Management's Discussion and
Analysis of Financial Condition and Results of Operations (cont.)

Income from operations.
Income from operations for the year ended December 31, 1999 increased to $146.8 million from $22.8 million in 1998, primarily for the reasons discussed above. Excluding recapitalization-related, restructuring and other charges and nonrecurring costs of $11.2 million in 1999 and $108.4 million in 1998, income from operations for 1999 increased to $158.0 million from $131.2 million in 1998.

Interest expense.
Interest expense for the year ended December 31, 1999 increased to $104.2 million from $90.3 million in 1998. The increase was primarily the result of a full year of interest expense in 1999 resulting from the January 1998 recapitalization and additional indebtedness resulting from our issuance of $200.0 million principal amount of 9% Senior Subordinated Notes in November 1998, both partially offset by one-time charges of $6.5 million in the first quarter of 1998 related to the consummation of the Recapitalization.

Other (income) expense, net.
Other (income) expense, net for the year ended December 31, 1999 increased to $15.2 million of income from $7.2 million of income in 1998. The increase in income in 1999 was primarily due to a gain on the sale of the UniKix Technology software business, gains from the sale of property, plant and equipment associated with our consolidation plans and a gain from the undesignated portion of our interest rate swap.

Income tax provision (benefit).
The income tax provision (benefit) was $34.4 million for the year ended December 31, 1999 compared with ($10.8) million in 1998. The effective tax rate was 59.5% for 1999. Excluding the $71.0 million of Recapitalization-related costs, of which a portion was nondeductible, the effective tax rate for 1998 was 152.7%. The decrease in the effective tax rate was due to reductions in foreign losses for which no tax benefits are recognized and the restructuring of foreign operations to permit the recognition of tax benefits on losses.

Net income (loss).
Net income for the year ended December 31, 1999 increased to $23.4 million from a loss of $49.5 million in 1998 for the reasons discussed above.

Liquidity and Capital Resources

For the year ended December 31, 2000, our operations generated $107.2 million of cash compared with $124.7 million for 1999. The decrease in cash generated from operations in 2000 is primarily due to increased investments in working capital, partially offset by an increase in cash generated from net income, adjusted for noncash items. We do not expect our working capital requirements for our continuing operations to significantly increase in 2001.

During the year ended December 31, 2000, we used $57.1 million of cash for investing activities, compared with $62.5 million in 1999. We used $23.1 million for acquisitions in 2000, primarily for a manufacturing facility. During 1999, we completed two acquisitions and acquired the remaining shares of Bioblock Scientific S.A. for an aggregate net purchase price of $34.4 million. Capital expenditures decreased to $29.4 million in 2000 compared to $41.1 million in 1999. The decrease in 2000 was due to lower spending on information systems due to reduced spending for the Year 2000 issue and lower spending on facilities. We anticipate 2001 capital expenditures to exceed the 1999 level due primarily to increased facility spending and capital expenditures related to our February 2001 acquisition of Covance’s pharmaceutical packaging services business. Proceeds from the sale of property, plant and equipment decreased to $1.7 million in 2000 from $16.0 million in 1999. In 1999, we received proceeds from the sale of the UniKix Technology software business and from fixed asset sales resulting from our long-term warehouse consolidation strategy. Our investing activities in 2000 and 1999 were funded with cash on hand and cash generated from operating activities.

We financed the $137.5 million purchase price for the acquisition of Covance’s pharmaceutical packaging services business in February 2001 through the sale of receivables under our receivables securitization facility. We intend to continue to pursue acquisitions of complementary businesses that will enhance our growth and profitability. We currently have no commitment, understanding or arrangement relating to any additional material acquisitions.

In August 2000, we became a founding member of the New Health Exchange, an internet healthcare exchange founded by AmeriSource Health Corporation, Cardinal Health, Inc., McKesson HBOC, Inc., and ourselves. Pursuant to the Limited Liability Company Agreement, we have committed to invest approximately $6.5 million in the entity in exchange for an approximate 13% ownership interest. Through December 31, 2000, we have funded $2.2 million of our commitment and anticipate fulfilling the remaining commitment during 2001.

Cash used in financing activities decreased to $32.8 million in 2000 compared with $74.1 million in 1999. Financing activities primarily related to reductions in the amount of receivables sold under our receivables securitization facility of $21.7 million in 2000 and $83.5 million in 1999.

Please refer to Note 12 to the Financial Statements for a description of our debt agreements. At December 31, 2000, we had $124.6 million of available borrowing capacity under our revolving credit facility, net of $50.4 million in letters of credit outstanding. At December 31, 2000, the unused portion of our receivables securitization facility was $170.0 million. As discussed above, we used $137.5 million of this amount to finance the acquisition of our pharmaceutical packaging services business in February 2001.

We expect that cash flows from operations, together with cash on hand and funds available under our existing credit facilities, will be sufficient to meet our ongoing operating, capital expenditure and debt service requirements for at least the next twelve months.