OWENS & MINOR INC/VA/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002
OR
o 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		54-1701843

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4800 Cox Road, Glen Allen, Virginia		23060

(Address of principal executive offices)		(Zip Code)

Post Office Box 27626, Richmond, Virginia		23261-7626

(Mailing address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code		(804) 747-9794

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 o

The number of shares of Owens & Minor, Inc.’s common stock outstanding as of July 31, 2002, was 34,108,856 shares.

Owens & Minor, Inc. and Subsidiaries
Index

			Page

Part I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Income – Three Months and Six Months Ended June 30, 2002 and 2001	3
		Consolidated Balance Sheets – June 30, 2002 and December 31, 2001	4
		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2002 and 2001	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Part II.	Other Information
	Item 1.	Legal Proceedings	21
	Item 4.	Submission of Matters to a Vote of Shareholders	21
	Item 6.	Exhibits and Reports on Form 8-K	21

Part I. Financial Information

Item 1. Financial Statements

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income

(in thousands, except per share data) (unaudited)	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

Net sales	$	979,557		$	953,531		$	1,946,240		$	1,878,039
Cost of goods sold		876,140			852,810			1,739,792			1,678,435

Gross margin		103,417			100,721			206,448			199,604

Selling, general and administrative expenses		74,894			73,294			150,618			145,995
Depreciation and amortization		3,928			4,124			7,909			8,234
Amortization of goodwill		—			1,497			—			2,994
Interest expense, net		2,775			3,385			5,703			6,808
Discount on accounts receivable securitization		938			1,296			1,377			2,905
Distributions on mandatorily redeemable preferred securities		1,774			1,774			3,548			3,548
Restructuring credit		(185	)		(1,476	)		(185	)		(1,476	)

Total expenses		84,124			83,894			168,970			169,008

Income before income taxes		19,293			16,827			37,478			30,596
Income tax provision		7,814			7,404			15,179			13,462

Net income	$	11,479		$	9,423		$	22,299		$	17,134

Net income per common share-basic	$	0.34		$	0.28		$	0.66		$	0.52

Net income per common share-diluted	$	0.31		$	0.26		$	0.60		$	0.48

Cash dividends per common share	$	0.08		$	0.07		$	0.15		$	0.1325

Excluding goodwill amortization and related tax benefit:
Net income	$	11,479		$	10,758		$	22,299		$	19,804

Net income per common share-basic	$	0.34		$	0.32		$	0.66		$	0.60

Net income per common share-diluted	$	0.31		$	0.29		$	0.60		$	0.55

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets

(in thousands, except per share data) (unaudited)			June 30, 2002			December 31, 2001

Assets
Current assets
	Cash and cash equivalents		$	11,662		$	953
	Accounts and notes receivable, net of allowance of $5,640 and $5,296			344,167			264,235
	Merchandise inventories			360,856			389,504
	Other current assets			26,249			24,760

	Total current assets			742,934			679,452
Property and equipment, net of accumulated depreciation of $69,321 and $65,594				23,728			25,257
Goodwill				198,324			198,324
Other assets, net				49,387			50,820

	Total assets		$	1,014,373		$	953,853

Liabilities and shareholders’ equity
Current liabilities
	Accounts payable		$	328,559		$	286,656
	Accrued payroll and related liabilities			9,722			12,669
	Other accrued liabilities			67,540			68,349

	Total current liabilities			405,821			367,674
Long-term debt				205,242			203,449
Other liabilities				15,187			14,487

	Total liabilities			626,250			585,610

Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc.				132,000			132,000

Shareholders’ equity
	Preferred stock, par value $100 per share; authorized – 10,000 shares
		Series A; Participating Cumulative Preferred Stock; none issued		—			—
	Common stock, par value $2 per share; authorized – 200,000 shares; issued and outstanding – 34,109 shares and 33,885 shares			68,218			67,770
	Paid-in capital			29,633			27,181
	Retained earnings			160,043			142,854
	Accumulated other comprehensive loss			(1,771	)		(1,562	)

	Total shareholders’ equity			256,123			236,243

	Total liabilities and shareholders’ equity		$	1,014,373		$	953,853

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(in thousands) (unaudited)				Six Months Ended June 30,

				2002			2001

Operating activities
Net income			$	22,299		$	17,134
Adjustments to reconcile net income to cash provided by operating activities:

	Depreciation and amortization			7,909			11,228
	Restructuring credit			(185	)		(1,476	)
	Provision for LIFO reserve			3,460			2,025
	Provision for losses on accounts and notes receivable			904			374
	Changes in operating assets and liabilities:
		Net increase (decrease) in receivables sold		(70,000	)		25,000
		Accounts and notes receivable, excluding sales of receivables		(10,836	)		(8,746	)
		Merchandise inventories		25,188			(62,732	)
		Accounts payable		25,403			30,537
		Net change in other current assets and current liabilities		(5,060	)		(8,115	)
	Other, net			2,891			2,953

Cash provided by operating activities				1,973			8,182


Investing activities
Additions to property and equipment				(2,600	)		(7,210	)
Additions to computer software				(2,654	)		(1,995	)
Other, net				(6	)		(872	)

Cash used for investing activities				(5,260	)		(10,077	)

Financing activities
Addition to debt				—			3,239
Cash dividends paid				(5,110	)		(4,441	)
Proceeds from exercise of stock options				1,919			6,694
Other, net				17,187			(2,800	)

Cash provided by financing activities				13,996			2,692

Net increase in cash and cash equivalents				10,709			797
Cash and cash equivalents at beginning of period				953			626

Cash and cash equivalents at end of period			$	11,662		$	1,423

See accompanying notes to consolidated financial statements.

Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)

1.	Accounting Policies
	In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) as of June 30, 2002 and the consolidated results of operations for the three and six month periods and cash flows for the six month periods ended June 30, 2002 and 2001.

2.	Interim Results of Operations
	The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

3.	Interim Gross Margin Reporting
	The company uses estimated gross margin rates to determine the cost of goods sold during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the company takes physical inventory counts at selected distribution centers. Management will continue a program of interim physical inventories at selected distribution centers to the extent it deems appropriate to ensure the accuracy of interim reporting and to minimize year-end adjustments.

4.	Goodwill
	On January 1, 2002, the company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 142, Goodwill and Other Intangible Assets. The provisions of SFAS 142 state that goodwill should not be amortized but should be tested for impairment upon adoption of the standard, and at least annually, at the reporting unit level. As a result, the company no longer records goodwill amortization expense.

	The provisions of SFAS 142 also require the company to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. At implementation, the company had no separately identifiable intangible assets from purchase business combinations that are recorded either separately or within goodwill.

	The following table presents the company’s net income for the three and six-month periods ended June 30, 2002 and 2001, adjusted to exclude goodwill amortization expense and related tax benefits:


(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,

	2002		2001		2002		2001

Net income	$	11,479	$	9,423	$	22,299	$	17,134
Goodwill amortization expense, net of tax benefit		—		1,335		—		2,670

Net income excluding goodwill amortization expense	$	11,479	$	10,758	$	22,299	$	19,804

Acquisition

In 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies. The acquisition was accounted for by the purchase method. In connection with the acquisition, management adopted a plan for integration of the businesses that included closure of some Medix facilities and consolidation of certain administrative functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the activity in the accrual since December 31, 2001:


*(in thousands)*	Balance at December 31, 2001		Charges		Balance at June 30, 2002

Losses under lease commitments	$	737	$	228	$	509
Other		65		8		57

Total	$	802	$	236	$	566


	The integration of the Medix business was completed in 2001. However, the company continues to make payments under lease commitments and other obligations.

6.	Restructuring Reserve
	As a result of the cancellation of a significant customer contract in 1998, the company recorded a restructuring charge to downsize operations. The following table sets forth the activity in the restructuring reserve since December 31, 2001:


(in thousands)	Balance at December 31, 2001		Charges		Adjustments		Balance at June 30, 2002

Losses under lease commitments	$	921	$	71	$	185	$	665
Asset write-offs		849		230		—		619

Total	$	1,770	$	301	$	185	$	1,284


7.	Revolving Credit Facility
	Effective April 30, 2002, the company replaced its revolving credit facility with a new agreement expiring in April 2005. The credit limit of the new facility is $150.0 million, and the interest rate is based on, at the company’s discretion, LIBOR, the Federal Funds Rate or the Prime Rate. Under the new facility, the company is charged a commitment fee of between 0.30% and 0.40% on the unused portion of the facility, and a utilization fee of 0.25% if borrowings exceed $75.0 million. The terms of the new agreement limit the amount of indebtedness that the company may incur, require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage ratio, and restrict the ability of the company to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. The refinancing resulted in a write-off of deferred financing costs of $0.2 million, which was included in interest expense for the quarter ended June 30, 2002.

8.	Off Balance Sheet Receivables Financing Facility
	Effective April 30, 2002, the company replaced its off balance sheet receivables financing facility (Receivables Financing Facility) with a new agreement expiring in April 2005. Under the terms of the new facility, O&M Funding is entitled to sell, without recourse, up to $225.0 million of its trade receivables to a group of unrelated third party purchasers at a cost of funds based on either commercial paper rates, the Prime Rate, or LIBOR. The terms of the new agreement require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage ratio, and restrict the company’s ability to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. The company incurred fees related to the origination of the agreement of $0.7 million, which were included in discount on accounts receivable securitization for the quarter ended June 30, 2002.

	At June 30, 2002, there were no outstanding sales under the Receivables Financing Facility. At December 31, 2001, net accounts receivable of $70.0 million had been sold under the previous agreement and, as a result, were excluded from the consolidated balance sheet.

9.	Comprehensive Income
	The company’s comprehensive income for the three and six month periods ended June 30, 2002 and 2001 is shown in the table below.


(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,

		2002			2001			2002			2001

Net income	$	11,479		$	9,423		$	22,299		$	17,134
Other comprehensive income – change in unrealized gain (loss) on investment, net of tax		(86	)		(43	)		(209	)		5

Comprehensive income	$	11,393		$	9,380		$	22,090		$	17,139

10.	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)*	Three Months Ended June 30,				Six Months Ended June 30,

		2002		2001		2002		2001

Numerator: Numerator for basic net income per common share – net income	$	11,479	$	9,423	$	22,299	$	17,134
Distributions on convertible mandatorily redeemable preferred securities, net of income taxes		1,064		993		2,129		1,986

Numerator for diluted net income per common share – net income attributable to common stock after assumed conversions	$	12,543	$	10,416	$	24,428	$	19,120

Denominator:
Denominator for basic net income per common share – weighted average shares		33,806		33,284		33,757		33,137
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred securities		6,400		6,400		6,400		6,400
Stock options		370		420		374		356
Restricted stock		275		263		271		257

Denominator for diluted net income per common share – adjusted weighted average shares and assumedconversions		40,851		40,367		40,802		40,150


Net income per common share – basic	$	0.34	$	0.28	$	0.66	$	0.52
Net income per common share – diluted	$	0.31	$	0.26	$	0.60	$	0.48


11.	Recently Adopted Accounting Pronouncement
	On January 1, 2002, the company adopted the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of SFAS 144 modify the accounting treatment for impairments of long-lived assets and discontinued operations. The adoption of this standard did not have a material effect on the company’s results of operations or financial condition.

12.

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; and the 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)

For the three months ended June 30, 2002	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Statements of Operations
Net sales	$	—		$	979,557		$	—		$	—		$	979,557
Cost of goods sold		—			876,140			—			—			876,140

Gross margin		—			103,417			—			—			103,417

Selling, general and administrative expenses		3			73,645			1,246			—			74,894
Depreciation and amortization		—			3,928			—			—			3,928
Interest expense, net		3,846			(1,071	)		—			—			2,775
Intercompany interest expense, net		(8,020	)		11,053			(3,033	)		—			—
Intercompany dividend income		(44,999	)		—			—			44,999			—
Discount on accounts receivable securitization		—			4			934			—			938
Distributions on mandatorily redeemable preferred securities		—			—			1,774			—			1,774
Restructuring credit		—			(185	)		—			—			(185	)

Total expenses		(49,170	)		87,374			921			44,999			84,124

Income (loss) before income taxes		49,170			16,043			(921	)		(44,999	)		19,293
Income tax provision (benefit)		1,772			6,273			(231	)		—			7,814

Net income (loss)	$	47,398		$	9,770		$	(690	)	$	(44,999	)	$	11,479


For the three months ended June 30, 2001	Owens & Minor, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations		Consolidated

Statements of Operations
Net sales	$	—		$	953,531		$	—		$	—	$	953,531
Cost of goods sold		—			852,810			—			—		852,810

Gross margin		—			100,721			—			—		100,721

Selling, general and administrative expenses		—			73,210			84			—		73,294
Depreciation and amortization		—			4,124			—			—		4,124
Amortization of goodwill		—			1,497			—			—		1,497
Interest expense, net		4,571			(1,186	)		—			—		3,385
Intercompany interest expense, net		(2,399	)		7,106			(4,707	)		—		—
Intercompany dividend income		(126,386	)		—			—			126,386		—
Discount on accounts receivable securitization		—			3			1,293			—		1,296
Distributions on mandatorily redeemable preferred securities		—			—			1,774			—		1,774
Restructuring credit		—			(1,476	)		—			—		(1,476)

Total expenses		(124,214	)		83,278			(1,556	)		126,386		83,894

Income before income taxes		124,214			17,443			1,556			(126,386)		16,827
Income tax provision (benefit)		(956	)		7,676			684			—		7,404

Net income	$	125,170		$	9,767		$	872		$	(126,386)	$	9,423

Condensed Consolidating Financial Information
(in thousands)

For the six months ended June 30, 2002	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Statements of Operations
Net sales	$	—		$	1,946,240		$	—		$	—		$	1,946,240
Cost of goods sold		—			1,739,792			—			—			1,739,792

Gross margin		—			206,448			—			—			206,448

Selling, general and administrative expenses		3			148,968			1,647			—			150,618
Depreciation and amortization		—			7,909			—			—			7,909
Interest expense, net		7,513			(1,810	)		—			—			5,703
Intercompany interest expense, net		(13,228	)		19,655			(6,427	)		—			—
Intercompany dividend income		(44,999	)		—			—			44,999			—
Discount on accounts receivable securitization		—			7			1,370			—			1,377
Distributions on mandatorily redeemable preferred securities		—			—			3,548			—			3,548
Restructuring credit		—			(185	)		—			—			(185	)

Total expenses		(50,711	)		174,544			138			44,999			168,970

Income (loss) before income taxes		50,711			31,904			(138	)		(44,999	)		37,478
Income tax provision		2,427			12,650			102			—			15,179

Net income (loss)	$	48,284		$	19,254		$	(240	)	$	(44,999	)	$	22,299


For the six months ended June 30, 2001	Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Statements of Operations
Net sales	$	—		$	1,878,039		$	—		$	—		$	1,878,039
Cost of goods sold		—			1,678,435			—			—			1,678,435

Gross margin		—			199,604			—			—			199,604

Selling, general and administrative expenses		—			145,654			341			—			145,995
Depreciation and amortization		—			8,234			—			—			8,234
Amortization of goodwill		—			2,994			—			—			2,994
Interest expense, net		8,954			(2,146	)		—			—			6,808
Intercompany interest expense, net		(4,225	)		14,538			(10,313	)		—			—
Intercompany dividend income		(126,386	)		—			—			126,386			—
Discount on accounts receivable securitization		—			6			2,899			—			2,905
Distributions on mandatorily redeemable preferred securities		—			—			3,548			—			3,548
Restructuring credit		—			(1,476	)		—			—			(1,476	)

Total expenses		(121,657	)		167,804			(3,525	)		126,386			169,008

Income before income taxes		121,657			31,800			3,525			(126,386	)		30,596
Income tax provision (benefit)		(2,081	)		13,978			1,565			—			13,462

Net income	$	123,738		$	17,822		$	1,960		$	(126,386	)	$	17,134

Condensed Consolidating Financial Information

*(in thousands)*
June 30, 2002			Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Balance Sheets
Assets
Current assets
		Cash and cash equivalents	$	11,583		$	78		$	1		$	—		$	11,662
		Accounts and notes receivable, net		—			4,090			340,077			—			344,167
		Merchandise inventories		—			360,856			—			—			360,856
		Intercompany advances, net		163,231			144,421			(307,652	)		—			—
		Other current assets		—			26,249			—			—			26,249

		Total current assets		174,814			535,694			32,426			—			742,934
Property and equipment, net				—			23,728			—			—			23,728
Goodwill				—			198,324			—			—			198,324
Intercompany investments				387,497			36,202			136,083			(559,782	)		—
Other assets, net				14,557			34,208			622			—			49,387

		Total assets	$	576,868		$	828,156		$	169,131		$	(559,782	)	$	1,014,373

Liabilities and shareholders’ equity
Current liabilities
		Accounts payable	$	—		$	328,559		$	—		$	—		$	328,559
		Accrued payroll and related liabilities		—			9,722			—			—			9,722
		Other accrued liabilities		5,918			62,314			(692	)		—			67,540

		Total current liabilities		5,918			400,595			(692	)		—			405,821
Long-term debt				205,242			—			—			—			205,242
Intercompany long-term debt				136,082			263,891			—			(399,973	)		—
Other liabilities				(755	)		15,970			(28	)		—			15,187

	Total liabilities			346,487			680,456			(720	)		(399,973	)		626,250

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		68,218			—			5,583			(5,583	)		68,218
		Paid-in capital		29,633			138,225			16,001			(154,226	)		29,633
		Retained earnings		132,453			11,323			16,267			—			160,043
		Accumulated other comprehensive income (loss)		77			(1,848	)		—			—			(1,771	)

		Total shareholders’ equity		230,381			147,700			37,851			(159,809	)		256,123

		Total liabilities and shareholders’ equity	$	576,868		$	828,156		$	169,131		$	(559,782	)	$	1,014,373

Condensed Consolidating Financial Information
*(in thousands)*
December 31, 2001			Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Balance Sheets
Assets
Current assets
		Cash and cash equivalents	$	507		$	445		$	1		$	—		$	953
		Accounts and notes receivable, net		—			—			264,235			—			264,235
		Merchandise inventories		—			389,504			—			—			389,504
		Intercompany advances, net		173,802			58,161			(231,963	)		—			—
		Other current assets		17			24,743			—			—			24,760

		Total current assets		174,326			472,853			32,273			—			679,452
Property and equipment, net				—			25,257			—			—			25,257
Goodwill				—			198,324			—			—			198,324
Intercompany investments				342,497			15,001			136,083			(493,581	)		—
Other assets, net				13,708			36,110			1,002			—			50,820

		Total assets	$	530,531		$	747,545		$	169,358		$	(493,581	)	$	953,853

Liabilities and shareholders’ equity
Current liabilities
		Accounts payable	$	—		$	286,656		$	—		$	—		$	286,656
		Accrued payroll and related liabilities		—			12,669			—			—			12,669
		Other accrued liabilities		7,238			61,800			(689	)		—			68,349

		Total current liabilities		7,238			361,125			(689	)		—			367,674
Long-term debt				203,449			—			—			—			203,449
Intercompany long-term debt				136,083			143,890			—			(279,973	)		—
Other liabilities				(755	)		15,270			(28	)		—			14,487

	Total liabilities			346,015			520,285			(717	)		(279,973	)		585,610

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		67,770			40,879			5,583			(46,462	)		67,770
		Paid-in capital		27,181			151,145			16,001			(167,146	)		27,181
		Retained earnings		89,279			37,084			16,491			—			142,854
		Accumulated other comprehensive income (loss)		286			(1,848	)		—			—			(1,562	)

		Total shareholders’ equity		184,516			227,260			38,075			(213,608	)		236,243

		Total liabilities and shareholders’ equity	$	530,531		$	747,545		$	169,358		$	(493,581	)	$	953,853

Condensed Consolidating Financial Information
(in thousands)

For the six months ended June 30, 2002			Owens & Minor, Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Statements of Cash Flows
Operating activities
Net income (loss)			$	48,284		$	19,254		$	(240	)	$	(44,999	)	$	22,299
Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities:
	Depreciation and amortization			—			7,909			—			—			7,909
	Restructuring credit			—			(185	)		—			—			(185	)
	Provision for LIFO reserve			—			3,460			—			—			3,460
	Provision for losses on accounts and notes receivable			—			(349	)		1,253			—			904
	Changes in operating assets and liabilities:
		Net decrease in receivables sold		—			—			(70,000	)		—			(70,000	)
		Accounts and notes receivable, excluding sales of receivables		—			(3,741	)		(7,095	)		—			(10,836	)
		Merchandise inventories		—			25,188			—			—			25,188
		Accounts payable		—			25,403			—			—			25,403
		Net change in other current assets and current liabilities		(1,302	)		(3,759	)		1			—			(5,060	)
	Other, net			1,026			1,486			379			—			2,891

Cash provided by (used for) operating activities				48,008			74,666			(75,702	)		(44,999	)		1,973

Investing activities
Additions to property and equipment				—			(2,600	)		—			—			(2,600	)
Additions to computer software				—			(2,654	)		—			—			(2,654	)
Investments in intercompany debt				(120,000	)		—			—			120,000			—
Decrease in intercompany investment				75,001			—			—			(75,001	)		—
Other, net				—			(6	)		—			—			(6	)

Cash used for investing activities				(44,999	)		(5,260	)		—			44,999			(5,260	)

Financing activities
Proceeds from issuance of intercompany debt				—			120,000			—			(120,000	)		—
Change in intercompany advances				10,571			(86,273	)		75,702			—			—
Decrease in intercompany investment				—			(75,001	)		—			75,001			—
Cash dividends paid				(5,110	)		—			—			—			(5,110	)
Intercompany dividends paid				—			(44,999	)		—			44,999			—
Proceeds from exercise of stock options				1,919			—			—			—			1,919
Other, net				687			16,500			—			—			17,187

Cash provided by (used for) financing activities				8,067			(69,773	)		75,702			—			13,996

Net increase (decrease) in cash and cash equivalents				11,076			(367	)		—			—			10,709

Cash and cash equivalents at beginning of period				507			445			1			—			953

Cash and cash equivalents at end of period			$	11,583		$	78		$	1		$	—		$	11,662

Condensed Consolidating Financial Information
(in thousands)

For the six months ended June 30, 2001			Owens & Minor Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

Statements of Cash Flows
Operating activities
Net income			$	123,738		$	17,822		$	1,960		$	(126,386	)	$	17,134
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation and amortization			—			11,228			—			—			11,228
	Restructuring credit			—			(1,476	)		—			—			(1,476	)
	Provision for LIFO reserve			—			2,025			—			—			2,025
	Provision for losses on accounts and notes receivable			—			591			(217	)		—			374
	Changes in operating assets and liabilities:
		Net increase in receivables sold		—			—			25,000			—			25,000
		Accounts and notes receivable, excluding sales of receivables		—			15,910			(24,656	)		—			(8,746	)
		Merchandise inventories		—			(62,732	)		—			—			(62,732	)
		Accounts payable		—			30,537			—			—			30,537
		Net change in other current assets and current liabilities		(200	)		(8,093	)		178			—			(8,115	)
	Other, net			1,943			984			26			—			2,953

Cash provided by operating activities				125,481			6,796			2,291			(126,386	)		8,182

Investing activities
Additions to property and equipment				—			(7,210	)		—			—			(7,210	)
Additions to computer software				—			(1,995	)		—			—			(1,995	)
Investments in intercompany debt				(143,890	)		—			—			143,890			—
Decrease in intercompany investment				17,504			—			—			(17,504	)		—
Other, net				—			128			(1,000	)		—			(872	)

Cash used for investing activities				(126,386	)		(9,077	)		(1,000	)		126,386			(10,077	)

Financing activities
Addition to (reduction of) debt				3,900			(661	)		—			—			3,239
Proceeds from issuance of intercompany debt				—			143,890			—			(143,890	)		—
Change in intercompany advances				(5,248	)		6,539			(1,291	)		—			—
Decrease in intercompany investment				—			(17,504	)		—			17,504			—
Cash dividends paid				(4,441	)		—			—			—			(4,441	)
Intercompany dividends paid				—			(126,386	)		—			126,386			—
Proceeds from exercise of stock options				6,694			—			—			—			6,694
Other, net				—			(2,800	)		—			—			(2,800	)

Cash provided by (used for) financing activities				905			3,078			(1,291	)		—			2,692

Net increase in cash and cash equivalents				—			797			—			—			797
Cash and cash equivalents at beginning of period				507			118			1			—			626

Cash and cash equivalents at end of period			$	507		$	915		$	1		$	—		$	1,423

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion and analysis describes material changes in the financial condition of Owens & Minor, Inc. and its wholly owned subsidiaries (the company) since December 31, 2001. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and management’s discussion and analysis of financial condition and results of operations included in the company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Results of Operations
Second quarter and first six months of 2002 compared with 2001
Overview. In the second quarter of 2002, the company earned net income of $11.5 million, or $0.31 per diluted common share, compared with $9.4 million, or $0.26 per diluted common share in the second quarter of 2001. For the first six months of 2002, the company earned net income of $22.3 million compared to $17.1 million in the first six months of 2001.

On January 1, 2002, the company adopted the provisions of SFAS 142, under which the company no longer records goodwill amortization expense. Excluding goodwill amortization and adjustments to a restructuring reserve, net income increased by 14% from $9.9 million in the second quarter of 2001 to $11.4 million in 2002 and net income per diluted common share increased by 11% to $0.30 from $0.27 in the second quarter of 2001. For the first six months of 2002, net income increased by 17% to $22.2 million from $19.0 million in 2001 and net income per diluted common share increased by 13% to $0.60 from $0.53, excluding the items mentioned above. These increases are primarily attributable to success in controlling operating expenses and reductions in financing costs.

The following tables reconcile net income as reported under generally accepted accounting principles to income excluding goodwill amortization and changes in the restructuring reserve for the three and six-month periods ended June 30, 2002 and 2001:

	Six Months Ended June 30,

	2002							2001

		As reported		Restructuring credit			As adjusted		As reported		Goodwill amortization		Restructuring credit			As adjusted

Income before income taxes	$	19,293	$	(185	)	$	19,108	$	16,827	$	1,497	$	(1,476	)	$	16,848
Income tax provision		7,814		(75	)		7,739		7,404		162		(649	)		6,917

Net income	$	11,479	$	(110	)	$	11,369	$	9,423	$	1,335	$	(827	)	$	9,931

	Six Months Ended June 30,

	2002							2001

		As reported		Restructuring credit			As adjusted		As reported		Goodwill amortization		Restructuring credit			As adjusted

Income before income taxes	$	37,478	$	(185	)	$	37,293	$	30,596	$	2,994	$	(1,476	)	$	32,114
Income tax provision		15,179		(75	)		15,104		13,462		324		(649	)		13,137

Net income	$	22,299	$	(110	)	$	22,189	$	17,134	$	2,670	$	(827	)	$	18,977

Net sales. Net sales increased 2.7% to $979.6 million in the second quarter of 2002 from $953.5 million in the second quarter of 2001. Net sales increased 3.6% to $1.95 billion in the first six months of 2002 from $1.88 billion in the comparable period of 2001. On a per-day basis, net sales increased 4.4%, as the first half of 2002 had one less sales day compared to the first half of 2001. This increase in sales resulted primarily from further penetration of existing accounts as well as new business. However, this increase was partially offset by declines in sales resulting from the loss of certain customers, including those who chose other distributors in 2001 in connection with the new Novation contract. Management expects the rate of sales growth in 2002 to be lower than in recent years as a result of these factors.

Gross margin. Gross margin for the second quarter and the first six months of 2002 was 10.6% of net sales, consistent with the same periods of 2001. Both customer margin and margin from supplier incentives have remained consistent. The company expects gross margin as a percentage of sales for the remainder of 2002 to remain consistent with 2001.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses for the second quarter of 2002 were 7.6% of net sales, improved from 7.7% of net sales in the second quarter of 2001. For the first six months of 2002, SG&A expenses were 7.7% of net sales, compared to 7.8% of net sales in the first half of 2001. These decreases are partly the result of reductions in information technology costs as well as lower personnel costs due to the completion of significant customer transitions that occurred in 2001. Additionally, SG&A continued to improve as a result of ongoing company-wide initiatives to improve productivity and control costs.

In July 2002, the company entered into a new, seven-year information technology agreement with Perot Systems Corporation, significantly expanding an existing outsourcing relationship. As a result of the new agreement, O&M will cancel its existing contract for mainframe computer services and record a liability for cancellation costs of $2.9 million in the third quarter of 2002.

Excluding the anticipated $2.9 million cancellation charge, the company expects SG&A expenses as a percentage of sales for 2002 to be at least 10 basis points lower than in 2001.

Interest expense, net, and discount on accounts receivable securitization (financing costs). Net financing costs totaled $3.7 million for the second quarter of 2002, compared with $4.7 million in the second quarter of 2001. Excluding collections of customer finance charges, financing costs for the second quarter were $4.7 million, a decrease of $1.3 million from the second quarter of 2001. Financing costs for the second quarter of 2002 included $0.7 million of fees associated with a new accounts receivable financing facility and a $0.2 million write-off of deferred fees resulting from the replacement of the company’s revolving credit facility. The decrease in financing costs was primarily driven by lower outstanding financing and lower effective interest rates resulting from both the refinancing of the company’s long-term debt and from decreases in short-term interest rates.

The company expects to continue to manage its financing costs by managing working capital levels. Future financing costs will be affected primarily by changes in short-term interest rates, as well as by working capital requirements.

Restructuring credits. As a result of a cancellation of a significant customer contract in 1998, the company recorded a restructuring charge of $6.6 million, net of tax, to downsize operations. The company periodically re-evaluates its restructuring reserve, and since the actions under this plan have

resulted in lower projected total costs than originally anticipated, the company recorded reductions in the reserve which increased net income by approximately $0.1 million in 2002 and $0.8 million in 2001, net of taxes.

Income taxes. The effective income tax rate was 40.5% for the second quarter and for the first six months of 2002, compared to 44.0% for the comparable periods of 2001. This rate decrease results primarily from the elimination of goodwill amortization, much of which was not tax-deductible. Excluding the effects of goodwill amortization and restructuring credits, the effective rate was 41.1% for the second quarter and 40.9% for the first six months of 2001.

Financial Condition, Liquidity and Capital Resources
Liquidity. Combined outstanding debt and off balance sheet accounts receivable securitization decreased by $68.2 million to $205.2 million at June 30, 2002, from $273.4 million at December 31, 2001. The company required less financing as many of the customer transitions that began in 2001 have been completed, and the high level of sales growth experienced in recent years has slowed. Excluding sales of accounts receivable under the Receivables Financing Facility, $72.0 million of cash was provided by operating activities in the first six months of 2002, compared with $16.8 million used for operating activities in the first half of 2001. This increase in operating cash flow was the result of inventory reductions made possible by the completion of customer transitions as well as increased levels of accounts payable due to the timing of both purchases and payments. For the second quarter of 2002, annualized inventory turns increased to 10.0 from 8.7 in the fourth quarter of 2001.

Effective April 30, 2002, the company replaced its revolving credit facility with a new agreement expiring in April 2005. The credit limit of the new facility is $150.0 million, and the interest rate is based on, at the company’s discretion, LIBOR, the Federal Funds Rate or the Prime Rate. Under the new facility, the company is charged a commitment fee of between 0.30% and 0.40% on the unused portion of the facility, and a utilization fee of 0.25% if borrowings exceed $75.0 million. The terms of the new agreement limit the amount of indebtedness that the company may incur, require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage ratio, and restrict the ability of the company to materially alter the character of the business through consolidation, merger, or purchase or sale of assets.

Effective April 30, 2002, the company replaced its Receivables Financing Facility with a new agreement expiring in April 2005. Under the terms of the new facility, O&M Funding is entitled to sell, without recourse, up to $225.0 million of its trade receivables to a group of unrelated third party purchasers at a cost of funds based on either commercial paper rates, the Prime Rate, or LIBOR. The terms of the new agreement require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed charge coverage ratio, and restrict the company’s ability to materially alter the character of the business through consolidation, merger, or purchase or sale of assets.

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 June 30, 2002, the company had $148.6 million of unused credit under its revolving credit facility and the ability to sell $225.0 million of accounts receivable under its Receivables Financing Facility.

Capital Expenditures. Capital expenditures were $5.3 million in the first six months of 2002, compared to $9.2 million in the first half of 2001. Excluding the purchase of land for the company’s future headquarters, capital expenditures in the first half of 2001 were $5.9 million. The company spent $3.9

million to purchase computer hardware and software, compared to $3.6 million in the first half of 2001. The company expects capital expenditures to continue at approximately the same level through 2002.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. The provisions of SFAS 143 address financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The company will be required to adopt the provisions of this standard beginning on January 1, 2003. Management believes that adoption of this standard will not have a material effect on the company’s results of operations or financial condition.

In May 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The most significant provisions of SFAS 145 address the termination of extraordinary item treatment for gains and losses on early retirement of debt. The company will be required to adopt the provisions of this standard beginning on January 1, 2003. The company will be required to modify the presentation of its 2001 results with respect to its loss on early retirement of debt.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. The provisions of SFAS 146 modify the accounting for the costs of exit and disposal activities by requiring that liabilities for those activities be recognized when the liability is incurred. Previous accounting literature permitted recognition of some exit and disposal liabilities at the date of commitment to an exit plan. The provisions of this statement will be effective for exit or disposal activities initiated after December 31, 2002.

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. The loss of one of the company’s larger customers could have a significant effect on its business. However, management believes that the company’s competitive position in the marketplace and its ability to control costs would enable it to continue profitable operations and attract new customers in the event of such a loss.

Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions; dependence on sales to certain customers; dependence on suppliers; competition; changing trends in customer profiles; the ability of the company to meet customer demand for additional value added services; the ability to convert customers to CostTrack; the availability of supplier incentives; the ability to capitalize on buying opportunities; the ability of business partners to perform their contractual responsibilities; the ability to manage operating expenses; the ability of the company to manage financing costs and interest rate risk; the risk that a decline in business volume or profitability could result in an impairment of goodwill; the

ability to timely or adequately respond to technological advances in the medical supply industry; the ability to successfully identify, manage or integrate possible future acquisitions; outcome of outstanding litigation; and changes in government regulations. As a result of these and other factors, no assurance can be given as to the company’s future results. The company is under no obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise.

Item 3. Quantitative and Qualitative Disclosures About 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 balance of fixed and variable rate financing. 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 both changes in interest rates related to its interest rate swaps and changes in discount rates related to its Receivables Financing Facility. Interest expense and discount on accounts receivable securitization are subject to change as a result of movements in interest rates. As of June 30, 2002, 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. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $1.0 million per year in connection with the swaps. The company had no outstanding financing under its Receivables Financing Facility at June 30, 2002, but does sell receivables under the facility from time to time. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding financing under the Receivables Financing Facility.

Part II. Other Information

Item 1. Legal Proceedings
Certain legal proceedings pending against the company are described in the company’s Annual Report on Form 10-K for the year ended December 31, 2001. Through June 30, 2002, there have been no material developments in any legal proceedings reported in such Annual Report.

Item 4. Submission of Matters to a Vote of Shareholders
The following matters were submitted to a vote of O&M’s shareholders at its annual meeting held on April 25, 2002, with the voting results designated below each such matter:

(1) Election of Vernard W. Henley, G. Gilmer Minor, III and Peter S. Redding as directors of O&M for a three–year term.

Directors	Votes For	Votes Against Or Withheld	Abstentions	Broker Non-Votes

Vernard W. Henley	30,219,854	643,660	0	0
G. Gilmer Minor, III	30,733,011	130,503	0	0
Peter S. Redding	30,231,784	631,730	0	0

(2) Ratification of the appointment of KPMG LLP as O&M’s independent auditors.

Votes For	Votes Against Or Withheld	Abstentions

29,925,765	910,064	27,685

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits

99.1			Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2			Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)	Reports on Form 8-K

		None

SIGNATURES

Pursuant to the requirements 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.

		Owens & Minor, Inc.

		(Registrant)


Date	August 12, 2002	/s/ G. Gilmer Minor, III

		G. Gilmer Minor, III
		Chairman and Chief Executive Officer


Date	August 12, 2002	/s/ Jeffrey Kaczka

		Jeffrey Kaczka
		Senior Vice President
		Chief Financial Officer


Date	August 12, 2002	/s/ Olwen B. Cape

		Olwen B. Cape
		Vice President & Controller
		Chief Accounting Officer

Exhibits Filed with SEC

	Exhibit #

99.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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