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Form 10-K Annual Report
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OWENS & MINOR, INC. AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-9810
OWENS & MINOR, INC.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
4800 Cox Road, Glen Allen, Virginia
(Address of principal executive offices)
54-01701843
(I.R.S. Employer Identification No.)
23060
(Zip Code)
Registrant's telephone number, including area code (804) 747-9794
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
============================== ======================
Common Stock, New York Stock
$2 par value Exchange
Preferred Stock New York Stock
Purchase Rights Exchange
10 7/8% Senior Subordinated New York Stock
Notes due 2006 Exchange
$2.6875 Term Convertible Not Listed
Securities, Series A
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sales price) was approximately 432,232,835 as of February 19,
1999. In determining this figure, the Company has assumed that all of its
officers, directors and persons known to the Company to be the beneficial owners
of more than five percent of the Company's Common Stock are affiliates. Such
assumption shall not be deemed conclusive for any other purpose.
The number of shares of the Company's Common Stock outstanding as of
February 19, 1999 was 32,621,346 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the annual meeting of security holders on April 28, 1999
is incorporated by reference into Part III of this Form 10-K.
ITEM CAPTIONS AND INDEX -
FORM 10-K ANNUAL REPORT
Item No. Page
============ =================================================
Part I
1. Business 15-24
2. Properties 22
3. Legal Proceedings 39-40
4. Submission of Matters to a Vote of
Security Holders N/A
Part II
5. Market for Registrant's
Common Equity and Related
Stockholder Matters 48
6. Selected Financial Data 14
7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 15-24
7A. Quantitative and Qualitative Disclosures
about Market Risk 24, 31-32
8. Financial Statements and
Supplementary Data See Item 14
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure N/A
Part III
10. Directors and Executive Officers of
the Registrant (a), 49
11. Executive Compensation (a)
12. Security Ownership of Certain
Beneficial Owners and Management (a)
13. Certain Relationships and Related
Transactions (a)
Part IV
14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
a. Consolidated Statements of Income
for the Years Ended Dec. 31, 1998,
Dec. 31, 1997 and Dec. 31, 1996 25
Consolidated Balance Sheets at
Dec. 31, 1998 and Dec. 31, 1997 26
Consolidated Statements of Cash Flows
for the Years Ended Dec. 31, 1998,
Dec. 31, 1997 and Dec. 31, 1996 27
Consolidated Statements of Changes
in Shareholders' Equity for the Years
Ended Dec. 31, 1998, Dec. 31, 1997
and Dec. 31, 1996 28
Notes to Consolidated Financial
Statements for the Years Ended
Dec. 31, 1998, Dec. 31, 1997 and
Dec. 31, 1996 29-46
Report of Independent Auditors 47
b. Reports on Form 8-K: None.
c. The index to exhibits has been filed
as separate pages of the 1998
Form 10-K and is available to
stockholders on request from the
Secretary of the Corporation at the
principal executive offices.
(a) Part III will be incorporated by reference from the registrant's 1999 Proxy
Statement pursuant to instructions G(1) and G(3) of the General Instructions to
Form 10-K.
FORM 10-K The Annual Report includes the materials required in Form 10-K filed
with the Securities and Exchange Commission. The integration of the two
documents gives stockholders and other interested parties timely, efficient and
comprehensive information on 1998 results. Portions of the Annual Report are
not required by the Form 10-K report and are not filed as part of the
Corporation's Form 10-K. Only those portions of the Annual Report referenced in
the Form 10-K Index are incorporated in the Form 10-K. The report has not been
approved or disapproved by the Securities and Exchange Commission, nor has the
Commission passed upon its accuracy or adequacy.
M I S S I O N
Our mission is to create consistent value for our customers and supply chain
partners that will maximize shareholder value and long term earnings growth: we
will do this by managing our business with integrity and the highest ethical
standards, while acting in a socially responsible manner with particular
emphasis on the well-being of our teammates and the communities we serve.
V I S I O N
To be a world-class provider of supply chain management solutions to the
selected segments of the healthcare industry we serve.
V A L U E S
o We believe in high integrity as the guiding principle of doing business
o We believe in our teammates and their well-being
o We believe in providing superior customer service
o We believe in supporting the communities we serve
o We believe in delivering long-term value to our shareholders
C O M P A N Y O V E R V I E W
Owens & Minor, Inc., a Fortune 500 company headquartered in Richmond, Va., is
the nation's largest distributor of national name brand medical/surgical
supplies. The company's distribution centers serve hospitals, integrated
healthcare systems and group purchasing organizations nationwide. In addition,
Owens & Minor helps customers control healthcare costs and improve inventory
management through innovative services in supply chain management, logistics
and technology.
Founded in 1882, Owens & Minor started as a wholesale drug company. Since
1992, the company has distributed only medical/surgical supplies. Owens &
Minor's common shares are traded on the New York Stock Exchange under the
symbol OMI. As of December 31, 1998, there were approximately 15,500 common
shareholders.
1998 Financial Overview
(in thousands, except ratios, per share data and employee statistics)
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Percent Change
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Year ended December 31, 1998 1997 1996 98/97 97/96
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Net sales $3,082,119 $3,116,798 $3,019,003 (1.1%) 3.2%
Net income $ 20,145 $24,320 $12,965 (17.2%) 87.6%
Net income per common share(1) $ 0.56 $0.60 $0.25 (6.7%) 140.0%
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Net income excluding restructuring expenses(2) $ 26,753 $24,320 $12,965 10.0% 87.6%
Net income per common share excluding
restructuring expenses(1) (2) $ 0.75 $0.60 $0.25 25.0% 140.0%
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Cash dividends per common share $ 0.20 $0.18 $0.18 11.1% _
Book value per common share $ 4.94 $4.48 $3.99 10.3% 12.3%
Stock price per common share at year-end $ 15.75 $14.50 $10.25 8.6% 41.5%
Number of common shareholders 15.5 16.1 17.0 (11.2%) (5.3%)
Shares of common stock outstanding 32,618 32,213 31,907 1.3% 1.0%
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Return on average common equity
excluding restructuring expenses(2) 15.9% 14.1% 6.3% 12.8% 123.8%
Return on total assets
excluding restructuring expenses(2) (3) 3.3% 3.0% 1.5% 10.0% 100.0%
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Gross margin as a percent of net sales 10.6% 10.2% 9.9% 3.9% 3.0%
Selling, general and administrative expenses
as a percent of net sales 7.8% 7.5% 7.7% 4.0% (2.6%)
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Debt(3) $ 225,000 $292,550 $293,549 (23.1%) (0.3%)
Capitalization ratio(3) (4) 43.4% 53.0% 54.8% (18.1%) (3.3%)
Average receivable days sales outstanding(3) 34.7 33.4 36.1 3.9% (7.5%)
Average inventory turnover 9.8 9.9 8.9 (1.0%) 11.2%
Employees at year-end 2,661 3,010 3,116 (11.6%) (3.4%)
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(1) Basic and diluted
(2) After tax. See Note 2 to Consolidated Financial Statements regarding the
1998 nonrecurring restructuring expenses ($11.2 million).
(3) Excludes impact of off balance sheet receivables securitization agreement.
See Note 6 to Consolidated Financial Statements.
(4) Includes mandatorily redeemable preferred securities as equity.
3
1998 Dear Shareholders, Customers, Suppliers, Teammates and Friends,
[PHOTO OF G. GILMER MINOR, III]
This annual report is dedicated to the people of Owens & Minor who persevered
through a year of change and whose determination and character helped us finish
the year on a strong note. We took a shot to the chin in late May when we lost a
major contract, but we stood our ground and quietly resolved to get back on top.
We immediately went to work, and within five months we replaced the lost
business. I am very grateful and proud of my teammates who came together as one
big team and did the right things.
The defining events in 1998 were Columbia, Tenet HealthSystems, Inc. (Tenet),
and Perot Systems. We lost the Columbia contract in late May, effective October
1. Between June and October, we negotiated and signed new agreements to
compensate for the lost business. Tenet was the big piece of this with an
eight-year contract having estimated annual sales of $250 million, signed in
late October. Most of the other new replacement business, as well as Tenet,
started coming on board in February 1999. Then, to ensure our leadership in the
area of technology for the future, we formed a strategic relationship with Perot
Systems in November to manage our information services function and to help us
create new and even more effective supply chain solutions for our customers.
With Perot Systems, we will expand our electronic commerce and Internet
capabilities to create a digital (e-commerce) order fulfillment system and
enhance the technology we already have in place faster than we could on our own.
Along The Way . . .
We retired our Series B cumulative preferred stock in favor of a less costly
private placement of mandatorily redeemable preferred securities. We
accomplished our targets for expense reduction after the loss of the
4
Columbia contract, and have done what we said we would do by moving quickly to
restore the company's health. We finished the year with a 25 percent increase in
net income per diluted common share compared to 1997, excluding a restructuring
charge we took in the second quarter.
We are a stronger company for what happened in 1998. You would expect me to
say that, and I believe it with all my heart. We dealt with adversity and fought
back. We looked at our mission and strategic plan with a magnifying glass and
found them sound and viable for us. With all the noise of consolidation around
us, we determined we can deliver better value and results to our customers,
shareholders and suppliers as a focused company creating world-class service and
supply chain solutions. Now we must do it.
Let's Look at the Numbers
Sales decreased 1.1 percent for the year, most of that coming in the fourth
quarter when the real loss of the Columbia contract was first felt and before we
could bring on the newly signed business. Gross margin improved from 10.2
percent to 10.6 percent, thanks to our partnership with key suppliers and our
supply chain initiatives. Net income per common share improved 25 percent,
excluding the restructuring charge, and increased from $0.60 to $0.75. And, net
income attributable to common stock improved $5.7 million, or 30 percent over
1997, excluding restructuring charges. Selling, general and administrative
(SG&A) expenses as a percent to sales were up from 7.5 percent last year to 7.8
percent in 1998, a difference of 4.0 percent; but dollars spent on SG&A were up
only 2.0 percent. Our capitalization ratio was reduced from 53.0 percent to 43.4
percent at the end of 1998, and debt reduction for the year was $67.6 million,
excluding the impact of the accounts receivable securitization. During the year,
our common stock price increased 8.6 percent, well below our expectations when
we started the year. But we finished the year on a strong note after the
announcement of the Tenet contract.
We must put some sales growth in our numbers for 1999, and that is our number
one priority. But, not growth at any price. We have a great value story to tell
and sell and a strategy of using technology to achieve successful supply chain
results, and we are doing this with the greatest team in the whole wide world.
The Value Story
We are delivering the best service and the best technological supply chain
management solutions in the medical/surgical business. For the second year in a
row, we were voted the best medical/surgical supplier in the industry in Health
Strategist, a widely-circulated industry publication. This was an independently
conducted survey, and it corroborates our own surveys. Our customers and
suppliers tell us they want world class distribution services, and they want
them right now. We get the products delivered on time and more accurately than
anyone else. We are known for our excellent service.
5
An advantage we have is our decision support tools developed with Business
Objects, which allow us to extract data from our data warehouse and organize it
on a customized and confidential basis for our customers. Today, our customers
are able to access and design data for themselves directly from our system. In
Information Week's 10th annual survey and ranking of America's most innovative
companies in technology, we were ranked 146 out of 500, the highest in our
industry. This ranking validates our leadership in providing innovative
technology solutions to our customers and suppliers.
To maintain this technology edge we entered into a strategic partnership with
Perot Systems. They are now managing our information systems and working with
our management team to further adapt their own work in other industries to
healthcare. They have already invented the future, and we will help them refine
their creative solutions for our use and benefit.
We are also recognized as the industry leader in Activity-Based Management
(ABM). Arthur Andersen Consulting recognized Owens & Minor as a "best practices"
company delivering activity-based management solutions, a tribute to our ABM
team. We have developed accurate cost information for ourselves and a growing
number of customers. We take this information and price our services based on
their cost and the frequency of activity by the customer. Activity-based pricing
is a much more accurate and efficient way of pricing than cost plus, because
cost plus treats all goods and services as if they have the same distribution
cost components. By the end of 1999, our plan is to have 15 percent to 20
percent of our business under ABM.
Operationally we are installing a new state of the art warehousing system
that improves the accuracy of picking and billing, reduces costs in receiving
and accounts payables, and facilitates more dynamic buying practices. We have
lowered the number of billing credits written appreciably by improving the
accuracy of prices and picking and packing of orders. This improved accuracy
lowers our customers' cost, also.
We spent more time and money in 1998 training our people. And we will spend
more again in 1999. The thirst for knowledge coupled with the complexity of a
changing healthcare environment are driving forces behind this investment. The
majority of our sales and management team work off of laptops today instead of
out of a briefcase. We have put solutions at their fingertips, and the results
are most helpful to our customers.
Strategically, in an industry that is consolidating, our goal is to
independently make ourselves indispensable to our customers. We are not trying
to be all things to all people. We are focused and committed to being the
standard everyone else must compare to when it comes to distribution service and
supply chain solutions. We are willing to partner strategically with other
healthcare
6
organizations to bring value to our mutual customers through the medium of
electronic commerce and connectivity, which enables us to create reliable and
usable information. We believe time will show the correctness of our strategy of
staying the course and focusing on delivering world-class distribution value
through logistics, service and technology.
New and Expanding Partnerships
As mentioned earlier, our eight-year distribution agreement with Tenet
represents all new business, with an estimated annual sales volume of $250
million per year once the business is fully converted. The contract began on
February 1, 1999, and the process of conversion has started. Other notable
contracts in 1998 included the doubling of our relationship with Sutter Health
to approximately $60 million annually; an estimated additional $20 million
annually with the University of Maryland Medical System; and several other new
and renewed contracts, including Florida Hospital in Orlando, that have given us
momentum for 1999.
Royal E. Cabell Retires
Roy Cabell has been a director of the company for 37 years. He will retire
from service at this year's annual meeting. During all of these years, he has
served our company with distinction, integrity, loyalty and most of all, great
wisdom. He joined the board in 1962, took us public in 1971 as the company's
general counsel, personally negotiated the Will Ross acquisition in 1981, and
was instrumental in all of our major decisions during the '70s, '80s and '90s.
He has been a mentor to me, an advisor I could turn to when good advice was hard
to come by, and a friend and colleague I trust more than anyone else in the
world. Thank you, Roy, for your long and faithful service. It has been my great
privilege to serve with you. You have indeed made a difference to Owens & Minor,
for which I am eternally grateful.
Come On, 1999
So long, 1998. No material harm done. Great lessons learned. Determination
and a passion for new success fueled. And, momentum generated as we move
quickly into the last year of the century. We are 117 years old now, and as
nice as that is from a historical standpoint, it doesn't guarantee success
going forward. We must grow our top line, manage our costs and assets more
effectively, and improve measurable productivity. Our war cry for this year is,
"It's Time in '99". The "proof is in the pudding," as they say, so I will keep
you posted.
I am grateful to our suppliers for their willingness to work so closely with
us on supply chain solutions and cost savings. I am grateful to our customers
for believing in us and trusting our ability to bounce back and continue to
deliver value. I am grateful to our shareholders for your patience and continued
support during a volatile year. I am also very grateful to our team of dedicated
people, who, day in and day out, deliver real value to our customers. Thanks to
all for being a part of the team.
My warmest regards,
/s/ G. Gilmer Minor, III
---------------------------------------
G. Gilmer Minor, III
Chairman, President and Chief Executive Officer
7
We succeed in the fiercely
competitive medical/surgical supply
business by maintaining a relentless focus
on customer service and lean operations. Cost
management is absolutely essential, not only to drive our own costs down,
but those of our customers as well.
Operational Excellence: It's our people who make it all possible
[PHOTO]
We at Owens & Minor have a clear-cut business strategy: to deliver service,
solutions and value to our customers - and to do so better than anyone else.
As the nation's largest distributor of national name brand medical/surgical
supplies, we help hospitals, integrated healthcare networks and group purchasing
organizations reduce healthcare costs through improved supply chain management.
O&M buys about 140,000 products from some 1,200 suppliers - everything from
bandages to needles and syringes to disposable gloves - and sells them to nearly
4,000 hospitals and alternate health care providers throughout the U.S. It's a
complex business, one that requires the coordinated efforts of roughly 2,700
well-trained and highly motivated teammates using the best logistics management
techniques and information technology.
Operational excellence is vital to our success. "It all comes down to
delivering the right product, at the right time, to the right place and at the
right price," says
8
Craig Smith, O&M's executive vice president and chief operating officer.
"That means executing the basics of the business - picking, packing and shipping
medical/surgical products - as efficiently and as reliably as possible. When
you're dealing with something as critical as healthcare, there's very little
tolerance for error."
We succeed in the fiercely competitive medical/surgical supply business by
maintaining a relentless focus on customer service and lean operations. "Cost
management is absolutely essential, not only to drive our own costs down, but
those of our customers as well," Smith says. "Our teammates are constantly
looking for better, more productive ways to serve our customers at less overall
cost."
One area in which O&M has made great strides in recent years is inventory
management. In partnership with our major suppliers, we provide product
information to help customers standardize and reduce their inventories. By
year-end 1998, we had
[PHOTO]
reduced the number of items we carry to 140,000, a dramatic reduction from
250,000 just two years earlier. Reduced inventory means less money invested in
products sitting on shelves, which frees up warehouse space for high-demand
items. Furthermore, inventory consolidation helps us concentrate on delivering
those products our customers need most. The result is improved service levels
and reduced costs for O&M and our customers.
Tighter inventory management is just one of many areas where our teammates
are providing logistics expertise to help customers improve asset management and
reduce costs. "We're proud of our record of partnering with customers and
suppliers to achieve mutual efficiencies in areas such as distribution,
logistics, electronic commerce and supply chain management," Smith says. "It's
through these effective partnerships that we're finding innovative ways to
create value for our partners and shareholders."
[PHOTO OF CRAIG SMITH]
"It all comes down to delivering the right product, at the right time, to the
right place and at the right price."
Craig Smith
Chief Operating Officer
9
At Owens & Minor, we use technology to get closer to our customers.
"Our information technology team is customer-centered in the way we think
about and apply technology," says Lee Marston, O&M's chief information officer.
"We are successful because our teammates have been passionate about using
information and technology to create value for our business partners and to make
it easier for them to do business with us."
In 1997, O&M began offering electronic decision support services (DSS) to our
teammates and business partners, giving them access to information to evaluate
purchasing patterns for identifying cost savings opportunities. Our decision
support tools enable our teammates, customers and suppliers to gather and
summarize business transaction information and quickly convert it into
customized knowledge for making informed supply chain decisions.
[PHOTO]
INFORMATION MANAGEMENT: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE
"Our partners, particularly integrated healthcare networks, are delighted
with our willingness to openly share information," Marston says. "Information,
of course, is only useful if it is timely and can be interpreted correctly,"
Marston points out, and we are constantly searching for innovative ways to
enhance the free flow and clarity of information between O&M and our business
partners. In 1998, O&M began offering some of our partners Internet access to
this customized information, as well. "We're one of the early adapters of
Internet technology for information management across the supply chain," says
Marston, "and it's helping cement our relationship with customers and
suppliers."
O&M took a major step toward enhancing our technology capabilities in
November 1998 by entering into a 10-year partnership with Perot Systems Corp.,
the Dallas-based technology services company with extensive expertise in
healthcare information management. Perot Systems is managing O&M's information
technology services and aligning our extensive supply chain service offerings.
"The partnership with Perot Systems is exciting," Marston says, "because it will
help us extend our competitive advantage in information management and develop
innovative technology applications at a more rapid pace." We will also be
positioned to keep pace with the rapid changes in technology as we
[PHOTO OF LEE MARSTON]
"We're one of the early adapters of internet technology for information
management across the supply chain."
Lee Marston
Chief Information Officer
10
continually seek to drive internal operating efficiencies and to enhance our
products and services.
Under our technology-based CostTrack program in activity-based management are
supply chain initiatives that allow both O&M and our customers to capitalize on
information and knowledge. CostTrack enables us to separate product and process
costs to reflect the true cost of specific distribution activities. In turn, our
customers can choose those distribution services most cost effective for them.
Several of these technology-based CostTrack programs include the following:
FOCUS (Focus on Consolidation, Utilization & Standardization): This program
allows O&M to increase inventory turnover by consolidating product lines and
[PHOTO]
Our teammates have been passionate about using information and technology.
developing stronger partnerships with our most efficient suppliers. In turn,
FOCUS provides cost savings and improved inventory management for our customers
and increased market share opportunities for our supplier partners.
CRP (Continuous Replenishment Process): With CRP, we electronically transmit
inventory usage data to our suppliers, which in turn forecast supply needs and
create electronic purchase orders to continually replenish products for our
mutual healthcare customers.
EDI (Electronic Data Interchange): We lead the industry in EDI and continue
to expand our automated business transactions with both customers and suppliers.
Of O&M's top 20 suppliers, 18 are sending invoices via EDI, accounting for
approximately 80 percent of the products we buy.
PANDAC(R) (automated wound closure asset management program): PANDAC provides
customers the information they need to manage their inventories and usage levels
of wound closure products in order to reduce costs.
Effective use of technology has made O&M the medical/surgical supply
industry's most efficient distributor, while allowing us to achieve innovations
in supply chain management. Our customer-centered focus will ensure our
continued success.
11
Customer satisfaction isn't merely an objective at Owens & Minor - it's a
passion.
"Everything we do is geared toward helping our customers succeed," says
Henry Berling, O&M's executive vice president, partnership development. "We sell
service, but our ultimate goal is to deliver value. We do that by earning the
confidence of our customers and suppliers, understanding their business and
forging partnerships to reach mutual objectives."
Everything we do is geared toward helping our customers succeed.
Every teammate at O&M - from sales representatives to truck drivers to
warehouse workers - is focused on providing our customers the best possible
service at the lowest possible cost. We are constantly seeking ways to do our
jobs better, and we measure our progress in every way imaginable. We reinforce
our commitment to excellence through training, incentives and benchmarking.
CUSTOMER SATISFACTION: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE
[PHOTO]
Our divisions compete against one another each year to determine the best and
most-improved divisions in five different quality assurance categories, with all
teammates in each winning division receiving cash awards. "We believe we have
the most highly skilled and customer-focused employees in our industry, and we
prove it every day," Berling says.
Of course, we're not the only ones recognizing our teammates for quality
service. Our customer satisfaction ratings, as measured by an independent
polling firm, are the highest they have been in four years. Also, in an
independent survey conducted in 1998 by Health Strategist newsletter, providers
and suppliers ranked O&M as the best medical/surgical supplies distributor for
the second year in a row.
While gratified by the positive recognition we've earned, we realize we have
a ways to go to reach our full potential. We are committed to being the best in
our business. All our efforts are directed toward helping our customers and
suppliers make patient care more affordable by maximizing the efficiency of the
supply chain. We do all we can to help our partners succeed. After all, our
success is fundamentally tied to their success.
[PHOTO OF HENRY BERLING]
"We believe we have the most highly skilled and customer-focused employees in
our industry, and we prove it every day."
Henry Berling
Executive Vice President,
Partnership Development
12
The business priorities discussed on the preceding pages of this report are the
foundation that supports Owens & Minor's strategy for creating shareholder
value: putting technology to work for our partners and ourselves, achieving
operational excellence and improving customer satisfaction.
We use our competitive edge in applying information technology to improve the
efficiency of our operations and to help our customers and suppliers enhance
their business processes. Consequently, we will continue to invest heavily in
technology so we can provide value to our trading partners through knowledge
sharing.
Operational excellence is probably our most easily quantifiable means of
demonstrating value. The investments we have made in such areas as warehouse
productivity, inventory management and electronic commerce will drive efficiency
for our customers and our suppliers.
[PHOTO OF ANN GREER RECTOR]
"Despite fierce competition and pricing pressure, we are excited about the
future, and Owens & Minor is positioned to achieve strong earnings growth."
Ann Greer Rector
Chief Financial Officer
VALUE CREATION: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE
[PHOTO]
Medical/surgical supply is a dynamic industry with continually changing
customer requirements. We will continue to measure quality from the vantage
point of our customers, suppliers and teammates, for we cannot achieve our full
potential unless we meet the expectations of each of these key constituencies.
We measure our success in creating value through benchmarking and performance
management - tools that are flexible enough to respond to the rapidly changing
requirements of modern healthcare.
One such tool is CostTrack, our activity-based management process, which has
been invaluable in improving strategic and operational decision making. We are
applying the power of CostTrack to operations and in managing the supply chain
more effectively. Activity-based management is helping O&M develop closer
partnerships with our customers as we pursue the mutual benefits of cutting
costs and improving service.
"We are convinced our continued success in flexible business design,
consistent operational performance and superior customer service will result in
significant improvements in service and profits, producing superior long-term
value for all our stakeholders - our teammates, customers, suppliers and
investors," says Ann Greer Rector, O&M's chief financial officer.
Customer satisfaction remains the ultimate yardstick for evaluating our
performance.
13
Selected Financial Data(1)
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OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
1998 1997 1996 1995 1994
=============== =============== =============== =============== ===============
SUMMARY OF OPERATIONS:
Net sales $3,082,119 $3,116,798 $3,019,003 $2,976,486 $2,395,803
Nonrecurring restructuring expenses(2) $ 11,200 $ - $ - $ 16,734 $ 29,594
Net income (loss)(2) $ 20,145 $ 24,320 $ 12,965 $ (11,308) $ 7,919
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:
Net income (loss) - basic $ 0.56 $ 0.60 $ 0.25 $ (0.53) $ 0.15
Net income (loss) - diluted $ 0.56 $ 0.60 $ 0.25 $ (0.53) $ 0.15
Average number of shares
outstanding - basic 32,488 32,048 31,707 30,820 30,633
Average number of shares
outstanding - diluted 32,591 32,129 31,809 30,820 31,680
Cash dividends $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.17
Stock price at year end $ 15.75 $ 14.50 $ 10.25 $ 12.75 $ 14.25
Book value $ 4.94 $ 4.48 $ 3.99 $ 3.90 $ 4.59
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF FINANCIAL POSITION:
Working capital $ 235,247 $ 233,789 $ 192,990 $ 331,663 $ 281,788
Total assets $ 717,768 $ 712,563 $ 679,501 $ 857,803 $ 868,560
Long-term debt $ 150,000 $ 182,550 $ 167,549 $ 323,308 $ 248,427
Mandatorily redeemable preferred
securities $ 132,000 $ - $ - $ - $ -
Shareholders' equity $ 161,126 $ 259,301 $ 242,400 $ 235,271 $ 256,176
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
SELECTED RATIOS:
Gross margin as a percent of net sales 10.6% 10.2% 9.9% 9.0% 9.7%
Selling, general and administrative
expenses as a percent of net sales 7.8% 7.5% 7.7% 7.6% 6.9%
Average receivable days sales
outstanding(3) 34.7 33.4 36.1 37.7 35.9
Average inventory turnover 9.8 9.9 8.9 8.3 8.8
Return on average total equity(4) 7.3% 9.7% 5.4% (4.6%) 3.7%
Return on average total equity(5) 9.6% 9.7% 5.4% (4.6%) 3.7%
Current ratio 1.9 1.9 1.7 2.1 1.8
Capitalization ratio(3)(4) 43.4% 53.0% 54.8% 61.9% 49.2%
Capitalization ratio(3)(5) 68.9% 53.0% 54.8% 61.9% 49.2%
(1) IN 1994, THE COMPANY ACQUIRED STUART MEDICAL, INC. AND EMERY MEDICAL SUPPLY
INC. THESE BUSINESS COMBINATIONS WERE ACCOUNTED FOR AS PURCHASES.
(2) IN 1998, THE COMPANY INCURRED $11.2 MILLION, OR $6.6 MILLION AFTER TAXES, OF
NONRECURRING RESTRUCTURING EXPENSES RELATED TO THE CANCELLATION OF ITS
MEDICAL/SURGICAL DISTRIBUTION CONTRACT WITH COLUMBIA/HCA HEALTHCARE
CORPORATION. THE COMPANY INCURRED $16.7 MILLION AND $29.6 MILLION, OR $10.3
MILLION AND $17.9 MILLION AFTER TAXES, IN 1995 AND 1994 OF NONRECURRING
RESTRUCTURING EXPENSES RELATED TO ITS RESTRUCTURING PLANS DEVELOPED IN
CONJUNCTION WITH ITS COMBINATION WITH STUART MEDICAL, INC.
(3) EXCLUDES IMPACT OF OFF BALANCE SHEET RECEIVABLES SECURITIZATION AGREEMENT.
SEE NOTE 6 TO CONSOLIDATED FINANCIAL STATEMENTS.
(4) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS EQUITY.
(5) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS DEBT.
14
Analysis of Operations
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Owens and Minor, Inc. and subsidiaries (O&M or the company) is the largest
distributor of branded medical and surgical supplies in the United States.The
company was incorporated in Virginia on December 7, 1926, as a successor to a
partnership founded in Richmond, Virginia in 1882. In 1998, the company reported
net sales of $3.1 billion and net income of $26.8 million, excluding
restructuring.
[CHART]
Net Sales
(Billions)
98 $3.08
97 $3.12
96 $3.02
95 $2.98
94 $2.40
O&M distributes approximately 140,000 finished medical and surgical products
produced by approximately 1,200 suppliers to approximately 4,000 customers
nationwide. The company's customers are primarily acute care hospitals and
hospital-based systems, which account for more than 90% of O&M's net sales.
Other customers include alternate care facilities such as nursing homes,
clinics, surgery centers, rehabilitation facilities, physicians' offices and
home healthcare. The company serves a number of large healthcare networks and
major buying groups that represent independently owned member hospitals. Most of
O&M's sales consist of disposable gloves, dressings, endoscopic products,
intravenous products, needles and syringes, sterile procedure trays, surgical
products and gowns, urological products and wound closure products.
O&M has significantly expanded and strengthened its national presence over
the last five years through both internal growth and acquisitions. In May 1994,
the company acquired Stuart Medical, Inc., then the third largest distributor of
medical and surgical supplies in the United States with 1993 net sales of
approximately $890.5 million.
1998 Financial Results
In 1998, O&M earned net income of $20.1 million, or $0.56 per diluted common
share, compared with $24.3 million, or $0.60 per diluted common share, in
1997. Net income was reduced by the impact of a nonrecurring restructuring
charge of $11.2 million, or $6.6 million after taxes, that the company recorded
in the second quarter of 1998 to reflect its plan to downsize warehouse
operations as a result of the cancelled Columbia Healthcare Corporation
(Columbia/HCA) contract. Excluding the restructuring charge, net income for 1998
would have been $26.8 million or $0.75 per diluted common share. Gross margin
improved to 10.6% of sales from 10.2% in 1997 as a result of the continued
success of the company's supply chain initiatives. This improvement was
partially offset by an increase in selling, general and administrative (SG&A)
expenses as a result of increased information technology spending, which
included expenses to prepare computer systems for the Year 2000 (Y2K).
Financial Condition, Liquidity and Capital Resources
Liquidity. O&M's liquidity improved in 1998 in comparison to 1997. Outstanding
financing (excluding the impact of the off balance sheet accounts receivable
securitization) was reduced by approximately $67.6 million to $225.0 million at
December 31, 1998, from $292.6 million at December 31, 1997. The reduction was
due to improvements in cash flow from operations as discussed below.
In May 1998, Owens & Minor Trust I (Trust), a business trust sponsored and
wholly owned by the company, issued Mandatorily Redeemable Preferred Securities
(Securities) and used the proceeds to repurchase all of its outstanding Series B
Cumulative Preferred Stock. These transactions reduced the company's net cost of
capital in 1998.
The capitalization ratio at December 31, 1998, including the Securities as
equity and excluding the effect of the accounts receivable securitization, was
43.4% compared with 53.0% at December 31, 1997. This improvement was primarily
the result of the reduction in outstanding financing.
The company expects that its available financing will be sufficient to fund
its working capital needs and long-term strategic growth, although this cannot
be assured. At December 31, 1998, O&M had approximately $225.0 million of unused
credit under its revolving credit facility and $43.4 million under its
receivables financing facility.
15
Working Capital Management. In 1998, the company's working capital increased
slightly compared with 1997. O&M's accounts receivable days sales outstanding
(excluding the impact of the accounts receivable securitization) increased to
34.7 at December 31, 1998 compared with 33.4 at December 31, 1997 and inventory
turnover decreased to 9.8 times in 1998 compared with 9.9 times in 1997. These
changes were driven in part by the reduction in the sales base during the second
half of the year as sales to Columbia/HCA declined.
Capital Expenditures. Capital expenditures were approximately $12.6 million in
1998, of which approximately $10.2 million was for computer hardware and
software, including $3.2 million for system upgrades to prepare for Year 2000.
The company expects to continue to invest in technology, including system
upgrades, as the most cost-effective method of reducing operating expenses.
These capital expenditures are expected to be funded through cash flow from
operations.
Industry Overview
Distributors of medical and surgical supplies provide a wide variety of medical
and surgical products to healthcare providers, including hospitals and
hospital-based systems, integrated healthcare networks (IHNs) and alternate care
providers. The medical/surgical supply distribution industry has experienced
growth in recent years due to the aging population and emerging medical
technology resulting in new healthcare procedures and products. Healthcare
providers have consolidated to form larger and more sophisticated entities that
are increasingly seeking lower procurement costs and sophisticated inventory
management from their preferred suppliers and distributors. Over the years,
major acute care hospitals have aligned with or acquired outpatient and
long-term care facilities to form IHNs, and forged partnerships with national
medical and surgical supply distributors to manage the supply procurement and
distribution needs of their entire network. The traditional role of a
distributor involving warehousing and delivering medical and surgical supplies
to a customer has evolved into the role of assisting their partners to manage
the entire supply chain. O&M expects that further consolidation in the
medical/surgical supply distribution industry will continue due to the
competitive advantages enjoyed by larger distributors.
Business Strategy
O&M is committed to enhancing its long-term growth prospects by providing
customers and suppliers with the most responsive, efficient and cost-effective
distribution system for the delivery of medical and surgical products and
services. To meet this commitment, the company has implemented the following
strategy:
(i) Follow and support patient care. Using technological tools and leveraging
its broad distribution network, O&M helps its customers align business
functions, standardize products and reduce costs. The company has benefited from
the ongoing consolidation of the hospital market because of its strong
association with national healthcare networks and group purchasing
organizations. Its strong partnership with IHNs allows O&M to extend its acute
care supply distribution expertise to the alternate care market - by following
the patient migration beyond the acute care setting.
(ii) Convert information into knowledge, then profits. O&M has created a
valuable database of information gathered from its relationships with customers
and suppliers as well as from its internal activities. The company converts this
information into customized knowledge to help its customers reduce costs and
make knowledgeable, well-supported business decisions. O&M has developed
innovative services which are discussed further below that provide customers the
resources to develop the best supply chain solutions for their distribution and
inventory management challenges.
(iii) Maintain the highest quality of service and operational excellence. The
company maintains its high-quality and efficient distribution services by
providing customers with local sales and service support and industry-leading
supply chain logistics management. The company continually strives to achieve
100% customer satisfaction in picking, billing, sales, delivery and customer
service functions, with the ultimate goal of providing the most efficient
distribution network for getting medical and surgical supplies to the patient.
16
Analysis of Operations(continued)
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Customers
The company markets its distribution services to approximately 4,000 healthcare
providers, including hospitals, IHNs and alternate care providers. O&M
contracts with these providers directly and through national healthcare networks
(Networks) and group purchasing organizations (GPOs).
National Healthcare Networks and Group Purchasing Organizations. Networks and
GPOs are entities that act on behalf of a group of healthcare providers to
obtain pricing and other benefits that may be unavailable to individual members.
Hospitals, physicians and other types of healthcare providers have joined
Networks and GPOs to take advantage of improved economies of scale and to obtain
services from medical and surgical supply distributors ranging from discounted
product pricing to logistical and clinical support. Networks and GPOs negotiate
directly with medical and surgical product suppliers and distributors on behalf
of their members, establishing exclusive or multi-supplier relationships.
Networks and GPOs cannot ensure that members will purchase their supplies from a
given supplier.
Since 1985, O&M has been a distributor for VHA, Inc. (VHA), a nationwide
network that comprises nearly a quarter of the nation's community hospitals. On
January 1, 1998, VHA and University HealthSystem Consortium Services Corp.
(UHCSC), an alliance of academic medical centers, created Novation, a new supply
company that serves VHA and UHCSC health care organizations. O&M currently
serves VHA and UHCSC under separate contracts. Sales to VHA members represented
approximately 41% of O&M's net sales in 1998, and sales to UHCSC accounted for
7% of net sales.
Integrated Healthcare Networks. An IHN is an organization composed of several
healthcare facilities that jointly offer a variety of healthcare services in a
given market. An IHN is typically a network of different types of healthcare
providers that seeks to offer a broad spectrum of healthcare services and
comprehensive geographic coverage to a particular local market. IHNs have become
increasingly important because of their expanding role in healthcare delivery
and cost containment and their reliance upon the hospital, O&M's traditional
customer, as a key component of their organizations. Individual healthcare
providers within a multiple-entity IHN may be able to contract individually for
distribution services; however, the providers' shared economic interests create
strong incentives for participation in distribution contracts established at the
system level. Because IHNs frequently rely on cost containment as a competitive
advantage, IHNs have become an important source of demand for O&M's enhanced
inventory management and other value-added services.
Until 1998, O&M was the primary distributor for Columbia/HCA, one of the
company's largest customers. In May 1998, Columbia/HCA cancelled its
medical/surgical supply contract. Columbia/HCA substantially reduced purchases
from the company, beginning the third quarter of 1998. In 1998 and 1997,
approximately 9 percent and 11 percent of O&M's net sales were to Columbia/HCA
facilities.
O&M has made substantial progress in replacing the lost sales from the
Columbia/HCA contract cancellation, including entering into an exclusive,
eight-year medical/surgical supply distribution agreement with Tenet Healthcare,
the second largest for-profit hospital chain in the nation. In addition to being
a sole supplier to Tenet's 130 acute care hospitals, O&M will provide
distribution services to Tenet's BuyPower Purchasing Program. One of the
nation's leading GPOs, BuyPower provides national contracting through its
approximately 330 acute care hospitals, 530 associated facilities and 2,500
affiliated members. The Tenet contract represents all new business for the
company. In addition, O&M has entered into contracts with a number of other new
customers and has renewed contracts with existing customers.
Individual Providers. In addition to contracting with healthcare providers at
the IHN level and through Networks and GPOs, O&M contracts directly with
healthcare providers. In 1998, not-for-profit hospitals represented a majority
of these facilities.
Suppliers
O&M believes its size and longstanding relationships enable it to obtain
attractive terms and incentives from suppliers and contribute significantly to
its gross margin. The company has well-established relationships
17
with virtually all of the major suppliers of medical and surgical supplies.
Approximately 18% and 20% of O&M's net sales in 1998 and 1997 were sales of
Johnson & Johnson Hospital Services, Inc. products. Approximately 12% of the
company's net sales in 1998 were sales of products of the subsidiaries of Tyco
International.
Distribution
O&M employs a decentralized approach to sales and customer service through its
38 distribution centers, strategically located to serve customers in 50 states
and the District of Columbia. These distribution centers generally serve
hospitals and other customers within, on average, a 100-to-150-mile radius. O&M
delivers most medical and surgical supplies with a fleet of leased trucks.
Contract carriers and parcel services are used to transport all other medical
and surgical supplies.
Competition
The medical/surgical supply distribution industry in the United States is highly
competitive and consists of three major nationwide distributors: O&M; Allegiance
Corp., which merged with Cardinal Health, Inc. in early 1999; and McKesson
General Medical Corp., a subsidiary of McKesson HBOC, Inc. The industry also
includes Bergen Brunswig Medical Corp., a wholly owned subsidiary of Bergen
Brunswig Corp.; smaller national distributors of medical and surgical supplies;
and a number of regional and local distributors.
Competitive factors within the medical/surgical supply distribution industry
include total delivered product cost, product availability, the ability to fill
and invoice orders accurately, delivery time, services provided, inventory
management, information technology, and the ability to meet special customer
requirements. O&M believes its decentralized and customer-focused approach to
distribution of medical/surgical supplies enables it to effectively compete with
both larger and smaller distributors by being located near the customer and
offering a high level of customer service. Further consolidation of
medical/surgical supply distributors is expected to continue through the
purchase of smaller distributors by larger companies as a result of competitive
pressures in the market place.
Asset Management
O&M aims to provide the highest quality of service in the medical/surgical
supply distribution industry by focusing on providing suppliers and customers
with local sales and service support and the most responsive, efficient and
cost-effective distribution of medical and surgical products. The company draws
on technology to provide a broad range of value-added services to control
inventory and accounts receivable.
Inventory. Due to O&M's significant investment in inventory to meet the rapid
delivery requirements of its customers, efficient asset management is essential
to the company's profitability. The significant and ongoing emphasis on cost
control in the healthcare industry puts pressure on distributors and healthcare
providers to create more efficient inventory management systems.
O&M has responded to these ongoing changes by developing its inventory
forecasting capabilities, client/server warehouse management system, its product
standardization and consolidation initiative, and its continuous inventory
replenishment process (CRP). CRP allows the company's suppliers to monitor daily
sales and inventory levels electronically so they can automatically and
accurately replenish O&M's inventory. These and other services have enabled the
company to reduce its inventory of finished medical and surgical products to
approximately 140,000 stock keeping units (SKUs) in 1998 from approximately
250,000 in 1996. During the same period, O&M was able to reduce the number of
suppliers with which it conducts business to approximately 1,200 from 3,000.
Accounts Receivable. The company's credit practices are consistent with those of
other medical/surgical supply distributors. O&M actively manages its accounts
receivable to minimize credit risk and does not believe that credit risk
associated with accounts receivable poses a significant risk to its results of
operations.
Information Technology
In November 1998, O&M signed a 10-year agreement to outsource its information
technology (IT) operations and procure strategic application development
services.
The company makes major investments each year in
18
Analysis of Operations(continued)
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
IT to improve operational efficiency and support supply chain management
initiatives with customers and suppliers. In 1998, O&M's capital expenditures
included approximately $10.2 million for computer hardware and software. These
ongoing investments have been successful in electronically linking O&M with its
customers and suppliers for efficient purchasing, invoicing, funds transfer and
contract pricing.
Computer-to-computer transfer of data significantly reduces paperwork and
manual processes and is a key contributor to O&M's operational efficiency.
Recognizing that the Internet is reshaping the way business is transacted
electronically, O&M is planning an even greater emphasis on the deployment of
Internet-based applications, including electronic data interchange (EDI), online
product information, decision support systems and direct ordering.
In 1998, the company made major investments in a new client/server warehouse
management system for its distribution centers. Approximately half of the
distribution centers received the new system in 1998, with the remainder to
follow in 1999. The new system provides O&M with modern, paperless systems for
its physical distribution operations. This enables the company to standardize
warehousing best practices and enhance operational efficiency.
Sales and Marketing
O&M's sales and marketing force is organized on a decentralized basis in
order to provide individualized services to customers by giving the local sales
force at each distribution center the discretion to respond to customers' needs
quickly and efficiently. The sales and marketing force consists of approximately
200 locally based sales personnel. The company, with the support of its
suppliers, provides comprehensive training programs for its sales and marketing
force to sharpen customer service skills.
The company employs an integrated marketing strategy, offering logistics,
asset management, information management and product mix management products
and services to customers. Leading technology services offered by the company
include:
o Decision Support System (DSS). DSS enables the company to compile and
customize account-specific information for its customers, so that they can make
better, well-supported business decisions. Through its distribution activities,
O&M collects and stores a wealth of information about its customers' product
usage, ordering and pricing patterns. O&M makes this information available to
its customers electronically, allowing them to compare product usage, ordering
and pricing for each of the facilities within an IHN. Using this information, a
customer can standardize facilities on the right products at the lowest cost. In
1999, O&M intends to make its DSS capabilities more widely accessible to
customers and suppliers through the Internet, using WISDOM, the company's new
decision support tool.
o CostTrack SCM. CostTrack SCM is a supply chain management approach based on
activity-based costing that allows management to identify the cost drivers in
specific distribution activities, giving customers the information they need to
reduce costs.
o Focus On Consolidation, Utilization & Standardization (FOCUS). The FOCUS
program drives product standardization and consolidation that increases the
volume of purchases from O&M's most efficient suppliers and provides operational
benefits for its customers. By increasing the volume of purchases from its most
efficient suppliers, O&M reduces operational costs for its customers, its
suppliers and itself. To qualify as a FOCUS partner, O&M requires participating
suppliers to satisfy minimum requirements, such as automated purchasing,
exceeding minimum fill rates and offering a flexible returned goods policy.
o Continuous Replenishment Program (CRP). Utilizing computer-to-computer
interfaces, this initiative allows suppliers to monitor daily sales and
inventory levels so that they can automatically and accurately replenish O&M's
inventory.
o PANDAC(R). The PANDAC(R) wound closure management system provides customers
with an evaluation of their current wound closure inventories and usage levels
in order to reduce costs for wound closure products. The company guarantees its
customers that PANDAC(R) will generate a minimum of 5% savings in total wound
closure inventory expenditures during its first year of use.
19
Results of Operations
The following table presents the company's consolidated statements of income on
a percentage of net sales basis:
- --------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.4 89.8 90.1
- --------------------------------------------------------------------------------
Gross margin 10.6 10.2 9.9
- --------------------------------------------------------------------------------
Selling, general and
administrative expenses 7.8 7.5 7.7
Depreciation and
amortization 0.6 0.6 0.5
Interest expense, net 0.5 0.5 0.7
Discount on accounts
receivable securitization 0.1 0.2 0.2
Distributions on mandatorily
redeemable preferred
securities 0.1 - -
Nonrecurring restructuring
expenses 0.4 - -
- --------------------------------------------------------------------------------
Total expenses 9.5 8.8 9.1
- --------------------------------------------------------------------------------
Income before income taxes 1.1 1.4 0.8
Income tax provision 0.4 0.6 0.4
- --------------------------------------------------------------------------------
Net income 0.7% 0.8% 0.4%
- --------------------------------------------------------------------------------
Net sales. Net sales declined slightly by 1.1% to $3.08 billion during the year
ended December 31, 1998, from $3.12 billion in 1997, and decreased 10.9% to $717
million for the fourth quarter of 1998 from $805 million for the fourth quarter
of 1997. The reduction in net sales was due to the unanticipated mid-year
cancellation of Columbia/HCA's distribution contract, which mostly affected
fourth-quarter results. Net sales increased 3.2% to $3.12 billion for the year
ended December 31, 1997, from $3.02 billion for the year ended December 31,
1996, and increased 6.8% to $805 million for the fourth quarter of 1997 from
$754 million for the fourth quarter of 1996. The increase was the result of both
increased sales to existing customers and new customer contracts.
Gross margin. Gross margin as a percentage of net sales increased to 10.6% in
1998 compared with 10.2% in 1997 and 9.9% in 1996. Gross margin as a percentage
of sales increased to 11.3% for the fourth quarter of 1998 from 10.5% in the
fourth quarter of 1997 and 10.0% in the fourth quarter of 1996. This improvement
reflects the company's continued emphasis on supply chain initiatives with key
suppliers. The improvement in the fourth quarter of 1998 was also impacted by
the reduction in sales to Columbia/HCA as the benefits of certain supply chain
initiatives were recognized over a lower sales base. The 1997 result includes a
$1.5 million increase in the annual LIFO (last-in, first-out) provision compared
with 1996. The lower charge in 1996 resulted from reductions in inventory levels
and modest inflation.
[CHART]
Gross Margin % vs. SG&A % of Net Sales
Gross Margin %
94 2.8%
95 1.4%
96 2.2%
97 2.7%
98 2.8%
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales increased to 7.8% in
1998 compared with 7.5% in 1997 and 7.7% in 1996. The increase in 1998 was
partially the result of increased information technology spending, including
$3.6 million of expenses to address Y2K computer issues, compared with $2.1
million in 1997. The favorable comparison between 1997 and 1996 resulted from a
number of cost-saving initiatives, including the reduction of more than 100
full-time equivalent (FTE) employees. The increase in SG&A expenses as a
percentage of net sales to 8.2% in the fourth quarter of 1998 from 7.7% in the
fourth quarter of 1997 was impacted by the reduction of sales to Columbia/HCA.
Depreciation and amortization. Depreciation and amortization increased by 3.4%
in 1998 to $18.3 million, compared with $17.7 million in 1997 and $16.1 million
in 1996. This increase was due primarily to the company's continued investment
in IT, including capital spending in 1998 for systems upgrades of $3.2 million
associated with Y2K compliance. O&M anticipates similar increases in
depreciation and amortization in 1999 associated with additional capital
investment in IT.
20
Analysis of Operations(continued)
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Net interest expense and discount on accounts receivable securitization
(financing costs). Financing costs, net of finance charge income, totaled $18.7
million in 1998, compared with $22.3 million in 1997 and $25.5 million in 1996.
Finance charge income, which represents payments from customers for past due
balances on their accounts, decreased to $3.0 million in 1998 from $3.1 million
in 1997 and $4.7 million in 1996. The lower financing costs were due to improved
cash flow from operations, which enabled the company to reduce borrowings in
both 1998 and 1997 compared with the prior-year periods, as well as lower
effective interest rates in both 1998 and 1997 compared with the prior-year
periods. O&M reduced outstanding debt, excluding the impact of the accounts
receivable securitization, to $225.0 million in 1998 from $292.6 million in 1997
and from $293.5 million in 1996. Included in cash flow from operations in 1998
was a $15.9 million refund of federal income tax resulting from a tax method
change. Beginning with the tax year ended December 31, 1997, the company
received permission from the Internal Revenue Service to change its method of
accounting for last-in, first-out inventory. This refund resulted in an increase
in the current deferred tax liability and had no effect on the total income tax
provision for 1998. O&M expects to continue to manage its financing costs by
continuing its working capital reduction initiatives and management of interest
rates, although the future results of these initiatives cannot be assured.
Distributions on mandatorily redeemable preferred securities and dividends on
preferred stock. In May 1998, the Trust issued $132 million of the Securities.
The company applied substantially all of the net proceeds to repurchase and
retire all of its Series B Cumulative Preferred Stock at its par value. The
effect of this transaction was to reduce the overall cost of capital of the
company. The after-tax combined cost of the Securities and the dividend on
preferred stock was $4.5 million in 1998, compared to the total dividends on
preferred stock of $5.2 million in 1997 and 1996.
Nonrecurring restructuring expenses. In the second quarter 1998, as a result of
the Columbia/HCA contract termination, the company recorded a nonrecurring
restructuring charge of $11.2 million, or $6.6 million after taxes, to downsize
warehouse operations. As of December 31, 1998, $2.0 million had been charged
against this liability.
Income taxes. The company had an income tax provision of $14.6 million in 1998,
compared with $17.6 million in 1997 and $10.1 million in 1996. O&M's effective
tax rate was 42.0% in 1998, compared with 42.0% and 43.9% in 1997 and 1996. The
1998 effective tax rate remained consistent with the 1997 effective tax rate as
the decrease in income before taxes, which increased the impact of nondeductible
goodwill, was offset by the increase in the impact of nontaxable income. The
decline in the effective tax rate for 1997 compared with 1996 was due to
increased income before taxes reducing the impact of nondeductible goodwill
amortization.
[CHART]
Financing Outstanding Financing
(Millions) Financing Costs
94 248.4 10.2
95 382.6 26.2
96 293.5 25.5
97 292.6 22.3
98 225.0 18.7
Net income. Net income decreased $4.2 million or 17.2% in 1998 compared to 1997
and increased $11.4 million or 87.6% in 1997 compared to 1996. The decrease in
1998 was due to the impact of the restructuring charge discussed above.
Excluding the effect of the restructuring charge, 1998 net income increased
10.0% to $26.8 million and net income per diluted common share increased to
$0.75 compared to $0.60 in 1997 and $0.25 in 1996. Net income for the fourth
quarter decreased $0.5 million or 6.4% in 1998 compared to 1997 and increased
$2.3 million or 48.5% in 1997 compared to 1996. The decrease in net income in
the fourth quarter of 1998 compared to the fourth quarter of 1997 was a result
of the reduction in sales from the cancelled Columbia/HCA contract discussed
above. The increase in 1997 compared to 1996 was a result of
21
improvements discussed above in gross margin and financing costs, and previously
described improvements in SG&A expenses. Excluding the effect of the
restructuring charge, 1998 net income attributable to common stock increased to
$24.9 million or by 29.8% compared to 1997, due to the positive effect of the
issuance of the Securities and the retirement of the Series B Cumulative
Preferred Stock. Although the trend, excluding the effect of the restructuring
charge, has been favorable and the company continues to pursue initiatives to
improve profitability, the future impact on net income cannot be assured.
Other Matters
Regulation. The medical/surgical supply distribution industry is subject to
regulation by federal, state and local government agencies. Each of O&M's
distribution centers is licensed to distribute medical and surgical supplies as
well as certain pharmaceutical and related products. The company must comply
with regulations, including operating and security standards for each of its
distribution centers, of the Food and Drug Administration, the Drug Enforcement
Agency, the Occupational Safety and Health Administration, state boards of
pharmacy and, in certain areas, state boards of health. O&M believes it is in
material compliance with all statutes and regulations applicable to distributors
of medical and surgical supply products and pharmaceutical and related products,
as well as other general employee health and safety laws and regulations.
Employees. As of December 31, 1998, O&M employed approximately 2,660 people.
[CHART]
Full-Time Equivalent Employees
98 2,898
97 3,319
96 3,425
95 4,197
94 3,624
Properties. O&M's corporate headquarters are located in western Henrico County,
in a suburb of Richmond, Virginia, in leased facilities. The company owns two
undeveloped parcels of land adjacent to its corporate headquarters. The company
leases offices and warehouses for its 38 distribution centers across the United
States. In 1999, the company plans to make adjustments in the capacity of
several facilities to meet current and anticipated business needs. The company
believes that its facilities are adequate to carry on its business as currently
conducted. All of O&M's distribution centers are leased from unaffiliated third
parties. A number of leases are scheduled to terminate within the next several
years. The company believes that, if necessary, it could find facilities to
replace these leased premises without suffering a material adverse effect on its
business.
Readiness for Year 2000. The Year 2000 (Y2K) issue is the result of computer
programs being written using two-digit, rather than four-digit, year dates.
O&M's computer hardware, software and devices with embedded technology that are
time-sensitive may recognize a date code using "00" as the year 1900 rather than
the year 2000. This situation could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities.
The company has divided its Y2K efforts into three main areas:
o computer hardware and software;
o other systems and equipment, such as telephone equipment, scanning equipment
and alarm systems; and
o suppliers and customers.
Computer Hardware and Software. In 1997, O&M completed its assessment of its
computer hardware and software, and developed a strategy of remediation. This
strategy includes retirement of outdated software and replacement or repair of
the remaining software and hardware. The company began repair and replacement
efforts in 1997, and expects they will be substantially complete by mid-1999,
prior to any currently anticipated impact on its computer hardware and software.
22
Testing of repairs is expected to be substantially complete in the third quarter
of 1999, but will continue through the end of the year. O&M estimates that, as
of December 31, 1998, it had completed approximately 95% of the repair, 40% of
replacement, and 35% of the testing that it believes will be necessary to fully
address potential Y2K issues relating to its computer hardware and software.
Other Systems and Equipment. The company has completed an inventory and
assessment of non-computer related systems and equipment at its operating
divisions and a similar inventory and assessment at its corporate offices. O&M
believes that the impact on operations of potential noncompliance for these
systems and equipment would be minimal. In 1998, the company started a program
of replacement and repair of non-compliant systems and equipment, and expects
this effort to be complete by late 1999.
Suppliers and Customers. O&M has contacted its significant suppliers to
determine the extent to which the company is vulnerable to the suppliers'
failure to remediate their Y2K compliance issues. Of the suppliers representing
approximately 90% of O&M's sales, 89% have responded, and, of those responding,
93% have indicated that they have either remedied their Y2K compliance issues,
or plan to do so before the end of 1999.
In 1998, the company also contacted its largest customers to determine their
level of Y2K readiness. Many customers have not yet responded to these inquiries
or have not responded with sufficient detail for O&M to determine whether
they will be Y2K compliant on a timely basis. The company is continuing its
efforts to ascertain the readiness of its customers, but since this readiness
cannot be assured, O&M is in the process of developing contingency plans to
address the most likely risks of non-compliance.
The company estimates the cost of its Y2K remediation efforts will total
approximately $9.7 million of operating expenses and $6.7 million of capital
expenditures. These expenditures will be funded from operating cash flows.
Through December 31, 1998, O&M had incurred approximately $5.7 million of
expenses and $3.8 million of capital spending related to its Y2K efforts of
which $3.6 million and $3.2 million were incurred in 1998. For 1999, the company
expects to incur approximately $4.0 million of expenses and $2.9 million of
capital spending. Other information technology efforts have not been
significantly delayed by Y2K initiatives.
O&M is working on, but has not yet completed, an analysis of the
operational problems and costs that would be reasonably likely to result from
the failure by the company and certain third parties to complete efforts
necessary to achieve Y2K compliance on a timely basis. The company is currently
determining its most reasonably likely worst-case scenario and will be
developing contingency plans to address this scenario. O&M plans to complete its
analysis and contingency planning by late 1999.
O&M believes the Y2K issue will not pose significant operational problems for
the company. However, if all Y2K issues are not properly identified or if
assessment, remediation and testing are not completed on a timely basis, there
can be no assurance that the Y2K issue will not have a material adverse impact
on the company's results of operations or adversely affect its relationships
with customers, suppliers or others. Additionally, there can be no assurance
that Y2K non-compliance by other entities will not have a material adverse
impact on the company's systems or results of operations.
The costs of O&M's Y2K efforts and the dates on which the company believes
it will complete these efforts are based upon management's current estimates.
These estimates used numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans and
other factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. (SFAS)
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments
23
embedded in other contracts, and for hedging activities. This statement is
effective for all fiscal years beginning after June 15, 1999. Management
believes the effect of the adoption of this standard will be limited to
financial statement presentation and disclosure and will not have a material
effect on the company's financial condition or results of operations.
Risks. The company is subject to risks associated with changes in the medical
industry, including continued efforts to control costs, which place pressure on
operating margin, and changes in the way medical and surgical services are
delivered to patients.
Market Risk. O&M provides credit, in the normal course of business, to its
customers. The company performs ongoing credit evaluations of its customers and
maintains reserves for credit losses.
The company is exposed to market risk relating to changes in interest rates.
To manage this risk, O&M uses interest rate swaps to modify the company's
exposure to interest rate movements and reduce borrowing costs. The company
enters into these derivative transactions pursuant to its policies in areas such
as counterparty exposure and hedging practices. O&M's net exposure to interest
rate risk consists of floating rate instruments that are benchmarked to London
Interbank Offered Rate (LIBOR). The company is exposed to certain losses in the
event of nonperformance by the counterparties to these swap agreements. However,
O&M's exposure is not significant and, since the counterparties are investment
grade financial institutions, nonperformance is not anticipated.
The company is exposed to market risk from changes in interest rates related
to its interest rate swaps. Interest expense is subject to change as a result of
movements in interest rates. As of December 31, 1998, O&M had $100 million of
interest rate swaps on which the company pays a variable rate based on LIBOR and
receives a fixed rate and $75 million of interest rate swaps on which the
company pays a fixed rate and receives a variable rate based on LIBOR. A
hypothetical increase in interest rates of 10%, or 50 basis points, would result
in a potential reduction in future pre-tax earnings of approximately $0.5
million per year in connection with the $100 million swaps and an increase in
future pre-tax earnings of approximately $0.4 million per year in connection
with the $75 million swaps.
Forward-Looking Statements. Certain statements in this discussion constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, including, but not limited to, general economic and business
conditions, competition, changing trends in customer profiles, outcome of
outstanding litigation, readiness for year 2000 and changes in government
regulations. Although O&M believes its expectations with respect to the
forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
24
Consolidated Statements of Income
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1998 1997 1996
============================================================== =============== ================ ================
Net sales $ 3,082,119 $ 3,116,798 $ 3,019,003
Cost of goods sold 2,755,158 2,800,044 2,720,613
- -------------------------------------------------------------- ----------- ------------ ------------
Gross margin 326,961 316,754 298,390
- -------------------------------------------------------------- ----------- ------------ ------------
Selling, general and administrative expenses 239,543 234,872 233,704
Depreciation and amortization 18,270 17,664 16,098
Interest expense, net 14,066 15,703 18,954
Discount on accounts receivable securitization 4,655 6,584 6,521
Distributions on mandatorily redeemable preferred securities 4,494 - -
Nonrecurring restructuring expenses 11,200 - -
- -------------------------------------------------------------- ----------- ------------ ------------
Total expenses 292,228 274,823 275,277
- -------------------------------------------------------------- ----------- ------------ ------------
Income before income taxes 34,733 41,931 23,113
Income tax provision 14,588 17,611 10,148
- -------------------------------------------------------------- ----------- ------------ ------------
Net income 20,145 24,320 12,965
Dividends on preferred stock 1,898 5,175 5,175
- -------------------------------------------------------------- ----------- ------------ ------------
Net income attributable to common stock $ 18,247 $ 19,145 $ 7,790
- -------------------------------------------------------------- ----------- ------------ ------------
Net income per common share - basic $ 0.56 $ 0.60 $ 0.25
- -------------------------------------------------------------- ----------- ------------ ------------
Net income per common share - diluted $ 0.56 $ 0.60 $ 0.25
- -------------------------------------------------------------- ----------- ------------ ------------
Cash dividends per common share $ 0.20 $ 0.18 $ 0.18
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 1998 1997
======================================================================= =========== ============
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 546 $ 583
Accounts and notes receivable, net 213,765 187,878
Merchandise inventories 275,094 285,529
Other current assets 14,816 25,274
- ----------------------------------------------------------------------- -------- ---------
TOTAL CURRENT ASSETS 504,221 499,264
Property and equipment, net 25,608 26,628
Goodwill, net 158,276 162,821
Other assets, net 29,663 23,850
- ----------------------------------------------------------------------- -------- ---------
TOTAL ASSETS $717,768 $ 712,563
- ----------------------------------------------------------------------- -------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $206,251 $ 224,072
Accrued payroll and related liabilities 8,974 7,840
Other accrued liabilities 53,749 33,563
- ----------------------------------------------------------------------- -------- ---------
TOTAL CURRENT LIABILITIES 268,974 265,475
Long-term debt 150,000 182,550
Accrued pension and retirement plans 5,668 5,237
- ----------------------------------------------------------------------- -------- ---------
TOTAL LIABILITIES 424,642 453,262
- ----------------------------------------------------------------------- -------- ---------
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust, holding solely convertible debentures of
Owens & Minor, Inc. 132,000 -
- ----------------------------------------------------------------------- -------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, par value $100 per share; authorized-10,000 shares
Series A; Participating Cumulative Preferred Stock; none issued - -
Series B; Cumulative Preferred Stock; 4.5%, convertible; issued and
outstanding - none and 1,150 shares - 115,000
Common stock, par value $2 per share; authorized-200,000 shares;
issued and outstanding - 32,618 shares and 32,213 shares 65,236 64,426
Paid-in capital 12,280 8,005
Retained earnings 83,610 71,870
- ----------------------------------------------------------------------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY 161,126 259,301
- ----------------------------------------------------------------------- -------- ---------
Commitments and contingencies
- -----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $717,768 $ 712,563
======================================================================= ======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS)
Year ended December 31, 1998 1997 1996
================================================================== ============= ============== =============
OPERATING ACTIVITIES
Net income $ 20,145 $ 24,320 $ 12,965
Adjustments to reconcile net income to cash provided by operating
activities
Depreciation and amortization 18,270 17,664 16,098
Nonrecurring restructuring provision 11,200 - -
Deferred income taxes 22,737 (3) 2,406
Provision for LIFO reserve 1,536 2,414 908
Provision for losses on accounts and notes receivable 496 268 838
Changes in operating assets and liabilities:
Accounts and notes receivable (26,383) (40,903) 117,157
Merchandise inventories 8,899 (6,104) 43,633
Accounts payable (23,375) 4,714 (9,670)
Net change in other current assets and current liabilities (651) 4,614 2,619
Other, net (389) 1,038 1,178
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 32,485 8,022 188,132
- ------------------------------------------------------------------ ---------- ---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment (8,053) (7,495) (6,242)
Additions to computer software (4,556) (4,472) (6,985)
Proceeds from sale of property and equipment 160 1,851 6,865
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH USED FOR INVESTING ACTIVITIES (12,449) (10,116) (6,362)
- ------------------------------------------------------------------ ---------- ---------- ----------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily redeemable
preferred securities 127,268 - -
Repurchase of preferred stock (115,000) - -
Additions to long-term debt - 26,026 150,000
Reductions of long-term debt (32,550) (11,049) (314,877)
Other short-term financing, net 5,554 (4,679) (7,341)
Cash dividends paid (9,268) (10,950) (10,868)
Proceeds from exercise of stock options 3,923 2,586 1,844
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (20,073) 1,934 (181,242)
- ------------------------------------------------------------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37) (160) 528
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 583 743 215
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 546 $ 583 $ 743
================================================================== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS)
Preferred Common
Shares Preferred Shares Common Paid-in Retained
Outstanding Stock Outstanding Stock Capital Earnings
============= ============= ============= ========== =========== ===========
Balance December 31, 1995 1,150 $ 115,000 30,862 $61,724 $ 2,144 $ 56,403
Net income - - - - - 12,965
Common stock cash dividends(1) - - - - - (5,693)
Preferred stock cash dividends(1) - - - - - (5,175)
Exercise of stock options - - 206 412 1,432 -
Convertible debt conversion - - 867 1,734 1,766 -
Other - - (28) (56) (256) -
- ----------------------------------- ----- ---------- ------ ------- ------- --------
Balance December 31, 1996 1,150 115,000 31,907 63,814 5,086 58,500
Net income - - - - - 24,320
Common stock cash dividends(1) - - - - - (5,775)
Preferred stock cash dividends(1) - - - - - (5,175)
Exercise of stock options - - 303 606 2,902 -
Other - - 3 6 17 -
- ----------------------------------- ----- ---------- ------ ------- ------- --------
Balance December 31, 1997 1,150 115,000 32,213 64,426 8,005 71,870
Net income - - - - - 20,145
Issuance of restricted stock - - 64 128 832 -
Unearned compensation - - - - (657) -
Common stock cash dividends(1) - - - - - (6,507)
Preferred stock cash dividends(1) - - - - - (1,898)
Exercise of stock options - - 333 666 3,978 -
Repurchase of preferred stock (1,150) (115,000) - - - -
Other - - 8 16 122 -
- ----------------------------------- ------ ---------- ------ ------- ------- --------
BALANCE DECEMBER 31, 1998 - $ - 32,618 $65,236 $12,280 $ 83,610
=================================== ====== ========== ====== ======= ======= ========
(1) Cash dividends were $0.20 per common share and $1.65 per preferred share in
1998. Cash dividends were $0.18 per common share and $4.50 per preferred
share in 1997 and 1996.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Owens & Minor, Inc. is the largest distributor of national
name brand medical/ surgical supplies in the United States. The consolidated
financial statements include the accounts of Owens & Minor, Inc. and its wholly
owned subsidiaries (the company). All significant intercompany accounts and
transactions have been eliminated. The preparation of the consolidated financial
statements in accordance with generally accepted accounting principles requires
management assumptions and estimates that affect amounts reported. Actual
results may differ from these estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and marketable
securities with an original maturity or maturity at acquisition of three months
or less. Cash and cash equivalents are stated at cost, which approximates market
value.
ACCOUNTS RECEIVABLE The company maintains an allowance for doubtful accounts
based upon the expected collectibility of accounts receivable. Allowances for
doubtful accounts of $6.3 million have been applied as a reduction of accounts
receivable at December 31, 1998 and 1997.
MERCHANDISE INVENTORIES The company's merchandise inventories are valued on a
last-in, first-out (LIFO) basis.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost or, if acquired
under capital leases, at the lower of the present value of minimum lease
payments or fair market value at the inception of the lease. Normal maintenance
and repairs are expensed as incurred, and renovations and betterments are
capitalized. Depreciation and amortization are provided for financial reporting
purposes on the straight-line method over the estimated useful lives of the
assets or, for capital leases and leasehold improvements, over the terms of the
lease, if shorter. In general, the estimated useful lives for computing
depreciation and amortization are four to eight years for warehouse equipment
and three to eight years for computer, office and other equipment. Straight-line
and accelerated methods of depreciation are used for income tax purposes.
GOODWILL Goodwill is amortized on a straight-line basis over 40 years from the
dates of acquisition. As of December 31, 1998 and 1997, goodwill was $181.1
million and the related accumulated amortization was $22.8 million and $18.3
million, respectively. Based upon management's assessment of future cash flows
of acquired businesses, the carrying value of goodwill at December 31, 1998 has
not been impaired. The carrying value of goodwill could be impacted if estimated
future cash flows are not achieved.
COMPUTER SOFTWARE The company develops and purchases software for internal use.
Effective January 1, 1998, the company adopted the provisions of Statement of
Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. Software development costs incurred during the
application development stage are capitalized. Once the software has been
installed and tested and is ready for use, additional costs incurred in
connection with the software are expensed as incurred. Capitalized computer
software costs are amortized over the estimated useful life of the software,
usually between 3 and 5 years. Computer software costs are included in other
assets, net in the Consolidated Balance Sheets. Unamortized software at December
31, 1998 and 1997 was $10.2 million and $11.0 million. Depreciation and
amortization expense includes $5.1 million, $4.6 million and $2.8 million of
software amortization for the years ended December 31, 1998, 1997 and 1996.
REVENUE RECOGNITION Revenue from product sales is generally recognized at the
time the product is shipped. Service revenue is recognized over the contractual
period as the services are performed.
STOCK-BASED COMPENSATION The company uses the intrinsic value method of
Accounting Principles Board Opinion No. 25 to account for stock-based
compensation. This method requires compensation expense to be recognized for the
excess of the quoted market price of the stock at the grant date or the
measurement date over the amount an employee must pay to acquire the stock. The
disclosure requirements of Statement of Financial Accounting Standards No.
(SFAS) 123 are included in Note 8 to Consolidated Financial Statements.
29
DERIVATIVE FINANCIAL INSTRUMENTS The company enters into interest rate swaps and
caps as part of its interest rate risk management strategy. These instruments
are designated as hedges of interest-bearing liabilities and anticipated cash
flows associated with off balance sheet financing. Net payments or receipts are
accrued as interest payable or receivable and as interest expense or income.
Fees related to these instruments are amortized over the life of the instrument.
If the outstanding balance of the underlying liability were to drop below the
notional amount of the swap or cap, the excess portion of the swap or cap would
be marked to market, and the resulting gain or loss included in net income.
OPERATING SEGMENTS The company adopted the provisions of Statement of Financial
Accounting Standards No. (SFAS) 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, effective January 1, 1998. As defined in SFAS 131, the
company operates in 34 operating segments. As each of these segments is
substantially identical to the others in each of the five aggregation
characteristics identified in the statement, these segments have been aggregated
for purposes of financial statement disclosure.
NOTE 2 - NONRECURRING RESTRUCTURING EXPENSES
In the second quarter of 1998, the company recorded a nonrecurring restructuring
charge of $11.2 million related to the impact of the cancellation of its
medical/ surgical distribution contract with Columbia/HCA Healthcare Corporation
(Columbia/HCA). The restructuring plan includes reductions in warehouse space
and in the number of employees in those divisions which had the highest volume
of business with Columbia/HCA facilities. The following table sets forth the
activity in the restructuring reserve through December 31, 1998:
(IN THOUSANDS)
BALANCE AT
RESTRUCTURING DECEMBER 31,
PROVISION CHARGES 1998
================= ========= =============
Losses under lease
commitments $ 4,194 $ 573 $3,621
Asset write-offs 3,968 505 3,463
Employee separations 2,497 848 1,649
Other 541 33 508
- ----------------------- ------- ------ ------
Total $11,200 $1,959 $9,241
Approximately 100 employees were terminated in 1998 in connection with the
restructuring plan.
NOTE 3 - MERCHANDISE INVENTORIES
The company's merchandise inventories are valued on a LIFO basis. If LIFO
inventories had been valued on a current cost or first-in, first-out (FIFO)
basis, they would have been greater by $26.8 million and $25.3 million as of
December 31, 1998 and 1997, respectively. During 1996, inventory quantities were
reduced which resulted in a liquidation of LIFO inventory carried at lower costs
prevailing in prior years as compared with the cost of 1996 purchases, the
effect of which increased net income by approximately $1.2 million or $0.04 per
diluted common share.
NOTE 4 - PROPERTY AND EQUIPMENT
The company's investment in property and equipment consists of the following:
(IN THOUSANDS)
December 31, 1998 1997
============================= =========== ===========
Warehouse equipment $23,138 $ 23,477
Computer equipment 25,888 22,729
Office and other equipment 11,368 11,198
Leasehold improvements 9,288 9,221
Land and improvements 1,738 1,503
- ----------------------------- ------- --------
71,420 68,128
Accumulated depreciation
and amortization (45,812) (41,500)
- ----------------------------- ------- --------
Property and equipment, net $25,608 $ 26,628
Depreciation and amortization expense for property and equipment in 1998,
1997 and 1996 was $8.6 million, $8.5 million and $8.7 million.
NOTE 5 - ACCOUNTS PAYABLE
Accounts payable balances were $206.3 million and $224.1 million as of December
31, 1998 and 1997, respectively, of which $164.5 million and $187.8 million,
respectively, were trade accounts payable and $41.8 million and $36.3 million,
respectively, were drafts payable. Drafts payable are checks written in excess
of bank balances to be funded upon clearing the bank.
30
NOTE 6 - FINANCIAL INSTRUMENTS
The company's long-term debt consists of the following:
(IN THOUSANDS)
December 31, 1998 1997
==================================================== ============================= ========================
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
============== ============ ========== ===========
10.875% Senior Subordinated Notes, mature
June 2006 $150,000 $162,000 $150,000 $168,750
Revolving Credit Facility with interest based on
London Interbank Offered Rate (LIBOR) or Prime
Rate, expires May 2001, credit limit of $225,000 - - 32,550 32,550
- ---------------------------------------------------- -------- -------- -------- --------
Long-term debt $150,000 $162,000 $182,550 $201,300
In May 1996, the company issued $150.0 million of 10.875% Senior
Subordinated 10-year notes (Notes), which mature on June 1, 2006. Interest on
the Notes is payable semi-annually on June 1 and December 1. The Notes are
redeemable, after June 1, 2001, at the company's option, subject to certain
restrictions. The Notes are unconditionally guaranteed on a joint and several
basis by all direct and indirect subsidiaries of the company, other than O&M
Funding Corp. (OMF) and Owens & Minor Trust I.
The Revolving Credit Facility expires in May 2001 with interest based on,
at the company's discretion, LIBOR or the Prime Rate. The company is charged a
commitment fee of between 0.15% and 0.25%, depending upon the company's
capitalization ratio, on the unused portion of the Revolving Credit Facility.
The terms of the Revolving Credit Facility limit the amount of indebtedness that
the company may incur, require the company to maintain certain levels of
tangible net worth, current ratio, leverage ratio and fixed charge coverage, and
restrict the ability of the company to materially alter the character of the
business through consolidation, merger or purchase or sale of assets. At
December 31, 1998, the company was in compliance with these covenants.
Net interest expense includes finance charge income of $3.0 million, $3.1
million and $4.7 million in 1998, 1997 and 1996, respectively. Finance charge
income represents payments from customers for past due balances on their
accounts. Cash payments for interest during 1998, 1997 and 1996 were $16.4
million, $18.3 million and $22.1 million, respectively.
The estimated fair value of long-term debt is based on the borrowing rates
currently available to the company for loans with similar terms and average
maturities. There are no maturities of long-term debt for any of the five years
subsequent to December 31, 1998.
OFF BALANCE SHEET FINANCING Under the terms of the Receivable Financing
Facility, OMF is entitled to transfer, without recourse, certain of the
company's trade receivables and to receive up to $150.0 million from an
unrelated third party purchaser at a cost of funds at commercial paper rates
plus a charge for administrative and credit support services. In October 1998,
the Receivables Financing Facility was modified primarily to extend the facility
termination date to October 4, 1999. At December 31, 1998 and 1997, the company
had received $75.0 million and $110.0 million, respectively, under the
agreement. To continue use of the Receivables Financing Facility, the company is
required to be in compliance with the covenants of the Revolving Credit
Facility.
The company manages its interest rate risk, primarily through the use of
interest rate swap agreements. The company's interest rate swap agreements as of
December 31, 1998 and 1997 included $100.0 million notional amounts that
effectively converted a portion of the company's fixed rate financing
instruments to variable rates. Under these swap agreements, expiring in May
2006, the company pays the counterparties a variable rate based on LIBOR and the
counterparties pay the company a fixed interest rate ranging from 7.29% to
7.32%. At the option of the counterparties, these swaps
31
can be terminated in 2001. As of December 31, 1998, the company also had $75.0
million notional amounts of interest rate swap agreements that effectively
converted the company's variable rate financing instruments to fixed rate
instruments. Under these swap agreements, which expire in May 2001, the company
pays the counterparties a fixed rate ranging from 5.75% to 5.93% and the
counterparties pay the company a variable rate based on LIBOR. As of December
31, 1997, the company had $50.0 million notional amounts of interest rate swap
agreements, which effectively converted a portion of the company's variable rate
financing instruments to fixed rate instruments. Under these swap agreements,
which expired in February 1998, the company paid the counterparties a fixed rate
ranging from 7.41% to 7.72% and the counterparties paid the company a variable
rate based on LIBOR.
The payments received or disbursed related to the interest rate swaps are
included in interest expense, net. Based on estimates of the prices obtained
from a dealer, the company had an unrealized gain of approximately $5.0 million
and $2.7 million at December 31, 1998 and 1997, respectively, for the fixed to
variable rate swaps and an unrealized loss of approximately $1.2 million and
$0.2 million at December 31, 1998 and 1997, respectively, for the variable to
fixed rate swaps.
The company is exposed to certain losses in the event of nonperformance by
the counterparties to these swap agreements. However, the company's exposure is
not material and, since the counterparties are investment grade financial
institutions, nonperformance is not anticipated.
NOTE 7 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
In May 1998, Owens & Minor Trust I (Trust), a statutory business trust sponsored
and wholly owned by Owens & Minor, Inc. (O&M), issued 2,640,000 shares of
$2.6875 Term Convertible Securities, Series A (Securities), for aggregate
proceeds of $132.0 million. Each Security has a liquidation value of $50. The
net proceeds were invested by the Trust in 5.375% Junior Subordinated
Convertible Debentures of O&M (Debentures). The Debentures are the sole assets
of the Trust. O&M applied substantially all of the net proceeds of the
Debentures to repurchase 1,150,000 shares of its Series B Cumulative Preferred
Stock at its par value.
The Securities accrue and pay quarterly cash distributions at an annual
rate of 5.375% of the liquidation value. Each Security is convertible into
2.4242 shares of the common stock of O&M at the holder's option prior to May 1,
2013. The Securities are mandatorily redeemable upon the maturity of the
Debentures on April 30, 2013, and may be redeemed by the company in whole or in
part after May 1, 2001. The obligations of the Trust, as provided under the term
of the Securities, are fully and unconditionally guaranteed by O&M.
The estimated fair value of the Securities is $127.4 million at December
31, 1998, based on a quoted market price. As of December 31, 1998, the company
had accrued $1.2 million of distributions related to these Securities.
NOTE 8 - STOCK-BASED COMPENSATION
The company maintains stock based compensation plans (Plans) which provide for
the granting of stock options, stock appreciation rights (SARs), restricted
common stock and common stock. The Plans are administered by the Compensation
and Benefits Committee of the Board of Directors and allow the company to award
or grant to officers, directors and employees incentive, non-qualified and
deferred compensation stock options, SARs and restricted and unrestricted stock.
At December 31, 1998, approximately two million common shares were available for
issuance under the Plans.
Stock options awarded under the Plans generally vest over three years and
expire ten years from the date of grant. The options are granted at a price
equal to fair market value at the date of grant. Restricted stock awarded under
the Plans generally vests over three or five years. At December 31, 1998, there
were no SARs outstanding.
In 1997, the company adopted a Management Equity Ownership Program. This
program requires each of the company's officers to own the company's common
stock at specified levels, which gradually increase over five years. Officers
who meet specified ownership goals in a given year are awarded restricted stock
under the provisions of the program. Upon issuance of restricted shares,
unearned compensation is charged to shareholders' equity for the market value of
restricted stock and recognized as compensation
32
expense ratably over the vesting period. Amortization of unearned compensation
was approximately $301.6 thousand, $54.3 thousand and $2.3 thousand for 1998,
1997 and 1996.
The following table summarizes the activity and terms of outstanding
options at December 31, 1998, and for the years in the three-year period then
ended:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
======================= ===================== ======================
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
========== ========== ======== ========== ======== ===========
Options outstanding beginning of year 1,940 $ 13.50 1,922 $ 13.06 1,745 $ 12.41
Granted 550 13.79 523 12.73 629 13.38
Exercised (333) 12.12 (303) 13.41 (206) 8.95
Expired/cancelled (156) 13.89 (202) 14.58 (246) 12.67
- --------------------------------------- ----- ------- ----- ------- ----- -------
Outstanding at end of year 2,001 $ 13.78 1,940 $ 13.50 1,922 $ 13.06
Exercisable options at end of year 1,137 $ 14.16 1,123 $ 13.87 1,053 $ 12.40
At December 31, 1998, the following option groups were outstanding:
Outstanding Exercisable
============= =============
Weighted Weighted
Weighted Average Weighted Average
Range of Number of Average Remaining Number of Average Remaining
Exercise Options Exercise Contractual Life Options Exercise Contractual Life
Prices (000's) Price (Years) (000's) Price (Years)
================= =========== ============= ================== =========== ============= =================
$ 9.50-13.00 538 $ 12.36 7.96 270 $ 12.22 7.64
$13.37-17.07 1,463 $ 14.30 7.01 867 $ 14.76 5.82
- ------------ ----- ------- ---- --- ------- ----
2,001 $ 13.78 7.26 1,137 $ 14.16 6.25
Using the intrinsic value method, the company's 1998, 1997 and 1996 net
income includes stock-based compensation expense (net of tax benefit) of
approximately $201 thousand, $67 thousand and $50 thousand. The weighted average
fair value of options granted in 1998, 1997 and 1996 was $4.06, $3.77 and $3.90
per option. Had the company included in stock-based compensation expense the
fair value at grant date of stock option awards granted in 1998, 1997 and 1996,
net income would have been $19.0 million or $0.52 per basic and diluted common
share, $23.2 million or $0.56 per basic and diluted common share and $12.3
million or $0.23 per basic and diluted common share for the years ended December
31, 1998, 1997 and 1996. The fair value of each option is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants: dividend yield of 1.2%-1.5% in 1998, 1.2%-1.7% in
1997 and 1.8% in 1996; expected volatility of 32.44%-37.90% in 1998, 24.6%-41.0%
in 1997 and 32.0% in 1996; risk-free interest rate of 4.7% in 1998 and 5.6% in
1997 and 6.3% in 1996; and expected lives of 2.1-5.1 years in 1998 and in 1997
and 4.0 years in 1996.
33
NOTE 9 - RETIREMENT PLANS
PENSION PLAN The company has a noncontributory pension plan covering
substantially all employees who had earned benefits as of December 31, 1996. On
that date, substantially all of the benefits of employees under this plan were
frozen, with all participants becoming fully vested. The changes in this plan
resulted in a 1996 curtailment gain of approximately $2.0 million, which was
recorded in selling, general and administrative expenses in the company's
Consolidated Statements of Income. The company expects to continue to fund the
plan based on federal requirements, amounts deductible for income tax purposes,
and as needed to ensure that plan assets are sufficient to satisfy plan
liabilities. As of December 31, 1998, plan assets consist primarily of equity
securities, including 34 thousand shares of the company's common stock, and U.S.
Government securities.
RETIREMENT PLAN The company also has a noncontributory, unfunded retirement plan
for certain officers and other key employees. Benefits are based on a percentage
of the employees' compensation. The company maintains life insurance policies on
plan participants to act as a financing source for the plan.
The following table sets forth the plans' financial status and the amounts
recognized in the company's Consolidated Balance Sheets:
(IN THOUSANDS)
Pension Plan Retirement Plan
========================= ===========================
1998 1997 1998 1997
=========== =========== ============ ============
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $20,671 $18,324 $ 5,078 $ 5,017
Service cost 243 283 354 285
Interest cost 1,415 1,344 350 371
Actuarial loss (gain) 831 1,461 452 (454)
Benefits paid (872) (741) (140) (141)
- ---------------------------------------------- ------- ------- -------- ---------
Benefit obligation, end of year $22,288 $20,671 $ 6,094 $ 5,078
- ---------------------------------------------- ------- ------- -------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year $22,121 $16,950 $ - $ -
Actual return on plan assets 2,827 3,393 - -
Employer contribution 67 2,519 140 141
Benefits paid (872) (741) (140) (141)
- ---------------------------------------------- ------- ------- -------- ---------
Fair value of plan assets, end of year $24,143 $22,121 $ - $ -
- ---------------------------------------------- ------- ------- -------- ---------
FUNDED STATUS
Funded status at December 31 $ 1,855 $ 1,450 $ (6,094) $ (5,078)
Unrecognized net actuarial (gain) loss (816) (502) 1,696 1,301
Unrecognized prior service benefit - - (204) (221)
Unrecognized net obligation being recognized
through 2002 - - 164 205
- ---------------------------------------------- ------- ------- -------- ---------
Prepaid (accrued) benefit cost $ 1,039 $ 948 $ (4,438) $ (3,793)
34
The components of net periodic pension cost for the pension and retirement
plans are as follows:
(IN THOUSANDS)
Year ended
December 31, 1998 1997 1996
=========================== =========== =========== ==========
Service cost $ 597 $ 568 $ 2,598
Interest cost 1,765 1,715 1,714
Expected return on
plan assets (1,682) (1,430) (1,225)
Amortization of prior
service (benefit)
cost (17) (17) 65
Curtailment gain - - (1,988)
Amortization of
transition obligation
(asset) 41 41 (66)
Recognized net
actuarial loss 57 90 82
- --------------------------- ------ ------ -------
Net periodic pension
cost $ 761 $ 967 $ 1,180
The weighted average discount rate, rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations and the expected long-term rate of return on plan
assets were assumed to be 6.75%, 5.5% and 8.5% in 1998 and 7.0%, 5.5% and 8.5%
in 1997.
OTHER RETIREMENT BENEFITS The company substantially terminated its
postretirement medical plan in 1996. The termination resulted in a reduction in
the company's accumulated postretirement benefit obligation of approximately
$1.6 million, which is being recognized in income through the year 2008.
The following table sets forth the plan's financial status and the amounts
recognized in the company's Consolidated Balance Sheets:
(IN THOUSANDS)
Postretirement Medical Plan
========================================================
1998 1997
============= =============
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation,
beginning of year $ 956 $ 932
Interest cost 66 65
Benefits paid (60) (41)
- ------------------------ ------- --------
Benefit obligation, end
of year $ 962 $ 956
- ------------------------ ------- --------
CHANGE IN PLAN
ASSETS
Fair value of plan
assets, beginning of
year $ - $ -
Employer contribution 60 41
Benefits paid (60) (41)
- ------------------------ ------- --------
Fair value of plan
assets, end of year $ - $ -
- ------------------------ ------- --------
FUNDED STATUS
Funded status at
December 31 $ (962) $ (956)
Unrecognized prior
service benefit (1,306) (1,436)
- ------------------------ ------- --------
Accrued benefit cost $(2,268) $ (2,392)
The components of net periodic cost for the postretirement medical plan
are as follows:
(IN THOUSANDS)
Year ended
December 31, 1998 1997 1996
====================== ========= ========= ========
Service cost $ - $ - $ 308
Interest cost 66 65 177
Amortization of prior
service benefit (130) (131) (78)
- ---------------------- ----- ----- -----
Net periodic
postretirement
cost (benefit) $ (64) $ (66) $ 407
35
For measurement purposes, a 9.0% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for 1998; the rate was assumed
to decrease gradually to 6.0% for the year 2001 and remain at that level
thereafter. The healthcare cost trend rate assumption does not have a
significant effect on the amounts reported.
The company maintains a voluntary Savings and Protection Plan covering
substantially all full-time employees who have completed six months of service
and have attained age 18. The company matches a certain percentage of each
employee's contribution. Effective January 1, 1997, the company enhanced this
plan to provide for a minimum contribution by the company to the plan for all
eligible employees of 1% of their salary. This contribution can be increased at
the company's discretion. The company incurred approximately $2.1 million, $2.6
million and $1.0 million in 1998, 1997 and 1996, respectively, of expenses
related to this plan.
NOTE 10 - INCOME TAXES
The income tax provision consists of the following:
(IN THOUSANDS)
Year ended
December 31, 1998 1997 1996
================= ============ ============== ==========
Current tax
provision
(benefit):
Federal $(7,690) $ 14,484 $ 6,186
State (459) 3,130 1,556
- ----------------- ------- -------- --------
Total current
provision
(benefit) (8,149) 17,614 7,742
- ------------------ ------- -------- --------
Deferred tax
provision
(benefit):
Federal 19,895 (2) 1,923
State 2,842 (1) 483
- ------------------ ------- ---------- --------
Total deferred
provision
(benefit) 22,737 (3) 2,406
- ------------------ ------- ---------- --------
Total income tax
provision $14,588 $ 17,611 $ 10,148
A reconciliation of the federal statutory rate to the company's effective
income tax rate is shown below:
Year ended
December 31, 1998 1997 1996
============================ =========== ========== ==========
Federal statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in
the rate resulting from:
State income taxes, net
of federal income
tax impact 4.9 4.9 5.0
Nondeductible
goodwill
amortization 4.7 3.7 7.5
Nontaxable income (4.0) (2.6) (4.6)
Other, net 1.4 1.0 1.0
- ---------------------------- ---- ---- ----
Effective rate 42.0% 42.0% 43.9%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
(IN THOUSANDS)
Year ended December 31, 1998 1997
================================ ============ =========
Deferred tax assets:
Allowance for doubtful
accounts $ 2,509 $ 2,525
Accrued liabilities not
currently deductible 5,276 7,044
Employee benefit plans 3,616 3,377
Merchandise inventories - 4,169
Nonrecurring
restructuring expenses 3,692 -
Tax loss carryforward, net 947 1,238
Other 815 839
- -------------------------------- ------- -------
Total deferred tax assets 16,855 19,192
- -------------------------------- ------- -------
Deferred tax liabilities:
Merchandise inventories 19,113 -
Accounts receivable 2,101 -
Property and equipment 1,076 1,557
Computer software 708 1,252
Other 1,359 1,148
- -------------------------------- ------- -------
Total deferred tax liabilities 24,357 3,957
- -------------------------------- ------- -------
Net deferred tax asset
(liability) $(7,502) $15,235
36
At December 31, 1998 and 1997, the company had a $0.27 million and $0.10
million valuation allowance, respectively, for state net operating losses. Based
on the level of historical taxable income and projections of future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the company will realize the
benefits of these deductible differences, net of existing valuation allowances.
For the tax year ended December 31, 1997, the company received permission
from the Internal Revenue Service to change its method of accounting for
inventories. For tax purposes only, the company's inventories were restated to
reflect this change in the method of accounting. This change resulted in a $24.1
million net increase in the company's deferred tax liability in 1998 as well as
a cash refund of income taxes of $15.9 million received in the third quarter of
1998.
Cash payments for income taxes for 1998, 1997 and 1996 were $14.1 million,
$18.6 million and $8.0 million, respectively.
- --------------------------------------------------------------------------------
NOTE 11 - NET INCOME PER COMMON SHARE
The following sets forth the computation of basic and diluted net income per
common share:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
============ ============= =============
Numerator:
Net income $20,145 $ 24,320 $ 12,965
Preferred stock dividends 1,898 5,175 5,175
- ------------------------------------------------------------------- ------- -------- --------
Numerator for basic net income per common share - net income
available to common shareholders $18,247 $ 19,145 $ 7,790
Effect of dilutive securities-interest on convertible debt, net - - 51
- ------------------------------------------------------------------- ------- -------- --------
Numerator for diluted net income per common share - net income
available to common shareholders after assumed conversions $18,247 $ 19,145 $ 7,841
- ------------------------------------------------------------------- ------- -------- --------
Denominator:
Denominator for basic net income per common share - weighted
average shares 32,488 32,048 31,707
Effect of dilutive securities:
Stock options and restricted stock 99 74 78
Convertible debt - - 21
Other 4 7 3
- ------------------------------------------------------------------- ------- -------- --------
Denominator for diluted net income per common share - adjusted
weighted average shares and assumed conversions 32,591 32,129 31,809
- ------------------------------------------------------------------- ------- -------- --------
Net income per common share - basic $ 0.56 $ 0.60 $ 0.25
Net income per common share - diluted $ 0.56 $ 0.60 $ 0.25
At December 31, 1998, 2.6 million shares of mandatorily redeemable
preferred securities, convertible into approximately 6.4 million shares of
common stock, were outstanding. All of these potential common shares were
excluded from the calculation of diluted net income per share because their
inclusion would have had an antidilutive effect.
During the years ended December 31, 1998, 1997 and 1996, options to
purchase approximately 461 thousand, 1,192 thousand and 1,737 thousand common
shares were outstanding. These options were excluded from the calculation of
diluted net income per share because their exercise price exceeded the average
market price for the year.
37
NOTE 12 - SHAREHOLDERS' EQUITY
In May 1998, the company repurchased all of the shares of its Series B preferred
stock at par value. This stock was originally issued in May 1994 in connection
with the Stuart Medical, Inc. (Stuart) acquisition. Each share of preferred
stock had an annual dividend of $4.50, payable quarterly, had voting rights on
items submitted to a vote of the holders of common stock and was convertible
into approximately 6.1 shares of common stock at the shareholder's option.
The company has a shareholder rights agreement under which 8/27ths of a
Right is attendant to each outstanding share of common stock of the company.
Each full Right entitles the registered holder to purchase from the company one
one-hundredth of a share of Series A Participating Cumulative Preferred Stock
(the Series A Preferred Stock), at an exercise price of $75 (the Purchase
Price). The Rights will become exercisable, if not earlier redeemed, only if a
person or group acquires 20% or more of the outstanding shares of the company's
common stock or announces a tender offer, the consummation of which would result
in ownership by a person or group of 20% or more of such outstanding shares.
Each holder of a Right, upon the occurrence of certain events, will become
entitled to receive, upon exercise and payment of the Purchase Price, Series A
Preferred Stock (or in certain circumstances, cash, property or other securities
of the company or a potential acquirer) having a value equal to twice the amount
of the Purchase Price. The Rights will expire on April 30, 2004, if not earlier
redeemed.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The company has a commitment through November 2, 2008 to outsource its
information technology operations, including strategic application development
services. The commitment is cancellable after November 2, 2003 with 180 days
prior notice and payment of a minimum termination fee of between $12.0 million
to $3.0 million depending upon the date of termination.
The company has a commitment through December 2001 to outsource the
management and operation of its mainframe computer. This commitment is
cancellable at any time on 180 days prior notice and a minimum payment of $7.5
million.
The company also has entered into noncancellable agreements to lease
certain office and warehouse facilities with remaining terms ranging from one to
nine years. Certain leases include renewal options, generally for five-year
increments. At December 31, 1998, future minimum annual payments under
noncancellable operating lease agreements with original terms in excess of one
year are as follows:
(IN THOUSANDS)
Total
==========
1999 $18,887
2000 15,216
2001 12,153
2002 9,469
2003 8,164
Later years 13,469
- ------------------------ -------
Total minimum payments $77,358
Minimum lease payments have not been reduced by minimum sublease rentals
aggregating $0.5 million due in the future under noncancellable subleases.
Rent expense for all operating leases for the years ended December 31,
1998, 1997 and 1996 was $26.1 million, $26.3 million and $25.6 million,
respectively.
The company has limited concentrations of credit risk with respect to
financial instruments. Temporary cash investments are placed with high credit
quality institutions and concentrations within accounts and notes receivable are
limited due to their geographic dispersion.
In 1998, 1997 and 1996, net sales to Columbia/HCA totaled $276 million,
$356 million and $321 million, or approximately 9% in 1998 and 11% in 1997 and
1996 of the company's net sales. In May 1998, Columbia/HCA cancelled its
medical/surgical distribution contract with the company.
Net sales to member hospitals under contract with VHA Inc. totaled $1.3
billion in 1998 and 1997 and $1.2 billion in 1996, approximately 41%, 40% and
41%, respectively, of the company's net sales. As members of a national
healthcare network, VHA Inc. hospitals have an incentive to purchase from their
primary selected distributor; however, they operate independently and are free
to negotiate directly with distributors and manufacturers.
38
NOTE 14 - LEGAL PROCEEDINGS
As of January 30, 1999, Stuart is named as a defendant along with product
manufacturers, distributors, healthcare providers, trade associations and others
in approximately 54 lawsuits filed in various federal and state courts (the
Cases). The Cases represent the claims of approximately 55 plaintiffs claiming
personal injuries and approximately 30 spouses asserting claims for loss of
consortium. The Cases seek damages for personal injuries allegedly attributable
to spinal fixation devices. The great majority of the Cases seek compensatory
and punitive damages in unspecified amounts.
Prior to December 1992, Stuart distributed spinal fixation devices
manufactured by Sofamor SNC, a predecessor of Sofamor Danek Group, Inc. (Sofamor
Danek). Approximately three fourths of the claims involve plaintiffs implanted
with spinal fixation devices manufactured by Sofamor Danek. Such plaintiffs
allege that Stuart is liable to them under applicable products liability law for
injuries caused by such devices distributed and sold by Stuart. In addition,
such plaintiffs allege that Stuart distributed and sold the spinal fixation
devices through deceptive and misleading means and in violation of applicable
law. In the remaining Cases, plaintiffs seek to hold Stuart liable for injuries
caused by other manufacturers' devices that were neither distributed nor sold by
Stuart. Such plaintiffs allege that Stuart engaged in a civil conspiracy and
concerted action with manufacturers, distributors and others to promote the sale
of spinal fixation devices through deceptive and misleading means in violation
of applicable law. Stuart never manufactured any spinal fixation devices. The
company believes that affirmative defenses are available to Stuart. All Cases
filed against Stuart have been, and will continue to be, vigorously defended.
A majority of the Cases have been transferred to, and consolidated for
pretrial proceedings, in the Eastern District of Pennsylvania in Philadelphia
under the style MDL Docket No. 1014: In re Orthopedic Bone Screw Products
Liability Litigation. Discovery proceedings, including the taking of depositions
have been ongoing in certain of the Cases, and, in a number of Cases, discovery
has been completed and these Cases have been remanded back for trial to those
jurisdictions where they were originally filed. The company is unable at this
time to determine with certainty whether or not Stuart may be liable.
Based upon management's analysis of indemnification agreements between
Stuart and Sofamor Danek, the manufacturer of the devices distributed by Stuart,
the company believes that Stuart is entitled to indemnification by Sofamor Danek
at least with respect to claims brought by plaintiffs implanted with devices
manufactured by Sofamor Danek. Such Cases are being defended by Stuart's
insurance carriers. Regarding those Cases filed by plaintiffs implanted with
other manufacturers' devices, Stuart's primary insurance carriers have provided
a defense for such Cases and is expected to continue to provide a defense
through June 1999. The company and Stuart are also contractually entitled to
indemnification by the former shareholders of Stuart for any liabilities and
related expenses incurred by the company or Stuart in connection with the
foregoing litigation. The company believes that Stuart's available insurance
coverage together with the indemnification rights discussed above are adequate
to cover any losses should they occur, and accordingly has accrued no liability
therefor. The company is not aware of any uncertainty as to the availability and
adequacy of such insurance or indemnification, although there can be no
assurance that Sofamor Danek and the former shareholders will have sufficient
financial resources in the future to meet such obligations.
As of January 29, 1999, approximately 70 lawsuits (the "Lawsuits") seeking
compensatory and punitive damages, in most cases of an unspecified amount, have
been filed in various federal and state courts against the company, product
manufacturers and other distributors and sellers of natural rubber latex
products. The Lawsuits allege injuries arising from the use of latex products,
principally medical gloves. The Lawsuits also include claims by approximately 42
spouses asserting loss of consortium. The company may be named as a defendant in
additional similar lawsuits in the future.
In the course of its medical supply business, the company has distributed
latex products, including medical gloves, but it does not, nor has it ever,
manufactured any latex products. The company has tendered the defense of the
Lawsuits to manufacturer defendants whose gloves were distributed by the
39
company and one manufacturer's insurer has agreed to indemnify and assume the
defense of the company in five Lawsuits. The company will continue to vigorously
pursue indemnification from latex product manufacturers. The company's insurers
are paying all costs of defense growing out of the Lawsuits and the company
believes at this time that future defense costs and any potential liability
should be adequately covered by its insurance, subject to policy limits and
insurer solvency. Since all of the Lawsuits are in early stages of trial
preparation, the likelihood of an unfavorable outcome for the company or the
amount or range of potential loss with respect to any of these matters cannot be
reasonably determined at this time.
The company is party to various other legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, management believes the outcome of these proceedings
will not have a material adverse effect on the company's financial condition or
results of operations.
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for:
Owens & Minor, Inc.; on a combined basis, the guarantors of Owens & Minor,
Inc.'s Notes (all of the wholly owned subsidiaries of Owens & Minor, Inc. except
for OMF and the Trust); and OMF and the Trust, non-guarantor subsidiaries of the
Notes. Separate financial statements of the guarantor subsidiaries are not
presented because the guarantors are jointly, severally and unconditionally
liable under the guarantees and the company believes the condensed consolidating
financial information is more meaningful in understanding the financial
position, results of operations and cash flows of the guarantor subsidiaries.
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
STATEMENTS OF OPERATIONS
Net sales $ - $3,082,119 $ - $ - $3,082,119
Cost of goods sold - 2,755,158 - - 2,755,158
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Gross margin - 326,961 - - 326,961
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Selling, general and administrative expenses 5 239,295 243 - 239,543
Depreciation and amortization - 18,270 - - 18,270
Interest expense, net 17,205 (3,139) - - 14,066
Intercompany interest expense, net (10,854) 25,750 (13,813) (1,083) -
Discount on accounts receivable securitization - 67 4,588 - 4,655
Distributions on mandatorily redeemable
preferred securities - - 4,494 - 4,494
Nonrecurring restructuring expenses - 11,200 - - 11,200
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Total expenses 6,356 291,443 (4,488) (1,083) 292,228
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Income (loss) before income taxes (6,356) 35,518 4,488 1,083 34,733
Income tax provision (benefit) (2,574) 14,886 1,821 455 14,588
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Net income (loss) (3,782) 20,632 2,667 628 20,145
Dividends on preferred stock 1,898 - - - 1,898
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Net income (loss) attributable to common stock $ (5,680) $ 20,632 $ 2,667 $ 628 $ 18,247
40
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
STATEMENTS OF OPERATIONS
Net sales $ - $3,116,798 $ - $ - $3,116,798
Cost of goods sold - 2,800,044 - - 2,800,044
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Gross margin - 316,754 - - 316,754
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Selling, general and administrative expenses - 234,721 151 - 234,872
Depreciation and amortization - 17,664 - - 17,664
Interest expense, net 18,422 (2,707) (12) - 15,703
Intercompany interest expense, net (15,669) 27,371 (10,421) (1,281) -
Discount on accounts receivable securitization - 10 6,574 - 6,584
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Total expenses 2,753 277,059 (3,708) (1,281) 274,823
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Income (loss) before income taxes (2,753) 39,695 3,708 1,281 41,931
Income tax provision (benefit) (1,129) 16,685 1,517 538 17,611
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Net income (loss) (1,624) 23,010 2,191 743 24,320
Dividends on preferred stock 5,175 - - - 5,175
- ------------------------------------------------ --------- ---------- --------- -------- ----------
Net income (loss) attributable to common stock $ (6,799) $ 23,010 $ 2,191 $ 743 $ 19,145
Year ended Owens & Guarantor Non-guarantor
December 31, 1996 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
STATEMENTS OF OPERATIONS
Net sales $ - $3,019,003 $ - $ - $3,019,003
Cost of goods sold - 2,720,613 - - 2,720,613
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Gross margin - 298,390 - - 298,390
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Selling, general and administrative expenses - 233,036 668 - 233,704
Depreciation and amortization - 16,098 - - 16,098
Interest expense, net 22,542 (3,588) - - 18,954
Intercompany interest expense, net (21,525) 30,046 (7,605) (916) -
Discount on accounts receivable securitization - 1,908 4,613 - 6,521
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Total expenses 1,017 277,500 (2,324) (916) 275,277
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Income (loss) before income taxes (1,017) 20,890 2,324 916 23,113
Income tax provision (benefit) (407) 9,312 877 366 10,148
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Net income (loss) (610) 11,578 1,447 550 12,965
Dividends on preferred stock 5,175 - - - 5,175
- ------------------------------------------------ --------- ---------- -------- ------ ----------
Net income (loss) attributable to common stock $ (5,785) $ 11,578 $ 1,447 $ 550 $ 7,790
41
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
============================================== ============= ============== ============== ============== =============
BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 505 $ 40 $ 1 $ - $ 546
Accounts and notes receivable, net - 100,148 113,617 - 213,765
Merchandise inventories - 275,094 - - 275,094
Intercompany advances, net 148,992 90,698 1,183 (240,873) -
Other current assets - 14,816 - - 14,816
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL CURRENT ASSETS 149,497 480,796 114,801 (240,873) 504,221
Property and equipment, net - 25,608 - - 25,608
Goodwill, net - 158,276 - - 158,276
Intercompany investments 303,941 15,001 136,083 (455,025) -
Other assets, net 9,784 19,879 - - 29,663
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL ASSETS $463,222 $ 699,560 $250,884 $ (695,898) $717,768
- ---------------------------------------------- -------- --------- -------- ---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 206,251 $ - $ - $206,251
Accrued payroll and related liabilities - 8,974 - - 8,974
Intercompany advances, net - 148,992 92,509 (241,501) -
Other accrued liabilities 1,394 50,994 1,361 - 53,749
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL CURRENT LIABILITIES 1,394 415,211 93,870 (241,501) 268,974
Long-term debt 150,000 - - - 150,000
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 5,668 - - 5,668
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL LIABILITIES 287,477 420,879 93,870 (377,584) 424,642
- ---------------------------------------------- -------- --------- -------- ---------- --------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust,
holding solely convertible debentures of
Owens & Minor, Inc. - - 132,000 - 132,000
- ---------------------------------------------- -------- --------- -------- ---------- --------
SHAREHOLDERS' EQUITY
Common stock 65,236 - 4,083 (4,083) 65,236
Paid-in capital 12,280 299,858 15,001 (314,859) 12,280
Retained earnings (accumulated deficit) 98,229 (21,177) 5,930 628 83,610
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL SHAREHOLDERS' EQUITY 175,745 278,681 25,014 (318,314) 161,126
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $463,222 $ 699,560 $250,884 $ (695,898) $717,768
42
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
============================================== ============= ============== ============== ============== =============
BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 505 $ 78 $ - $ - $ 583
Accounts and notes receivable, net - 100,336 87,542 - 187,878
Merchandise inventories - 285,529 - - 285,529
Intercompany advances, net 176,335 68,016 - (244,351) -
Other current assets - 25,274 - - 25,274
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL CURRENT ASSETS 176,840 479,233 87,542 (244,351) 499,264
Property and equipment, net - 26,628 - - 26,628
Goodwill, net - 162,821 - - 162,821
Intercompany investments 299,858 15,001 - (314,859) -
Other assets, net 6,180 17,670 - - 23,850
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL ASSETS $482,878 $ 701,353 $87,542 $ (559,210) $712,563
- ---------------------------------------------- -------- --------- ------- ---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 224,072 $ - $ - $224,072
Accrued payroll and related liabilities - 7,840 - - 7,840
Intercompany advances, net - 176,335 68,759 (245,094) -
Other accrued liabilities 2,480 30,564 519 - 33,563
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL CURRENT LIABILITIES 2,480 438,811 69,278 (245,094) 265,475
Long-term debt 182,550 - - - 182,550
Accrued pension and retirement plans - 5,237 - - 5,237
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL LIABILITIES 185,030 444,048 69,278 (245,094) 453,262
- ---------------------------------------------- -------- --------- ------- ---------- --------
SHAREHOLDERS' EQUITY
Preferred stock 115,000 - - - 115,000
Common stock 64,426 - - - 64,426
Paid-in capital 8,005 299,858 15,001 (314,859) 8,005
Retained earnings (accumulated deficit) 110,417 (42,553) 3,263 743 71,870
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL SHAREHOLDERS' EQUITY 297,848 257,305 18,264 (314,116) 259,301
- ---------------------------------------------- -------- --------- ------- ---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $482,878 $ 701,353 $87,542 $ (559,210) $712,563
43
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (3,782) $ 20,632 $ 2,667 $ 628 $ 20,145
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 18,270 - - 18,270
Nonrecurring restructuring provision - 11,200 - - 11,200
Deferred income tax - 22,737 - - 22,737
Provision for LIFO reserve - 1,536 - - 1,536
Provision for losses on accounts and
notes receivable - 262 234 - 496
Changes in operating assets and liabilities:
Accounts and notes receivable - (74) (26,309) - (26,383)
Merchandise inventories - 8,899 - - 8,899
Accounts payable - (23,375) - - (23,375)
Net change in other current assets and
current liabilities 460 (1,952) 841 - (651)
Other, net 1,506 (1,152) (115) (628) (389)
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,816) 56,983 (22,682) - 32,485
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
INVESTING ACTIVITIES
Additions to property and equipment - (8,053) - - (8,053)
Additions to computer software - (4,556) - - (4,556)
Proceeds from sale of property and equipment - 160 - - 160
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
CASH USED FOR INVESTING ACTIVITIES - (12,449) - - (12,449)
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily
redeemable preferred securities (4,732) - 132,000 - 127,268
Repurchase of preferred stock (115,000) - - - (115,000)
Reduction of long-term debt (32,550) - - - (32,550)
Change in intercompany advances 159,443 (50,126) (109,317) - -
Other short-term financing, net - 5,554 - - 5,554
Cash dividends paid (9,268) - - - (9,268)
Proceeds from exercise of stock options 3,923 - - - 3,923
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,816 (44,572) 22,683 - (20,073)
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - (38) 1 - (37)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 78 - - 583
- --------------------------------------------------- ---------- --------- ---------- ------ ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 40 $ 1 $ - $ 546
44
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (1,624) $ 23,010 $ 2,191 $ 743 $ 24,320
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 17,664 - - 17,664
Deferred income taxes - (3) - - (3)
Provision for LIFO reserve - 2,414 - - 2,414
Provision for losses on accounts and
notes receivable - 124 144 - 268
Changes in operating assets and liabilities:
Accounts and notes receivable - (12,591) (28,312) - (40,903)
Merchandise inventories - (6,104) - - (6,104)
Accounts payable - 4,714 - - 4,714
Net change in other current assets and
current liabilities 147 4,670 (203) - 4,614
Other, net 1,411 158 212 (743) 1,038
- --------------------------------------------------- --------- ---------- --------- ------ ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (66) 34,056 (25,968) - 8,022
- --------------------------------------------------- --------- ---------- --------- ------ ----------
INVESTING ACTIVITIES
Additions to property and equipment - (7,495) - - (7,495)
Additions to computer software - (4,472) - - (4,472)
Proceeds from sale of property and equipment - 1,851 - - 1,851
- --------------------------------------------------- --------- ---------- --------- ------ ----------
CASH USED FOR INVESTING ACTIVITIES - (10,116) - - (10,116)
- --------------------------------------------------- --------- ---------- --------- ------ ----------
FINANCING ACTIVITIES
Addition to (reduction of) long-term debt 26,026 (11,049) - - 14,977
Change in intercompany advances (17,596) (8,372) 25,968 - -
Other short-term financing, net - (4,679) - - (4,679)
Cash dividends paid (10,950) - - - (10,950)
Proceeds from exercise of stock options 2,586 - - - 2,586
- --------------------------------------------------- --------- ---------- --------- ------ ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 66 (24,100) 25,968 - 1,934
- --------------------------------------------------- --------- ---------- --------- ------ ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS - (160) - - (160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 238 - - 743
- --------------------------------------------------- --------- ---------- --------- ------ ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 78 $ - $ - $ 583
45
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor
December 31, 1996 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (610) $ 11,578 $ 1,447 $ 550 $ 12,965
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 16,098 - - 16,098
Deferred income taxes - 2,406 - - 2,406
Provision for LIFO reserve - 908 - - 908
Provision for losses on accounts and
notes receivable - 190 648 - 838
Changes in operating assets and liabilities:
Accounts and notes receivable - 150,013 (32,856) - 117,157
Merchandise inventories - 43,633 - - 43,633
Accounts payable - (9,670) - - (9,670)
Net change in other current assets and
current liabilities 582 1,824 213 - 2,619
Other, net 306 589 833 (550) 1,178
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 278 217,569 (29,715) - 188,132
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
INVESTING ACTIVITIES
Additions to property and equipment - (6,242) - - (6,242)
Additions to computer software - (6,985) - - (6,985)
Proceeds from sale of property and equipment - 6,865 - - 6,865
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
CASH USED FOR INVESTING ACTIVITIES - (6,362) - - (6,362)
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
FINANCING ACTIVITIES
Addition to (reduction of) long-term debt (164,155) (722) - - (164,877)
Change in intercompany advances 173,201 (202,916) 29,715 - -
Other short-term financing, net - (7,341) - - (7,341)
Cash dividends paid (10,868) - - - (10,868)
Proceeds from exercise of stock options 1,844 - - - 1,844
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 22 (210,979) 29,715 - (181,242)
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 300 228 - - 528
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 205 10 - - 215
- --------------------------------------------------- ---------- ---------- --------- ------ ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 238 $ - $ - $ 743
46
Independent Auditors' Report
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
The Board of Directors and Shareholders
Owens & Minor, Inc.:
We have audited the accompanying consolidated balance sheets of Owens &
Minor, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Owens &
Minor, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
---------------------------
KPMG LLP
Richmond, Virginia
February 3, 1999
Report of Management
- --------------------------------------------------------------------------------
The management of Owens & Minor, Inc. is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and related
information presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles applied on a consistent basis and include, when necessary, the best
estimates and judgments of management.
The company maintains a system of internal controls that provides
reasonable assurance that its assets are safeguarded against loss or
unauthorized use, that transactions are properly recorded and that financial
records provide a reliable basis for the preparation of the consolidated
financial statements.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not current employees of Owens & Minor, Inc., meets
periodically and privately with the company's independent auditors and internal
auditors, as well as with company management, to review accounting, auditing,
internal control and financial reporting matters. The independent auditors and
internal auditors have direct access to the Audit Committee with and without
management present to discuss the results of their activities.
/s/ G. Gilmer Minor, III /s/ Ann Greer Rector
- ---------------------------- ---------------------------
G. Gilmer Minor, III Ann Greer Rector
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
47
Quarterly Financial Information
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
==============================================================
Quarters 1ST 2ND 3RD 4TH
================== ============== ============ ============== =============
Net sales $ 797,950 $ 798,978 $ 768,416 $ 716,775
- ------------------ ---------- --------- ---------- ---------
Gross margin 82,087 82,533 81,004 81,337
- ------------------ ---------- --------- ---------- ---------
Net income 6,759 145 6,618 6,623
- ------------------ ---------- --------- ---------- ---------
Per common share:
Net income
Basic $ 0.17 $ (0.01) $ 0.20 $ 0.20
Diluted $ 0.17 $ (0.01) $ 0.20 $ 0.20
Dividends $ 0.050 $ 0.050 $ 0.050 $ 0.050
- ------------------ ---------- --------- ---------- ---------
Market price
High $ 19.88 $ 18.88 $ 13.13 $ 17.25
Low $ 13.13 $ 10.00 $ 10.00 $ 10.63
1997
=================================================================
Quarters 1st 2nd 3rd 4th
================== ============== ============== ============== ==============
Net sales $ 749,623 $ 776,722 $ 785,778 $ 804,675
- ------------------ ---------- ---------- ---------- ----------
Gross margin 75,102 78,041 78,881 84,730
- ------------------ ---------- ---------- ---------- ----------
Net income 4,994 5,770 6,478 7,078
- ------------------ ---------- ---------- ---------- ----------
Per common share:
Net income
Basic $ 0.12 $ 0.14 $ 0.16 $ 0.18
Diluted $ 0.12 $ 0.14 $ 0.16 $ 0.18
Dividends $ 0.045 $ 0.045 $ 0.045 $ 0.045
- ------------------ ---------- ---------- ---------- ----------
Market price
High $ 11.38 $ 16.25 $ 15.38 $ 15.38
Low $ 9.75 $ 10.75 $ 12.63 $ 13.00
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Owens & Minor, Inc.'s common stock trades on the
New York Stock Exchange under the symbol OMI. As of
December 31, 1998, there were approximately 15,500
common shareholders.
48
Corporate Officers
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
G. GILMER MINOR, III, 58, President since 1981 and Chief Executive Officer since
1984. Chairman of the Board since May, 1994.
CRAIG R. SMITH, 47, Chief Operating Officer since February 1995. Prior to
February 1995, Mr. Smith was Executive Vice President, Distribution and
Information Systems from 1994 to 1995, Senior Vice President, Distribution and
Information Systems from 1993 to 1994 and Senior Vice President, Distribution in
1993.
HENRY A. BERLING, 56. Executive Vice President, Partnership Development since
1995. Mr. Berling was Executive Vice President, Partnership Development and
Chief Sales Officer from 1996 to 1998. Prior to 1995, Mr. Berling was Executive
Vice President, Sales and Customer Development from 1994 to 1995 and Senior
Vice President, Sales and Marketing from 1992 to 1994.
DREW ST. J. CARNEAL, 60, Senior Vice President, General Counsel and Secretary
since March, 1990.
JACK M. CLARK, 48, Senior Vice President, Sales and Marketing since November
1997. Mr. Clark was employed by Campbell Soup Company from 1996 to 1997,
serving as Vice President, U.S. Sales and Marketing. From 1987 to 1996, he was
employed by Coca-Cola USA where his last position was Area Vice President.
GLORIA M. FARROW, 51, Senior Vice President and Managing Director, Human
Resources since April 1997. Ms. Farrow was employed by Allstate Insurance
Company from 1973 to 1996 in various positions including Assistant Vice
President, Corporate Human Resources.
MARK R. GORDON, 45, Senior Vice President, Marketing, since September 1998. Mr.
Gordon was Senior Vice President, Strategic Planning and Business Development
from November 1997 to September 1998. Mr. Gordon was employed by The Procter &
Gamble Company from 1979 to 1997, serving in various positions including Vice
President-Latin America and Corporate Officer.
JAMES L. GRIGG, 51, Senior Vice President, Supply Chain Management since August
1996. Mr. Grigg joined the company in June 1996 as Senior Vice President,
Product. Mr. Grigg was Vice President, Trade Relations and Product Management
for FoxMeyer Health Corp. from 1992 to 1996.
F. LEE MARSTON, 45, Senior Vice President and Chief Information Officer since
April 1997. Prior to joining the company, Mr. Marston was President of The
Logistics Technology Group. From 1993 to 1996 he also directed the logistics
information systems practice of the Progress Group, a logistics consulting firm.
ANN GREER RECTOR, 41, Senior Vice President and Chief Financial Officer since
August 1996. From 1995 to 1996 Ms. Rector served as Vice President and
Controller. From 1992 to 1995, Ms. Rector was Vice President and Controller of
USAir Group, Inc.
RICHARD F. BOZARD, 51, Vice President and Treasurer since 1991.
OLWEN B. CAPE, 48, Vice President and Controller since June 1997. Ms. Cape was
employed by Bausch & Lomb Incorporated from 1990 to 1997 serving in various
financial positions, including Director, Business Analysis & Planning.
CHARLES C. COLPO, 41, Vice President, Operations since August, 1998. Prior to
August 1998, Mr. Colpo was Vice President, Supply Chain Process from 1996 to
1998, Vice President, Inventory Management from 1995 to 1996 and Director,
Business Process Redesign from 1994 to 1995. From 1984 to 1994, Mr. Colpo
served as Division Vice President.
HUGH F. GOULDTHORPE, JR., 59, Vice President, Quality and Communications since
1993.
WAYNE B. LUCK, 42, Vice President, Business Technology Group, since November
1998. Prior to November 1998, Mr. Luck was Vice President, Information
Technology from 1995 to 1998. Mr. Luck served as Director, Application Services
from 1993 to 1995.
BRUCE J. MACALLISTER, 47, Group Vice President, East since 1997. Prior to 1997,
Mr. MacAllister was Group Vice President, Southern and Western Regions from
1995 to 1997. From 1993 to 1995 Mr. MacAllister was Division Vice President.
THOMAS J. SHERRY, 50, Group Vice President, West since November 1997. Mr.
Sherry was Senior Vice President, Customer Care from 1996 to 1997, and Vice
President, Sales and Marketing from 1994, when Stuart Medical Inc. was acquired
by the company, to 1996. Prior to this acquisition, Mr. Sherry had been
employed by Stuart Medical Inc. as Executive Vice President.
HUE THOMAS, III, 59, Vice President, Corporate Relations since 1991.
49
Board of Directors
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Henry A. Berling (56) (1) (4)
Executive Vice President,
Partnership Development,
Owens & Minor, Inc.
Josiah Bunting, III (58) (2) (4)
Superintendent,
Virginia Military Institute
R. E. Cabell, Jr., Esq. (75) (1) (2)*
Retired (Of Counsel) from
Williams, Mullen, Christian
& Dobbins
James B. Farinholt, Jr. (64) (1) (2) (4)*
Special Assistant to the President
for Economic Development,
Virginia Commonwealth University
Vernard W. Henley (69) (2) (3) (5)
Chairman & CEO,
Consolidated Bank & Trust Company
E. Morgan Massey (72) (3) (4) (5)
Chairman,
Inter-American Coal, N.V.
Chairman Emeritus,
A.T. Massey Coal Company, Inc.
G. Gilmer Minor, III (58) (1)* (4)
Chairman, President & CEO,
Owens & Minor, Inc.
James E. Rogers (53) (1) (3)* (4)
President,
SCI Investors Inc.
James E. Ukrop (61) (3) (4)
Chairman,
Ukrop's Super Markets, Inc.
Anne Marie Whittemore (53) (1) (3) (5)*
Partner,
McGuire, Woods, Battle & Boothe LLP
- --------------------------------------------------------------------------------
Board Committees: 1 Executive Committee, 2 Audit Committee, 3 Compensation &
Benefits Committee
4 Strategic Planning Committee, 5 Governance & Nominating Committee, * Denotes
Chairperson
50
Corporate Information
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Annual Meeting
The annual meeting of Owens & Minor, Inc. shareholders will be held on
Wednesday, April 28, 1999, at the Virginia Historical Society, 428 North
Boulevard, Richmond, Virginia.
Transfer Agent, Registrar and Dividend Disbursing Agent
The Bank of New York
Shareholder Relations Department-11E
P.O. Box 11258
Church Street Station
New York, NY 10286
800.524.4458
shareowner-svcs@bankofny.com
Dividend Reinvestment and Stock Purchase Plan
The Dividend Reinvestment and Stock Purchase Plan offers holders of Owens &
Minor, Inc. common stock an opportunity to buy additional shares automatically
with cash dividends and to buy additional shares with voluntary cash payments.
Under the plan, the Company pays all brokerage commissions and service charges
for the acquisition of shares. Information regarding the plan may be obtained by
writing the transfer agent at the following address:
The Bank of New York
Dividend Reinvestment Department
P.O. Box 1958
Newark, NJ 07101-9774
Shareholder Records
Direct correspondence concerning Owens & Minor, Inc. stock holdings or change of
address to The Bank of New York's Shareholder Services Department (listed
above). Direct correspondence concerning lost or missing dividend checks to:
Receive and Deliver Department-11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Duplicate Mailings
When a shareholder owns shares in more than one account or when several
shareholders live at the same address, they may receive multiple copies of
annual and quarterly reports. To eliminate multiple mailings, please write to
the transfer agent.
Counsel
Hunton & Williams
Richmond, Virginia
Independent Auditors
KPMG LLP
Richmond, Virginia
Stock Exchange Listing
The Company's common shares are listed on the New York Stock Exchange. The
trading symbol is OMI.
Press Releases
Owens & Minor, Inc.'s press releases are available through Company News On-Call
by fax-on-demand at 800.758.5804, ext. 667125, or at www.prnewswire.com or at
www.owens-minor.com.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 9th day of
March 1999.
OWENS & MINOR, INC.
By: /s/ G. Gilmer Minor, III
------------------------------
G. Gilmer Minor, III
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant on the 9th day of March 1999 and in the capacities indicated.
/s/ G. Gilmer Minor, III Chairman, President and Chief
- --------------------------- Executive Officer and Director
G. Gilmer Minor, III (Principal Executive Officer)
/s/ Ann Greer Rector Senior Vice President and
- --------------------------- Chief Financial Officer
Ann Greer Rector (Principal Financial Officer)
/s/ Olwen B. Cape Vice President and Controller
- --------------------------- (Principal Accounting Officer)
Olwen B. Cape
/s/ Henry A. Berling Executive Vice President,
- --------------------------- Partnership Development and
Henry A. Berling Director
/s/ Josiah Bunting, III Director
- ---------------------------
Josiah Bunting, III
/s/ R. E. Cabell, Jr. Director
- ---------------------------
R. E. Cabell, Jr.
/s/ James B. Farinholt, Jr. Director
- ---------------------------
James B. Farinholt, Jr.
/s/ Vernard W. Hensley Director
- ---------------------------
Vernard W. Hensley
/s/ E. Morgan Massey Director
- ---------------------------
E. Morgan Massey
/s/ James E. Rogers Director
- ---------------------------
James E. Rogers
/s/ James E. Ukrop Director
- ---------------------------
James E. Ukrop
/s/ Anne Marie Whittemore Director
- ---------------------------
Anne Marie Whittemore
52
Owens & Minor, Inc.
Statement of Differences
1. The printed Annual Report and Form 10-K contains numerous graphs, a map and
photographs not incorporated into the electronic Form 10-K.
2. The 10-K cover sheet and index, presented on pages 48 and 49 of the printed
document, have been repositioned to the front of the electronic document.
53
INDEX TO EXHIBITS
Description
2.1 Agreement of Exchange dated December 22, 1993, as amended and restated on
March 31, 1994, by and among Stuart Medical, Inc., Owens & Minor, Inc.
and certain shareholders of Stuart Medical, Inc. (incorporated herein by
reference to the Company's Proxy Statement/Prospectus dated April 6,
1994, Annex III)**
3.1 Amended and Restated Articles of Incorporation of Owens & Minor, Inc.
(incorporated herein by reference to the Company's Annual Report on Form
10-K, Exhibit 3(a), for the year ended December 31, 1994)
3.2 Amended and Restated Bylaws of Owens & Minor, Inc.
4.1 Indenture dated as of May 29, 1996 among Owens & Minor, Inc., as Issuer,
Owens & Minor Medical, Inc., National Medical Supply Corporation, Owens &
Minor West, Inc., Koley's Medical Supply, Inc., Lyons Physician Supply
Company, A. Kuhlman & Co., Stuart Medical, Inc., as Guarantors, and
Crestar Bank, as Trustee ("Notes Indenture") (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4(a),
for the quarter ended June 30, 1996)
4.2 Supplemental Indenture No. 1 dated as of May 12, 1998 to Notes Indenture
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4.1, for the quarter ended June 30, 1998)
4.3 Amended and Restated Rights Agreement dated as of May 10, 1994 between
Owens & Minor, Inc. and Bank of New York, as successor Rights Agent
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4, for the quarter ended June 30, 1995)
4.4 Credit Agreement dated as of September 15, 1997 by and among Owens &
Minor, Inc., certain of its subsidiaries, the various banks and lending
institutions identified on the signature pages thereto, NationsBank,
N.A., as agent, Bank of America NT and SA and Crestar Bank, as co-agents,
and NationsBank, N.A., as administrative agent ("Credit Agreement")
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4, for the quarter ended September 30, 1997)
4.5 Amendment No. 1 dated as of April 27, 1998 to Credit Agreement
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4.2, for the quarter ended June 30, 1998)
4.6 Junior Subordinated Debentures Indenture dated as of May 13, 1998 between
Owens & Minor, Inc. and The First National Bank of Chicago (incorporated
herein by reference to the Company's Registration Statement on Form S-3,
Registration No. 333-58665, Exhibit 4.1)
4.7 First Supplemental Indenture dated as of May 13, 1998 between Owens &
Minor, Inc. and The First National Bank of Chicago (incorporated herein
by reference to the Company's Registration Statement on Form S-3,
Registration No. 333-58665, Exhibit 4.2)
4.8 Registration Rights Agreement dated as of May 13, 1998 between Owens &
Minor, Inc. and J.P. Morgan Securities Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch & Co. (incorporated
herein by reference to the Company's Registration Statement on Form S-3,
Registration No. 333-58665, Exhibit 4.3)
4.9 Amended and Restated Declaration of Trust of Owens & Minor Trust I
(incorporated herein by reference to the Company's Registration
Statement on Form S-3, Registration No. 333-58665, Exhibit 4.4)
4.10 Restated Certificate of Trust of Owens & Minor Trust I (included in
Exhibit 4.9)
4.11 Form of $2.6875 Term Convertible Security (included in Exhibit 4.9)
4.12 Form of 5.375% Junior Subordinated Convertible Debenture (included in
Exhibit 4.7)
4.13 Owens & Minor, Inc. Guarantee Agreement dated as of May 13, 1998
(incorporated herein by reference to the Company's Registration Statement
on Form S-3, Registration No. 333-58665, Exhibit 4.8)
10.1 Owens & Minor, Inc. Annual Incentive Plan (incorporated herein by
reference to the Company's definitive Proxy Statement dated March 25,
1991)*
10.2 Owens & Minor, Inc. Management Equity Ownership Program (incorporated
herein by reference to the Company's Quarterly Report on Form 10-Q,
Exhibit 10(a), for the quarter ended September 30, 1997)*
10.3 Owens & Minor, Inc. Pension Plan, as amended and restated effective
January 1, 1994 ("Pension Plan") (incorporated herein by reference to the
Company's Annual Report on Form 10-K, Exhibit 10(c), for the year ended
December 31, 1996)*
10.4 Amendment No. 1 to Pension Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K, Exhibit 10(d), for the year ended
December 31, 1996)*
10.5 Amendment No. 2 to Pension Plan*
10.6 Owens & Minor, Inc. Supplemental Executive Retirement Plan dated July 1,
1991 ("SERP") (incorporated herein by reference to the Company's Annual
Report on Form 10-K, Exhibit 10(i), for the year ended December 31,
1991)*
10.7 First Amendment to SERP, effective July 30, 1996 (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit
10(e), for the quarter ended September 30, 1996)*
10.8 Forms of Owens & Minor, Inc. Executive Severance Agreements*
10.9 Agreement dated May 1, 1991 by and between Owens & Minor, Inc. and W.
Frank Fife (incorporated herein by reference to the Company's Annual
Report on Form 10-K, Exhibit 10(m), for the year ended December 31,
1992)*
10.10 Owens & Minor, Inc. 1993 Stock Option Plan (incorporated herein by
reference to the Company's Annual Report on Form 10-K, Exhibit 10(k), for
the year ended December 31, 1993)*
10.11 Amended and Restated Owens & Minor, Inc. 1993 Directors' Compensation
Plan ("Directors' Plan") (incorporated herein by reference to the
Company's Annual Report on Form 10-K, Exhibit 10(k), for the year ended
December 31, 1996)*
10.12 The forms of agreement with directors entered into pursuant to (i) the
Stock Option Program, (ii) the Deferred Fee Program and (iii) the Stock
Purchase Program of the Directors' Plan (incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q, Exhibit (10), for the
quarter ended March 31, 1996)*
10.13 Owens & Minor, Inc. 1998 Stock Option and Incentive Plan (incorporated
herein by reference to Annex A of the Company's definitive Proxy
Statement filed pursuant to Section 14(a) of the Securities Exchange Act
on March 13, 1998 (File No. 001-09810))*
10.14 Owens & Minor, Inc. 1998 Directors' Compensation Plan (incorporated
herein by reference from Annex B of the Company's definitive Proxy
Statement filed pursuant to Section 14(a) of the Securities Exchange Act
on March 13, 1998 (File No. 001-09810))*
10.15 Amendment No. 1 to Owens & Minor, Inc. 1998 Directors' Compensation Plan*
10.16 Form of Enhanced Authorized Distribution Agency Agreement dated as of
August 20, 1997 between VHA, Inc. and Owens & Minor (incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q, Exhibit
10(d), for the quarter ended September 30, 1997)***
10.17 Amended and Restated Purchase and Sale Agreement dated as of May 28, 1996
among Owens & Minor Medical, Inc., Owens & Minor, Inc. and O&M Funding
Corp. (incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q, Exhibit 10(a), for the quarter ended June 30, 1996)
10.18 Amended and Restated Receivables Purchase Agreement dated as of May 28,
1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Receivables Capital Corporation and Bank of America National Trust
and Savings Association, as Administrator (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(b),
for the quarter ended June 30, 1996)
10.19 First Amendment dated as of October 17, 1997 to the Amended and Restated
Receivables Purchase Agreement among O&M Funding Corp., Owens & Minor
Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and
Bank of America National Trust and Savings Association (incorporated
herein by reference to the Company's Quarterly Report on Form 10-Q,
Exhibit 10(b), for the quarter ended September 30, 1997)
10.20 Amended and Restated Parallel Asset Purchase Agreement dated as of May
28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., the Parallel Purchasers from time to time party thereto and
Bank of America National Trust and Savings Association, as Administrative
Agent (incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q, Exhibit 10(c), for the quarter ended June 30, 1996)
10.21 First Amendment dated as of October 17, 1997 to the Amended and Restated
Parallel Asset Purchase Agreement among O&M Funding Corp., Owens & Minor
Medical, Inc., Owens & Minor, Inc., Parallel Purchasers and Bank of
America National Trust and Savings Association (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(c),
for the quarter ended September 30, 1997)
11.1 Calculation of Net Income (Loss) Per Common Share [Information related
to this item is in Part II, Item 8, Notes to Consolidated Financial
Statements, Note 11 - Net Income (Loss) per Common Share]
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
** The schedules to this Agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K. The company hereby undertakes to file
supplementally with the Commission upon request a copy of the omitted
schedules.
*** The company has requested confidential treatment by the Commission of
certain portions of this Agreement, which portions have been omitted and
filed separately with the Commission.