with the delivery of mail thereto, (b) to follow your usual operating procedures for the handling of any remittance received in the Lockbox[es] or the Lockbox Account[s] that contains restrictive endorsements, irregularities (such as a variance between the written and numerical amounts), undated or postdated items, missing signatures or incorrect payees, (c) to endorse and process all checks and other remittance items received in the Lockbox Account[s] or the Lockbox[es] (including any checks and other remittance items covered by clause (b) above that are eligible for endorsement and processing) and deposit such checks and remittance items in the Lockbox Account[s], (d) to maintain a record of all checks and other remittance items received in the Lockbox[es] and the Lockbox Account[s] and to provide the Servicer (acting on behalf of the Trustee) and, upon request, the Trustee, with photostatic copies, vouchers, enclosures, etc. of such checks and remittance items on a daily basis, and (e) to remit, on a daily basis, in immediately available funds, all available amounts deposited in the Lockbox Account[s] to the following account (the "Concentration Account") or such other account as the Trustee or the Servicer may specify: Corestates Bank 1339 Chestnut Street Philadelphia, Pennsylvania 19107 ABA # 031000011 For credit to the Manufacturers and Traders Trust Company, as Trustee Account No. 01019301 No such transfer of funds shall either reflect the rounding off of any funds so transferred or constitute a partial remittance except for (i) amounts applied to fees and expenses under the terms of this letter agreement, and (ii) amounts deducted for returned checks that were previously deposited in [a] [the] Lockbox Account and with respect to which funds were previously transferred to the Concentration Account. page 2 122 All transfers referred to in paragraph (e) above shall be made by you irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off (except as expressly permitted otherwise by this letter agreement) and shall be final, and you agree that you will not seek to recover any amount from the Trustee, ARC, or the Servicer for any reason once any payment or transfer has been made. The Trustee's instructions with respect to the Lockbox[es] and the Lockbox Account[s] may be given through a Servicer that the Trustee may appoint from time to time and will notify you thereof in writing, and you agree to follow the instructions of such Servicer with the same effect as if such instructions were given by the Trustee directly (subject to any limitations on such appointment imposed by the Trustee that are communicated in writing to you) until such time as the Trustee notifies you of the revocation of the Servicer's authority to act for the Trustee. The initial servicer will be AmeriSource. The Trustee and the Servicer shall each provide to you a list of their respective employees authorized to issue instructions and give notices with respect to the Lockbox[es] and the Lockbox Account[s], which lists may be revised from time to time, and you shall be entitled to rely on (and to assume) the authority of any employee of the Trustee or the Servicer identified on such lists, and are hereby authorized to act on any notice given on behalf of the Trustee or the Servicer by any such employee, subject to any limitations on the appointment of the Servicer and the revocation of the Servicer's authority as provided above. AmeriSource and ARC also hereby irrevocably notify you that, at all times from and after the date hereof until your receipt of contrary and/or terminating instructions from the Trustee, the Trustee shall be entitled (subject to your rights set forth herein) to exercise in the place and stead of AmeriSource and ARC (or either of them) any and all rights in respect of or in connection with the Lockbox[es], this letter agreement and the Lockbox Account[s], including, without limitation (i) the right to specify that payments are to be made out of or in connection with the Lockbox Account[s] to different accounts or at different times than those specified in clauses (c) and (e) above (subject to your customary and then-current procedures for lockbox processing) and (ii) the right to require preparation of duplicate monthly bank statements on the Lockbox Account[s] for mailing directly to an address specified by the Trustee. By executing this letter agreement you acknowledge that you have not heretofore received a notice, writ, order or any form of legal process from any other person asserting, claiming or exercising, any right of set-off, banker's lien or other purported form of claim with respect to the items collected from the Lockbox[es], the Lockbox Account[s] or any funds from time to time therein or in transit thereto, and agree to immediately inform the Trustee in writing of any such action in the future. By executing this letter agreement, you irrevocably waive and agree not to assert, any right to setoff against, or otherwise deduct from, any items collected from the Lockbox[es], the Lockbox Account[s] or any funds from time to time therein or in transit thereto; page 3 123 provided, however, that you may (i) debit [a] [the] Lockbox Account for any items deposited in [such] [the] Lockbox Account that are returned or otherwise not collected in accordance with your customary practices for the chargeback of returned items and (ii) apply funds in the Lockbox Account[s] for reimbursement of any fees and expenses incurred by you in connection with this letter agreement, to the extent that such fees and expenses are not paid or reimbursed by AmeriSource. AmeriSource shall pay, or reimburse you for, customary and reasonable fees and expenses incurred by you in the maintenance and operation of the Lockbox Account[s] in accordance with this letter agreement. The Trustee will have no liability to you or the Servicer for any costs, fees or charges under your usual and customary procedures or this letter agreement. You also agree that, notwithstanding anything to the contrary herein: (i) you shall promptly notify all relevant postmasters that the Trustee is authorized to have access to the Lockbox[es]; and (ii) you shall promptly notify the Trustee of your failure to receive timely payment of any fee under this letter agreement. You may terminate this letter agreement by cancelling the Lockbox Account[s] and Lockbox[es], which cancellation and termination shall become effective only upon sixty days' prior written notice thereof from you to the Trustee. Upon the termination of this letter agreement, you will close the Lockbox Account[s] and transfer any monies remaining therein to the Master Collection Account. You agree that you shall forward all incoming mail addressed to [any of] the Lockbox[es] or [the] Lockbox Account[s] and all wire transfers and deposits to [any of] the Lockbox Account[s] that you receive after such cancellation in the form received to another lockbox or to another lockbox account or the Concentration Account or to such other address or account as the Trustee (or the Servicer on behalf of the Trustee) shall specify, promptly after you discover that you have received any such mail or transfers. This letter agreement may also be terminated upon written notice to you by the Trustee. Except as expressly set forth in this paragraph, this letter agreement may not be terminated or amended without the prior written consent of the Trustee. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, by facsimile or by overnight courier, to the intended person at the address or facsimile number of such person set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such person in a written notice to the other parties hereto given in accordance with the requirements of this paragraph. All notices and other communications hereunder shall also be provided to the Trustee and shall be addressed as follows until you receive written notice from the Trustee to the contrary: page 4 124 Manufacturers and Traders Trust Company One M&T Plaza Buffalo, New York 14203 Attention: Russell Whitley Telephone: (716) 842-5602 Facsimile: (716) 842-4474. All notices and communications provided for hereunder shall be effective, (i) if personally delivered, when received, (ii) if sent by certified mail, four business days after having been deposited in the mail, postage prepaid and properly addressed, (iii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means and (iv) if sent by overnight courier, two business days after having been given to such courier unless sooner received by the addressee. This letter agreement shall be binding upon you and your successors and assigns and shall inure to the benefit of AmeriSource, ARC, and the Trustee and their respective successors, transferees and assigns; provided, however, that you may not assign your rights and duties under this letter agreement without the prior written consent of the Trustee. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York, not including the choice of law rules thereof. Please acknowledge your agreement to the terms set forth in this letter agreement by signing [four (4) copies] of this letter agreement in the space provided below and returning such copies to us at the address indicated below for AmeriSource. Very truly yours, AmeriSource Corporation By: ------------------------------- Title: --------------------------- Address: 300 Chester Field Parkway Malvern, Pennsylvania 19355 Attention: Kurt Hilzinger Telephone: (610) 296-4480 Facsimile: (610) 993-9085 page 5 125 AmeriSource Receivables Corporation By: ------------------------------- Title: --------------------------- Address: P.O. Box 1735 Southeastern, Pennsylvania 19399-1735 Attention: Kurt Hilzinger Telephone: (610) 296-4480 Facsimile: (610) 993-9085 page 6 126 TO: AmeriSource Corporation AmeriSource Receivables Corporation Manufacturers and Traders Trust Company, as Trustee The undersigned hereby acknowledges and agrees to the foregoing letter agreement as of this ___ day of _______, 1994. [NAME OF LOCKBOX BANK] By: ------------------------------- Title: ----------------------------- Address: ------------------- ------------------- Telephone: ------------------- Facsimile: ------------------- page 7 127 TO: [NAME OF LOCKBOX BANK] [ADDRESS OF LOCKBOX BANK] The undersigned hereby acknowledges and agrees to the foregoing letter agreement dated as of the ___ day of ________, 1994: MANUFACTURERS AND TRADERS TRUST COMPANY, as Trustee By: -------------------------------------- Title: ------------------------------------ page 8 128 EXHIBIT B to Pooling Agreement FORM OF CONCENTRATION ACCOUNT LETTER AGREEMENT November , 1994 -- Corestates Bank 1339 Chestnut Street Philadelphia, Pennsylvania 19107 Ladies and Gentlemen: By this letter agreement, (a) AmeriSource Corporation ("AmeriSource") irrevocably transfers exclusive ownership and control of its demand deposit account numbered 01019301 (the "Concentration Account") maintained with you to AmeriSource Receivables Corporation ("ARC"), and (b) ARC irrevocably transfers all of its rights and title to and interest in the Concentration Account acquired hereby to Manufacturers and Traders Trust Company, as trustee (the "Trustee") for the benefit of certain holders of certificates issued by the Trustee under a Pooling and Servicing Agreement, dated as of December 13, 1994 (the "Pooling Agreement"), among ARC, AmeriSource, as initial Servicer, and the Trustee (collectively, the "Certificateholders") and of ARC (to the extent of ARC's residual interest in the Transferred Assets (as defined in the Pooling Agreement). AmeriSource acknowledges and agrees that ARC is transferring to the Trustee the rights, titles and interests transferred by AmeriSource to ARC as provided above, and each of AmeriSource and ARC agrees to cooperate as provided in the Pooling Agreement with the Trustee and its agents and representatives (including, without limitation, the Servicer referred to hereinafter) in the exercise of such rights. The transfers described in this paragraph are effective on and as of the date of this letter agreement. By executing this letter agreement, you acknowledge the existence of the Trustee's right to dominion and control over the Concentration Account and its ownership of and security interest in the Concentration Account, all moneys and instruments delivered to the Concentration Account and the amounts from time to time on deposit therein, and agree that, from and after the date hereof, you shall maintain the Concentration Account and shall hold all such moneys and instruments and such amounts for the benefit and subject to the interests of the Trustee (for the benefit of itself, the Certificateholders and ARC (to the extent described above)). You also acknowledge that your execution of this letter agreement is a condition precedent to continued maintenance of the 129 Concentration Account with you. The Concentration Account is to be maintained in the name of "Manufacturers and Traders Trust Company, as Trustee." AmeriSource and ARC hereby irrevocably instruct you, and the Trustee, by its acknowledgement hereof, hereby instructs you, at all times from and after the date hereof until your receipt of contrary and/or terminating instructions from the Trustee: (a) to follow your usual operating procedures for the handling of any remittance received in the Concentration Account that contains restrictive endorsements, restrictive or conditional notations (i.e., "paid in full" or "final payment"), irregularities (such as a variance between the written and numerical amounts), undated or postdated items, missing signatures or incorrect payees, (b) to endorse and process all checks and other remittance items received in the Concentration Account (including any checks and other remittance items covered by clause (a) above that are eligible for endorsement and processing), (c) to maintain a record of all checks and other remittance items received in the Concentration Account and to provide the Servicer (acting on behalf of the Trustee) and, upon request, the Trustee, with photostatic copies, vouchers, enclosures, etc. of such checks and remittance items on a daily basis, and (d) to remit, on a daily basis, in immediately available funds, all available and collected amounts deposited in the Concentration Account to the following account (the "Master Collection Account") or such other account as the Trustee or the Servicer may specify: Manufacturers and Traders Trust Company One M&T Plaza Buffalo, New York 14203 ABA # 022000046 For credit to the MANUFACTURERS AND TRADERS TRUST COMPANY, AS TRUSTEE Account No. 185481728 No such transfer of funds shall either reflect the rounding off of any funds so transferred or constitute a partial remittance except for (i) amounts applied to fees and expenses under the terms of this letter agreement, and (ii) amounts deducted for returned checks that were previously deposited in the Concentration Account and with respect to which funds were previously transferred to the Master Collection Account. page 2 130 All transfers referred to in paragraph (d) above shall be made by you irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off (except as expressly permitted otherwise by this letter agreement) and shall be final, and you agree that you will not seek to recover any amount from the Trustee, ARC or the Servicer for any reason once any payment or transfer has been made. The Trustee's instructions with respect to the Concentration Account may be given through a Servicer that the Trustee may appoint from time to time and will notify you thereof in writing, and you agree to follow the instructions of such Servicer with the same effect as if such instructions were given by the Trustee directly (subject to any limitations on such appointment imposed by the Trustee that are communicated in writing to you) until such time as the Trustee notifies you of the revocation of the Servicer's authority to act for the Trustee. The initial servicer will be AmeriSource. The Trustee and the Servicer shall each provide to you a list of their respective employees authorized to issue instructions and give notices with respect to the Concentration Account, which lists may be revised from time to time, and you shall be entitled to rely on (and to assume) the authority of any employee of the Trustee or the Servicer identified on such lists, and are hereby authorized to act on any notice given on behalf of the Trustee or the Servicer by any such employee, subject to any limitations on the appointment of the Servicer and the revocation of the Servicer's authority as provided above. AmeriSource and ARC also hereby irrevocably notify you that, at all times from and after the date hereof until your receipt of contrary and/or terminating instructions from the Trustee, the Trustee shall be entitled (subject to your rights set forth herein) to exercise in the place and stead of AmeriSource and ARC (or either of them) any and all rights in respect of or in connection with this letter agreement and the Concentration Account, including, without limitation (i) the right to specify that payments are to be made out of or in connection with the Concentration Account to different accounts or at different times than those specified in clauses (b) and (d) above (subject to your customary and then-current procedures for account processing) and (ii) the right to require preparation of duplicate monthly bank statements on the Concentration Account for mailing directly to an address specified by the Trustee. By executing this letter agreement you acknowledge that you have not heretofore received a notice, writ, order or any form of legal process from any other person asserting, claiming or exercising any right of set-off, banker's lien or other purported form of claim with respect to the items collected from the Concentration Account or any funds from time to time therein or in transit thereto, and agree to immediately inform the Trustee in writing of any such action in the future. By executing this letter agreement, you irrevocably waive and agree not to assert any right to setoff against, or otherwise deduct from, any items collected from the Concentration Account or any funds from time to time therein or in transit thereto; provided, however, that you may (i) debit the Concentration Account for any items deposited in the Concentration page 3 131 Account that are returned or otherwise not collected in accordance with your customary practices for the chargeback of returned items and (ii) apply funds in the Concentration Account for reimbursement of any fees and expenses incurred by you in connection with this letter agreement, to the extent that such fees and expenses are not paid or reimbursed by AmeriSource. AmeriSource shall pay, or reimburse you for, customary and reasonable fees and expenses incurred by you in the maintenance and operation of the Concentration Account in accordance with this letter agreement. The Trustee will have no liability to you or the Servicer for any costs, fees or charges under your usual and customary procedures or this letter agreement. You also agree that, notwithstanding anything to the contrary herein, you shall promptly notify the Trustee of your failure to receive timely payment of any fee under this letter agreement. You may terminate this letter agreement by cancelling the Concentration Account, which cancellation and termination shall become effective only upon sixty days' prior written notice thereof from you to the Trustee. Upon the termination of this letter agreement, you will close the Concentration Account and transfer any monies remaining therein to the Master Collection Account. You agree that you shall forward all wire transfers and deposits to the Concentration Account that you receive after such cancellation in the form received to the Master Collection Account or to such other address or account as the Trustee (or the Servicer on behalf of the Trustee) shall specify, promptly after you discover that you have received any such transfers. This letter agreement may also be terminated upon written notice to you by the Trustee. Except as expressly set forth in this paragraph, this letter agreement may not be terminated or amended without the prior written consent of the Trustee. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, by facsimile or by overnight courier, to the intended person at the address or facsimile number of such person set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such person in a written notice to the other parties hereto given in accordance with the requirements of this paragraph. All notices and other communications hereunder shall also be provided to the Trustee and shall be addressed as follows until you receive written notice from the Trustee to the contrary: page 4 132 Manufacturers and Traders Trust Company One M&T Plaza Buffalo, New York 14203 Attention: Corporate Trust and Agency Services Telephone: (716) 842-5602 Facsimile: (716) 842-4474. All notices and communications provided for hereunder shall be effective, (i) if personally delivered, when received, (ii) if sent by certified mail, four business days after having been deposited in the mail, postage prepaid and properly addressed, (iii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means and (iv) if sent by overnight courier, two business days after having been given to such courier unless sooner received by the addressee. This letter agreement shall be binding upon you and your successors and assigns and shall inure to the benefit of AmeriSource, ARC and the Trustee and their respective successors, transferees and assigns; provided, however, that you may not assign your rights and duties under this letter agreement without the prior written consent of the Trustee. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York, not including the choice of law rules thereof. Please acknowledge your agreement to the terms set forth in this letter agreement by signing [four (4) copies] of this letter agreement in the space provided below and returning such copies to us at the address indicated below for AmeriSource. Very truly yours, AmeriSource Corporation By: ---------------------------------------------- Title: Vice President, Legal Counsel Address: 300 Chester Field Parkway Malvern, Pennsylvania 19355 Attention: Teresa T. Ciccotelli Telephone: (610) 296-4480 Facsimile: (610) 647-0141 page 5 133 AmeriSource Receivables Corporation By: ---------------------------------------------- Title: ------------------------------------------ Address: P.O. Box 1735 Southeastern, Pennsylvania 19399-1735 Attention: Kurt Hilzinger Telephone: (610) 993-3407 Facsimile: (610) 993-9085 page 6 134 TO: AmeriSource Corporation AmeriSource Receivables Corporation Manufacturers and Traders Trust Company, as Trustee The undersigned hereby acknowledges and agrees to the foregoing letter agreement as of this ___ day of November, 1994. CORESTATES BANK By: ---------------------------------------------- Title: ------------------------------------------ Address: 1339 Chestnut Street Philadelphia, Pennsylvania 19107 Telephone: ---------------------------------- Facsimile: ---------------------------------- page 7 135 TO: CORESTATES BANK 1339 Chestnut Street Philadelphia, Pennsylvania 19107 The undersigned hereby acknowledges and agrees to the foregoing letter agreement dated as of the ___ day of ________, 1994: MANUFACTURERS AND TRADERS TRUST COMPANY, as Trustee By: -------------------------------------- Title: ------------------------------------ page 8 136 EXHIBIT C-1 to Pooling Agreement FORM OF DAILY REPORT (PRE-LIQUIDATION) ------------------------------ 137 EXHIBIT C-2 to Pooling Agreement FORM OF DAILY REPORT (LIQUIDATION) -------------------------- 138 EXHIBIT D-1 to Pooling Agreement FORM OF SETTLEMENT STATEMENT (PRE-LIQUIDATION) -------------------------------------- 139 EXHIBIT D-2 to Pooling Agreement FORM OF SETTLEMENT STATEMENT (LIQUIDATION) ---------------------------------- 140 EXHIBIT E to Pooling Agreement FORM OF MONTHLY SERVICER'S CERTIFICATE TO: Manufacturers and Traders Trust Company [Paying Agent] AmeriSource Receivables Corporation [Name of Rating Agency] AMERISOURCE CORPORATION (the "Servicer") hereby certifies that: (A) This Certificate is being delivered pursuant to Section 3.06 of the Pooling and Servicing Agreement, dated as of December 13, 1994, (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the "Pooling Agreement"), among AmeriSource Receivables Corporation, as Transferor, the Servicer, and Manufacturers and Traders Trust Company, as the Trustee. (B) As of the date of this Certificate, the Authorized Officer (as defined in the Pooling Agreement) that is executing this Certificate is not aware of the occurrence and continuance of any Liquidation Event, Unmatured Liquidation Event or Pay-Out Event (each as defined in the Pooling Agreement). [If a Liquidation Event, Unmatured Liquidation Event and/or Pay-Out Event has occurred and is continuing, specify each such Liquidation Event, Unmatured Liquidation Event and/or Pay-Out Event (as applicable) of which the Authorized Officer executing this Certificate is aware and the nature and status thereof and further certify that such information is true and accurate in all material respects.] (C) The method for calculating tax reserves reflected in the books and records of AmeriSource and ARC complies with GAAP and fairly presents estimated tax liabilities to the best of AmeriSource's and ARC's knowledge. [(D) Neither AmeriSource nor ARC have any obligations to any Restricted Federal Obligor or State Obligor that are due and payable and could be set off against the Unpaid Balance of the Receivable owed by such Obligor.] 141 IN WITNESS WHEREOF, the Servicer has caused this Certificate to be executed by its duly authorized officer this __ day of _______________, 19__. AMERISOURCE CORPORATION By: ---------------------------------------------- Title: -------------------------------------------- [AMERISOURCE RECEIVABLES CORPORATION By: ------------------------------------------ Title: ] ---------------------------------------- 142 EXHIBIT F to Pooling Agreement FORM OF MONTHLY REPORT TO CERTIFICATEHOLDERS ------------------------------------ 143 EXHIBIT G to Pooling Agreement FORM OF ARC REVOLVING CERTIFICATE THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE OR THE LAWS OF ANY FOREIGN COUNTRY. THIS CERTIFICATE MAY NOT BE RESOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH RESALE, TRANSFER OR DISPOSITION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AND FOREIGN LAWS. IN ADDITION TO THE RESTRICTIONS SET FORTH ABOVE, RESALE, TRANSFER OR DISPOSITION OF THIS CERTIFICATE IS PROHIBITED TO THE EXTENT SET FORTH IN THE POOLING AGREEMENT (AS DEFINED BELOW). AMERISOURCE RECEIVABLES MASTER TRUST ARC REVOLVING CERTIFICATE THIS CERTIFIES THAT AMERISOURCE RECEIVABLES CORPORATION is the registered owner of a nonassessable, fully-paid, fractional undivided interest in the AmeriSource Receivables Master Trust (the "Trust"), which was created pursuant to the Pooling and Servicing Agreement, dated as of December 13, 1994 (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the "Pooling Agreement"), by and among AmeriSource Receivables Corporation, a Delaware corporation, as Transferor ("ARC"), AmeriSource Corporation, as initial Servicer (in such capacity, the "Servicer"), and Manufacturers and Traders Trust Company, as trustee (in such capacity, together with its successors and assigns in such capacity, the "Trustee"). This Certificate is the duly authorized ARC Revolving Certificate designated and issued under the Pooling Agreement. To the extent not otherwise defined herein, capitalized terms have the meanings assigned to them in Appendix A to the Pooling Agreement. This Certificate is subject to the terms, provisions and conditions of, and is entitled to the benefits afforded by, the Pooling Agreement, to which terms, provisions and conditions the holder of this Certificate by virtue of the acceptance hereof assents and by which the holder is bound. The outstanding principal amount of this Certificate may vary from time to time as is further set forth in the Pooling Agreement. 144 This Certificate shall not bear interest. The Pooling Agreement may be amended and the rights and obligations of the parties thereto and of the holder of this Certificate modified as set forth in the Pooling Agreement. Unless the certificate of authentication hereon shall have been executed by or on behalf of the Trustee by the manual signature of a duly authorized signatory, this Certificate shall not entitle the holder hereof to any benefit under the Pooling Agreement or under any other Transaction Document or be valid for any purpose. This Certificate does not represent a recourse obligation of, or an interest in, ARC, the Seller, the Servicer, the Trustee or any Affiliate of any of them. This Certificate is limited in right of payment to the Trust Assets. ARC may not transfer, assign, exchange or otherwise convey or pledge, hypothecate or otherwise grant a security interest in this Certificate or any interest represented hereby except in compliance with the terms, conditions and restrictions set forth in the Pooling Agreement. This Certificate shall be construed in accordance with the laws of the State of New York, without reference to its conflict of laws principles, and all obligations, rights and remedies under, or arising in connection with, this Certificate shall be determined in accordance with the laws of the State of New York. 2 145 IN WITNESS WHEREOF, ARC has caused this Certificate to be executed by its officer thereunto duly authorized. AMERISOURCE RECEIVABLES CORPORATION By: ---------------------------------------- Title: ----------------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is the ARC Revolving Certificate referred to in the Pooling Agreement. MANUFACTURERS AND TRADERS TRUST COMPANY, as Trustee By: ---------------------------------------- Title: ----------------------------------- Dated: , 1994 --------------------------- 3 146 EXHIBIT H to Pooling Agreement FORM OF RESIDUAL CERTIFICATE THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE OR THE LAWS OF ANY FOREIGN COUNTRY. THIS CERTIFICATE MAY NOT BE RESOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH RESALE, TRANSFER OR DISPOSITION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AND FOREIGN LAWS. IN ADDITION TO THE RESTRICTIONS SET FORTH ABOVE, RESALE, TRANSFER OR DISPOSITION OF THIS CERTIFICATE IS PROHIBITED TO THE EXTENT SET FORTH IN THE POOLING AGREEMENT (AS DEFINED BELOW). AMERISOURCE RECEIVABLES MASTER TRUST RESIDUAL CERTIFICATE THIS CERTIFIES THAT AMERISOURCE RECEIVABLES CORPORATION is the registered owner of a nonassessable, fully-paid, remainder interest in the AmeriSource Receivables Master Trust (the "Trust"), which was created pursuant to the Pooling and Servicing Agreement, dated as of December 13, 1994 (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the "Pooling Agreement"), by and among AmeriSource Receivables Corporation ("ARC"), AmeriSource Corporation, as initial Servicer (in such capacity, the "Servicer"), and Manufacturers and Traders Trust Company, as Trustee (in such capacity, together with its successors and assigns in such capacity, the "Trustee"). This Certificate is the duly authorized Residual Certificate designated and issued under the Pooling Agreement. To the extent not otherwise defined herein, capitalized terms have the meanings assigned to them in Appendix A to the Pooling Agreement. This Certificate is subject to the terms, provisions and conditions of, and is entitled to the benefits afforded by, the Pooling Agreement, to which terms, provisions and conditions the holder of this Certificate, by virtue of the acceptance hereof, assents and by which the holder is bound. This Certificate represents the ownership interest in the remainder of the Trust Assets not allocated pursuant to the Pooling Agreement to the Fixed Principal Interest, 147 the Purchased Interests or the Revolving Certificate Interest, including the right to receive payments at the times and in the amounts specified in the Pooling Agreement. This Certificate shall not bear interest. The Pooling Agreement may be amended and the rights and obligations of the parties thereto and of the holder of this Certificate modified as set forth in the Pooling Agreement. Unless the certificate of authentication hereon shall have been executed by or on behalf of the Trustee by the manual signature of a duly authorized signatory, this Certificate shall not entitle the holder hereof to any benefit under the Pooling Agreement or under any other Transaction Document or be valid for any purpose. This Certificate does not represent an obligation of, or an interest in ARC, the Seller, the Servicer, the Trustee or any Affiliate of any of them. This Certificate is limited in right of payment to the Trust Assets. ARC may not transfer, assign, exchange or otherwise convey or pledge, hypothecate or otherwise grant a security interest in this Certificate or any interest represented hereby except in compliance with the terms, conditions and restrictions set forth in the Pooling Agreement. This Certificate shall be construed in accordance with the laws of the State of New York, without reference to its conflict of laws principles, and all obligations, rights and remedies under, or arising in connection with, this Certificate shall be determined in accordance with the laws of the State of New York. 2 148 IN WITNESS WHEREOF, ARC has caused this Certificate to be executed by its officer thereunto duly authorized. AMERISOURCE RECEIVABLES CORPORATION By: ---------------------------------------- Title: ------------------------------------ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is the Residual Certificate referred to in the Pooling Agreement. MANUFACTURERS AND TRADERS TRUST COMPANY, as Trustee By: ---------------------------------------- Title: ------------------------------------ Dated: , 1994 --------------------------- 3 149 EXHIBIT I to Pooling Agreement FORM OF OWNER REGULATION S CERTIFICATION FORM OF CERTIFICATE TO BE GIVEN BY CERTIFICATEHOLDER [Euroclear [Cedel, societe anonyme 151 Boulevard Jacqmain 67 Boulevard Grand-Duchesse Charlotte B-1210 Brussels, Belgium] L-1331 Luxembourg]
Re: [Description of Certificates] issued pursuant to the Pooling and Servicing Agreement dated as of December 13, 1994, among AmeriSource Receivables Corporation, AmeriSource Corporation and Manufacturers and Traders Trust Company, as Trustee, (the "Certificates"). This is to certify that as of the date hereof, and except as set forth below, the beneficial interest in the Certificates held by you for our account is owned by persons that are not U.S. persons (as defined in Rule 901 under the Securities Act of 1933, as amended). The undersigned undertakes to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Certificates held by you in which the undersigned has acquired, or intends to acquire, a beneficial interest in accordance with your operating procedures if any applicable statement herein is not correct on such date. In the absence of any such notification, it may be assumed that this certification applies as of such date. [This certification excepts beneficial interests in and does not relate to U.S. $_________ principal amount of the Certificates appearing in your books as being held for our account but that we have sold or as to which we are not yet able to certify.] We understand that this certification is required in connection with certain securities laws in the United States of America. If administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification or a copy thereof to any interested party in such proceedings. Dated: ,* By: , ------------------- -------------------------------- Account Holder
* Certification must be dated on or after the 15th day before the date of the Euroclear or Cedel certificate to which this certification relates. 1 150 EXHIBIT J to Pooling Agreement FORM OF TRANSFEREE REGULATION S CERTIFICATION FORM OF CERTIFICATE TO BE GIVEN BY TRANSFEREE OF BENEFICIAL INTEREST IN A REGULATION S TEMPORARY BOOK-ENTRY CERTIFICATE [Euroclear [Cedel, societe anonyme 151 Boulevard Jacqmain 67 Boulevard Grand-Duchesse Charlotte B-1210 Brussels, Belgium] L-1331 Luxembourg]
Re: [Description of Certificates] issued pursuant to the Pooling and Servicing Agreement dated as of December 13, 1994, among AmeriSource Receivables Corporation, AmeriSource Corporation and Manufacturers and Traders Trust Company, as Trustee, (the "Certificates"). This is to certify that as of the date hereof, and except as set forth below, for purposes of acquiring a beneficial interest in the Certificates, the undersigned certifies that it is not a U.S. person (as defined in Rule 901 under the Securities Act of 1933, as amended). The undersigned undertakes to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Certificates held by you in which the undersigned intends to acquire a beneficial interest in accordance with your operating procedures if any applicable statement herein is not correct on such date. In the absence of any such notification, it may be assumed that this certification applies as of such date. We understand that this certification is required in connection with certain securities laws in the United States of America. If administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification or a copy thereof to any interested party in such proceedings. Dated: , By: ------------------- -------------------------------------
1 151 EXHIBIT K to Pooling Agreement FORM OF DEPOSITARY REGULATION S CERTIFICATION FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR OR CEDEL [Trustee and Transfer Agent and Registrar] Re: [Description of Certificates] issued pursuant to the Pooling and Servicing Agreement dated as of December 13, 1994, among AmeriSource Receivables Corporation, AmeriSource Corporation and Manufacturers and Traders Trust Company, as Trustee, (the "Certificates"). This is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organizations appearing in our records as persons being entitled to a portion of the principal amount set forth below (our "Member Organizations") as of the date hereof, $__________ principal amount of the Certificates is owned by persons (a) that are not U.S. persons (as defined in Rule 901 under the Securities Act of 1933, as amended (the "Securities Act")) or (b) who purchased their Certificates (or interests therein) in a transaction or transactions that did not require registration under the Securities Act. We further certify (a) that we are not making available herewith for exchange any portion of the related Regulation S Temporary Book-Entry Certificate excepted in such certifications and (b) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by them with respect to any portion of the part submitted herewith for exchange are no longer true and cannot be relied upon as of the date hereof. We understand that this certification is required in connection with certain securities laws of the United States of America. If administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification or a copy hereof to any interested party in such proceedings. Date: * Yours faithfully, ----------------- * To be dated no earlier By: -------------------------------------- than the Effective Date. [Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euroclear Clearance System] [Cedel, societe anonyme]
1 152 EXHIBIT L to Pooling Agreement FORM OF TRANSFER TO REGULATION S CERTIFICATION FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER FROM 144A BOOK-ENTRY CERTIFICATE TO REGULATION S TEMPORARY BOOK-ENTRY CERTIFICATE OR UNRESTRICTED BOOK-ENTRY CERTIFICATE [Trustee and Transfer Agent and Registrar] Re: [Description of Certificates] issued pursuant to the Pooling and Servicing Agreement dated as of December 13, 1994, among AmeriSource Receivables Corporation, AmeriSource Corporation and Manufacturers and Traders Trust Company, as Trustee, (the "Certificates"). Reference is hereby made to the Pooling and Servicing Agreement dated as of December 13, 1994 (the "Agreement") between AmeriSource Receivables Corporation, as transferor, AmeriSource Corporation, as initial Servicer, and Manufacturers and Traders Trust Company, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Agreement. This letter relates to U.S. $___________ principal amount of Certificates that are held as a beneficial interest in the 144A Book-Entry Certificate (CUSIP No. _______) with DTC in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of the beneficial interest for an interest in the Regulation S Book-Entry Certificate (CUSIP No. _______) to be held with [Euroclear] [Cedel] through DTC. In connection with the request and in receipt of the Certificates, the Transferor does hereby certify that the exchange or transfer has been effected in accordance with the transfer restrictions set forth in the Agreement and the Certificates and: (a) pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and accordingly the Transferor does hereby certify that: (i) the offer of the Certificates was not made to a States person in the United of America, [(ii) at the time the buy order was originated, the transferee was outside the United States of America or the Transferor and any person acting 1 153 on its behalf reasonably believed that the transferee was outside the United States of America, (ii) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States of America,]* (iii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, (iv) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act, and (b) with respect to transfers made in reliance on Rule 144 under the Securities Act, the Transferor does hereby certify that the Certificates are being transferred in a transaction permitted by Rule 144 under the Securities Act. This certification and the statements contained herein are made for your benefit and the benefit of the issuer and the [placement agent]. [Insert name of Transferor] Dated: By: ------------------- ------------------------------- Title: ------------------- * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. 2 154 EXHIBIT M to Pooling Agreement FORM OF PLACEMENT AGENT EXCHANGE INSTRUCTIONS EXCHANGE INSTRUCTIONS FROM [placement agent] Depository Trust Company 55 Water Street 50th Floor New York, New York 10041 Re: [Description of Certificates] issued pursuant to the Pooling and Servicing Agreement dated as of December 13, 1994, among AmeriSource Receivables Corporation, AmeriSource Corporation and Manufacturers and Traders Trust Company, as Trustee, (the "Certificates"). Pursuant to Section 6.03 of the Pooling and Servicing Agreement dated as of December 13, 1994 (the "Agreement") among AmeriSource Receivables Corporation, as transferor, AmeriSource Corporation, as initial Servicer, and Manufacturers and Traders Trust Company, as Trustee, _______________________ (the "Placement Agent") hereby requests that $____________ aggregate principal amount of the Certificates held by you for our account and represented by the Regulation S Temporary Book-Entry Certificate (CUSIP No. _______) (as defined in the Agreement) be exchanged for an equal principal amount represented by the 144A Book-Entry Certificate (CUSIP No. _______) to be held by you for our account. Dated: [placement agent] --------------------------- By: --------------------------------- Title: ---------------------------- 1 155 EXHIBIT N to Pooling Agreement FORM OF RESTRICTIVE LEGENDS ARC REVOLVING CERTIFICATE THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE OR THE LAWS OF ANY FOREIGN COUNTRY. THIS CERTIFICATE MAY NOT BE RESOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH RESALE, TRANSFER OR DISPOSITION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AND FOREIGN LAWS. IN ADDITION TO THE RESTRICTIONS SET FORTH ABOVE, RESALE, TRANSFER OR DISPOSITION OF THIS CERTIFICATE IS PROHIBITED TO THE EXTENT SET FORTH IN THE POOLING AGREEMENT (AS DEFINED BELOW). RESIDUAL CERTIFICATE THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE OR THE LAWS OF ANY FOREIGN COUNTRY. THIS CERTIFICATE MAY NOT BE RESOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH RESALE, TRANSFER OR DISPOSITION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS AND FOREIGN LAWS. IN ADDITION TO THE RESTRICTIONS SET FORTH ABOVE, RESALE, TRANSFER OR DISPOSITION OF THIS CERTIFICATE IS PROHIBITED TO THE EXTENT SET FORTH IN THE POOLING AGREEMENT (AS DEFINED BELOW). SERIES 1994-1 INVESTOR REVOLVING CERTIFICATE THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE OF THE UNITED STATES OF AMERICA. THE CERTIFICATEHOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY 1 156 BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON THAT THE CERTIFICATEHOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A "QUALIFIED INSTITUTIONAL BUYER"), PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, AND WHOM THE CERTIFICATEHOLDER HAS INFORMED, IN EACH CASE, THAT THE OFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN A TRANSACTION COMPLYING WITH THE PROVISIONS OF REGULATION S UNDER THE SECURITIES ACT OR (3) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND THE TRUSTEE AND ARC RECEIVES WRITTEN REPRESENTATIONS OF THE TRANSFEROR AND TRANSFEREE SATISFACTORY TO THE TRUSTEE AND ARC REGARDING THE DISPOSITIONS, AND, IF THE TRUSTEE OR ARC SO REQUIRES, AN OPINION OF COUNSEL OF THE TRANSFEROR SATISFACTORY TO THE TRUSTEE AND ARC WITH RESPECT TO THE AVAILABILITY OF SUCH EXEMPTION PRIOR TO THE RESALE OR TRANSFER. WITH RESPECT TO CLAUSES (1), (2) AND (3), SUBJECT TO THE RECEIPT BY THE TRUSTEE OF OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT THE OFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE UNITED STATES OF AMERICA OR OTHER APPLICABLE JURISDICTION AND SECURITIES AND BLUE SKY LAWS OF THE STATES OF THE UNITED STATES OF AMERICA. THE CERTIFICATEHOLDER OF THIS CERTIFICATE AGREES THAT IT WILL, AND EACH SUBSEQUENT CERTIFICATEHOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS CERTIFICATE OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. 2 157 EXHIBIT O-1 to Pooling Agreement FORM OF PHASE I INTERCREDITOR AGREEMENT ------------------------------- 1 158 EXHIBIT O-2 to Pooling Agreement FORM OF PHASE II INTERCREDITOR AGREEMENT -------------------------------- 1 159 SCHEDULE 1 to Pooling Agreement OFFICES of the TRANSFEROR, the SERVICER and the SELLER Where RECORDS ARE MAINTAINED ---------------------------- AmeriSource Corporation AmeriSource-Louisville 300 Chester Field Parkway 244 E. Woodlawn Malvern, PA 19355 Louisville, KY 40214 AmeriSource-Chattanooga AmeriSource-Lynchburg 300 Tallan Building 9221 Timberlake Road Two Union Square Lynchburg, VA 24502 Chattanooga, TN 37402 AmeriSource-Paducah 322 North 3rd Street Paducah, KY 42001 AmeriSource-Minneapolis 6810 Shady Oak Road Eden Prairie, MN 55344 AmeriSource-Thorofare 400 Grove Road Thorofare, NJ 08086 Rita-Ann Distributors 901 Curtain Ave. Baltimore, MD 21218 AmeriSource-Columbus 1200 E. 5th Avenue Columbus, OH 43219 AmeriSource-Toledo 3145 Nebraska Avenue Toledo, OH 43607 160 SCHEDULE 2 to Pooling Agreement ACCOUNT BANKS - LOCKBOX BANKS ----------------------------- BANK ONE, COLUMBUS, N.A. 100 East Broad Street 5th Floor Columbus, OH 43271-0157 Box: 0813 Acct: 1006535 CITIZENS BANK & TRUST CO. P.O. Box 2400 333 Broadway Paducah, KY 42002-2400 Box: 2400 Acct: 0148571 CORESTATES BANK, N.A. 30 North 3rd Street Harrisburg, PA 17101 Box: 9390 Acct: 61488545 CRESTAR BANK 1010 Main Street Lynchburg, VA 24504 Box: 79301 Acct: 13389564 FIRST NATIONAL BANK OF MARYLAND 25 South Charles Street MC 101-745 18th Floor Baltimore, MD 21201 Box: 64041 Acct: 18197041 1ST SOURCE BANK P.O. Box 1602 100 North Michigan South Bend, IN 46634 1 161 Box: 4181 Acct: 1192590 MERCANTILE BANK OF JOPLIN P.O. Box 8 Joplin, MO 64802 Box: 1747 Acct: 6000038684 NATIONAL CITY BANK P.O. Box 36000 Louisville, KY 40232 Box: Section #318 Acct: 71131114 NATIONSBANK OF NORTH CAROLINA, N.A. 101 South Tryon Street Mail Code NC1-002-28-14 Charlotte, NC 28255 Box: 65839 Acct: 001671452 NATIONSBANK OF TEXAS, N.A. 101 South Tryon Street Mail Code NC1-002-28-14 Charlotte, NC 28255 Box: 841046 Acct: 129285627 NEW JERSEY NATIONAL BANK 600 Cuthbert Boulevard Haddon Township, NJ 08108 Box: 41950 Acct: 1142662 NORWEST BANK MINNESOTA, N.A. 6th & Marquette Minneapolis, MN 55479-0085 Box: 8617 Acct: 6355004016 2 162 PNC BANK, NATIONAL ASSOCIATION Two PNC Plaza, 31st Floor 620 Liberty Avenue Pittsburgh, PA 15265 Box: 896 Acct: 2115709 PNC BANK, KENTUCKY, INC. 539 South Fourth Avenue Louisville, KY 40292 Box: Dept. # 97311 Acct: 3095332730 SOCIETY NATIONAL BANK P.O. Box 10099 Toledo, OH 43699-0099 Box: 1028 Acct: 500793585 TRUST COMPANY BANK 25 Park Place MC 118, 23rd Floor Atlanta, GA 30302 Box: 055 Acct: 8801346506 (Chattanooga) Box: 304 Acct: 8801948319 (Johnson City) Box: 593 Acct: 8801522312 (Valdosta) ACCOUNT BANKS - CONCENTRATION ACCOUNT BANK ------------------------------------------ CORESTATES BANK 1339 Chestnut Street Philadelphia, PA 19107 Acct: 01019301 3 EX-10.13 4 AMENDMENT NO. 2 TO PARTNERS PLAN 1 EXHIBIT 10.13 Amendment No. 2 to Alco Health Distribution Corporation Partners Stock Option Plan Dated: ____________, 1995 Background On December 11, 1990, the Board of Directors of AmeriSource Health Corporation, formerly know as Alco Health Distribution Corporation (the "Company") adopted the Alco Health Distribution Corporation Partners Stock Option Plan (the "Partners Plan") to enable certain members of the management of the Company to participate in the equity ownership of the Company. Amendment No. 1 to the Partners Plan ("Amendment No. 1"), which was adopted by the Board of Directors on February 19, 1992 and approved by stockholders on April 7, 1992, provided for, among other things, disinterested administration of the Partners Plan after the Company registers its Class A Common Stock, par value $0.01 per share, under Section 12 of the Securities Exchange Act of 1934, as amended. The Partners Plan as amended by Amendment No. 1 is referred to herein as the "Existing Plan." The Company's Board of Directors now wishes to make certain modifications to and amendments of the Existing Plan ("Amendment No. 2"), as follows: Section 1. Defined Terms; References. Unless otherwise defined in this Amendment No. 2, terms defined in the Existing Plan are used herein as defined in the Existing Plan. All references to sections in this Amendment No. 2 shall refer to sections in the Existing Plan, unless otherwise indicated. Section 2. Amendments to Existing Plan. The Existing Plan is hereby amended by deleting all references to "Alco Health Distribution Corporation" in the Existing Plan (except with respect to Section 2(e) which shall be modified in accordance with Section 3 of this Amendment No. 2) and substituting in its stead the name "AmeriSource Health Corporation" Section 3. Amendments to Section 2 of the Existing Plan. Section 2 of the Existing Plan is hereby amended by deleting the definition of "Company" set forth in Section 2(e) in its entirety and inserting the following in its stead: "e. "Company" means AmeriSource Health Corporation, formerly named Alco Health Distribution Corporation." 2 Section 4. Amendments to Section 7 of the Existing Plan. Section 7 of the Existing Plan is hereby amended by: a. deleting the text set forth in Section 7(f) in its entirety and inserting the following in its stead: "(f) Mandatory Holding Period After Exercise. Intentionally Omitted." b. deleting the text set forth in Section 7(h) in its entirety and inserting the following in its stead: "(h) Calculation of Fair Market Value. Intentionally Omitted." 2 EX-10.16 5 ISSUER 1995 STOCK OPTION PLAN 1 EXHIBIT 10.16 AMERISOURCE HEALTH CORPORATION 1995 STOCK OPTION PLAN Date Adopted: February 21, 1995 2 AMERISOURCE HEALTH CORPORATION 1995 STOCK OPTION PLAN 1. Purpose of the Plan The purpose of the Plan is to assist the Company and its Subsidiaries in attracting and retaining valued employees by offering them a greater stake in the Company's success and a closer identity with it, and to encourage ownership of the Company's stock by such employees. 2. Definitions 2.01 "1934 ACT" means the Securities Exchange Act of 1934, as amended. 2.02 "AMERISOURCE" means AmeriSource Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company. 2.03 "BOARD" means the Board of Directors of the Company. 2.04 "CODE" means the Internal Revenue Code of 1986, as amended. 2.05 "COMMITTEE" means the committee designated by the Board to administer the Plan under Section 4. The Committee shall have at least two members, each of whom shall be a member of the Board and shall be a Disinterested Person. - 1 - 3 2.06 "COMMON STOCK" means the Company's Class A Common Stock, $0.01 par value per share, or such other class or kind of shares or other securities resulting from the application of Section 7. 2.07 "COMPANY" means AmeriSource Health Corporation, a Delaware corporation, or any successor corporation. 2.08 "DISINTERESTED PERSON" means a person defined in Rule 16b-3(c)(2)(i) promulgated by the Securities and Exchange Commission under the 1934 Act, or any successor definition adopted by the Securities and Exchange Commission. 2.09 "EMPLOYEE" means an officer or other key employee of the Company or a Subsidiary including a director who is such an employee. 2.10 "FAIR MARKET VALUE" means, on any given date, the previous days' closing price of actual sales of shares of Common Stock on the principal national securities exchange on which the Common Stock is listed, or if not listed, as reported on the NASDAQ Stock Market, on such date or, if the Common Stock was not traded or reported on such date, on the last preceding day on which the Common Stock was traded or reported; provided, however, that the Option price for any Options granted on the date that the Registration Statement is declared or deemed effective by the Securities and Exchange Commission shall be equal to the price to the public set forth on the cover page of the definitive prospectus included in the Registration Statement. 2.11 "HOLDER" means an Employee to whom an Option is granted. - 2 - 4 2.12 "MATURE COMMON STOCK" means Common Stock owned for six months or more, or such other period as the Committee may determine subject to applicable accounting regulations, by the respective Holder. 2.13 "OPTION" means a non-qualified stock option granted from time to time under Section 6 of the Plan. 2.14 "PLAN" means the AmeriSource Health Corporation 1995 Stock Option Plan herein set forth, as amended from time to time. 2.15 "REGISTRATION STATEMENT" means the Company's Form S-2 Registration Statement (No. 33-57513), as amended. 2.16 "RETIREMENT" means retirement from the active employment of the Company or a Subsidiary pursuant to the relevant provisions of the applicable pension plan of such entity or as otherwise determined by the Committee. 2.17 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company (or any subsequent parent of the Company) if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.18 "VPI" means 399 Venture Partners, Inc., a Delaware corporation. - 3 - 5 3. Eligibility Any Employee is eligible to receive an Option grant. 4. Administration and Implementation of Plan 4.01 The Plan shall be administered by the Committee, which shall have full power to interpret and administer the Plan and full authority to act in selecting the Employees to whom Options will be granted, in determining the amount of Options to be granted to each such Employee and the terms and conditions of Options granted under the Plan. 4.02 The Committee's powers shall include, but not be limited to, the power: (a) to determine whether, to what extent and under what circumstances an Option may be granted; (b) to determine whether, to what extent and under what circumstances an Option may be exercised; (c) to determine whether, to what extent and under what circumstances exceptions to the exercisability of an Option (including accelerating the exercisability) may be granted; (d) to condition an Option grant upon the attainment of specified performance goals; (e) to determine the effect, if any, of a change in control of the Company (including a merger of the Company into, a consolidation of the Company with, or an acquisition of the Company by a person or entity or a liquidation of the Company) upon outstanding Options; (f) to establish an arrangement through registered broker-dealers whereby temporary financing may be made available to a - 4 - 6 Holder by the broker-dealer, under the rules and regulations of the Federal Reserve Board, for the purpose of assisting the Holder in the exercise of an Option; (g) to establish procedures at the Committee's discretion, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, for a Holder (i) to have withheld from the total number of shares to be acquired upon the exercise of an Option that number of shares having a Fair Market Value, which, together with such cash as shall be paid in respect of fractional shares, shall equal the minimum statutory tax withholding obligation incurred by the Holder upon such exercise, or (ii) to exercise an Option by delivering a number of shares of Mature Common Stock already owned by such Holder having a Fair Market Value that shall equal the option exercise price and/or the tax withholding obligation incurred by the Holder upon such exercise; (h) to condition an Option grant upon such Employee's execution of non-compete, non-disclosure or similar arrangements in favor of the Company and/or its Subsidiaries and satisfactory in form and substance to the Committee; and (i) to establish a loan program, or to cause AmeriSource to establish a loan program, if permitted by the restrictions in the Company's and AmeriSource's financing agreements, to loan to a Holder who is still employed by the Company at the time of exercise an amount sufficient to satisfy the exercise price and/or tax obligation incurred by the Holder upon such exercise and thereafter loan promptly to such Holder such additional amounts sufficient to pay further withholding obligations as may be determined from - 5 - 7 time to time to be payable as a result of such exercise. Any amounts loaned to such Holder shall be evidenced by a promissory note from such Holder on such terms as are mutually agreed to by the Committee and the Holder; provided, however, that such loan shall bear a market rate of interest and shall be full recourse. 4.03 The Committee shall have the power to adopt regulations for carrying out the Plan and to make changes in such regulations as it shall, from time to time, deem advisable. The Committee shall have the power unilaterally and without approval of a Holder to amend an existing Option in order to carry out the purposes of the Plan so long as such amendment does not take away any benefit granted to a Holder by the Option and as long as the amended Option comports with the terms of the Plan. Any interpretation by the Committee of the terms and provisions of the Plan and the administration thereof, and all action taken by the Committee, shall be final and binding on Holders. 5. Shares of Stock Subject to the Plan 5.01 Subject to adjustment as provided in Section 7, the total number of shares of Common Stock available for Options under the Plan shall be 1,116,431 shares, subject to increase by such number of shares as equals 5% of any and all Common Stock sold pursuant to the over-allotment option contained in the Underwriting Agreement between the Company and the several underwriters named - 6 - 8 therein relating to the offering of Common Stock registered pursuant to the Registration Statement. 5.02 Any shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for Options under the Plan. Any shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares subject to any Option granted hereunder are forfeited or such Option otherwise terminates without the issuance of such shares or the payment of other consideration in lieu of such shares, the shares subject to such Option, to the extent of any such forfeiture or termination, shall again be available for grants of Options under the Plan. 6. Options Options give an Employee the right to purchase a specified number of shares of Common Stock from the Company for a specified time period at a fixed price. The grant of Options shall be subject to the following terms and conditions: 6.01 OPTION GRANTS: Options shall be evidenced by Option award certificates. Such certificates shall conform to the requirements of the Plan, and may contain such other provisions as the Committee shall deem advisable. 6.02 OPTION PRICE: The price per share at which Common Stock may be purchased upon exercise of an Option shall be determined by the Committee and shall - 7 - 9 be not less than the Fair Market Value of a share of Common Stock on the date of grant. 6.03 TERM OF OPTIONS: The Option certificates shall specify when an Option may be exercisable and the terms and conditions applicable thereto. The term of an Option shall in no event be greater than six years from the date of grant or such shorter term as specified by the Committee in the Option award certificate. If an Option is exercised sooner than six months from the date of grant, then the shares acquired upon such exercise must be held for at least six months from the date of grant of the Option. 6.04 RESTRICTION ON TRANSFERABILITY: No Option shall be transferable otherwise than by will or the laws of descent and distribution and, during the lifetime of the Holder shall be exercisable only by the Holder. Upon the death of a Holder, the person to whom the rights have passed by will or by the laws of descent and distribution may exercise an Option only in accordance with this Section 6. 6.05 PAYMENT OF OPTION PRICE: The Option price of the shares of Common Stock acquired upon the exercise of an Option shall be paid in full in cash at the time of the exercise or, with the consent of the Committee, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, in whole or in part in Mature Common Stock valued at Fair Market Value on the date of exercise by delivering to the Company such Mature Common Stock already owned by the Holder. - 8 - 10 6.06 MANDATORY HOLDING PERIOD AFTER EXERCISE: During the four-year period after the date of grant of an Option, the Holder shall be required to hold 50% of the shares of Common Stock acquired upon exercise of such Option for a period of one year after the date of exercise. Any purported transfer of shares of Common Stock acquired upon exercise of an Option in violation of the Plan shall be null and void and of no force and effect and the purported transferree(s) shall have no rights or privileges in or with respect to the Company. 6.07 TERMINATION BY DEATH: If a Holder's employment by the Company or a Subsidiary terminates by reason of death, any Option held by such Holder may thereafter be exercised, to the extent such Option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant, by the legal representative of the Holder, until the expiration of the stated term of the Option or until such shorter term before the expiration of the Option as the Committee may determine. 6.08 TERMINATION BY REASON OF RETIREMENT OR DISABILITY: If a Holder's employment by the Company or a Subsidiary terminates by reason of disability (as determined by the Committee) or Retirement, any Option held by such Holder may thereafter be exercised by the Holder (or, where appropriate, the Holder's legal representative), to the extent it was exercisable at the time of such termination or on such accelerated basis as the Committee may determine at or after grant, until the - 9 - 11 expiration of the stated term of the Option or until such shorter term before the expiration of the Option as the Committee may determine. 6.09 OTHER TERMINATION: If a Holder's employment by the Company or Subsidiary terminates for any reason other than death, disability or Retirement, the Option shall terminate 30 days after the date of such termination of employment. 7. Adjustments Upon Changes in Capitalization In the event of a reorganization, recapitalization, stock split, reverse stock split, spin-off, split-off, split up, stock dividend, issuance of stock rights, combination of shares, merger, consolidation or any other change in the corporate structure of the Company affecting Common Stock, or any distribution to stockholders in respect of stock other than a cash dividend, the Committee shall make the adjustments in the number and kind of shares authorized by the Plan and any adjustments to outstanding Options as it determines appropriate. No fractional shares of Common Stock shall be issued pursuant to such an adjustment. The Fair Market Value of any fractional shares resulting from adjustments pursuant to this section shall, where appropriate, be paid in cash to the Holder. If during the term of any Option granted hereunder the Company shall be, with the prior approval of a majority of the members of the Board, merged into or consolidated with or otherwise combined with or acquired by a person or entity, or there is a liquidation of the Company, then at the election of the Committee, the Company may take such other action as the - 10 - 12 Committee shall determine to be reasonable under the circumstances to permit the Holder to realize the value of such Option, including without limitation paying cash to such Holder equal to the value of the Option or requiring the acquiring corporation to grant options or stock to such Holder having a value equal to the value of the Option. 8. Effective Date, Termination and Amendment The Plan shall become effective on March __, 1995, subject to stockholder approval. The Plan shall remain in full force and effect until the earlier of 10 years from the date of its adoption by the Board, or the date it is terminated by the Board. The Board shall have the power to amend, suspend or terminate the Plan at any time, provided that no such amendment shall be made without stockholder approval which shall: 8.01 Increase (except as provided in Section 7) the total number of shares available for issuance pursuant to the Plan; 8.02 Change the class of employees eligible to be Holders; 8.03 Change the provisions of this Section 8; or 8.04 Make any other change for which stockholder approval is required under Section 16(b)(3) or any successor provision of the 1934 Act. Termination of the Plan pursuant to this Section 8 shall not affect Options outstanding under the Plan at the time of termination. - 11 - 13 9. General Provisions 9.01 Nothing contained in the Plan, or any Option granted pursuant to the Plan, shall confer upon any Employee any right with respect to continuance of employment by the Company or a Subsidiary, nor interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any Employee at any time. 9.02 For purposes of this Plan, transfer of employment between the Company and its Subsidiaries shall not be deemed termination of employment. 9.03 Holders shall be responsible to make appropriate provision for all taxes required to be withheld in connection with any Option, the exercise thereof and the transfer of shares of Common Stock pursuant to this Plan. Such responsibility shall extend to all applicable Federal, state, local or foreign withholding taxes. In the case of the exercise of Options, the Company shall, at the election of the Holder, but only with the consent of the Committee, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, have the right to repurchase from shares already held by the Holder, the number of shares of Mature Common Stock whose Fair Market Value equals the withholding tax obligation of such Holder or to make loans or cause AmeriSource to make loans on the terms set forth in Section 4.02(i) to pay the applicable tax obligation incurred by the Holder upon such exercise. - 12 - 14 9.04 The Company shall not be obligated to deliver certificates for Common Stock upon the exercise of an Option unless the Holder has made payment in full for such Common Stock required by Sections 6.02 and 6.05 and has arranged for withholding of all taxes required by Section 9.03. 9.05 Without amending the Plan, Options may be granted to Employees who are foreign nationals or employed outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purpose of the Plan. 9.06 Upon exercise of an Option, the Holder shall be required to make such representations and furnish such information as may, in the opinion of counsel for the Company, be appropriate to permit the Company to issue or transfer the shares of Common Stock in compliance with the provisions of applicable federal or state securities laws. The Company, in its discretion, may postpone the issuance and delivery of shares of Common Stock upon any exercise of an Option until completion of such registration or other qualification of such shares under any federal or state laws, or stock exchange listing, as the Company may consider appropriate. The Company is not obligated to register or qualify the shares of Common Stock issued pursuant to Options under federal or state securities laws and may refuse to issue such shares if neither registration nor exemption therefrom is practical. The Board may require that prior to the issuance or transfer of any shares of Common Stock upon - 13 - 15 exercise of an Option, the recipient enter into a written agreement to comply with any restrictions on subsequent disposition that the Board or the Company deems necessary or advisable under any applicable federal and state securities laws. Certificates representing the shares of Common Stock issued hereunder may be legended to reflect such restrictions. 9.07 To the extent that Federal laws (such as the 1934 Act, the Code or the Employee Retirement Income Security Act of 1974, as amended) do not otherwise control, the Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of Delaware and construed accordingly. 9.08 Upon the occurrence of a Change in Control, each Option then outstanding shall become immediately exercisable to the full extent of the shares of Common Stock subject thereto; provided, that (i) such Holder was employed by the Company at the time of such Change in Control and (ii) either (x) such Holder is employed by the Company on the first anniversary date of the Change in Control, (y) such Holder's employment is subsequently terminated by the Company other than for Cause during the one-year period following such Change in Control, or (z) such Holder voluntarily terminates such Holder's employment during the one-year period following such Change in Control as a result of a Constructive Termination. For purposes of this Plan, "Cause" means willful misconduct or dishonesty, or conviction of or failure to contest prosection for a felony, or excessive absenteeism unrelated to - 14 - 16 illness. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act, other than VPI and its Affiliates (as defined in Rule 12b-2 under the 1934 Act) becomes the "beneficial owner" (as defined in Section 13(d)(3) under the 1934 Act) of securities of the Company representing more than 35 percent (35%) of the total aggregate voting power of the Company's then outstanding securities entitled to vote generally in the election of directors, and such person or group owns more aggregate voting power of the Company's then outstanding securities entitled to vote generally in the election of directors than any other person or group. For purposes of this Plan, "Constructive Termination" means when the Company (a) requires Holder to assume duties inconsistent with, or the Company makes a significant diminution or reduction in the nature or scope of Holder's authority or duties from, the authority or duties assigned to or held by Holder during the 30 days immediately prior to the Change in Control, or (b) materially reduces Holder's base salary, incentive compensation opportunities or fringe benefits or (c) relocates Holder's site of employment to a location more than 50 miles away from Holder's site of employment 30 days immediately prior to the Change in Control. Notwithstanding anything else contained in this Section 9.07, a Holder shall be eligible to exercise Options both before and after a Change in Control to the full extent otherwise permitted under the Plan. - 15 - EX-10.17 6 ISSUER NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN 1 EXHIBIT 10.17 AMERISOURCE HEALTH CORPORATION NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Date Adopted: February 21, 1995 2 AMERISOURCE HEALTH CORPORATION NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN 1. Purpose of the Plan. The purpose of the Plan is to assist the Company and its Subsidiaries in attracting and retaining services of experienced and knowledgeable independent directors of the Company for the benefit of the Company and its stockholders and to provide additional incentives for such independent directors to continue to work for the best interests of the Company and its stockholders through continuing ownership of its common stock. 2. Definitions 2.01 "1934 ACT" means the Securities Exchange Act of 1934, as amended. 2.02 "AMERISOURCE" means AmeriSource Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company. 2.03 "BOARD" means the Board of Directors of the Company. 2.04 "CODE" means the Internal Revenue Code of 1986, as amended. 2.05 "COMMITTEE" means the committee designated by the Board to administer the Plan under Section 4. The Committee shall have at least two members, each of whom shall be a member of the Board and shall be a Disinterested Person. - 1 - 3 2.06 "COMMON STOCK" means the Company's Class A Common Stock, $0.01 par value per share, or such other class or kind of shares or other securities resulting from the application of Section 7. 2.07 "COMPANY" means AmeriSource Health Corporation, a Delaware corporation, or any successor corporation. 2.08 "DISINTERESTED PERSON" means a person defined in Rule 16b-3(c)(2)(i) promulgated by the Securities and Exchange Commission under the 1934 Act, or any successor definition adopted by the Securities and Exchange Commission. 2.09 "ELIGIBLE DIRECTOR" means each director of the Company who is not (i) otherwise an employee of the Company or any Subsidiary or (ii) an employee of VPI or any affiliate of VPI. 2.10 "FAIR MARKET VALUE" means, on any given date, the previous days' closing price of actual sales of shares of Common Stock on the principal national securities exchange on which the Common Stock is listed, or if not listed, as reported on the National Association of Securities Dealers Automated Quotation System, on such date or, if the Common Stock was not traded or reported on such date, on the last preceding day on which the Common Stock was traded or reported. 2.11 "HOLDER" means an Eligible Director to whom an Option is granted. 2.12 "INITIAL GRANT" shall have the meaning set forth in Section 3. - 2 - 4 2.13 "MATURE COMMON STOCK" means Common Stock owned for six months or more, or such other period as the Committee may determine subject to applicable accounting regulations, by the respective Holder. 2.14 "OPTION" means a non-qualified stock option granted from time to time under Section 3 of the Plan. 2.15 "OPTION EXERCISE PERIOD" means (i) with respect to Options granted under the Initial Grant, the period commencing three (3) years after the date of Initial Grant and ending six years from the date of grant and (ii) with respect to all Options granted under this Plan other than under the Initial Grant, the period commencing one (1) year after the date of grant and ending ten years from the date of grant. 2.16 "PLAN" means the AmeriSource Health Corporation Non-Employee Directors Stock Option Plan herein set forth, as amended from time to time. 2.17 "REGISTRATION STATEMENT" means the Company's Form S-2 Registration Statement (No. 33-57513), as amended. 2.18 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company (or any subsequent parent of the Company) if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.19 "VPI" means 399 Venture Partners, Inc., a subsidiary of Citicorp. - 3 - 5 3. Eligibility; Grant of Option An Option to acquire 5,000 shares of Common Stock shall be granted (the "Initial Grant") to each Eligible Director on the date that the Company's Registration Statement is declared or deemed to be effective by the Securities and Exchange Commission, subject to approval of the Plan by the stockholders of the Company. Thereafter, each Eligible Director shall be granted an Option to acquire 5,000 shares of Common Stock following such Eligible Director's election or reelection to the Board, as the case may be, by the stockholders at the Company's annual stockholders' meeting during each year from 1996 through 1997, inclusive. 4. Administration and Implementation of Plan 4.01 The Plan shall be administered by the Committee, which shall have full power to interpret and administer the Plan and full authority to act in determining the terms and conditions of Options granted under the Plan. 4.02 The Committee's powers shall include, but not be limited to, the power: (a) to determine whether, to what extent and under what circumstances exceptions to the exercisability of an Option (including accelerating the exercisability) may be granted; (b) to determine the effect, if any, of a change in control of the Company (including a merger of the Company into, a consolidation of the Company with, or an acquisition of the Company by a person or entity or a liquidation of the Company) - 4 - 6 upon outstanding Options; (c) to establish an arrangement through registered broker-dealers whereby temporary financing may be made available to a Holder by the broker-dealer, under the rules and regulations of the Federal Reserve Board, for the purpose of assisting the Holder in the exercise of an Option; (d) to establish procedures at the Committee's discretion, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, for a Holder (i) to have withheld from the total number of shares to be acquired upon the exercise of an Option that number of shares having a Fair Market Value, which, together with such cash as shall be paid in respect of fractional shares, shall equal the minimum statutory tax withholding obligation incurred by the Holder upon such exercise, or (ii) to exercise an Option by delivering a number of shares of Mature Common Stock already owned by such Holder having a Fair Market Value that shall equal the option exercise price and/or the tax withholding obligation incurred by the Holder upon such exercise; and (e) to establish a loan program, or to cause AmeriSource to establish a loan program, if permitted by the restrictions in the Company's and AmeriSource's financing agreements, to loan to a Holder who is still a director of the Company at the time of exercise an amount sufficient to satisfy the exercise price and/or tax obligation incurred by the Holder upon such exercise and thereafter loan promptly to such Holder such additional amounts sufficient to pay further withholding obligations as may be determined from time to time to be payable as a result of such exercise. Any amounts - 5 - 7 loaned to such Holder shall be evidenced by a promissory note from such Holder on such terms as are mutually agreed to by the Committee and the Holder; provided, however, that such loan shall bear a market rate of interest and shall be full recourse. 4.03 The Committee shall have the power to adopt regulations for carrying out the Plan and to make changes in such regulations as it shall, from time to time, deem advisable. The Committee shall have the power unilaterally and without approval of a Holder to amend an existing Option in order to carry out the purposes of the Plan so long as such amendment does not take away any benefit granted to a Holder by the Option and as long as the amended Option comports with the terms of the Plan. Any interpretation by the Committee of the terms and provisions of the Plan and the administration thereof, and all action taken by the Committee, shall be final and binding on Holders. 5. Shares of Common Stock Subject to the Plan 5.01 Subject to adjustment as provided in Section 7, the total number of shares of Common Stock available for Options under the Plan shall be 50,000 shares of Common Stock. 5.02 The grant of an Option shall reduce the shares of Common Stock as to which Options may be granted by the number of shares subject to such Option. Any shares of Common Stock issued by the Company through the assumption or - 6 - 8 substitution of outstanding grants from an acquired company shall not reduce the shares available for Options under the Plan. Any shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares subject to any Option granted hereunder are forfeited or such Option otherwise terminates without the issuance of such shares or the payment of other consideration in lieu of such shares, the shares subject to such Option, to the extent of any such forfeiture or termination, shall again be available for grants of Options under the Plan. In the event there are insufficient shares of Common Stock available for Options under the Plan to satisfy all of the Option grants under Section 3 on the same day, such Option grants shall be reduced pro-rata. 6. Options Options give an Eligible Director the right to purchase a specified number of shares of Common Stock from the Company for a specified time period at a fixed price. The grant of Options shall be subject to the following terms and conditions: 6.01 OPTION GRANTS: Options shall be evidenced by Option award certificates. Such certificates shall conform to the requirements of the Plan, and may contain such other provisions as the Committee shall deem advisable. 6.02 OPTION PRICE: The price per share at which Common Stock may be purchased upon exercise of an Option shall be determined by the Committee and shall - 7 - 9 be not less than the Fair Market Value of a share of Common Stock on the date of grant; provided, however, that the Option price for the Initial Grant shall be equal to the price to the public set forth on the cover page of the definitive prospectus included in the Registration Statement. 6.03 EXERCISE OF OPTION: Subject to Section 4 of this Plan, each Option granted under this Plan may be exercised in full at one time or in part from time to time only during the Option Exercise Period by the giving of written notice, signed by the person or persons exercising the Option, to the Company stating the number of shares of Common Stock with respect to which the Option is being exercised, accompanied by full payment for such shares pursuant to Section 6.04 hereof. 6.04 TRANSFER AND EXERCISE: No Option shall be transferable by the Holder except by will or the laws of descent and distribution. In the event of the death, retirement or any other termination of Board service of a Holder except for removal for cause, the Option, if otherwise exercisable by the Holder at the time of such termination, may be exercised upon the earlier of (A) the end of the Option Exercise Period and (B) within one year after such termination. In the event of termination for cause, all previously granted Options shall be of no further force and effect. Termination for cause shall be defined as termination on account of any act of (x) fraud or intentional misrepresentation, or (y) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary. - 8 - 10 6.05 PAYMENT OF OPTION PRICE: The Option price of the shares of Common Stock acquired upon the exercise of an Option shall be paid in full in cash at the time of the exercise or, with the consent of the Committee, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, in whole or in part in Mature Common Stock valued at Fair Market Value on the date of exercise by delivering to the Company such Mature Common Stock already owned by the Holder. 7. Adjustments Upon Changes in Capitalization In the event of a reorganization, recapitalization, stock split, reverse stock split, spin-off, split-off, split up, stock dividend, issuance of stock rights, combination of shares, merger, consolidation or any other change in the corporate structure of the Company affecting Common Stock, or any distribution to stockholders in respect of stock other than a cash dividend, the Committee shall make the adjustments in the number and kind of shares authorized by the Plan and any adjustments to outstanding Options as it determines appropriate. No fractional shares of Common Stock shall be issued pursuant to such an adjustment. The Fair Market Value of any fractional shares resulting from adjustments pursuant to this section shall, where appropriate, be paid in cash to the Holder. If during the term of any Option granted hereunder the Company shall be, with the prior approval of a majority of the members of the Board, merged into or consolidated with or otherwise combined with or acquired by a person or entity, or there is a liquidation of the Company, - 9 - 11 then at the election of the Committee, the Company may take such other action as the Committee shall determine to be reasonable under the circumstances to permit the Holder to realize the value of such Option, including without limitation paying cash to such Holder equal to the value of the Option or requiring the acquiring corporation to grant options or stock to such Holder having a value equal to the value of the Option. 8. Effective Date, Termination and Amendment The Plan shall become effective on March __, 1995, subject to stockholder approval. The Plan shall remain in full force and effect until the earlier of 10 years from the date of its adoption by the Board, or the date it is terminated by the Board. The Board shall have the power to amend, suspend or terminate the Plan at any time, provided that no such amendment shall be made without stockholder approval that shall: 8.01 Increase (except as provided in Section 7) the total number of shares available for issuance pursuant to the Plan; 8.02 Change the class of directors eligible to be Holders; 8.03 Change the provisions of this Section 8; or 8.04 Make any other change for which stockholder approval is required under Section 16(b) or any successor provision of the 1934 Act. Termination of the Plan pursuant to this Section 8 shall not affect Options outstanding under the Plan at the time of termination. - 10 - 12 9. General Provisions 9.01 No person affiliated with the Company or any Subsidiary or other person shall have any claim or right to be granted an Option hereunder. Neither this Plan nor any action taken hereunder shall be construed as (i) giving any Holder any right to continue to be affiliated with the Company, (ii) giving any Holder any equity or interest of any kind in any assets of the Company, or (iii) creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person. No Holder shall have any of the rights of a stockholder with respect to shares of Common Stock covered by an Option until such time as the Option has been exercised and shares have been issued to such person. 9.02 Holders shall be responsible to make appropriate provision for all taxes required to be withheld in connection with any Option, the exercise thereof and the transfer of shares of Common Stock pursuant to this Plan. Such responsibility shall extend to all applicable Federal, state, local or foreign withholding taxes. In the case of the exercise of Options, the Company shall, at the election of the Holder, but only with the consent of the Committee, and if permitted by the restrictions in the Company's and AmeriSource's financing agreements, have the right to repurchase from shares already held by the Holder, the number of shares of Mature Common Stock whose Fair Market Value equals the withholding tax obligation of such Holder - 11 - 13 or to make loans or cause AmeriSource to make loans on the terms set forth in Section 4.02(e) to pay the applicable tax obligation incurred by the Holder upon such exercise. 9.03 The Company shall not be obligated to deliver certificates for Common Stock upon the exercise of an Option unless the Holder has made payment in full for such Common Stock required by Sections 6.02 and 6.05 and has arranged for withholding of all taxes required by Section 9.02. 9.04 Without amending the Plan, Options may be granted to Eligible Directors who are foreign nationals or employed outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purpose of the Plan. 9.05 Upon exercise of an Option, the Holder shall be required to make such representations and furnish such information as may, in the opinion of counsel for the Company, be appropriate to permit the Company to issue or transfer the shares of Common Stock in compliance with the provisions of applicable federal or state securities laws. The Company, in its discretion, may postpone the issuance and delivery of shares of Common Stock upon any exercise of an Option until completion of such registration or other qualification of such shares under any federal or state laws, or stock exchange listing, as the Company may consider appropriate. The Company is not obligated to register or qualify the shares of Common Stock issued - 12 - 14 pursuant to Options under federal or state securities laws and may refuse to issue such shares if neither registration nor exemption therefrom is practical. The Board may require that prior to the issuance or transfer of any shares of Common Stock upon exercise of an Option, the recipient enter into a written agreement to comply with any restrictions on subsequent disposition that the Board or the Company deems necessary or advisable under any applicable federal and state securities laws. Certificates representing the shares of Common Stock issued hereunder may be legended to reflect such restrictions. 9.06 To the extent that Federal laws (such as the 1934 Act, the Code or the Employee Retirement Income Security Act of 1974, as amended) do not otherwise control, the Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of Delaware and construed accordingly. - 13 - EX-10.18 7 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.18 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of March 30, 1995 among AMERISOURCE DISTRIBUTION CORPORATION, a Delaware corporation (the "Company"), and 399 VENTURE PARTNERS, INC., a Delaware corporation ("VPI"). The Company desires to grant registration rights to VPI. NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Demand Registrations. (a) Requests for Registration. Subject to paragraph (b), at any time and from time to time (i) the holders of at least 50% of the Registrable Securities may request registration under the Securities Act of all or part of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registrations"), (ii) the holders of at least 50% of the Registrable Securities may request registration under the Securities Act of all or part of their Registrable Securities on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if available and (iii) the holders of at least 50% of the Registrable Securities may request that the Company file with the Securities and Exchange Commission a registration statement under the Securities Act on any applicable form pursuant to Rule 415 under the Securities Act (the "Required Registration"). Within ten days after receipt of any such request with respect to clauses (i) and (ii), the Company will give written notice of such requested registration to all other holders of Registrable Securities and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. All registrations requested pursuant to this paragraph 1(a) are referred to herein as "Demand Registrations". The Company acknowledges that VPI may request a Demand Registration in connection with a public offering of Holders Securities. (b) Long-Form Registrations. If at any time the Company is eligible to use a Short-Form Registration, the holders of Registrable Securities will not be entitled to request a Long-Form Registration at such time. If the Company is not eligible to use a Short-Form Registration, the holders of Registrable Securities will be entitled to request a Long-Form Registration, up to a maximum of 2 Long-Form Registrations. A registration will not count as one of the permitted Long-Form Registrations until it has become effective, and no Long-Form Registration will count as one 2 of the permitted Long-Form Registrations unless the holders of Registrable Securities are able to register and sell at least 90% of the Registrable Securities requested to be included in such registration. (c) Short-Form Registrations. In addition to the Long-Form Registrations provided pursuant to paragraph 1(b), the holders of Registrable Securities will be entitled to request an unlimited number of Short-Form Registrations in which the Company will pay all Registration Expenses; provided that the aggregate offering value of the Registrable Securities requested to be registered in any Short-Form Registration must equal at least $20,000,000. Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form. (d) Required Registration. (i) Subject to the availability of required financial information, within 45 days after the Company receives written notice of a request for a Required Registration, the Company shall file with the Securities and Exchange Commission a registration statement under the Securities Act for the Required Registration. The Company shall use its best efforts to cause the Required Registration to be declared effective under the Securities Act as soon a practical after filing, and once effective, the Company shall (subject to the provisions of paragraph 1(f)(ii) below) cause such Required Registration to remain effective for such time period as is specified in such request, but for no time period longer than the period ending on the earlier of (i) the fourth anniversary of the date of filing of the Required Registration or (ii) the date on which all Registrable Securities have been sold pursuant to the Required Registration or (iii) the date as of which there are no longer any Registrable Securities in existence (the "Effective Period"). (ii) Holdback Agreement. If any holder or holders of Registrable Securities notify the Company in writing that they intend to effect the sale of all or substantially all of the Registrable Securities pursuant to a single integrated offering pursuant to a then effective registration statement pursuant to subparagraph (d)(i) above (a "Sale"), the Company shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for its equity securities, during the 90-day period beginning on the date such notice of a Sale is received. (iii) Limitations on Additional Securities. If in connection with any Sale the Managing Underwriter (as defined below) advises the Company that, in its opinion, the inclusion of any other securities other than Registrable Securities would adversely affect the marketability of the offering, then no such securities shall be permitted to be included. Additionally, if in connection with an offering, the number of Registrable Securities and other securities (if any) requested to be included in such Sale exceeds the number of Registrable Securities and other securities - 2 - 3 which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such Sale (i) first, the Registrable Securities requested to be included in such Sale, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each such holder, and (ii) second, other securities requested to be included in such Sale to the extent permitted hereunder. (iv) Selection of Underwriter. The holders of a majority of Registrable Securities shall have the right to retain and select an investment banker and manager (the "Managing Underwriter") to administer the Required Registration, subject to the Company's approval which shall not be unreasonably withheld. (v) Required Registration Expenses. In addition to the provisions in paragraph 4 below, all expenses incurred in connection with the management of the Required Registration (whether incurred by the Company or the holders of Registrable Securities) shall be borne by the Company (including, without limitation, all fees and expenses of the investment banker and Managing Underwriter) (excluding discounts and commissions). (e) Priority on Demand Registrations. Other than with respect to registration rights which have been granted by the Company prior to the date hereof, the Company will not include in any Long-Form or Short-Form Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least 50% of the Registrable Securities initially requesting such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold without adversely affecting the marketability of the offering, pro rata among the respective holders thereof on the basis of the amount of Registrable Securities owned by each such holder; provided that in the event any holders of Registrable Securities under the Securities Purchase Agreement (the "Management Registrable Securities") have requested that such securities be included in such offering (other than a Required Registration), such Management Registrable Securities shall be included pro rata among the respective holders thereof and the holders of Registrable Securities on the basis of the amount of Management Registrable Securities and Registrable Securities owned by each such holder. (f) Restrictions on Demand Registrations. The Company (acting upon the good faith determination of the Company's board of - 3 - 4 directors) may postpone the filing or the effectiveness of a registration statement for a Demand Registration until the sixth month anniversary of the effective date of a previously requested Demand Registration. Additionally, the Company may (i) postpone for up to six months the filing or the effectiveness of a registration statement for a Demand Registration or (ii) suspend the effectiveness of the registration statement filed for the Required Registration if the Company's board of directors reasonably determines in its good faith judgment that such Demand Registration would have an adverse effect on any proposal or plan by the Company or any of its subsidiaries to engage (i) in any material acquisition or disposition of assets(other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction or (ii) any private or public debt or equity financing which is material to the Company and its Subsidiaries taken as a whole; provided that in any of the events described in the previous two sentences, the holders of Registrable Securities initially requesting such Demand Registration will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as one of the permitted Demand Registrations hereunder; provided further the Company may cause only one postponement or suspension described in this paragraph during any 365 day period. (g) Selection of Underwriters. Any Long-Form or Short-Form Demand Registration shall be pursuant to an underwritten offering with the managing underwriter or underwriters selected by the holders of a majority of the Registrable Securities included in any Demand Registration, subject to the Company's approval which will not be unreasonably withheld. 2. Piggyback Registrations. The parties hereto hereby acknowledge that (a) the Company has provided piggyback registration rights to VPI and certain other stockholders pursuant to the Securities Purchase Agreement, (b) the Securities Purchase Agreement shall remain in full force and effect and (c) nothing contained herein shall be deemed to impair the rights of VPI under such agreement. 3. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its best efforts to effect the registration of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by - 4 - 5 the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel); (b) subject to paragraph (e), prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period which will terminate when all Registrable Securities covered by such registration statement have been sold (but not before the expiration of the 40-day period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (e) promptly notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided, however, that upon not less than five days' notice to the holders of Registrable Securities, the Company may defer the filing of an amendment or - 5 - 6 withdraw an amendment or may defer the effectiveness of an amendment or the preparation of a supplement if the Board of Directors of the Company determines, in good faith, that such amendment or supplement, or the disclosure of any information in connection therewith, would (i) have a material adverse affect upon the Company or its subsidiaries or (ii) substantially interfere with a significant transaction of a type which would allow the Company to postpone a Demand Registration under paragraph 1(e); (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each such seller agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates unless and until such is made generally available to the public. Each such seller further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; - 6 - 7 (j) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; and (k) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters. 4. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company will be borne by the Company. (b) In connection with each Demand Registration, the Company will reimburse the holders of Registrable Securities covered by such registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities initially requesting such registration. 5. Holdback Agreements. (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities agrees not to effect any public sale or distribution of the issue of securities being registered or a similar security of the Company or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement covering Common Stock (except as part of such registration), if and to the extent requested by the Company in the case of a non-underwritten public offering or if and to the extent requested by the managing underwriter or underwriters in the case of an underwritten public offering. (b) Restrictions on Public Sale by the Company and Others. The Company and its affiliates (other than holders of Registrable Securities) agree (i) not to effect any public sale or distribution of any securities similar to those being registered in accordance with paragraph 1 (other than similar securities convertible into or exchangeable or exercisable for such securities) during the 14 days prior to, and during the 90-day - 7 - 8 period beginning on, the effective date of any registration statement (except as part of such registration statement) filed pursuant to this Agreement; and (ii) that any agreement entered into after the date of this Agreement pursuant to which the Company issues or agrees to issue any privately placed securities shall contain a provision under which holders of such securities agree not to effect any public sale or distribution of any such securities during the periods described in (i) above, in each case including a sale pursuant to Rule 144 under the Securities Act; provided, however, that the provisions of this paragraph (b) shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities. 6. Indemnification. (a) The Company agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the most current registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder; provided that the obligation to indemnify will be - 8 - 9 individual to each holder and will be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (c) If any action or proceeding (including any governmental investigation) shall be brought or asserted against any Person entitled to indemnification under clauses (a) or (b) above (an "Indemnified Party") in respect of which indemnity may be sought from any party who has agreed to provide such indemnification (an "Indemnifying Party"), the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all expenses. Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that there is a conflict of interest under applicable standards of professional responsibility on the part of counsel employed by the Indemnifying Party to represent such Indemnified Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party; it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such Indemnified Parties). The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. (d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. - 9 - 10 7. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. Definitions. "Common Stock" means (i) the Class A Common Stock, par value $.01 per share, of the Company including any shares of Class A Common Stock issued or issuable upon conversion of Class B Common Stock, and (ii) Capital Stock issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split, or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Holders Securities" means any securities of VPI or any affiliate of VPI which are exchangeable, convertible or otherwise similarly exercisable into Registrable Securities. "Person" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or government or department or agency thereof. "Registrable Securities" means (i) the Common Stock held by VPI, its affiliates and their respective employees on the date hereof or acquired hereafter by VPI, its affiliates, or their respective employees, and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force). For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. "Securities Purchase Agreement" means the Securities Purchase and Holders Agreement initially by and among the Company, Citicorp Venture Capital, Ltd., and certain management investors named therein. - 10 - 11 9. Information. The Company may require each seller of Registrable Securities to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as it may from time to time reasonably request and such other information as may be legally required or reasonably requested in connection with such registration. 10. Amended or Supplemented Prospectus. Each seller of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph 3(e), such seller will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such seller's receipt of the copies of the supplemented or amended prospectus contemplated by paragraph 3(e), and, if so directed by the Company, such seller will deliver to the Company all copies, other than permanent file copies then in such seller's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. 11. Miscellaneous. (a) No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. (b) Adjustments Affecting Registrable Securities. The Company will not take any action, or permit any change to occur, with respect to its securities which would materially and adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would materially and adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). (c) Remedies. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of at least 50% of the Registrable Securities. - 11 - 12 (e) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities; provided that no Demand Registration may be requested by any subsequent holder of Registrable Securities unless such holder holds at least $20 million in Registrable Securities (such securities being valued for purposes of this clause (e) at the initial public offering price) and such subsequent holder is not a then present customer, pharmaceutical supplier or, in the Company's reasonable judgment, competitor of the Company in the full-service drug wholesale business. Upon request, the Company will inform any holder of Registrable Securities whether it or any person is a customer, pharmaceutical supplier or, in the Company's reasonable judgment, competitor of the Company. (f) Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (g) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. (h) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (i) Governing Law. The corporate law of Delaware will govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity and interpretation of this Agreement and the exhibits and schedules hereto will be governed by the internal law, and not the law of conflicts, of the State of New York. (j) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid) or - 12 - 13 mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications will be sent to the Company and VPI at the address indicated below: To the Company: AmeriSource Distribution Corporation 300 Chester Field Parkway Malvern, Pa. 19355 Attention: Teresa T. Ciccotelli with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Attention: Craig L. Godshall, Esq. To VPI: 399 Park Avenue New York, New York 10043 Attention: James A. Urry or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. (k) Termination. Notwithstanding anything in this Agreement to the contrary, this Agreement shall terminate at such time as the Registrable Securities constitute less than 5% of the Company's Common Stock on a fully-diluted basis and such securities may be exchanged for a new certificate or other evidence of ownership which are not required to bear a restrictive legend and may be resold in a public offering in compliance with the Securities Act without subsequent registration under the Securities Act. * * * * * - 13 - 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. AMERISOURCE DISTRIBUTION CORPORATION By: /s/ Teresa T. Ciccotelli ------------------------------------ Name: Teresa T. Ciccotelli Title: Vice President, Legal Counsel and Secretary 399 VENTURE PARTNERS, INC. By: /s/ James A. Urry ------------------------------------ Name: Title: - 14 - -----END PRIVACY-ENHANCED MESSAGE-----