<PAGE>
LOGO
Notice of
1994
Annual Meeting
and
Proxy Statement
O&M Holding, Inc.
Prospectus With Respect to
20,448,000 Shares of Common Stock
And Related Series A
Preferred Stock Purchase Rights
WHETHER OR NOT YOU PRESENTLY PLAN TO ATTEND THE MEETING
IN PERSON, THE BOARD OF DIRECTORS URGES YOU TO SIGN AND
RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE.
<PAGE>
O&M Logo - O&M Letterhead
___________________________________________
Owens & Minor, Inc.
4800 Cox Road, Post Office Box 27626
Richmond, Virginia 23261-7626
(804) 747-9794 FAX (804) 270-7281
April 6, 1994
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Owens & Minor, Inc. The meeting will be held on Tuesday, May 10, 1994,
at 10:00 a.m. at the Corporate Headquarters Building, 4800 Cox Road, Glen
Allen, Virginia. Morning refreshments will be served.
At the Annual Meeting you will be asked to consider and approve the
transactions contemplated by the Agreement of Exchange, dated as of
December 22, 1993, as amended and restated on March 31, 1994 (the
"Agreement of Exchange"), by and among Stuart Medical, Inc. ("SMI"), Owens
& Minor, Inc. ("O&M"), O&M Holding, Inc., formerly OMI Holding, Inc. ("O&M
Holding"), and the principal shareholders of SMI, including the Plan of
Exchange pursuant to which each share of O&M Common Stock will be exchanged
for one share of O&M Holding Common Stock. As a result of the proposed
transactions:
(i) O&M Holding will acquire all the outstanding shares of SMI Common
Stock (except shares as to which dissenters' rights may be
perfected) in exchange for an aggregate of 1,150,000 shares of
O&M Holding Series B Preferred Stock and $40,200,000 in cash,
adjusted for shares of SMI Common Stock as to which dissenters'
rights may be perfected;
(ii) Each outstanding share of O&M Common Stock will be exchanged for
one share of O&M Holding Common Stock, which will be listed on
the New York Stock Exchange;
(iii) O&M and SMI will become wholly-owned subsidiaries of O&M
Holding; and
(iv) O&M Holding's name will be changed to "Owens & Minor, Inc." and
O&M's name will be changed to "Owens & Minor Medical, Inc."
Accordingly, as a result of the proposed transactions, you will continue to
own common stock in a company named Owens & Minor, Inc., but such company
will be a holding company with two subsidiaries: Owens & Minor Medical,
Inc. and Stuart Medical, Inc.
At the Annual Meeting you also will be asked to elect four directors
and to ratify the appointment of independent certified public accountants
for O&M.
During the meeting, I will also report to you on the condition and
performance of O&M during 1993 and the first quarter of 1994. You will
have the opportunity to meet members of the Board of Directors as well as
senior management and to ask questions on matters of importance to you and
all shareholders.
The accompanying Proxy Statement and Prospectus sets forth, or
incorporates by reference, information relating to O&M, O&M Holding and SMI
and describes the terms and conditions of the transactions contemplated by
the Agreement of Exchange. Please carefully review these materials before
completing the enclosed proxy card.
I hope to see you on May 10, 1994. Whether you plan to attend or not,
please complete, sign, date and return the enclosed proxy card as soon as
possible in the postage-paid envelope provided. Your vote is important.
All of us at O&M appreciate your continued interest and support of O&M.
Cordially,
G. GILMER MINOR, III
President
Chief Executive Officer
<PAGE>
LOGO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 10, 1994
To the Shareholders of Owens & Minor, Inc.:
You are hereby notified that the Annual Meeting of Shareholders of
Owens & Minor, Inc., a Virginia corporation ("O&M"), will be held at the
Corporate Headquarters Building, 4800 Cox Road, Glen Allen, Virginia, on
Tuesday, May 10, 1994, at 10:00 a.m., local time.
The purposes of the meeting are:
1. To approve the transactions contemplated by the Agreement of
Exchange, dated as of December 22, 1993, as amended and restated
on March 31, 1994 (the "Agreement of Exchange"), by and among
Stuart Medical, Inc. ("SMI"), O&M, O&M Holding, Inc., formerly
OMI Holding, Inc. ("O&M Holding") and the principal shareholders
of SMI, including the Plan of Exchange pursuant to which each
share of O&M Common Stock will be exchanged for one share of O&M
Holding Common Stock;
2. To elect three directors of O&M to serve until the Annual Meeting
of Shareholders in 1997 and one director of O&M to serve until
the Annual Meeting of Shareholders in 1996;
3. To ratify the appointment of KPMG Peat Marwick as independent
accountants; and
4. To transact such other business as may properly be brought before
the meeting.
Notwithstanding shareholder approval of Proposal 1, O&M reserves the
right to abandon the transactions contemplated by the Agreement of Exchange
at any time prior to consummation thereof.
The Board of Directors has fixed the close of business on March 14,
1994, as the record date for the determination of shareholders entitled to
receive notice of and to vote at the meeting and any adjournment(s) or
postponement(s) thereof.
Your attention is directed to the attached Proxy Statement and
Prospectus.
By Order of the Board of Directors
Drew St. J. Carneal,
Senior Vice President, Corporate Counsel and Secretary
Richmond, Virginia
April 6, 1994
<PAGE>
OWENS & MINOR, INC. O&M HOLDING, INC.
___________________
PROXY STATEMENT AND PROSPECTUS
___________________
GENERAL INFORMATION
This Proxy Statement and Prospectus (the "Proxy Statement/Prospectus")
is furnished in connection with the solicitation of proxies by the Board of
Directors of Owens & Minor, Inc., a Virginia corporation ("O&M"), for use
in connection with the Annual Meeting of Shareholders of O&M (the "Annual
Meeting") which is to be held on Tuesday, May 10, 1994, or any
adjournment(s) or postponement(s) thereof. At such meeting, the
shareholders of O&M (the "O&M Shareholders") will vote on the transactions
contemplated by the Agreement of Exchange, dated as of December 22, 1993,
as amended and restated on March 31, 1994 (the "Agreement of Exchange"), by
and among Stuart Medical, Inc., a Pennsylvania corporation ("SMI"), O&M,
O&M Holding, Inc., a Virginia corporation, formerly OMI Holding, Inc. ("O&M
Holding"), and the principal shareholders of SMI (the "SMI Shareholders"),
including the O&M plan of exchange attached hereto as Annex I (the "O&M
Plan of Exchange") pursuant to which each share of O&M Common Stock, $2.00
par value (the "O&M Common Stock"), will be exchanged for one share of O&M
Holding Common Stock, $2.00 par value (the "O&M Holding Common Stock").
As a result of the proposed transactions, (i) O&M Holding will acquire
all the outstanding shares of SMI Common Stock, $.0025 par value per share
(the "SMI Common Stock") (except shares as to which dissenters' rights may
be perfected) in exchange for an aggregate of 1,150,000 shares of O&M
Holding Series B Preferred Stock, $100 par value per share (the "Series B
Preferred Stock"), and $40,200,000 in cash, adjusted for shares of SMI
Common Stock as to which dissenters' rights may be perfected (collectively,
the "SMI Exchange Consideration"), (ii) each outstanding share of O&M
Common Stock will be exchanged for one share of O&M Holding Common Stock,
which will be listed on the New York Stock Exchange (the "NYSE"), (iii) O&M
and SMI will become wholly-owned subsidiaries of O&M Holding, and (iv) O&M
Holding's name will be changed to "Owens & Minor, Inc." and O&M's name will
be changed to "Owens & Minor Medical, Inc."
O&M Holding has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-4 (the "Registration Statement")
in connection with the issuance pursuant to the O&M Plan of Exchange of
20,448,000 shares of O&M Holding Common Stock and the related Rights (as
defined below). This Proxy Statement/Prospectus constitutes a prospectus
of O&M Holding with respect to such shares and related Rights.
The O&M Shareholders also will consider and vote upon the election of
four directors of O&M and the ratification of independent accountants, and
such other business as may properly come before the meeting or any
adjournment(s) or postponement(s) thereof.
This Proxy Statement/Prospectus is first being mailed to the O&M
Shareholders on or about April 6, 1994.
___________________
THE SECURITIES TO BE ISSUED PURSUANT TO THE O&M PLAN OF EXCHANGE HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
___________________
The date of this Proxy Statement/Prospectus is April 6, 1994.
___________________
<PAGE>
AVAILABLE INFORMATION
O&M is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information filed by O&M can
be inspected and copied at the public reference facilities of the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the SEC's Regional Offices at Seven World Trade Center, New York,
New York 10048 and the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. Documents filed by O&M
can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
O&M Holding has filed the Registration Statement with the SEC in
connection with the offering of the O&M Holding Common Stock and the
related Rights (as defined below) described herein. As permitted by the
Rules and Regulations of the SEC, this Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement,
including exhibits, which may be obtained from the SEC at prescribed rates
by addressing written requests for such copies to the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, DC
20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1993,
filed by O&M with the SEC pursuant to Section 13 of the Exchange Act, is
incorporated herein by reference.
All reports and other documents filed by O&M pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement/Prospectus and prior to the date of the Annual Meeting
shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing of such reports and other documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent
that a statement contained herein or in any other subsequently filed
document which also is incorporated or deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. These documents
(other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference herein) are available, without
charge, upon oral or written request from any person to whom a Proxy
Statement/Prospectus is delivered, including any beneficial owner of O&M
Common Stock, to Drew St. J. Carneal, Senior Vice President, Corporate
Counsel and Secretary of O&M, at Post Office Box 27626 Richmond, Virginia
23261-7626, (804) 747-9794. In order to allow timely delivery of the
documents, any request should be made by May 3, 1994.
___________________
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus and, if
given or made, such information or representation should not be relied upon
as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Proxy Statement/Prospectus, or the solicitation
of a proxy from any person, in any jurisdiction in which it is unlawful to
make such offer, solicitation of an offer or proxy solicitation. Neither
the delivery of this Proxy Statement/Prospectus nor any distribution of the
securities made under this Proxy Statement/Prospectus shall, under any
circumstances, create an implication that there has been no change in the
affairs of O&M, O&M Holding or SMI since the date of this Proxy
Statement/Prospectus.
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . i
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . ii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
O&M ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Matters to be Considered . . . . . . . . . . . . . . . . . . . . . 1
Date, Time and Place, Record Date. . . . . . . . . . . . . . . . . 1
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Solicitation of Proxies. . . . . . . . . . . . . . . . . . . . . . 1
PROPOSAL 1: APPROVAL OF THE TRANSACTIONS
CONTEMPLATED BY THE AGREEMENT OF EXCHANGE . . . . . . . . . . . . . . . 2
THE SMI EXCHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background of the SMI Exchange . . . . . . . . . . . . . . . . . . 2
Recommendation of the O&M Board; Reasons for the Exchanges . . . . 3
Opinion of O&M's Financial Advisor . . . . . . . . . . . . . . . . 4
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . 8
THE AGREEMENT OF EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . 8
The Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Representations, Warranties and Covenants. . . . . . . . . . . . . 9
Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . 9
Conditions to the Exchanges. . . . . . . . . . . . . . . . . . . . 10
Termination and Amendment. . . . . . . . . . . . . . . . . . . . . 10
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Dissenters' Rights of Holders of SMI Common Stock. . . . . . . . . 11
Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . 11
O&M Holding Board. . . . . . . . . . . . . . . . . . . . . . . . . 11
Restrictions Applicable to the SMI Shareholders' O&M Holding
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 12
Registration Rights Agreement. . . . . . . . . . . . . . . . . . . 13
Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . 13
CREATION OF O&M HOLDING . . . . . . . . . . . . . . . . . . . . . . . . 13
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Conditions to the Effectiveness of the O&M Exchange. . . . . . . . 14
Directors and Officers of O&M Holding Immediately After the
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . 14
Interests of Directors and Officers. . . . . . . . . . . . . . . . 14
Liability of Officers and Directors. . . . . . . . . . . . . . . . 15
O&M Holding Articles of Incorporation. . . . . . . . . . . . . . . 15
Capitalization of O&M Holding. . . . . . . . . . . . . . . . . . . 15
Senior Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . 17
Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 17
New York Stock Exchange Listing. . . . . . . . . . . . . . . . . . 20
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . 20
Amendment, Abandonment and Termination . . . . . . . . . . . . . . 20
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . 20
OPERATION OF O&M HOLDING AFTER THE EXCHANGES. . . . . . . . . . . . . . 21
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . 21
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS . . . . . . 22
O&M COMMON STOCK PER SHARE PRICES AND DIVIDENDS . . . . . . . . . . . . 28
SELECTED FINANCIAL INFORMATION OF O&M . . . . . . . . . . . . . . . . . 29
SELECTED FINANCIAL INFORMATION OF SMI . . . . . . . . . . . . . . . . . 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SMI. . . . . . . . . . . . . . . . . . . . 31
INFORMATION CONCERNING SMI. . . . . . . . . . . . . . . . . . . . . . . 35
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Development of Business. . . . . . . . . . . . . . . . . . 35
Hospital Customers . . . . . . . . . . . . . . . . . . . . . . . . 35
Alternate Site Customers . . . . . . . . . . . . . . . . . . . . . 36
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Management Information Systems . . . . . . . . . . . . . . . . . . 37
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Purchasing and Suppliers . . . . . . . . . . . . . . . . . . . . . 37
Sales and Marketing. . . . . . . . . . . . . . . . . . . . . . . . 38
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
COMPARISON OF RIGHTS OF HOLDERS OF O&M
COMMON STOCK AND O&M HOLDING COMMON STOCK . . . . . . . . . . . . . . . 40
Business Combinations. . . . . . . . . . . . . . . . . . . . . . . 40
Election of Directors. . . . . . . . . . . . . . . . . . . . . . . 40
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Liquidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
LEGAL OPINIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PROPOSAL 2: ELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . 42
Nominees for Election to the O&M Board . . . . . . . . . . . . . . 43
Members of the O&M Board Continuing in Office. . . . . . . . . . . 43
Meetings and Committees of the O&M Board . . . . . . . . . . . . . 45
Compensation Committee Interlocks and Insider Participation. . . . 45
Compensation of Directors. . . . . . . . . . . . . . . . . . . . . 45
O&M COMMON STOCK OWNED BY PRINCIPAL
SHAREHOLDERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 46
Compliance with Section 16(a) of the Exchange Act. . . . . . . . . 47
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . 47
Report of the Compensation Committee . . . . . . . . . . . . . . . 47
Comparison of Five-Year Cumulative Total Return. . . . . . . . . . 49
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . 50
Option Grants in Last Fiscal Year. . . . . . . . . . . . . . . . . 51
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values . . . . . . . . . . . . . . . . . . . . . . 52
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . 52
PROPOSAL 3: SELECTION OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . 53
PROPOSALS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 53
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
INDEX TO FINANCIAL STATEMENTS OF O&M AND SMI. . . . . . . . . . . . . . 54
ANNEX I O&M Plan of Exchange
ANNEX II SMI Plan of Exchange
ANNEX III Agreement of Exchange
ANNEX IV O&M Holding Articles of Incorporation
ANNEX V Opinion of J.P. Morgan
ANNEX VI Glossary of Certain Terms
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. Reference is made to, and this Summary
is qualified in its entirety by, the more detailed information contained,
or incorporated by reference, in this Proxy Statement/Prospectus and the
Annexes hereto. The information contained in this Proxy
Statement/Prospectus with respect to SMI and the SMI Shareholders has been
supplied by SMI and the SMI Shareholders. Unless otherwise defined herein,
capitalized terms used in this Summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement/Prospectus. See Annex
VI - Glossary of Certain Terms. O&M Shareholders are urged to read this
Proxy Statement/Prospectus and the Annexes hereto in their entirety.
O&M ANNUAL MEETING
The Annual Meeting will be held on Tuesday, May 10, 1994, at 10:00
a.m., local time, at the Corporate Headquarters Building, 4800 Cox Road,
Glen Allen, Virginia. At the Annual Meeting the O&M Shareholders will be
asked to:
(i) Approve the transactions contemplated by the Agreement of
Exchange, including approval of the O&M Plan of Exchange
("Proposal 1");
(ii) Elect three members to the Board of Directors of O&M (the "O&M
Board") to serve until the 1997 Annual Meeting of Shareholders
and one member to the O&M Board to serve until the 1996 Annual
Meeting of Shareholders ("Proposal 2"); and
(iii) Ratify the appointment of KPMG Peat Marwick ("KPMG") as
independent accountants ("Proposal 3").
The O&M Board has fixed the close of business on March 14, 1994, as
the record date for the determination of O&M Shareholders entitled to
notice of and to vote at the Annual Meeting (the "Record Date").
THE SMI EXCHANGE
General
Pursuant to the Agreement of Exchange and the plan of exchange of SMI
attached hereto as Annex II (the "SMI Plan of Exchange"), at the effective
time of the Exchanges (as defined below), which is anticipated to occur on
or about May 10, 1994 (the "Effective Time"), all the outstanding shares of
SMI Common Stock (except shares as to which dissenters' rights may be
perfected) will be exchanged for 1,150,000 shares of Series B Preferred
Stock and $40,200,000 in cash, adjusted for shares of SMI Common Stock as
to which dissenters' rights may be perfected, and SMI will become a wholly-
owned subsidiary of O&M Holding. See "Proposal 1: Approval of the
Transactions Contemplated by the Agreement of Exchange - The SMI Exchange."
The Parties to the SMI Exchange
Each of O&M and SMI is a wholesale distributor of medical and surgical
supplies, pharmaceuticals and other related products to hospitals and
alternate care medical facilities. O&M serves healthcare providers
throughout the United States and the District of Columbia from 36
distribution centers. SMI serves healthcare providers in 39 states from 21
distribution centers. O&M Common Stock is traded on the NYSE under the
symbol "OMI". SMI Common Stock is held by eleven shareholders and is not
publicly traded.
O&M Holding was formed on December 20, 1993 under the Virginia Stock
Corporation Act (the "VSCA") as a wholly-owned subsidiary of O&M. Until
the Effective Time, it will have no assets, liabilities or income.
O&M and O&M Holding have the same principal place of business at 4800
Cox Road, Glen Allen, Virginia 23060, telephone (804) 747-9794. SMI's
principal place of business is One Stuart Plaza, Greensburg, Pennsylvania
15601, telephone (412) 837-5700.
All of the outstanding shares of SMI Common Stock are owned by eleven
shareholders. Members of the Henry L. Hillman family, a trust controlled
by Mr. Hillman, Howard B. Hillman and Tatnall L. Hillman collectively own
95% of the outstanding shares of SMI Common Stock. Such shareholders are
parties to the Agreement of Exchange and are referred to herein
collectively as the "SMI Shareholders." Mr. Henry L. Hillman is the
Chairman of the Executive Committee and principal shareholder of The
Hillman Company, a Pittsburgh, Pennsylvania company with diversified
investments and operations.
Series B Preferred Stock
Pursuant to the SMI Plan of Exchange, all outstanding shares of SMI
Common Stock (except shares as to which dissenters' rights may be
perfected) will be exchanged for the SMI Exchange Consideration, which
includes the Series B Preferred Stock (the "SMI Exchange"). The Series B
Preferred Stock will have the rights and designations set forth in the
Amended and Restated Articles of Incorporation of O&M Holding attached
hereto as Annex IV (the "O&M Holding Articles of Incorporation"). Except
with respect to certain matters on which a separate class vote is required
by Virginia law, certain amendments to the O&M Holding Articles of
Incorporation and bylaws of O&M Holding and the election of the Series B
Preferred Stock Director (as defined below), the holders of the Series B
Preferred Stock and the O&M Holding Common Stock will vote together as one
class. The Series B Preferred Stock initially will have 4.04 votes per
share. The holders of the Series B Preferred Stock will be entitled to
elect one director (the "Series B Preferred Stock Director") to the Board
of Directors of O&M Holding (the "O&M Holding Board"). See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange -
Creation of O&M Holding - Capitalization of O&M Holding - Series B
Preferred Stock."
The holders of Series B Preferred Stock are entitled to (i) a
preferential annual dividend of $4.50 per share and (ii) a preferential
liquidation right equal to $100 per share plus accrued and unpaid
dividends. All of the outstanding shares of Series B Preferred Stock may
be converted into O&M Holding Common Stock at any time at the option of the
holders of a majority of the outstanding shares of Series B Preferred Stock
at the ratio of 4.04 shares of O&M Holding Common Stock for each share of
Series B Preferred Stock, subject to adjustment. All shares of Series B
Preferred Stock will be converted automatically into O&M Holding Common
Stock upon the conversion of any shares of Series B Preferred Stock (other
than in the case of conversions of shares called for redemption). See
"Proposal 1: Approval of the Transactions Contemplated by the Agreement of
Exchange - Creation of O&M Holding - Capitalization of O&M Holding - Series
B Preferred Stock."
At any time after April 30, 1997, O&M Holding may redeem all or a
portion of the outstanding shares of Series B Preferred Stock at a
redemption price equal to the par value thereof ($100) plus accrued and
unpaid dividends. Redemptions prior to April 30, 2004 are subject to
certain limitations. See "Proposal 1: Approval of the Transactions
Contemplated by the Agreement of Exchange " Creation of O&M Holding -
Capitalization of O&M Holding - Series B Preferred Stock - Redemption."
Restrictions Applicable to the Series B Preferred Stock and the O&M Holding
Common Stock Held by the SMI Shareholders
Voting Agreement
Each SMI Shareholder has agreed that as long as he owns any shares of
Series B Preferred Stock or the SMI Shareholders and their Affiliates (as
such term is defined in the Glossary) collectively own at least 5% of the
outstanding shares of O&M Holding Common Stock, he will vote such shares in
the same proportion as the votes cast on such matter by all other holders
of O&M Holding Common Stock (excluding certain holders of 5% or more of O&M
Holding Common Stock). Such voting agreement will not apply to certain
amendments to the O&M Holding Articles of Incorporation or bylaws, the
election of the Series B Preferred Stock Director or the SMI Shareholders'
Nominee (as defined below) and certain matters specified by Virginia law.
See "Proposal 1: Approval of the Transactions Contemplated by the
Agreement of Exchange - The SMI Exchange - Restrictions Applicable to the
SMI Shareholders' O&M Holding Capital Stock - Voting Agreement."
Standstill Agreement
Each SMI Shareholder has agreed that as long as he owns any shares of
Series B Preferred Stock or the SMI Shareholders and their Affiliates
collectively own at least 5% of the outstanding shares of O&M Holding
Common Stock, he will not, and will not allow his Affiliates to: (i) buy
or deposit in a voting trust any shares of any class of capital stock of
O&M Holding ("O&M Holding Capital Stock"); (ii) transfer any shares of O&M
Holding Capital Stock, except under certain circumstances; (iii) solicit
proxies or take any position contrary to the O&M Holding Board with respect
to matters submitted to a vote of holders of O&M Holding Capital Stock;
(iv) form or participate in any "group" with respect to O&M Holding Capital
Stock; or (v) initiate or assist any person in a tender offer or exchange
offer for O&M Holding Capital Stock. See "Proposal 1: Approval of the
Transactions Contemplated by the Agreement of Exchange - The SMI Exchange -
Restrictions Applicable to the SMI Shareholders' O&M Holding Capital Stock
- - Standstill Agreement."
Limitations on Transfer
The SMI Shareholders have agreed to certain limitations on their
ability to transfer O&M Holding Capital Stock. The SMI Shareholders may
only transfer shares of Series B Preferred Stock by gift, descent or
distribution, to beneficiaries of a trust existing as of December 22, 1993
or to another SMI Shareholder. The SMI Shareholders may transfer shares of
O&M Holding Common Stock received upon conversion of the Series B Preferred
Stock only after first offering O&M Holding the right to purchase such
shares. The Agreement of Exchange also prohibits any transfer of O&M
Holding Common Stock held by the SMI Shareholders except pursuant to a
registration statement or an exemption from registration under federal and
state securities laws. See "Proposal 1: Approval of the Transactions
Contemplated by the Agreement of Exchange - The SMI Exchange - Restrictions
Applicable to the SMI Shareholders' O&M Holding Capital Stock -
Restrictions on Transfer."
Conditions to the SMI Exchange
The obligation of SMI and O&M Holding to effect the SMI Exchange is
subject to the fulfillment or waiver of certain conditions specified in the
Agreement of Exchange, including (i) approval by the O&M Shareholders of
the transactions contemplated by the Agreement of Exchange, including the
O&M Plan of Exchange, (ii) expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Improvements Act of 1976 (the
"HSR Act") (which has occurred), (iii) J.P. Morgan Securities Inc. ("J.P.
Morgan") shall not have withdrawn its opinion that the consideration to be
paid by O&M Holding in the SMI Exchange is fair from a financial point of
view to O&M (the "Opinion of J.P. Morgan"), (iv) O&M Holding shall have
obtained adequate financing to consummate the transactions contemplated by
the Agreement of Exchange and to finance O&M's and SMI's indebtedness and
(v) simultaneous consummation of the O&M Exchange. See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange -
The Agreement of Exchange - Conditions to the Exchanges."
Locations of Facilities
The map below shows the locations of the facilities of O&M and SMI,
respectively.
<PAGE>
MAP
SEE APPENDIX
<PAGE>
CREATION OF O&M HOLDING
General
Pursuant to the transactions contemplated by the Agreement of
Exchange, O&M Holding will become the publicly-held parent of O&M and SMI.
The O&M Shareholders will become holders of O&M Holding Common Stock
instead of O&M Common Stock. The holders of SMI Common Stock will become
holders of Series B Preferred Stock. At the Effective Time, O&M Holding's
name will be changed to "Owens & Minor, Inc." and O&M's name will be
changed to "Owens & Minor Medical, Inc.". The O&M Holding Common Stock
will be approved for listing on the NYSE and, as a result of the name
changes, will trade as the common stock of "Owens & Minor, Inc."
Conditions to the O&M Exchange
The obligation of O&M and O&M Holding to effect the exchange of each
outstanding share of O&M Common Stock for one share of O&M Holding Common
Stock (the "O&M Exchange") is subject to the fulfillment or waiver of
certain conditions specified in the Agreement of Exchange, including (i)
approval by the O&M Shareholders of the transactions contemplated by the
Agreement of Exchange, including the O&M Plan of Exchange, (ii) expiration
or termination of the applicable HSR waiting period (which has occurred),
and (iii) simultaneous consummation of the SMI Exchange. See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange -
The Agreement of Exchange - Conditions to the Exchanges."
Capitalization of O&M Holding
The authorized capital of O&M Holding will be 200,000,000 shares of
O&M Holding Common Stock and 10,000,000 shares of cumulative preferred
stock (the "Cumulative Preferred Stock"), of which 300,000 shares will be
designated as Series A Preferred Stock, $100 par value per share (the
"Series A Preferred Stock") issuable pursuant to the O&M Holding Rights
Agreement (as defined below) and 1,150,000 shares will be designated as
Series B Preferred Stock issuable pursuant to the SMI Plan of Exchange.
See "Proposal 1: Approval of the Transactions Contemplated by the
Agreement of Exchange - Creation of O&M Holding - Capitalization of O&M
Holding."
Ownership of O&M Holding Voting Stock
Immediately following the Effective Time, there will be approximately
20,448,000 shares of O&M Holding Common Stock outstanding, which will have
been issued in the O&M Exchange to the O&M Shareholders. Immediately
following the Effective Time, the Series B Preferred Stock held by the
former shareholders of SMI will be convertible into and, subject to certain
restrictions, generally will have voting rights equivalent to 4,646,000
shares of O&M Holding Common Stock. Accordingly, on an as-converted basis,
the Series B Preferred Stock held by the former shareholders of SMI will
represent approximately 18.5% of the O&M Holding voting stock then
outstanding. The remaining 81.5% of the O&M Holding voting stock then
outstanding will be owned by the O&M Shareholders. The holders of O&M
Holding Common Stock and the Series B Preferred Stock will vote together as
a single class, except as provided by Virginia law, in the election of the
Series B Preferred Stock Director and with respect to certain amendments to
the O&M Holding Articles of Incorporation and bylaws. See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange -
Creation of O&M Holding - Capitalization of O&M Holding."
In the Agreement of Exchange, the SMI Shareholders agreed that, as
long as any share of O&M Holding Preferred Stock is outstanding or the SMI
Shareholders and their Affiliates own at least 5% of the outstanding shares
of O&M Holding Common Stock, they will vote their shares on any matter in
the same proportion as the votes cast on such matter by all holders of O&M
Holding Common Stock (excluding certain holders who own 5% or more of the
outstanding shares of O&M Holding Common Stock). Such voting agreement
will not apply to certain amendments to the O&M Holding Articles of
Incorporation and bylaws and the election of the Series B Preferred Stock
Director and the SMI Shareholder's Nominee (as defined below). See
"Proposal 1: Approval of the Transactions Contemplated by the Agreement of
Exchange - The Agreement of Exchange - Restrictions Applicable to the SMI
Shareholders' O&M Holding Capital Stock - Voting Agreement."
Opinion of Financial Advisor
J.P. Morgan has delivered to the O&M Board its written opinion
attached hereto as Annex V dated April 6, 1994, to the effect that, based
upon and subject to the matters set forth therein, the consideration to be
paid by O&M Holding in the SMI Exchange is fair, from a financial point of
view to O&M. The Opinion of J.P. Morgan should be read in its entirety.
For additional information concerning the assumptions made, matters
considered and limits of the review by J.P. Morgan in reaching its opinion,
and the fees paid and to be paid to J.P. Morgan, see "Proposal 1: Approval
of the Transactions Contemplated by the Agreement of Exchange - The SMI
Exchange - Opinion of O&M's Financial Advisor" and Annex V hereto.
Effective Time
After all the conditions set forth in the Agreement of Exchange have
been satisfied or waived, SMI will file articles of exchange with the
Department of State of the Commonwealth of Pennsylvania ("Pennsylvania
Department of State") with respect to the SMI Plan of Exchange (the "SMI
Articles of Exchange") and O&M will file articles of exchange with the
Commonwealth of Virginia State Corporation Commission (the "SCC") with
respect to the O&M Plan of Exchange (the "O&M Articles of Exchange"). The
O&M Exchange and the SMI Exchange (collectively, the "Exchanges") will
become effective simultaneously at the time specified in such articles. At
the Effective Time, O&M Holding's name will be changed to "Owens & Minor,
Inc." and O&M's name will be changed to "Owens & Minor Medical, Inc." See
"Proposal 1: Approval of the Transactions Contemplated by the Agreement of
Exchange - Agreement of Exchange - The Exchanges."
Officers and Directors of O&M Holding
The members of the O&M Board at the Effective Time will serve as
members of the O&M Holding Board. In addition, the holders of the Series B
Preferred Stock will be entitled to elect the Series B Preferred Stock
Director immediately following the Effective Time. It is anticipated that
C.G. Grefenstette will serve as the initial Series B Preferred Stock
Director. See "Proposal 1: Approval of the Transactions Contemplated by
the Agreement of Exchange - Creation of O&M Holding - Directors and
Officers of O&M Holding." After the Series B Preferred Stock is retired
and as long as the SMI Shareholders own at least 5% of the outstanding
shares of O&M Common Stock, O&M Holding has agreed, to the extent permitted
by Virginia law, to include in the slate of director nominees recommended
by the O&M Holding Board one nominee selected by the SMI Shareholders (the
"SMI Shareholders' Nominee"). See "Proposal 1: Approval of the
Transactions Contemplated by the Agreement of Exchange - Creation of O&M
Holding - Capitalization of O&M Holding - Series B Preferred Stock."
The executive officers of O&M Holding at the Effective Time are
expected to be as follows:
G. Gilmer Minor, III President and Chief Executive Officer
Robert E. Anderson, III Executive Vice President
Henry A. Berling Executive Vice President
Richard P. Byington Executive Vice President
Craig R. Smith Executive Vice President
Drew St. J. Carneal Senior Vice President, Corporate
Counsel and Corporate Secretary
Glenn J. Dozier Senior Vice President and Chief
Financial Officer
See "Proposal 1: Approval of the Transactions Contemplated by the
Agreement of Exchange - Creation of O&M Holding - Directors and Officers of
O&M Holding."
Certain Federal Income Tax Consequences of the Exchanges
The exchange of shares of O&M Common Stock for O&M Holding Common
Stock in the O&M Exchange is intended to qualify as a nontaxable
transaction for federal income tax purposes. A condition to consummation
of the Exchanges is the receipt by O&M of an opinion of Hunton & Williams
(counsel to O&M and O&M Holding) to the effect that the Exchanges will not
result in the recognition of gain or loss by O&M Holding, O&M, the O&M
Shareholders or SMI for federal income tax purposes. See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange "
Creation of O&M Holding " Certain Federal Income Tax Consequences."
Accounting Treatment
The transactions contemplated by the Agreement of Exchange will be
accounted for under the purchase method of accounting. See "Proposal 1:
Approval of the Transactions Contemplated by the Agreement of Exchange "
The SMI Exchange " Accounting Treatment."
Exchange of Stock Certificates
At the Effective Time, each certificate evidencing ownership of
outstanding shares of O&M Common Stock will automatically be deemed to
evidence an identical number of shares of O&M Holding Common Stock. It
will not be necessary for O&M Shareholders to surrender their certificates
for new certificates representing O&M Holding Common Stock. See "Proposal
1: Approval of the Transactions Contemplated by the Agreement of Exchange
- - Creation of O&M Holding - General."
Dissenters' Rights
The O&M Shareholders have no right under Virginia law to dissent from
the O&M Exchange and receive payment for the value of their shares of O&M
Common Stock. See "Proposal 1: Approval of the Transactions Contemplated
by the Agreement of Exchange - Creation of O&M Holding - Dissenters'
Rights."
Vote Required
On the Record Date, there were 20,396,601 shares of O&M Common Stock
outstanding held by approximately 2,961 holders of record. Holders of O&M
Common Stock on the Record Date are entitled to one vote per share
outstanding. The favorable vote of holders of more than two-thirds of the
outstanding shares of O&M Common Stock as of the Record Date is required to
approve the O&M Plan of Exchange. See "O&M Annual Meeting " Voting
Rights," and "Proposal 1: Approval of the Transactions Contemplated by
the Agreement of Exchange - Creation of O&M Holding - Vote Required."
Recommendation of the O&M Board
The O&M Board has unanimously approved the Agreement of Exchange and
the O&M Plan of Exchange and recommends their approval by the O&M
Shareholders. The decision of the O&M Board was based on their belief that
the Agreement of Exchange (including the O&M Plan of Exchange and the SMI
Plan of Exchange) is in the best interests of O&M and the O&M Shareholders.
See "Proposal 1: Approval of the Transactions Contemplated by the
Agreement of Exchange - The SMI Exchange - Recommendation of the O&M Board;
Reasons for the Exchanges."
Market Price Data
On December 21, 1993, the last trading day prior to the public
announcement of the execution of the Agreement of Exchange, the last sales
price of O&M Common Stock as reported on the NYSE Composite Tape was $191/8
per share. On March 31, 1994, the last sales price of O&M Common Stock as
reported on the NYSE Composite Tape was $223/4 per share.
SUMMARY OF SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected historical and unaudited pro
forma financial information for O&M, SMI and O&M Holding. Such information
should be read in conjunction with the consolidated financial statements of
O&M and subsidiaries and the financial information of SMI, and the notes
thereto, and the unaudited pro forma combined financial information of O&M,
SMI and O&M Holding and notes thereto, contained elsewhere in this Proxy
Statement/Prospectus.
The selected unaudited pro forma combined financial information is
derived from, and should be read in conjunction with, the "Unaudited Pro
Forma Combined Financial Information" elsewhere herein. With respect to
the income statement data for the year ended December 31, 1993, the
unaudited pro forma combined financial information gives effect to the
Exchanges and related transactions as if they had been consummated as of
January 1, 1993. With respect to the balance sheet data, the unaudited pro
forma combined financial information gives effect to the Exchanges and
related transactions as if they had been consummated on December 31, 1993.
The unaudited pro forma combined financial information has been included
for comparative purposes only and does not purport to represent the actual
results that would have been achieved by SMI, O&M and O&M Holding had they
been operating as a single entity during the periods indicated, nor is such
data necessarily indicative of future operating results.
<PAGE>
<TABLE>
Summary Selected Historical Information of O&M
Year ended December 31,
(In thousands, except per share data) 1993 1992 1991
<S> <C> <C> <C>
Income Statement Data(1):
Net sales $ 1,396,971 1,177,298 1,021,014
Net income from continuing operations
before cumulative effect of change in
accounting principles 18,517 15,435 9,669
Net income per common share from
continuing operations before
cumulative effect of change in
accounting principles $ .90 .78 .49
Cash dividends per share $ .21 .165 .132
Selected Ratios:
Gross margin as percent of net sales 10.5% 10.6% 10.1%
Selling, general and administrative
expenses as a percent of net sales 7.6% 7.7% 7.6%
Balance Sheet Data(2):
Total assets $ 334,322 274,540 311,786
Long-term debt 50,768 24,986 67,675
Stockholders' equity 136,943 116,659 97,091
(1)Amounts exclude the impact of discontinued operations related to
divestitures of O&M's Wholesale Drug and Specialty Packaging Divisions.
(2)The decreases in total assets and long-term debt in 1992 relate primarily
to the divestitures of O&M's Wholesale Drug and Specialty Packaging
Divisions.
</TABLE>
<PAGE>
<TABLE>
Summary Selected Historical Financial Information of SMI
Eight months
Year ended ended
December 31, December 31, Year ended April 30,
(In thousands) 1993 1992 1992 1991
<S> <C> <C> <C> <C>
Income Statement Data(1):
Net sales $ 890,477 584,047 752,416 648,729
Historical net income (loss) from
continuing operations 8,747 2,763 2,254 (2,660)
Pro forma net income (loss) from
continuing operations (2)(3) 4,325 1,099 654 (2,638)
Selected Ratios:
Gross margin as a percent of net
sales 10.8% 10.7% 11.6% 11.9%
Operating expenses as a percent of
net sales (4) 9.2% 9.3% 9.8% 10.2%
Balance Sheet Data:
Total assets $ 178,720 195,688 193,951 175,037
Long-term debt 47,976 60,948 52,942 48,542
Stockholders' equity 43,581 37,888 52,937 48,991
(1)Amounts exclude the impact of discontinued operations related to the
divestiture and spin-off of SMI's Surgical Implant Division in December
1992 and the sale of its General Surgery and Anesthesia Division in July
1993.
(2)SMI has been an S corporation since May 1, 1987, and has not been subject
to federal income taxes since that date. Historical dividends per share
are not presented because dividends were primarily for the purpose of
covering shareholders' tax liabilities.
(3)Pro forma information reflects the pro forma effect of treating SMI as if
it had been taxed as a C corporation for federal and state tax purposes.
(4)Operating expenses include warehouse, selling and administrative
expenses, depreciation and amortization and non-recurring expenses.
Operating expenses as a percentage of net sales, adjusted to exclude
depreciation and amortization and nonrecurring expenses, were 8.2%, 8.1%,
8.8% and 9.2% for the respective periods.
</TABLE>
<PAGE>
Summary Selected Pro Forma Information of O&M Holding
Year ended
December 31,
(In thousands, except per share data) 1993
Income Statement Data:
Net sales $ 2,339,235
Net income from continuing operations 24,201
Net income per common share from
continuing operations $.93
Selected Ratios:
Gross margin as percent of net sales 10.7%
Selling, general and administrative
expenses as a percent of net sales 7.8%
December 31,
1993
Balance Sheet Data:
Total assets $ 727,334
Long-term debt 231,716
Stockholders' equity 251,943
<PAGE>
ELECTION OF DIRECTORS
Three persons, all incumbent directors, have been nominated for
election as directors of O&M to serve until the 1997 Annual Meeting of
Shareholders, and one other incumbent director has been nominated for
election as a director of O&M to serve until the 1996 Annual Meeting of
Shareholders. See "Proposal 2: Election of Directors - Nominees for
Election to the O&M Board."
SELECTION OF INDEPENDENT ACCOUNTANTS
The O&M Board and the Audit Committee thereof recommend that the O&M
Shareholders ratify the appointment by the O&M Board of KPMG as the
independent accountants of O&M for 1994. If ratified, it is contemplated
that KPMG will be appointed as the independent accountants of O&M Holding
for 1994. Representatives of KPMG will have an opportunity to make a
statement at the Annual Meeting and will be available to respond to
appropriate questions from O&M Shareholders.
<PAGE>
O&M ANNUAL MEETING
Matters to be Considered
The purpose of the Annual Meeting is (i) to consider and vote upon the
transactions contemplated by the Agreement of Exchange, including approval
of the O&M Plan of Exchange, (ii) to elect three members of the O&M Board
to serve until the 1997 Annual Meeting of Shareholders and one member of
the O&M Board to serve until the 1996 Annual Meeting of Shareholders,
(iii) to ratify the appointment of KPMG as independent accountants of O&M
and (iv) to consider such other matters as shall properly come before the
Annual Meeting.
Date, Time and Place, Record Date
The Annual Meeting will be held on Tuesday, May 10, 1994 at 10:00
a.m., local time, at the Corporate Headquarters Building, Glen Allen,
Virginia. The O&M Board has fixed March 14, 1994 as the record date for
the determination of O&M Shareholders entitled to notice of and to vote at
the Annual Meeting.
Voting Rights
On the Record Date, there were 20,396,601 shares of O&M Common Stock
outstanding held by approximately 2,961 holders of record. Holders of O&M
Common Stock on the Record Date will be entitled to one vote per share of
O&M Common Stock held by them on each matter submitted to the O&M
Shareholders at the Annual Meeting. No other voting securities of O&M are
outstanding. The presence at the Annual Meeting, in person or by proxy, of
O&M Shareholders holding a majority of the shares of the O&M Common Stock
shall constitute a quorum for the transaction of business at the Annual
Meeting.
The affirmative vote of holders of more than two-thirds of the
outstanding shares of O&M Common Stock is required for the approval of the
Agreement of Exchange and the O&M Plan of Exchange. Abstentions and shares
held in street name ("Broker Shares") that are not voted on the proposal to
approve the transactions contemplated by the Agreement of Exchange,
including the O&M Plan of Exchange, will not be considered votes for
approval of Proposal 1. If a quorum is present, the election of each
nominee for director requires the affirmative vote of the holders of a
plurality of the shares of O&M Common Stock cast in the election of
directors. Votes that are withheld and Broker Shares that are not voted on
Proposal 2 will not be included in determining the number of votes cast.
The ratification of KPMG as independent auditors requires that the votes
cast in favor of the matter exceed the votes cast opposing the matter.
Abstentions and Broker Shares that are not voted on the matter will not be
included in determining the number of votes cast on Proposal 3.
Solicitation of Proxies
Any person giving a proxy may revoke it at any time before it is voted
by delivering another proxy or written notice of revocation to the
Secretary of O&M. A proxy, if executed and not revoked, will be voted and,
if it contains any specific instructions, will be voted in accordance with
such instructions. If the proxy does not contain any specific
instructions, it will be voted for the approval of the transactions
contemplated by the Agreement of Exchange, including the O&M Plan of
Exchange, for the election of the four nominees for election to the O&M
Board and for the ratification of the appointment of KPMG as independent
accountants.
All expenses associated with the solicitation of proxies in the form
enclosed, including printing expenses, will be borne by O&M. O&M has
retained Corporate Investor Communications, Inc. at an estimated cost of
$7,500, plus reimbursement of expenses, to assist in the solicitation of
proxies. O&M will reimburse brokers and other persons holding stock in
their name as nominees for their expenses in obtaining authorization to
execute proxies from their principals.
PROPOSAL 1: APPROVAL OF THE TRANSACTIONS
CONTEMPLATED BY THE AGREEMENT OF EXCHANGE
THE SMI EXCHANGE
General
The Agreement of Exchange provides for the acquisition by O&M Holding,
in simultaneous statutory share exchanges, of all of the issued and
outstanding common stock of each of O&M and SMI. As a result of the
Exchanges, (i) O&M and SMI will become wholly-owned subsidiaries of O&M
Holding, (ii) the O&M Shareholders will receive one share of O&M Holding
Common Stock for each outstanding share of O&M Common Stock and (iii) the
holders of SMI Common Stock (except shares as to which dissenters' rights
may be perfected) will receive the SMI Exchange Consideration which
consists of 1,150,000 shares of Series B Preferred Stock and $40,200,000 in
cash, adjusted for shares of SMI Common Stock as to which dissenters'
rights may be perfected. The discussion in this Proxy Statement/Prospectus
of the SMI Exchange and the description of the principal terms of the SMI
Exchange are subject to and qualified in their entirety by reference to the
Agreement of Exchange, a copy of which is attached to this Proxy
Statement/Prospectus as Annex III and which is incorporated herein by
reference.
Background of the SMI Exchange
In November 1992, SMI and Baxter International, Inc. ("Baxter")
publicly announced that they had signed a letter of intent with respect to
the acquisition by Baxter of SMI. In February 1993, SMI and Baxter
publicly announced that they had terminated their negotiations with respect
to a proposed business combination. The management of O&M believes that
the acquisition of medical supply distribution companies, such as SMI,
provides an efficient method to increase its geographic coverage of
markets; therefore, following the announcement of the termination of the
Baxter negotiations, G. Gilmer Minor, III, President and Chief Executive
Officer of O&M, telephoned C. G. Grefenstette, Chief Executive Officer of
The Hillman Company, to express his interest in discussing a potential
business combination with SMI. From February 1993 until October 1993,
there were no further communications regarding a potential business
combination between O&M and SMI.
On or about October 22, 1993, Richard P. Byington, President of SMI,
following an analysis by SMI's senior management of its financial and
strategic alternatives to enhance shareholder value, telephoned Mr. Minor
to inquire as to whether O&M would be interested in exploring a potential
business combination of SMI and O&M. Messrs. Minor and Byington met in New
York on October 26, 1993, to continue their discussions. On November 8,
1993, Mr. Minor, Robert E. Anderson, III, Senior Vice President of
Development of O&M, and Drew St. J. Carneal, Senior Vice President,
Corporate Counsel and Secretary of O&M, met Messrs. Grefenstette and
Byington, Mark J. Laskow, Chairman of SMI, and Henry L. Hillman in
Pittsburgh to continue discussions regarding a potential business
combination of O&M and SMI. At this meeting and over the course of the
following week, certain financial information was exchanged by the parties.
Certain representatives of the two companies met again on November 12 and
13, 1993 in Richmond to review more financial information and to discuss
certain operational aspects of a potential business combination.
On November 11, 1993, at a meeting of the Strategic Planning Committee
of the O&M Board, Mr. Minor and other senior management of O&M briefed the
committee members on the status of discussions with SMI and O&M's
preliminary analysis of a combination with SMI.
On or about November 15, 1993, O&M retained J.P. Morgan as its
financial advisor. O&M and J.P. Morgan together conducted additional due
diligence of SMI during the week of November 15, 1993, which included a
comprehensive review of additional financial information. On November 18,
1993, the senior management of SMI made a presentation to Messrs. Minor and
Anderson, Mr. Glenn J. Dozier, Senior Vice President and Chief Financial
Officer of O&M, and a representative of J.P. Morgan in Pittsburgh of the
interim financial results of SMI for 1993 and SMI's budget for 1994. O&M
and its financial, legal and accounting advisors then worked for several
weeks to conduct preliminary due diligence and to develop potential
structures for a transaction.
At a special meeting of the O&M Board held on December 9, 1993, senior
management of O&M, J.P. Morgan and Hunton & Williams (counsel to O&M)
reviewed with the O&M Board the status of discussions with SMI, and among
other things, reviewed the background of the proposed acquisition of SMI,
the strategic rationale for the business combination, the potential risks
and benefits of a proposed transaction, financing alternatives, a summary
of due diligence findings, preliminary financial valuation analyses,
potential structures for the transaction and a preliminary analysis of
legal issues.
On December 10, 1993, Messrs. Minor, Anderson and Dozier and
representatives of J.P. Morgan met Messrs. Grefenstette and Laskow in
Pittsburgh to negotiate various terms of a proposed agreement. The
discussions and negotiations continued through the week of December 13,
1993, as both companies reviewed drafts of a proposed agreement. On
December 16, 1993, senior management of O&M and a representative of J.P.
Morgan briefed the O&M Board on the status of negotiations with SMI and
discussed considerations raised by members of the O&M Board. On the
evening of December 16, 1993, Messrs. Minor, Anderson, Grefenstette and
Laskow met in Richmond to discuss various business issues.
The O&M Board held a special meeting on December 21, 1993, to consider
the proposed Exchanges and the transactions contemplated by the Agreement
of Exchange. At such meeting, O&M's senior management, legal and financial
advisors reviewed the terms of the Agreement of Exchange, the financial and
valuation analyses of the transaction and, in particular, the items listed
in the following paragraph. J.P. Morgan also delivered its oral opinion to
the O&M Board that, as of such date and based upon various considerations
and assumptions, the proposed consideration to be paid by O&M Holding
pursuant to the SMI Exchange was fair from a financial point of view, to
O&M. After extensive consideration and discussion, the O&M Board
unanimously approved and authorized O&M to enter into the Agreement of
Exchange.
Recommendation of the O&M Board; Reasons for the Exchanges
The O&M Board believes that the terms of and transactions contemplated
by the Agreement of Exchange (including the O&M Plan of Exchange and the
SMI Plan of Exchange, collectively, the "Plans of Exchange") are in the
best interests of O&M and the O&M Shareholders. Accordingly, the O&M Board
has unanimously approved the transactions contemplated by the Agreement of
Exchange (including the O&M Plan of Exchange) and recommends approval
thereof by the O&M Shareholders. In reaching its determination, the O&M
Board consulted with management of O&M as well as O&M's financial and legal
advisors, and considered a number of factors, including, without
limitation, the following:
(i) The belief that the acquisition of SMI provides O&M Holding with
the opportunity to expand efficiently its geographic coverage of
markets where SMI has greater market presence, and strengthen its
coverage of markets and customers where there is complementary
market presence, or where O&M has a greater market presence;
(ii) The ability of the combined companies to serve customers
throughout the continental United States on a same-day or next-
day delivery basis and the attractiveness of this capability to
regional and national customers;
(iii) The opportunities for economies of scale and operating
efficiencies that O&M's management expects will result from
the consolidation of distribution centers and the
integration of office facilities, data centers and support
functions;
(iv) The attractiveness of a national distribution network for medical
and surgical supply manufacturers which may shift their business
from direct distribution to wholesale distribution;
(v) A combination with SMI is consistent with O&M's growth strategy
of combining with or acquiring companies to complement its
existing business;
(vi) SMI's business, operations, financial performance and condition,
prospects and relationships with customers and suppliers;
(vii) The terms of the Agreement of Exchange;
(viii) The expectation that, before giving effect to any
restructuring charges, based on the relative earnings of O&M
and SMI and the SMI Exchange Consideration, the combination
would not be dilutive to the O&M Shareholders;
(ix) The belief that the business combination should position O&M
Holding, as a larger entity, to deal more effectively with the
uncertainties of healthcare reform and hospitals and hospital
management companies;
(x) The quality of SMI's management and employees; and
(xi) The oral opinion of J.P. Morgan given on December 21, 1993 that,
based upon its analysis as of such date, the proposed
consideration to be paid by O&M Holding in the SMI Exchange was
fair, from a financial point of view, to O&M.
The foregoing discussion is a summary of all the material information
and factors considered by the O&M Board and does not purport to be a
complete description of every matter considered by the O&M Board. In view
of the wide variety of factors considered in connection with its evaluation
of the transactions contemplated by the Agreement of Exchange, the O&M
Board did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching its determinations.
Certain of the factors and analyses considered by the O&M Board are
based on forecasts of, or expectations as to, future results. Such
forecasts and expectations are based on a variety of estimates and
assumptions with respect to financial, business, competitive and other
factors affecting O&M, SMI and the respective industries in which they
operate, prevailing and future economic and competitive conditions, taxes
and other matters, most of which are difficult to predict and beyond the
control of O&M and SMI. Because events and circumstances frequently do not
occur as expected, there will be differences between current forecasts and
expectations and actual results, and such differences may be material.
THE O&M BOARD UNANIMOUSLY RECOMMENDS THAT O&M SHAREHOLDERS VOTE TO
APPROVE THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT OF EXCHANGE,
INCLUDING THE O&M PLAN OF EXCHANGE.
Opinion of O&M's Financial Advisor
The O&M Board engaged J.P. Morgan to act as O&M's exclusive financial
advisor with respect to O&M's possible acquisition of SMI. O&M initially
contacted J.P. Morgan based on its general reputation and knowledge of O&M
and the medical supply distribution industry. O&M selected J.P. Morgan as
its exclusive financial advisor after a J.P. Morgan presentation to the
management of O&M. On December 21, 1993, J.P. Morgan rendered its oral
opinion to the O&M Board to the effect that, as of such date and based upon
various considerations and assumptions, the proposed consideration to be
paid by O&M Holding in the proposed SMI Exchange was fair, from a financial
point of view, to O&M. J.P. Morgan confirmed its oral opinion by delivery
of its written opinion, dated April 6, 1994, to the O&M Board, to the
effect that, as of the date of such opinion and based upon and subject to
the matters set forth therein, the proposed consideration to be paid by O&M
Holding in the proposed SMI Exchange is fair, from a financial point of
view, to O&M. A copy of the opinion of J.P. Morgan is attached as Appendix
V to this Proxy Statement/Prospectus and is incorporated herein by
reference. The summary of the opinion of J.P. Morgan set forth in this
Proxy Statement/Prospectus is qualified in its entirety by reference to the
full text of such opinion. O&M Shareholders are urged to read the opinion
carefully in its entirety for a description of the assumptions made,
matters considered and the limits of the review undertaken by J.P. Morgan.
J.P. Morgan's opinion is directed to the O&M Board, relates only to
the fairness, from a financial point of view, to O&M of the consideration
to be paid by O&M Holding in the proposed SMI Exchange, does not address
any other aspect of the transactions described in this Proxy
Statement/Prospectus, and does not constitute a recommendation to any O&M
Shareholder as to how such shareholder should vote at the Annual Meeting.
The consideration to be paid by O&M Holding in the proposed SMI Exchange
was determined through negotiations between O&M and SMI.
In connection with its written opinion, J.P. Morgan reviewed, among
other things: (i) the financial terms of the Agreement of Exchange,
including the financial terms of the Series B Preferred Stock, and the
financial terms of the acquisition of the medical supply distribution
business of Midwest Hospital Supply Company, Inc. ("Midwest"); (ii) a draft
of this Proxy Statement/Prospectus; (iii) certain information concerning
the businesses of SMI and Midwest provided to J.P. Morgan by the
managements of O&M and SMI and certain publicly available information
concerning the businesses of certain other companies engaged in businesses
J.P. Morgan considered comparable in certain respects to SMI, and the
reported market prices for certain other companies' securities deemed
comparable in certain respects; (iv) publicly available terms of certain
transactions involving companies J.P. Morgan considered comparable in
certain respects to SMI and the consideration paid for such companies; (v)
current and historical market prices of the O&M Common Stock; (vi) the
audited financial statements of O&M for the fiscal years ended December 31,
1991, 1992 and 1993, the audited financial statements of SMI for the fiscal
years ended April 30, 1991 and 1992, the eight-month period ended December
31, 1992 and the fiscal year ended December 31, 1993 and the unaudited
financial statements of the commodity supply business of SMI for the eleven
months ended November 30, 1993, and the audited financial statements of
Midwest for the fiscal years ended December 31, 1991 and 1992; and
(vii) certain internal financial analyses and forecasts prepared by O&M and
SMI and their respective managements.
In addition, J.P. Morgan held discussions with certain members of the
management of O&M and SMI with respect to certain aspects of the SMI
Exchange, and the past and current business operations of O&M and SMI, the
financial condition and future prospects and operations of O&M Holding, O&M
and SMI, the effects of the SMI Exchange on the financial condition and
future prospects of O&M Holding, O&M and SMI (including financial forecasts
of the combined businesses of O&M, SMI and Midwest), and certain other
matters J.P. Morgan believed necessary or appropriate to its inquiry. J.P.
Morgan reviewed such other financial studies and analyses and considered
such other information as J.P. Morgan deemed appropriate for the purposes
of its opinion.
In performing such analysis, J.P. Morgan used such valuation
methodologies as J.P. Morgan deemed necessary or appropriate for the
purposes of its opinion. J.P. Morgan's view is based on (i) J.P. Morgan's
consideration of the information O&M and SMI supplied to it to the date of
its opinion, (ii) J.P. Morgan's understanding of the financial terms of the
Agreement of Exchange, (iii) J.P. Morgan's understanding of the currently
contemplated capital structure and the anticipated credit standing of O&M
Holding and its subsidiaries upon consummation of the Exchanges, and
(iv) an assumption that the Exchanges will be consummated within the time
period contemplated by the Agreement of Exchange.
In giving its opinion, J.P. Morgan relied upon and assumed, without
independent verification, the accuracy and completeness of all information
that was publicly available or was furnished to it by O&M, SMI or the SMI
Shareholders or otherwise reviewed by it. J.P. Morgan has not verified the
accuracy or completeness of any such information and has not conducted any
evaluation or appraisal of any assets or liabilities, nor have any such
valuations or appraisals been provided to J.P. Morgan. J.P. Morgan did not
make any physical inspection of the properties or assets of O&M, SMI or
Midwest. In relying on financial analyses and forecasts provided to it,
J.P. Morgan assumed that they were reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by the
managements of O&M and SMI as to the expected future results of operations
and financial condition of O&M Holding, O&M and SMI.
J.P. Morgan's opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to it
as of, the date of its opinion. It should be understood that subsequent
developments may affect its opinion and that J.P. Morgan does not have any
obligation to update, revise, or reaffirm its opinion.
J.P. Morgan's opinion does not express a view as to the price at which
the O&M Holding Common Stock will trade if and when issued or at any future
time. Factors occurring after the date hereof may affect the value of the
businesses of O&M Holding, O&M and SMI after consummation of the Exchanges,
including but not limited to (i) changes in prevailing interest rates and
other factors which generally influence the price of securities, (ii)
adverse changes in the current capital markets, (iii) the occurrence of
adverse changes in the financial condition, business, assets, results of
operations or prospects of O&M Holding, O&M or SMI, and (iv) actions by or
restrictions of federal, state or other governmental agencies or regulatory
authorities, including recent health care reform proposals.
J.P. Morgan is a subsidiary of an internationally recognized
diversified financial services firm. As part of its investment banking
business, J.P. Morgan and its affiliates are continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, investments for passive and control purposes, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
No limitations were placed on J.P. Morgan by O&M with respect to the
investigation made or the procedures followed by it in preparing and
rendering its opinion.
The terms of the engagement of J.P. Morgan by O&M are set forth in a
letter agreement dated November 30, 1993 between J.P. Morgan and O&M (the
"Engagement Letter"). Pursuant to the terms of the Engagement Letter, O&M
has paid J.P. Morgan a fee of $100,000 in cash upon execution of the
Engagement Letter and $400,000 in cash plus warrants ("Warrants") for
100,000 shares of O&M Common Stock upon delivery of its oral opinion to the
O&M Board and execution by O&M of the Agreement of Exchange. O&M has
agreed to pay J.P. Morgan an additional fee of $500,000 in cash plus
Warrants for an additional 100,000 shares of the O&M Common Stock upon
consummation of the SMI Exchange. The Warrants will be exercisable until
approximately the third anniversary of the Closing of the SMI Exchange at
an exercise price of $19.75 per share (equal to the arithmetic average
closing price of the O&M Common Stock for ten (10) trading days preceding
the execution of the Agreement of Exchange). Pursuant to a registration
rights agreement, J.P. Morgan will have "piggyback" registration rights
with respect to the shares issuable upon exercise of the Warrants. In
addition, O&M has agreed to reimburse J.P. Morgan for all of its reasonable
out-of-pocket expenses, including reasonable attorneys' fees, and to
indemnify and hold harmless J.P. Morgan against certain liabilities and
expenses, including certain liabilities arising under the federal
securities laws.
The following is a summary of certain financial analyses used by J.P.
Morgan in connection with providing its oral opinion to the O&M Board on
December 21, 1993 and does not purport to be a complete description of the
analyses performed by J.P. Morgan. J.P. Morgan used substantially the same
types of financial analyses in preparing its written opinion dated April 6,
1994, as it used in providing its oral opinion.
Contribution Analysis
J.P. Morgan reviewed certain financial information and forecasted
financial information for the pro forma combined company resulting from the
Exchanges. In conducting its review, J.P. Morgan relied upon financial
information, financial forecasts and certain assumptions, and estimates of
certain synergies resulting from the business combination provided by the
respective managements of O&M and SMI. Such review indicated that, after
giving effect to certain forecasted cost savings (i) assuming the SMI
Exchange had been consummated on January 1, 1993 and assuming that the cash
portion of the purchase price were financed at rates prevailing for
companies of comparable credit quality to O&M, earnings per share of common
stock for the pro forma combined company for the year ended December 31,
1993, excluding certain one-time charges incurred by SMI and certain
one-time restructuring charges, would have been higher than earnings per
share of O&M as a stand alone company and (ii) assuming the SMI Exchange
were consummated on April 1, 1994 and assuming alternative financing
strategies and a range of interest rates considered appropriate, forecasted
earnings per share of common stock for the pro forma combined company for
the year ending December 31, 1994, excluding certain one-time restructuring
charges, would be substantially the same as or higher than forecasted
earnings per share for O&M as a stand alone company. Such review also
indicated that, at the Closing of the proposed SMI Exchange, the debt to
equity (including the Series B Preferred Stock) and debt to total capital
(including the Series B Preferred Stock) ratios for the pro forma combined
company would be approximately 115% and 54%, respectively, as compared to
54% and 35%, respectively, for O&M as a stand alone company.
Discounted Cash Flow Analysis
J.P. Morgan also analyzed the present value of SMI's (including
Midwest's) future cash flows. In conducting its analysis, J.P. Morgan
relied on certain assumptions, financial forecasts and other information
provided by the managements of O&M and SMI. Using discount rates ranging
from 9% to 10.25% per annum and assuming terminal value multiples ranging
from 15x to 19x of SMI's projected earnings before interest but after taxes
("EBIAT") in 2002, the analysis indicated that, at March 31, 1994, the net
after-tax present value of SMI's projected future cash flows from March 31,
1994 through 2002 and of its projected terminal value (less debt of
approximately $141 million) ranged from $110 to 165 million on a stand
alone basis (without giving effect to any operating or other efficiencies,
or any sales synergies, resulting from the SMI Exchange).
Selected Comparable Company Analysis
J.P. Morgan reviewed and compared certain actual and estimated
financial information for SMI and Midwest with corresponding information
for O&M and corresponding publicly available information for certain
publicly traded distribution companies (the "Distribution Comparable
Group") and certain publicly traded medical supply manufacturers (the
"Manufacturer Comparable Group") that J.P. Morgan considered comparable to
SMI in certain respects. The Distribution Comparable Group included AVNET,
Inc., Bergen Brunswig Corp., Bindley Western Industries, Inc., Cardinal
Distribution, Inc., Fleming Companies, Inc., Foxmeyer Corp., Genuine Parts
Co., Grainger (W.W.), Inc., McKesson Corp., O&M, SuperValu Inc. and Sysco
Corp. The Manufacturer Comparable Group included Abbot Laboratories,
Baxter, Becton Dickinson and Co., Johnson & Johnson, Kendall International
Inc. and McGaw Inc. Such analysis indicated that, excluding certain
results which J.P. Morgan considered anomalous (i) the arithmetic mean
ratios (excluding the high and low) of market capitalization (the market
value of common stock, plus the book value of preferred stock and debt,
less the book value of cash, cash equivalents and marketable securities) to
latest twelve-months' sales and of market capitalization to latest twelve-
months' earnings before interest, taxes, depreciation and amortization
("EBITDA") were 0.40 and 10.30 for the Distribution Comparable Group and
1.54 and 9.01 for the Manufacturer Comparable Group, as compared to
corresponding ratios of 0.34 and 11.49 for O&M and (ii) the arithmetic mean
ratios (excluding the high and low) of common stock market price to
estimated 1993 and estimated 1994 earnings per share of common stock were
16.36 and 14.29 for the Distribution Comparable Group and 16.02 and 13.52
for the Manufacturer Comparable Group, as compared to 21.41 and 18.33 for
O&M. Such analysis suggested a market trading value reference range for
the SMI Common Stock, as a stand alone public company, of $89 to $180
million.
None of the companies used in the comparable company analysis is
identical to SMI. Accordingly, an analysis of the results of such a
comparison is not simply mathematical; rather, it involves complex
considerations and judgments concerning differences between historical and
forecasted financial and operating characteristics of the comparable
companies and SMI, and other facts that could affect the public trading
values of such companies and SMI.
Selected Comparable Transaction Analysis
J.P. Morgan also reviewed the consideration paid in, and certain other
financial information relating to, selected acquisitions after 1990 of
companies that distribute products to providers of health care including
the acquisition of General Medical by Kelso & Company, the acquisition of
Healthco International by Hicks, Muse & Co. and the acquisition of Durr-
Fillauer Medical, Inc. by Bergen Brunswig Corp. (the "Selected
Transactions"). Such analysis indicated that for the Selected Transactions
(i) the ratios of aggregate consideration paid (including debt assumed) to
last available fiscal year's sales and to last available fiscal year's
EBITDA ranged from 0.37 to 0.46 and 7.8 to 16.0, respectively and (ii) the
ratio of aggregate consideration paid for common stock to last available
fiscal year's earnings available to common stock ranged from 17 to 34.
Such analysis suggested an acquisition price reference range for the SMI
Common Stock of $59 to $290 million.
None of the companies used in the comparable transaction analysis was
identical to SMI and none of the business combinations resulting from such
transactions is identical to the business combination resulting from the
SMI Exchange. Accordingly, an analysis of the results of such a comparison
is not simply mathematical; rather it involves complex considerations and
judgments concerning differences between historical and projected financial
and operating characteristics of the comparable acquired companies, their
acquirors and the resulting business combinations, and SMI, O&M and the
resulting business combination, and other factors that could affect the
acquisition of SMI.
Series B Preferred Stock Analysis
J.P. Morgan also reviewed the financial terms of the Series B
Preferred Stock and analyzed the range of values of such Preferred Stock
based upon certain assumptions and valuation theories. Such analysis
indicated that the economic value of the Series B Preferred Stock on
December 21, 1993 was no more than its aggregate par value.
The foregoing summary does not purport to be a complete description of
the analyses performed by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of
the summary set forth above, without considering the analysis as a whole,
could create an incomplete view of the processes underlying J.P. Morgan's
opinion. In arriving at its fairness determination, J.P. Morgan considered
the results of all such analyses. The analyses were prepared solely for
purposes of J.P. Morgan's providing its opinion to the O&M Board as to the
fairness, from a financial point of view, to O&M, of the consideration to
be paid by O&M Holding in the proposed SMI Exchange, and do not purport to
be appraisals. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses.
Accounting Treatment
The transactions contemplated by the Agreement of Exchange will be
accounted for under the purchase method of accounting as prescribed under
generally accepted accounting principles. Under this method of accounting,
the consideration will be allocated to the assets acquired and liabilities
assumed of SMI based on their estimated fair values as of the Effective
Time. Any excess purchase price over the estimated fair value of the net
assets acquired will be recorded as goodwill, which will be amortized on a
straight-line basis over the estimated period of benefit. The operating
results of SMI will be included with those of O&M from the Effective Time.
See "Unaudited Pro Forma Combined Condensed Financial Statements."
THE AGREEMENT OF EXCHANGE
The following is a summary of certain provisions of the Agreement of
Exchange, a copy of which is attached to this Proxy Statement/Prospectus as
Annex III. This summary is qualified in its entirety by reference to the
Agreement of Exchange (including the O&M Plan of Exchange and the SMI Plan
of Exchange) which is incorporated herein by reference.
The Exchanges
At the Effective Time (i) each share of O&M Common Stock issued and
outstanding immediately prior to the Effective Time will be exchanged for
one share of O&M Holding Common Stock pursuant to the O&M Plan of Exchange
and (ii) all of the shares of SMI Common Stock issued and outstanding
immediately prior to the Effective Time (except shares as to which
dissenters' rights may be perfected) will be exchanged for the SMI Exchange
Consideration pursuant to the SMI Plan of Exchange. The O&M Exchange and
the SMI Exchange will have the effects specified in the VSCA and the
Pennsylvania Business Corporation Law (the "PBCL"), respectively.
As soon as practicable after the confirmation of the satisfaction or
waiver of all conditions to the Exchanges at a meeting held for such
purpose (the "Closing") and provided that the Agreement of Exchange has not
been terminated (i) SMI will cause the SMI Articles of Exchange to be filed
with the Pennsylvania Department of State in accordance with the PBCL and
(ii) O&M Holding will cause the O&M Articles of Exchange to be filed with
the SCC in accordance with the VSCA. The Effective Time of the Exchanges
is anticipated to occur on or about May 10, 1994.
At the Effective Time, the name of O&M Holding will be changed to
"Owens & Minor, Inc." and O&M's name will be changed to "Owens & Minor
Medical, Inc.".
SMI Exchange
Upon consummation of the SMI Exchange, all of the shares of SMI Common
Stock issued and outstanding immediately prior to the Effective Time
(except shares as to which dissenters' rights may be perfected) will, by
reason of the SMI Exchange and without any action by any holder of SMI
Common Stock, be converted into and exchanged for the right to receive the
SMI Exchange Consideration. The SMI Exchange Consideration will be
allocated among the holders of SMI Common Stock in accordance with such
holders' elections made pursuant to the SMI Plan of Exchange. The SMI Plan
of Exchange provides that any holder of shares of SMI Common Stock may make
an election to receive cash (a "Cash Election") for up to 75% of the
outstanding shares of SMI Common Stock held by such holder, which Cash
Elections will be prorated among the electing holders to the extent such
Cash Elections in the aggregate exceed $40,200,000 (the "Aggregate Cash
Consideration"). To the extent that such Cash Elections in the aggregate
are less than the Aggregate Cash Consideration, the non-electing holders
also will receive cash in part. As a result of such elections, the
proportionate ownership interest of the Series B Preferred Stock of the
former holders of SMI Common Stock may be different than their
proportionate ownership interest of SMI Common Stock.
No fractional shares of Series B Preferred Stock will be issued in the
SMI Exchange. Instead, the number of shares of Series B Preferred Stock
that a holder of SMI Common Stock receives as a result of the SMI Exchange
will be rounded to the nearest full share (with a fraction of .5 or greater
being rounded to the next highest full share). Each share of SMI Common
Stock held in the treasury of SMI immediately prior to the Effective Time
will be automatically canceled and retired and cease to exist and no cash
or securities or other payment will be paid or payable in respect thereof.
O&M Exchange
At the Effective Time, by reason of the O&M Exchange and without any
action by any of the holders thereof: (i) each share of O&M Common Stock
issued and outstanding immediately prior to the Effective Time will be
automatically converted into and exchanged for one share of O&M Holding
Common Stock; (ii) each outstanding right to acquire a share of O&M Common
Stock, whether by stock option, conversion right or otherwise, will be
automatically converted into and exchanged for one right to acquire a share
of O&M Holding Common Stock; and (iii) each outstanding right to acquire a
share of O&M Series A Preferred Stock, $10 par value per share (the "O&M
Series A Preferred Stock"), pursuant to the Rights Agreement of O&M, dated
as of June 22, 1988, as amended (the "O&M Rights Agreement"), will be
automatically converted into and exchanged for the right to acquire a share
of Series A Preferred Stock (the "Rights") pursuant to the O&M Rights
Agreement, as amended as of the Effective Time, to provide, among other
things, for O&M Holding's assumption of the O&M Rights Agreement (the "O&M
Holding Rights Agreement").
Accordingly, at the Effective Time, each certificate evidencing
ownership of outstanding shares of O&M Common Stock will automatically and
without any action on the part of the holder thereof be deemed to evidence
an identical number of shares of O&M Holding Common Stock. Following the
Effective Time, and as a result of the change of the name of O&M Holding to
"Owens & Minor, Inc.," the O&M Shareholders will continue to own common
stock in a company named Owens & Minor, Inc., but such company will be a
holding company with two subsidiaries: Owens & Minor Medical, Inc. and
SMI. IT WILL NOT BE NECESSARY FOR THE HOLDERS OF O&M COMMON STOCK TO
SURRENDER THEIR CERTIFICATES FOR NEW CERTIFICATES REPRESENTING O&M HOLDING
COMMON STOCK.
Representations, Warranties and Covenants
The Agreement of Exchange contains various representations, warranties
and covenants of O&M, O&M Holding, SMI and the SMI Shareholders
(collectively, the "Parties").
Pursuant to the Agreement of Exchange, the Parties have agreed that
they will: (i) use their respective best efforts to take all actions and
to do all things necessary, proper or advisable to consummate and make
effective the transactions contemplated by the Agreement of Exchange; (ii)
use their respective best efforts to obtain all material consents, waivers
and approvals required to consummate the transactions contemplated by the
Agreement of Exchange; and (iii) permit representatives of each Party to
have appropriate access to the other's offices, warehouses, other
facilities, operating data and other information.
In the Agreement of Exchange, SMI covenants that prior to the Closing
it will, among other things: (i) conduct its operations in the ordinary
course consistent with past practice except as otherwise specifically
provided therein; (ii) not enter into or participate in any discussions or
negotiations with any other person relating to an acquisition of SMI or the
SMI Common Stock; and (iii) terminate certain agreements with affiliates of
SMI.
In the Agreement of Exchange, the SMI Shareholders covenant that prior
to the Closing they will, among other things: (i) not enter into or
participate in any discussions or negotiations with any other person
relating to an acquisition of SMI or the SMI Common Stock; (ii) cause the
acquisition of Midwest to be consummated as provided in the Agreement of
Exchange (which has occurred); and (iii) vote, or cause to be voted, all
shares of SMI Common Stock owned by each of them in favor of approval of
the SMI Plan of Exchange and the transactions contemplated by the Agreement
of Exchange.
In the Agreement of Exchange, O&M covenants that prior to the Closing
it will, among other things: (i) duly call the Annual Meeting or a special
meeting for the purpose of approving the transactions contemplated by the
Agreement of Exchange, including the O&M Plan of Exchange; and (ii) deliver
this Proxy Statement/Prospectus and form of proxy to the O&M Shareholders
for the purpose of soliciting the proxies of the O&M Shareholders in favor
of such approval.
Liquidated Damages
The Agreement of Exchange provides that (i) if SMI or the SMI
Shareholders terminate the Agreement of Exchange because of a material
breach by O&M of any representation or warranty therein, O&M shall pay to
SMI $2,000,000 as liquidated damages and (ii) if O&M or O&M Holding
terminates the Agreement of Exchange because of a material breach by SMI or
the SMI Shareholders of any representation or warranty therein, SMI shall
pay to O&M $2,000,000 as liquidated damages.
Conditions to the Exchanges
The obligations of SMI and the SMI Shareholders to consummate the
transactions contemplated by the Agreement of Exchange are subject to the
receipt of certain closing certificates, documents and legal opinions and
the fulfillment of the following conditions, among others: (i) the O&M
Plan of Exchange and the transactions contemplated by the Agreement of
Exchange shall have been approved by the O&M Shareholders; (ii) no order,
injunction or decree shall have been issued and remain in effect that makes
the Exchanges or any transaction contemplated by the Agreement of Exchange
illegal, that imposes limitations on the ability of SMI or O&M to operate
their businesses following the Exchanges (other than as specifically
permitted by the Agreement of Exchange) or that would otherwise prevent
consummation of the transactions contemplated by the Agreement of Exchange
and the Plans of Exchange; (iii) the waiting period under the HSR Act
applicable to the SMI Exchange shall have expired or terminated (which has
occurred); (iv) SMI shall have received all authorizations, consents and
approvals of governmental authorities and of certain third parties deemed
reasonably necessary for consummation of the transactions contemplated by
the Agreement of Exchange; (v) no suit, action or proceeding before any
court or other governmental authority shall be pending seeking to restrain,
change or delay the transactions contemplated by the Agreement of Exchange
or to challenge any material term of the Agreement of Exchange; and (vi)
O&M shall have performed each obligation and covenant to be performed by it
under the Agreement of Exchange on or prior to the Effective Time and the
representations and warranties of O&M shall be true and correct in all
material respects as of the Effective Time.
The obligations of O&M and O&M Holding to consummate the transactions
contemplated by the Agreement of Exchange are subject to the receipt of
certain closing certificates, documents and legal opinions and the
fulfillment of the following conditions, among others: (i) the O&M Plan of
Exchange and the transactions contemplated by the Agreement of Exchange
shall have been approved by the O&M Shareholders; (ii) no order, injunction
or decree shall have been issued and remain in effect that makes the
Exchanges or any transaction contemplated by the Agreement of Exchange
illegal, that imposes limitations on the ability of SMI or O&M to operate
their businesses following the Exchanges (other than as specifically
permitted by the Agreement of Exchange) or that would otherwise prevent
consummation of the transactions contemplated by the Agreement of Exchange
and the Plans of Exchange; (iii) the waiting period under the HSR Act
applicable to the SMI Exchange shall have expired or terminated (which has
occurred); (iv) O&M shall have received all authorizations, consents and
approvals of governmental authorities and of certain third parties deemed
reasonably necessary for consummation of the transactions contemplated by
the Agreement of Exchange (including, without limitation, the consent of
each of O&M's lenders and Voluntary Hospitals of America, Inc. ("VHA") (a
group purchasing organization whose members accounted for approximately 40%
of the combined revenues of O&M and SMI in 1993) (which has occurred); (v)
no suit, action or proceeding before any court or other governmental
authority shall be pending seeking to restrain, change or delay the
transactions contemplated by the Agreement of Exchange or to challenge any
material term of the Agreement of Exchange; (vi) O&M Holding shall have
received on or prior to the Effective Time proceeds of financings that are
adequate, in O&M Holding's reasonable opinion, to finance SMI's and O&M's
indebtedness and the consummation of the transactions contemplated by the
Agreement of Exchange; (vii) the SEC shall have declared the Registration
Statement effective and no stop order or similar order shall have been
threatened or entered by the SEC; (viii) O&M shall have received certain
assurances with respect to environmental compliance and condition of SMI's
properties; (ix) the Opinion of J.P. Morgan shall not have been withdrawn
by J.P. Morgan before the Effective Time; (x) O&M shall have received a
written opinion of Hunton & Williams (counsel to O&M and O&M Holding) to
the effect that the Exchanges will not result in the recognition of gain or
loss by SMI, O&M Holding, O&M or the O&M Shareholders for federal income
tax purposes; and (xi) SMI and the SMI Shareholders shall have performed
each obligation and covenant to be performed by each of them under the
Agreement of Exchange on or prior to the Effective Time and the
representations and warranties of SMI and the SMI Shareholders shall be
true and correct in all material respects as of the Effective Time.
Termination and Amendment
The Agreement of Exchange may be terminated and the Exchanges
abandoned at any time prior to the Effective Time, whether before or after
approval by the O&M Shareholders of the O&M Plan of Exchange and the
transactions contemplated by the Agreement of Exchange: (i) by mutual
consent of the Parties; (ii) by SMI and the SMI Shareholders if O&M enters
into a definitive agreement to merge or be acquired or to acquire another
corporation or entity for aggregate consideration in excess of
$100,000,000; (iii) by SMI and the SMI Shareholders if O&M fails to perform
in any material respect any of its obligations under the Agreement of
Exchange or by O&M and O&M Holding if SMI or any of the SMI Shareholders
fails to perform in any material respect any of its obligations under the
Agreement of Exchange; (iv) by SMI and the SMI Shareholders, on the one
hand, and O&M, on the other, if the other Party materially breaches a
representation or warranty; (v) by O&M or the SMI Shareholders if the O&M
Plan of Exchange is not approved by the O&M Shareholders; and (vi) by any
of the Parties if the Effective Time does not occur on or before June 30,
1994.
The Agreement of Exchange may be amended by the Parties at any time
before or after approval of the transactions contemplated thereby. The O&M
Plan of Exchange may be amended by the O&M Board and the O&M Holding Board
at any time before or after its approval by the O&M Shareholders; provided,
however, that after any such approval, no amendment may be made that would
require further approval by the O&M Shareholders under the VSCA unless such
approval is obtained. If such approval is sought for a material amendment,
O&M will provide O&M Shareholders with supplemental proxy materials.
Indemnification
The SMI Shareholders have agreed to indemnify O&M, O&M Holding and SMI
from any loss they may incur as a consequence of (i) any breach or
inaccuracy of any representation or warranty made by SMI or the SMI
Shareholders in or pursuant to the Agreement of Exchange, (ii) any failure
of SMI or any of the SMI Shareholders to perform any of its or their
obligations under the Agreement of Exchange or the agreements delivered
pursuant to the Agreement of Exchange, (iii) the conduct of the business of
SMI prior to the Effective Time to the extent that such losses are not
reflected on the balance sheet of SMI as of April 30, 1994, or disclosed in
the Agreement of Exchange and (iv) certain other contingencies. O&M and
O&M Holding have agreed to indemnify the SMI Shareholders from any loss
they may incur as a consequence of (i) any breach or inaccuracy of any
representation or warranty made by O&M in or pursuant to the Agreement of
Exchange, (ii) any failure of O&M or O&M Holding to perform any of its
obligations under the Agreement of Exchange or the agreements delivered
pursuant to the Agreement of Exchange or (iii) the conduct by SMI, O&M or
O&M Holding of the business of SMI after the Effective Time.
Dissenters' Rights of Holders of SMI Common Stock
All of the SMI Shareholders have agreed to vote in favor of the SMI
Plan of Exchange and, therefore, will not be entitled to dissenters'
rights that otherwise would be available under the PBCL. In the event any
holder of SMI Common Stock other than the SMI Shareholders perfects its
dissenters' rights and is entitled to receive an amount of consideration in
excess of the consideration it would be entitled to receive under the SMI
Plan of Exchange, the SMI Shareholders have agreed to indemnify O&M Holding
for the amount of any such excess as well as all costs incurred with
respect to the dissenters' rights proceedings.
Series B Preferred Stock
At the Effective Time, all of the outstanding shares of SMI Common
Stock (except shares as to which dissenters' rights may be perfected) will
be exchanged for the SMI Exchange Consideration, which includes the Series
B Preferred Stock. The Agreement of Exchange requires that the Series B
Preferred Stock have the rights and designations set forth in the O&M
Holding Articles of Incorporation attached hereto as Annex IV. For a
discussion of such rights and designations, see " - Creation of O&M Holding
- - Capitalization of O&M Holding - Series B Preferred Stock."
O&M Holding Board
The members of the O&M Board serving at the Effective Time will serve
as members of the O&M Holding Board. In addition, from and after the
Effective Time and for so long as any share of Series B Preferred Stock
remains outstanding, the holders of the Series B Preferred Stock, voting as
a separate group, will be entitled to elect the Series B Preferred Stock
Director. Such member will be in addition to the number of directors to be
elected by the holders of O&M Holding Common Stock and Series B Preferred
Stock, voting as a single class. The initial Series B Preferred Stock
Director expected to be elected by the holders of the Series B Preferred
Stock immediately following the Effective Time is C. G. Grefenstette. See
" - Operation of O&M Holding After the Exchanges - Directors and Officers."
In addition, pursuant to the Agreement of Exchange, upon any
conversion of the outstanding Series B Preferred Stock into O&M Holding
Common Stock and for so long as the SMI Shareholders, collectively, have
the right to vote at least 5% of the outstanding shares of O&M Holding
Common Stock, O&M Holding has agreed to exercise all authority under
applicable law, subject to the fiduciary obligations of the O&M Holding
Board, to cause the SMI Shareholders' Nominee, who must be reasonably
acceptable to the O&M Holding Board, to be included in the slate of
nominees at each annual meeting of shareholders of O&M Holding.
Restrictions Applicable to the SMI Shareholders' O&M Holding Capital Stock
In the Agreement of Exchange, each of the SMI Shareholders has agreed
to certain voting and other restrictions discussed below with respect to
the shares of Series B Preferred Stock to be acquired in the SMI Exchange
and the shares of O&M Holding Common Stock into which such shares are
convertible.
Voting Agreement
Each SMI Shareholder has agreed that, so long as he owns any shares of
Series B Preferred Stock or the SMI Shareholders, collectively with their
respective Affiliates, own 5% or more of the outstanding shares of O&M
Holding Common Stock, he will vote such shares of Series B Preferred Stock
or O&M Holding Common Stock, as the case may be, on any matter to be voted
upon by the holders of such shares, in the same proportion as the votes
cast on such matter by all other holders of the O&M Holding Common Stock
(excluding for such purposes shares held by a person or "group" within the
meaning of Section 13(d)(3) of the Exchange Act, which beneficially owns 5%
or more of the outstanding shares of O&M Holding Common Stock other than
any employee benefit plan of O&M Holding, O&M or any subsidiary of O&M).
The foregoing voting agreement would not apply with respect to (i) an
amendment to the provisions of the Series B Preferred Stock, (ii) an
amendment to the O&M Holding Articles of Incorporation or bylaws of O&M
Holding to adversely affect the relative rights and preferences of the
Series B Preferred Stock or (iii) the election of the Series B Preferred
Stock Director and the SMI Shareholders' Nominee.
Standstill Agreement
Each SMI Shareholder has agreed that, so long as he owns any shares of
Series B Preferred Stock or the SMI Shareholders, collectively with their
respective Affiliates, own 5% or more of the outstanding shares of O&M
Holding Common Stock, he will not (and will cause his Affiliates not to) do
any of the following: (i) acquire, offer to acquire or agree to acquire,
or assist any other person in acquiring, any shares of any class of O&M
Holding Capital Stock; (ii) form or in any way participate in a "group"
within the meaning of Section 13(d)(3) of the Exchange Act with respect to
O&M Holding Capital Stock (except insofar as such group consists solely of
the SMI Shareholders); (iii) solicit proxies with respect to O&M Holding
Capital Stock or participate by taking a position contrary to that of O&M
Holding Board in any contest relating to the election of directors or any
other matter submitted to shareholders at an annual or special meeting;
(iv) deposit any O&M Holding Capital Stock in a voting trust or enter into
a voting agreement with respect to such shares other than as provided
above; (v) transfer, sell, pledge or encumber any O&M Holding Capital Stock
except under certain specified circumstances; or (vi) initiate or assist
any other person to initiate any tender or exchange offer for O&M Holding
Capital Stock or any "affiliated transaction" (defined for these purposes
generally as defined in the VSCA).
Restrictions on Transfer
The shares of Series B Preferred Stock to be issued to the SMI
Shareholders in the SMI Exchange (and the shares of O&M Holding Common
Stock into which such shares may be converted) will be issued pursuant to
an exemption from registration under the Securities Act of 1933, as amended
(the "Securities Act"). The Agreement of Exchange provides that no SMI
Shareholder may transfer shares of Series B Preferred Stock other than by
gift, descent or distribution, to beneficiaries of a trust existing as of
December 22, 1993 or to another SMI Shareholder (provided that any such
transferee, other than a charitable institution holding less than 1% of the
outstanding O&M Holding Common Stock, agrees to be subject to the same
restrictions and agreements with respect to such shares as the SMI
Shareholders have agreed to) (collectively, "Permitted Transferees"). In
addition, the Agreement of Exchange provides that an SMI Shareholder may
transfer shares of O&M Holding Common Stock to a person other than a
Permitted Transferee only after first offering O&M Holding the right to
purchase such shares. Finally, the Agreement of Exchange requires that any
transfer to a person other than a Permitted Transferee be pursuant to an
effective registration statement, pursuant to certain provisions of Rule
144 promulgated under the Securities Act or pursuant to an exemption from
registration under the Securities Act.
Registration Rights Agreement
O&M Holding and the SMI Shareholders will, at the Effective Time,
enter into a Registration Rights Agreement (the "Registration Rights
Agreement") pursuant to which the SMI Shareholders will, subject to the
provisions of the Registration Rights Agreement, have the right on two
occasions to require O&M Holding at its expense to use all reasonable
efforts to register under the Securities Act shares of their O&M Holding
Common Stock, provided that the reasonably anticipated aggregate price to
the public of such shares is at least $50,000,000. The right of the SMI
Shareholders to require O&M Holding to register shares of O&M Holding
Common Stock will begin 18 months following the Effective Time and will
continue for a period of seven years after the Effective Time (the
"Registration Rights Period"). In addition, during the Registration Rights
Period and except as otherwise provided in the Registration Rights
Agreement, in the event O&M Holding registers shares of O&M Holding Common
Stock either for its own account or the account of holders of O&M Holding
Common Stock other than the SMI Shareholders, O&M Holding must use all
reasonable efforts to include in any such registration any shares of O&M
Holding Common Stock requested by the SMI Shareholders to be included in
any such registration. With respect to any shares of O&M Holding Common
Stock which the SMI Shareholders request to have registered under the
Registration Rights Agreement, O&M Holding will have the right and option
to purchase all or any portion of such shares at the average of the closing
prices of the O&M Holding Common Stock on the NYSE for the 30 consecutive
trading days preceding the date on which O&M Holding exercises such option
to purchase.
Noncompetition Agreement
Each SMI Shareholder has agreed that, for a period of three years
after the Effective Time, he will not compete with or otherwise have a
financial or other interest in any business that is competitive with the
business conducted by O&M or SMI as of the Effective Time; provided,
however, that the Shareholders and their Affiliates may own up to 5% of the
outstanding shares of any publicly traded class of a company that competes
with O&M or SMI.
CREATION OF O&M HOLDING
General
O&M Holding will become the publicly-held parent of O&M and SMI.
Under the Plans of Exchange, each share of O&M Common Stock outstanding at
the Effective Time will be exchanged for one share of O&M Holding Common
Stock and all shares of SMI Common Stock (except shares as to which
dissenters' rights may be perfected) outstanding at the Effective Time will
be exchanged for the SMI Exchange Consideration.
All of the outstanding shares of O&M Holding Capital Stock will be
held by the O&M Shareholders and the holders of SMI Common Stock. The
proportionate ownership interest of the O&M Shareholders, with respect to
each other, in O&M Holding will not be affected by the O&M Exchange.
Pursuant to the SMI Plan of Exchange, the holders of SMI Common Stock
(except shares as to which dissenters' rights may be perfected) will
receive the SMI Exchange Consideration, including the Series B Preferred
Stock, in exchange for all the outstanding shares of SMI Common Stock.
Subject to the rights and privileges of the Series B Preferred Stock, the
rights and privileges of the holders of O&M Holding Common Stock will be
substantially the same as the rights and privileges of the holders of O&M
Common Stock. O&M and O&M Holding are each Virginia corporations and their
articles of incorporation are substantially the same other than the
designation of the Series B Preferred Stock in the O&M Holding Articles of
Incorporation. Pursuant to the rules of the NYSE, after the Effective
Time, the O&M Common Stock will be delisted from trading thereon, and O&M
Holding Common Stock will be listed in its place. See " - Comparison of
Rights of Holders of O&M Common Stock and O&M Holding Common Stock."
IT WILL NOT BE NECESSARY FOR THE HOLDERS OF O&M COMMON STOCK TO
SURRENDER THEIR CERTIFICATES FOR NEW CERTIFICATES REPRESENTING O&M HOLDING
COMMON STOCK. Stock certificates representing the O&M Common Stock will
automatically represent an equal number of shares of O&M Holding Common
Stock after the O&M Exchange. As a result of the transactions contemplated
by the Agreement of Exchange and the change of the name of O&M Holding to
"Owens & Minor, Inc.," the O&M Shareholders will continue to own stock in a
company named Owens & Minor, Inc., but such company will be a holding
company with two subsidiaries: Owens & Minor Medical, Inc. and SMI.
Vote Required
Under the VSCA, holders of more than two-thirds of the outstanding
shares of the O&M Common Stock must approve the O&M Plan of Exchange.
Abstentions and Broker Shares not voted on Proposal 1 will not be
considered votes for such approval. A copy of the O&M Plan of Exchange,
which is attached to this Proxy Statement/Prospectus as Annex I, is
incorporated herein by reference.
Conditions to the Effectiveness of the O&M Exchange
O&M will file the O&M Articles of Exchange with the SCC as soon as
practicable after the Closing, which is presently anticipated to occur on
May 10, 1994, or as soon thereafter as the conditions of the effectiveness
of the O&M Plan of Exchange are satisfied. The O&M Plan of Exchange will
become effective at the time specified in the O&M Articles of Exchange upon
the issuance of a certificate of exchange by the SCC. See " - The
Agreement of Exchange - Conditions to the Exchanges."
Directors and Officers of O&M Holding Immediately After the Effective Time
The O&M Holding Board will consist of ten directors, who will be
divided into three classes, and the Series B Preferred Stock Director. The
members of the O&M Board at the Effective Time and the Series B Preferred
Stock Director will serve initially as members of the O&M Holding Board.
See "Proposal 2: Election of Directors - Nominees for Election to the O&M
Board" and "Proposal 2: Election of Directors - Members of the O&M Board
Continuing in Office." It is anticipated that the holders of the Series B
Preferred Stock will elect C. G. Grefenstette to the O&M Holding Board
immediately following the Effective Time to serve as the initial Series B
Preferred Stock Director. See " - Operation of O&M Holding After the
Exchanges - Directors and Officers."
At the Effective Time, it is expected that the following executive
officers of O&M and Richard P. Byington, currently President of SMI, will
hold the offices of O&M Holding indicated below:
Name Office
G. Gilmer Minor, III President and Chief Executive Officer
Robert E. Anderson, III Executive Vice President
Henry A. Berling Executive Vice President
Richard P. Byington Executive Vice President
Craig R. Smith Executive Vice President
Drew St. J. Carneal Senior Vice President, Corporate
Counsel and Corporate Secretary
Glenn J. Dozier Senior Vice President and Chief
Financial Officer
Compensation for the executive officers of O&M Holding will be the same as,
and in lieu of, the compensation paid to the executive officers of O&M.
See "Proposal 2: Election of Directors - Executive Compensation."
Interests of Directors and Officers
Other than the securities ownership indicated in the table set forth
below in the section "Proposal 2: Election of Directors - O&M Common Stock
Owned By Principal Shareholders and Management," no director or officer of
O&M has any material interest in the O&M Exchange.
Liability of Officers and Directors
The VSCA and O&M's bylaws require indemnification of O&M's directors
and officers. Under the VSCA, a Virginia corporation generally is
authorized to indemnify its directors and officers in civil or criminal
actions if they acted in good faith and believed their conduct to be in the
best interests of the corporation and, in the case of criminal actions, had
no reasonable cause to believe that the conduct was unlawful. O&M's bylaws
require indemnification of directors and officers with respect to certain
liabilities, expenses and other amounts imposed upon them by reason of
having been a director or officer, except in the case of willful misconduct
or a knowing violation of the criminal law. The VSCA permits a Virginia
corporation to limit or totally eliminate the liability of a director or
officer in a shareholder or derivative proceeding. O&M's bylaws provide
that no damages may be assessed against a director or officer of O&M in a
shareholder or derivative proceeding except for willful misconduct or a
knowing violation of the criminal law or any federal or state securities
law. The O&M Holding Articles of Incorporation will include substantially
similar provisions.
O&M Holding Articles of Incorporation
The O&M Holding Articles of Incorporation, which are attached to this
Proxy Statement/Prospectus as Annex IV and which are incorporated herein by
reference, are substantially the same as the present Amended and Restated
Articles of Incorporation of O&M (the "O&M Articles of Incorporation")
except for the designation of the Series B Preferred Stock of O&M Holding.
See " - Comparison of Rights of Holders of O&M Common Stock and O&M Holding
Common Stock."
Capitalization of O&M Holding
The O&M Articles of Incorporation presently authorize 30,000,000
shares of O&M Common Stock, 1,000,000 shares of cumulative preferred stock,
300,000 shares of which have been designated as O&M Series A Preferred
Stock issuable pursuant to the O&M Rights Agreement. The authorized
capital stock of O&M Holding will be 200,000,000 shares of O&M Holding
Common Stock, and 10,000,000 shares of Cumulative Preferred Stock, of which
300,000 shares will be designated as Series A Preferred Stock issuable
pursuant to the O&M Holding Rights Agreement and 1,150,000 shares will be
designated as Series B Preferred Stock issuable pursuant to the SMI Plan of
Exchange. The following is a summary of certain rights and privileges of
the holders of O&M Holding Common Stock and is qualified by reference to
the laws of Virginia and the O&M Holding Articles of Incorporation, which
are attached hereto as Annex IV and incorporated herein by reference.
The O&M Holding Common Stock will have one vote per share and will
vote together as a class with the holders of the Series B Preferred Stock
on all matters, except as otherwise provided by Virginia law, with respect
to certain amendments to the O&M Holding Articles of Incorporation and
bylaws and in the election of the Series B Preferred Stock Director. The
holders of the Series B Preferred Stock initially will have 4.04 votes per
share. Accordingly, on an as-converted basis, the Series B Preferred Stock
held by the former holders of SMI Common Stock will represent approximately
18.5% of the O&M Holding voting stock outstanding immediately following the
Effective Time. The remaining 81.5% of the O&M Holding Voting stock will
be owned by the O&M Shareholders.
The holders of Series B Preferred Stock will be entitled to elect the
Series B Preferred Stock Director. Holders of O&M Holding Capital Stock
(i) are not entitled to cumulative voting rights for the election of
directors and (ii) have no preemptive rights to subscribe for additional
securities.
O&M Holding Common Stock
Subject to the rights of holders of any outstanding shares of Series B
Preferred Stock and any other dividend preference of any outstanding series
of Cumulative Preferred Stock, holders of outstanding shares of O&M Holding
Common Stock are entitled to share ratably in dividends, according to the
number of shares of O&M Holding Common Stock held by each holder, from
sources legally available therefor, if and when declared by the O&M Holding
Board. No dividends, other than a dividend in O&M Holding Common Stock or
in other Junior Stock (as defined below), may be paid or declared on the
O&M Holding Common Stock unless the accrued dividends on each outstanding
share of Series B Preferred Stock and any other dividend preference of any
outstanding series of Cumulative Preferred Stock have been fully paid or
declared and set apart for payment. See " - Series B Preferred Stock -
Dividend Rights." It is expected that, subject to the payment of dividends
accrued on Cumulative Preferred Stock, the O&M Holding Board will declare
dividends on O&M Holding Common Stock at the dividend rate currently being
paid and on the same quarterly schedule now followed by O&M with respect to
the O&M Common Stock.
After payment of a $100 per share liquidation preference plus any
accrued and unpaid dividends to the holders of the outstanding shares of
Series B Preferred Stock and any other liquidation preference of any
outstanding series of Cumulative Preferred Stock, the remaining assets will
be paid or distributed to the holders of O&M Holding Common Stock ratably
according to the number of shares held by each holder in the event of the
voluntary or involuntary dissolution, liquidation or winding up of O&M
Holding. See " - Series B Preferred Stock - Liquidation Rights."
The transfer agent and registrar for O&M Holding Common Stock will be
Wachovia Bank & Trust, N.A.
Series B Preferred Stock
Voting Rights. The Series B Preferred Stock will have the number of
votes per share equal to the number of shares of O&M Holding Common Stock
into which such stock may be converted (initially 4.04 shares of O&M
Holding Common Stock for each share of Series B Preferred Stock). The
Series B Preferred Stock will vote together as a single class with the O&M
Holding Common Stock on all matters, except as provided by Virginia law,
with respect to certain amendments to the O&M Holding Articles of
Incorporation and bylaws and in the election of the Series B Preferred
Stock Director. Immediately following the Exchanges, on an as-converted
basis, the Series B Preferred Stock will constitute 18.5% of the
outstanding shares of O&M Holding voting stock then outstanding. In
addition, the holders of Series B Preferred Stock will be entitled to elect
the Series B Preferred Stock Director to the O&M Holding Board.
Dividend Rights. The Series B Preferred Stock will have an annual
preferential dividend of $4.50 per share. Such dividends will be
cumulative. As long as the Series B Preferred Stock is outstanding, O&M
Holding may not declare, pay or set aside dividends on the O&M Holding
Common Stock or any other class of stock of O&M Holding ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to
the Series B Preferred Stock ("Junior Stock") other than a dividend in O&M
Holding Common Stock or unless all accrued dividends on the Series B
Preferred Stock have been paid or declared and set aside for payment.
Liquidation Rights. The holders of the Series B Preferred Stock will
be entitled to a liquidation preference of $100 per share, plus accrued and
unpaid dividends, in the event of the voluntary or involuntary dissolution,
liquidation or winding up of O&M Holding. Upon any such event, after the
holders of the Series B Preferred Stock have been paid the $100 per share
and all accrued and unpaid dividends, such holders shall have no right or
claim to any of the remaining assets of O&M Holding.
Optional Conversion. The Series B Preferred Stock may be converted
into O&M Holding Common Stock at any time at the option of the holders of a
majority of the outstanding shares of Series B Preferred Stock. In such
event, all shares of Series B Preferred Stock will be converted into O&M
Holding Common Stock. Initially, the conversion ratio will be 4.04 shares
of O&M Holding Common Stock for each share of Series B Preferred Stock,
subject to adjustment under the circumstances described in the O&M Holding
Articles (the "Preferred Conversion Ratio"). The Preferred Conversion
Ratio will be adjusted in the event O&M Holding (i) pays dividends or makes
distributions on the O&M Holding Common Stock in shares of O&M Holding
Common Stock, (ii) subdivides the outstanding shares of O&M Holding Common
Stock into a greater number of shares or (iii) combines the outstanding
shares of O&M Holding Common Stock into a smaller number of shares.
Immediately following the Effective Time, the Series B Preferred Stock will
be convertible into 4,646,000 shares of O&M Holding Common Stock.
Mandatory Conversion. All shares of Series B Preferred Stock will be
converted automatically into O&M Holding Common Stock upon the conversion
of any shares of Series B Preferred Stock (other than shares converted upon
a call for redemption).
Redemption. Any time after April 30, 1997, O&M Holding may redeem all
or a portion of the outstanding shares of Series B Preferred Stock;
provided, however, that prior to April 30, 2004, the amount paid to redeem
the Series B Preferred Stock may not exceed the net proceeds from the sale
or issuance by O&M Holding of any O&M Holding Capital Stock after January
1, 1994, or any securities convertible into, or exchangeable or exercisable
for O&M Holding Capital Stock. In addition, prior to April 30, 2004,
redemptions in part are permitted only if the aggregate market value of the
O&M Holding Common Stock that would be received upon conversion of the
Series B Preferred Stock subject to such redemption is at least
$50,000,000. The redemption price for the Series B Preferred Stock is the
par value of such stock ($100) plus all accrued and unpaid dividends.
Voting on Certain Changes. Amendments to, or changes in the rights,
powers, preferences and privileges of, the Series B Preferred Stock must be
approved by a majority of the outstanding shares of Series B Preferred
Stock, voting as a separate voting group.
Series B Preferred Stock Director. The O&M Holding Articles of
Incorporation provide that the holders of the Series B Preferred Stock,
voting as a separate voting group, will be entitled to elect the Series B
Preferred Stock Director. Such member is in addition to the directors to
be elected by the holders of the O&M Holding Common Stock and Series B
Preferred Stock, voting as a single class. Immediately after the
retirement (whether upon redemption, conversion or otherwise) of the Series
B Preferred Stock, the tenure of the Series B Preferred Stock Director
shall terminate.
Senior Debt
O&M Holding is currently negotiating a revolving credit facility with
a group of commercial banks. The size of this facility is expected to be
$300,000,000 to $350,000,000. O&M Holding or its wholly-owned subsidiaries
expect to initially borrow between $250,000,000 to $270,000,000 to (i)
refinance SMI's currently outstanding debt, (ii) replace the financing
facility now provided to SMI by Stuart's Funding Corporation, an affiliate
of SMI ("SFC"), (iii) refinance a portion of O&M's debt, (iv) pay the
$40,200,000 cash portion of the purchase price for SMI's capital stock and
(v) pay the fees and expenses associated with the Exchanges. The balance
of the revolving credit facility will be used for general corporate
purposes, including to finance working capital.
Employee Benefit Plans
O&M's stock option plans and other employee benefit plans providing
for the issuance of O&M Common Stock will be amended at the Effective Time
to provide for the issuance of O&M Holding Common Stock in lieu of the O&M
Common Stock and to provide for participation by employees of O&M Holding
in those employee benefit plans. Adoption by the O&M Shareholders of the
O&M Plan of Exchange will constitute approval of O&M Holding's assumption
of the employee benefit plans, of all amendments thereto appropriate to
implement such assumption and the fact that all rights under such plans
relating to the O&M Common Stock will thereafter relate to shares of O&M
Holding Common Stock.
Rights Agreement
On June 22, 1988, the O&M Board declared a dividend distribution, of
one right created under the O&M Rights Agreement, in respect of each share
of O&M Common Stock outstanding on July 5, 1988. Pursuant to such
agreement, as subsequently amended to reflect the substitution of Wachovia
Bank of North Carolina, N.A., as successor rights agent (the "Rights
Agent"), to give effect to 3-for-2 stock splits declared with respect to
the O&M Common Stock in July, 1991 and March, 1993, adjustments were made
in the number of rights associated with each share of O&M Common Stock with
the result that as of April 6, 1994 each certificate for an outstanding
share of O&M Common Stock also represented 4/9 of one right.
Effective at the Effective Time, the O&M Rights Agreement will be
amended and restated as the O&M Holding Rights Agreement to provide for the
assumption of the obligations of O&M thereunder by O&M Holding, the
substitution for rights and other securities of O&M that would be issued
thereunder for comparable rights and other securities of O&M Holding and
the making of certain other conforming changes. There follows a summary of
the principal terms of the O&M Holding Rights Agreement and the Rights, as
thereby amended. Pursuant to the O&M Plan of Exchange, rights currently
attached to shares of O&M Common Stock will be exchanged for the same
number of Rights, which will be attached to shares of O&M Holding Common
Stock.
Upon the Effective Time, each Right will entitle the registered holder
to purchase from O&M Holding one one-hundredth of a share (a "Unit") of
Series A Preferred Stock. Each Unit of Series A Preferred Stock is
structured to be the economic equivalent of one share of O&M Holding Common
Stock. The exercise price per Right will be $75 subject to adjustment (the
"Purchase Price").
Rights will also attach to shares of O&M Holding Common Stock issued
after the Effective Time but prior to the Distribution Date (as defined
below), unless the O&M Holding Board determines otherwise at the time of
issuance.
Initially, the Rights will be attached to all O&M Holding Common Stock
certificates representing shares issued in the O&M Exchange, and no
separate certificates evidencing the Rights (the "Rights Certificates")
will be distributed. The Rights will separate from the O&M Holding Common
Stock and a distribution of the Rights Certificates will occur (the
"Distribution Date") upon the earlier of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of O&M
Holding Common Stock (the "Stock Acquisition Date"), or (ii) 10 business
days following the commencement of a tender offer or exchange offer that
would result in a person or group beneficially becoming an Acquiring
Person. Until the Distribution Date, (i) the Rights will be evidenced by
the O&M Holding Common Stock certificates and will be transferred with and
only with such O&M Holding Common Stock certificates, (ii) O&M Holding
Common Stock certificates issued after the Effective Time will contain a
notation incorporating the O&M Holding Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for O&M Holding Common
Stock outstanding will also constitute the transfer of the Rights
associated with the O&M Holding Common Stock represented by such
certificates.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on April 30, 2004, unless earlier redeemed
by O&M Holding as described below. As soon as practicable after the
Distribution Date, Rights Certificates will be mailed to holders of record
of the O&M Holding Common Stock as of the close of business on the
Distribution Date, and thereafter such separate Rights Certificates alone
will represent the Rights.
While each Right will initially provide for the acquisition of one
Unit of Series A Preferred Stock at the Purchase Price, the Agreement
provides that if (i) an Acquiring Person purchases 20% or more of the
outstanding O&M Holding Common Stock, or (ii) at any time following the
Distribution Date, O&M Holding is the surviving corporation in a merger
with an Acquiring Person and the O&M Holding Common Stock is not changed or
exchanged, or (iii) an Acquiring Person effects a statutory share exchange
with O&M Holding after which O&M Holding is not a subsidiary of any
Acquiring Person, proper provision shall be made so that each holder of a
Right (except as set forth below) will thereafter have the right to
receive, upon exercise and payment of the Purchase Price, Series A
Preferred Stock or O&M Holding Common Stock at the option of O&M Holding
(or, in certain circumstances, cash, property or other securities of O&M
Holding) having a value equal to twice the amount of the Purchase Price.
In the event that, at any time following the Stock Acquisition Date,
(i) O&M Holding is acquired in a merger, statutory share exchange, or other
business combination in which O&M Holding is not the surviving corporation
(other than a transaction described in the preceding paragraph), or (ii)
50% or more of O&M Holding's assets or earning power is sold or
transferred, each holder of a Right (except as set forth below) shall
thereafter have the right to receive, upon exercise and payment of the
Purchase Price, common stock of the acquiring company having a value equal
to twice the Purchase Price. The events set forth in this paragraph and in
the preceding paragraph are referred to as the "Triggering Events."
At any time after any person becomes an Acquiring Person, O&M Holding
may exchange all or part of the Rights (except as set forth below) for
shares of O&M Holding Common Stock (an "Exchange") at an exchange ratio of
one share per Right, as appropriately adjusted to reflect any stock split
or similar transaction.
Rights may not be transferred, directly or indirectly, to any person
who is, or who upon completion of the transfer would be, an Acquiring
Person, or to any affiliate or associate of any such Acquiring Person. Any
Right that is the subject of such an attempted transfer shall be deemed to
be held beneficially by the person who attempted to make such transfer and
shall continue to be exercisable by such person. Further, no Rights may be
exercised by an Acquiring Person.
Upon the occurrence of a Triggering Event that entitles Rights holders
to purchase securities or assets of O&M Holding, Rights that are or were
owned by the Acquiring Person that is a party to such Triggering Event, or
any affiliate or associate of such Acquiring Person, on or after such
Acquiring Person's Stock Acquisition Date shall be null and void and shall
not thereafter be exercised by any person (including subsequent
transferees). Upon the occurrence of a Triggering Event that entitles
Rights holders to purchase common stock of a third party, or upon the
authorization of an Exchange, Rights that are or were owned of record by
any Acquiring Person or any affiliate or associate of any Acquiring Person
on or after such Acquiring Person's Stock Acquisition Date shall be null
and void and shall not thereafter be exercised by any person (including
subsequent transferees).
The Purchase Price payable, and the number of shares of Series A
Preferred Stock, O&M Holding Common Stock or other securities or property
issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution.
At any time until ten days following the Stock Acquisition Date, O&M
Holding may redeem the Rights in whole, but not in part, at a price of $.01
per Right (the "Redemption Price"). Under certain circumstances set forth
in the O&M Holding Rights Agreement, the decision to redeem shall require
the concurrence of a majority of the Continuing Directors, (as defined
below). Additionally, O&M Holding may thereafter but prior to the
occurrence of a Triggering Event redeem the Rights in whole, but not in
part, at the Redemption Price provided that such redemption is incidental
to a merger or other business combination transaction approved by a
majority of the Continuing Directors involving O&M Holding, but not an
Acquiring Person, in which all holders of O&M Holding Common Stock are
treated alike. After the redemption period has expired, O&M Holding's
right of redemption may be reinstated if an Acquiring Person reduces his
beneficial ownership to less than 10% of the outstanding shares of O&M
Holding Common Stock in a transaction or series of transactions not
involving O&M Holding. Immediately upon the action of the O&M Holding
Board ordering redemption of the Rights, with, where required, the
concurrence of the Continuing Directors, the Rights will terminate and the
only right of the holders of Rights will be to receive the Redemption
Price.
The term "Continuing Directors" means any member of the O&M Holding
Board who was a member of the O&M Holding Board prior to the Effective
Time, and any person who is subsequently elected to the O&M Holding Board
if such person is recommended or approved by a majority of the Continuing
Directors, but does not include an Acquiring Person, or an affiliate or
associate of an Acquiring Person, or any representative of the foregoing
entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of O&M Holding, including, without limitation, the
right to vote or to receive dividends. While the distribution of the
Rights will not be taxable to shareholders or to O&M Holding, shareholders
may, depending upon the circumstances, recognize taxable income in the
event that the Rights become exercisable for Series A Preferred Stock (or
other consideration) of O&M Holding or for common stock of the acquiring
company as set forth above.
The holders of shares of Series B Preferred Stock will be entitled to
receive, upon the conversion of any shares of Series B Preferred Stock, the
same amount and kind of securities or other property distributed to holders
of O&M Holding Common Stock generally under the O&M Holding Rights
Agreement that such holder would have received if they had, immediately
prior to the record date for the distribution of such securities or other
property pursuant to the O&M Holding Rights Agreement, converted their
shares of Series B Preferred Stock into O&M Holding Common Stock.
Other than those provisions relating to the principal economic terms
of the Rights, any of the provisions of the O&M Holding Rights Agreement
may be amended by the O&M Holding Board prior to the Distribution Date.
After the Distribution Date, the provisions of the O&M Holding Rights
Agreement may be amended by the O&M Holding Board (in certain
circumstances, with the concurrence of the Continuing Directors) in order
to cure any ambiguity, to make changes that do not adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the O&M Holding
Rights Agreement; provided, however, no amendment to adjust the time period
governing redemption may be made at such time as the Rights are not
redeemable.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that acquires more than 20%
of the outstanding shares of O&M Holding Common Stock if a Triggering Event
thereafter occurs without the Rights having been redeemed or in the event
of an Exchange. However, the Rights should not interfere with any merger
or other business combination approved by the O&M Holding Board and the
shareholders because the Rights are redeemable under certain circumstances.
A copy of the O&M Holding Rights Agreement will be available after the
Effective Time free of charge from the Rights Agent. This summary
description of the Rights does not purport to be complete and is qualified
in its entirety by reference to the O&M Holding Rights Agreement.
New York Stock Exchange Listing
O&M Holding has applied to list the O&M Holding Common Stock on the
NYSE in substitution for the O&M Common Stock. It is expected that the
listing of O&M Holding Common Stock will occur at the Effective Time. As a
result of the name changes, the O&M Holding Common Stock will trade as the
common stock of "Owens & Minor, Inc.". At the time of the listing of O&M
Holding Common Stock, the O&M Common Stock will be delisted from trading on
the NYSE. After such listing, certificates evidencing shares of the O&M
Common Stock will continue, without any action on the part of the holder,
to represent the identical number of shares of O&M Holding Common Stock.
THE O&M EXCHANGE WILL BE EFFECTED BY OPERATION OF LAW WITHOUT AN ACTUAL
EXCHANGE OF CERTIFICATES.
Certain Federal Income Tax Consequences
The O&M Exchange is intended to qualify as a nontaxable transaction
for federal income tax purposes as both a "reorganization" under section
368(a)(1)(B) of the Internal Revenue Code and, together with the SMI
Exchange, an exchange described in section 351(a) of the Internal Revenue
Code. One condition to consummation of the Exchanges, which O&M may not
waive, is the receipt by O&M of an opinion of Hunton & Williams (counsel to
O&M and O&M Holding) to the effect that, for federal income tax purposes,
the Exchanges will not result in the recognition of gain or loss by O&M
Holding, O&M, the O&M Shareholders or SMI. Hunton & Williams' opinion will
be based on customary assumptions and representations regarding, among
other things, the existing and future ownership of O&M stock and O&M
Holding stock and the future business plans for O&M Holding. The federal
income tax consequences to O&M shareholders summarized below reflect the
opinion, to be delivered by Hunton & Williams, that the O&M Exchange will
qualify as a nontaxable transaction. This summary does not discuss all
potential federal income tax consequences, including consequences to any
O&M Shareholder subject to special tax treatment.
In the O&M Exchange, an O&M Shareholder will not recognize any gain or
loss on the exchange of shares of O&M Common Stock for shares of O&M
Holding Common Stock. An O&M Shareholder's federal income tax basis in
shares of O&M Holding Common Stock received in the O&M Exchange will be the
same as the shareholder's tax basis in the shares of O&M Common Stock
exchanged therefor. The holding period for shares of O&M Holding Common
Stock received in the O&M Exchange will include the shareholder's holding
period for the shares of O&M Common Stock exchanged therefor, if they are
held as a capital asset at the Effective Time of the O&M Exchange.
The preceding discussion summarizes generally the expected material
federal income tax consequences of the O&M Exchange to holders of the O&M
Common Stock and does not constitute individual tax advice. Holders of the
O&M Common Stock are urged to consult their own tax advisors with respect
to specific federal, state and local tax consequences of the O&M Exchange
as they may affect individual holders.
Amendment, Abandonment and Termination
Subject to the provisions of the Agreement of Exchange, the O&M Plan
of Exchange may be amended by the O&M Board and the O&M Holding Board at
any time before or after its approval by the O&M Shareholders; provided,
however, that, after any such approval, no amendment may be made that would
require further approval by the O&M Shareholders under the VSCA unless such
approval is obtained. The O&M Plan of Exchange may be abandoned and
terminated before the effectiveness of the O&M Exchange by the O&M Board if
the Agreement of Exchange is terminated. See " - The Agreement of Exchange
- - Termination and Amendment."
Dissenters' Rights
Since the O&M Common Stock is listed on the NYSE, the O&M Shareholders
have no right under Virginia law to dissent from the O&M Exchange and
receive payment for the value of their shares of O&M Common Stock. Under
the VSCA, there is no right of dissent when the stock subject to a
statutory share exchange is listed on a national securities exchange.
OPERATION OF O&M HOLDING AFTER THE EXCHANGES
General
Upon completion of the Exchanges, O&M Holding will function as a
holding company, with the operations of O&M continued by O&M as a wholly-
owned subsidiary of O&M Holding and the operations of SMI continued by SMI
as a wholly-owned subsidiary of O&M Holding.
Dividends
Subject to the right of holders of any outstanding shares of Series B
Preferred Stock and any other dividend preference of any outstanding series
of Cumulative Preferred Stock, holders of outstanding shares of O&M Holding
Common Stock are entitled to share ratably in dividends, according to the
number of shares of O&M Holding Common Stock held by each holder, from
sources legally available therefor, if and when declared by the O&M Holding
Board. See " - Creation of O&M Holding Company - Capitalization of O&M
Holding."
Directors and Officers
The O&M Holding Board will consist of ten directors, who will be
divided into three classes, and the Series B Preferred Stock Director. The
members of the O&M Holding Board initially will consist of those members of
the O&M Board serving at the Effective Time, who will have the same terms
of office as members of the O&M Holding Board that they have as of the
Effective Time with the O&M Board, and the Series B Preferred Stock
Director, as provided for in the O&M Holding Articles of Incorporation.
Immediately upon the retirement (whether upon redemption, conversion or
otherwise) of the Series B Preferred Stock, the tenure of the Series B
Preferred Stock Director will terminate and the number of directors to be
elected to the O&M Holding Board will be such number provided for in the
O&M Holding Articles of Incorporation or bylaws in effect at such time.
The initial Series B Preferred Stock Director is expected to be C. G.
Grefenstette. C. G. Grefenstette is Chairman of the Board and Chief
Executive Officer of The Hillman Company, a Pittsburgh, Pennsylvania
company with diversified investments and operations. Mr. Grefenstette was
President and Chief Executive Officer of The Hillman Company from 1989
until 1993 and President and Chief Operating Officer from 1982 until 1989.
He is a Trustee of the Henry L. Hillman Trust, the largest of the SMI
Shareholders, and a Director of SMI. Mr. Grefenstette also serves as a
Director of PNC Bank Corp.
After retirement of all the outstanding shares of Series B Preferred
Stock, the Agreement of Exchange provides that, as long as the SMI
Shareholders collectively have the right to vote at least 5% of the
outstanding shares of O&M Holding Common Stock, O&M Holding will exercise
all authority under applicable law, subject to the fiduciary obligations of
the O&M Holding Board, to include an SMI Shareholders' Nominee, who is
reasonably acceptable to the O&M Holding Board, in the slate of nominees
recommended by the O&M Holding Board at such annual meeting of shareholders
of O&M Holding.
At the Effective Time, it is expected that the following executive
officers of O&M and Richard P. Byington, currently President of SMI, will
hold the offices, of O&M Holding indicated below:
G. Gilmer Minor, III President and Chief Executive Officer
Robert E. Anderson, III Executive Vice President
Henry A. Berling Executive Vice President
Richard P. Byington Executive Vice President
Craig R. Smith Executive Vice President
Drew St. J. Carneal Senior Vice President, Corporate
Counsel and Corporate Secretary
Glenn J. Dozier Senior Vice President and Chief
Financial Officer
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Introduction
The following unaudited pro forma combined condensed financial
statements have been prepared by management of O&M from the historical
consolidated financial statements of O&M and SMI included elsewhere in this
Proxy Statement/Prospectus and include historical financial statement
amounts for Midwest which was acquired by SMI effective January 1, 1994.
The historical financial statements of Midwest are not included in this
Proxy Statement/Prospectus.
The unaudited pro forma combined condensed financial statements have
been prepared on the basis of assumptions described in the notes thereto,
including assumptions relating to the allocation of the consideration paid
for SMI to the assets and liabilities of SMI based on preliminary estimates
of their respective fair values. The actual allocation of such
consideration may differ from that reflected in the consolidated financial
statements after an appropriate review of the fair values of the
consolidated assets and liabilities of SMI and Midwest has been completed.
Amounts allocated will be based upon the estimated fair values at the time
of the SMI exchange which could vary significantly from the amounts
reflected in the unaudited pro forma combined condensed financial
statements. The SMI exchange has been accounted for using the purchase
method of accounting.
The pro forma financial information presented is not necessarily
indicative of actual results that would have been achieved had the SMI
Exchange closed on the dates assumed in the unaudited pro forma combined
condensed financial statements that follow. Moreover, they are not
intended to be indicative of future results of operations or financial
position.
The unaudited pro forma combined condensed financial statements should
be read in conjunction with the historical financial statements of O&M and
SMI included elsewhere in this Proxy Statement/Prospectus.
Unaudited Pro Forma Combined Condensed Statement of Income
<TABLE>
Year ended December 31, 1993
(In thousands, except Pro Forma Pro Forma
per share data) O&M SMI Midwest Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net sales $ 1,396,971 890,477 51,787 - 2,339,235
Cost of sales 1,249,660 793,879 45,812 - 2,089,351
Gross margin 147,311 96,598 5,975 - 249,884
Selling, general and
administrative expenses 106,362 73,060 4,544 (2,490)(3c) 181,476
Depreciation and amortization 7,593 7,922 109 (546)(3a) 15,078
Non recurring expenses - 1,184 - - 1,184
Service charges to affiliate
and other - (1,677) (3) - (1,680)
Interest expense, net 2,939 6,886 322 (215)(3b) 9,932
Total expenses 116,894 87,375 4,972 (3,251) 205,990
Income before income taxes 30,417 9,223 1,003 3,251 43,894
Provision for income taxes 11,900 476 - 7,317(3d) 19,693
Net income from continuing
operations 18,517 8,747 1,003 (4,066) 24,201
Dividends on preferred stock - - - 5,175(3e) 5,175
Net income from continuing
operations attributable to
common stock $ 18,517 8,747 1,003 (9,241) 19,026
Net income per common share
from continuing operations
Primary and fully diluted $ 0.90 $ 0.93
See accompanying notes to the unaudited pro forma combined condensed
financial statements.
</TABLE>
<TABLE>
Unaudited Pro Forma Combined Condensed Balance Sheet
Year ended December 31, 1993
Pro Forma Pro Forma
(In thousands) O&M SMI Midwest Adjustments Combined
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 2,048 5,896 - - 7,944
Accounts and notes receivable,
net 144,629 13,520 1,152 82,000(4a) 241,301
Merchandise inventories 124,848 107,298 6,298 1,800(2) 240,244
Other current assets 10,638 2,657 4 6,900(2) 20,199
Total current assets 282,163 129,371 7,454 90,700 509,688
Property and equipment, net 23,863 19,158 237 (1,400)(2) 41,858
Excess of purchase price over
net assets acquired, net 17,316 29,617 - 117,298(2) 164,231
Other assets 10,980 574 3 - 11,557
Total assets $ 334,322 178,720 7,694 206,598 727,334
LIABILITIES
Current maturities of long-
term debt 1,494 452 3,662 (4,114)(4b) 1,494
Accounts payable 120,699 75,223 1,999 - 197,921
Accrued payroll and related
liabilities 5,768 3,501 48 - 9,317
Other accrued liabilities 15,111 7,987 167 8,139(2) 31,404
Total current liabilities 143,072 87,163 5,876 4,025 240,136
Long-term debt 50,768 47,976 57 132,915(4a)(4b) 231,716
Accrued pension and retirement
plan 3,539 - - - 3,539
Total liabilities 197,379 135,139 5,933 136,940 475,391
STOCKHOLDERS' EQUITY
Preferred stock - - - 115,000(2) 115,000
Common stock 40,569 5 17 (22)(2) 40,569
Paid-in capital 9,258 4,026 - (4,026)(2) 9,258
Retained earnings 87,116 39,550 1,744 (41,294)(2) 87,116
Total stockholders'
equity 136,943 43,581 1,761 69,658 251,943
Total liabilities and
stockholders'
equity $ 334,322 178,720 7,694 206,598 727,334
See accompanying notes to the unaudited pro forma combined condensed
financial statements.
</TABLE>
<PAGE>
Notes to Unaudited Pro Forma
Combined Condensed Financial Statements
(1) Basis of Presentation
The accompanying unaudited pro forma combined condensed statement of
income for the year ended December 31, 1993 has been prepared by
combining the consolidated statement of income of O&M with the
consolidated statements of income for SMI and Midwest. The
unaudited pro forma combined condensed statements of income
reflect adjustments as if the acquisition of SMI, including SMI's
acquisition of Midwest, had occurred on January 1, 1993. The
accompanying unaudited combined condensed balance sheet as of
December 31, 1993 presents the historical balance sheets of O&M,
SMI and Midwest, with pro forma adjustments as if the acquisition
of SMI, including SMI's acquisition of Midwest, had occurred on
December 31, 1993, in a transaction accounted for using the
purchase method of accounting.
The unaudited pro forma financial statements may not necessarily
reflect the actual results of operations of O&M which would have
resulted had the purchase of SMI and Midwest occurred as of the
dates presented. The pro forma information is not necessarily
indicative of future results of operations for the combined
companies.
(2) Allocation of Purchase Price
Under the purchase method of accounting, the allocation of the
purchase price to SMI's and Midwest's assets and liabilities is
required to reflect fair values and to eliminate the historical
stockholders' equity of these companies. A final allocation of
the purchase price has not yet been performed; however, the
following sets forth certain preliminary adjustments (in
thousands, except share and per share data):
Purchase price:
Payment of cash to be financed by borrowings
(see note 3b and 4b) $ 40,200
Issuance of 1,150,000 shares of 4.5% cumulative,
convertible Series B Preferred Stock, with a
liquidation preference of $100 per share115,000
Total 155,200
Allocation of purchase price:
Net assets acquired SMI's stockholders' equity
at December 31, 1993, exclusive of goodwill
of $29,617 13,964
Adjustments to assets and liabilities to reflect
preliminary estimated fair values:
Inventory 1,800
Property and equipment (1,400)
Deferred tax asset, net 6,900
Provision for estimated costs of integrating
operations and acquisition related expenses (8,139)
SMI's pro forma goodwill from acquisition
of Midwest (4,840)
Pro forma net assets after adjustments 8,285
Pro forma excess of purchase price over net
assets acquired $146,915
(3) Income Statement Adjustments
(a) To amortize over forty years the cost in excess of fair value of
net assets acquired net of goodwill amortization previously
recorded by SMI, and to depreciate the fair value of acquired
property and equipment over useful lives consistent with those
used by O&M.
(in thousands)
Amortization of excess of purchase price
over net assets acquired $ 3,673
Reversal of SMI historical goodwill
amortization (2,107)
Depreciation adjustment to reflect
consistent fixed asset lives and
asset revaluations (2,112)
Net $ (546)
(b) O&M intends to fund the $40.2 million cash portion of the
purchase price from a $350 million Senior Credit Facility with
interest based on LIBOR. In addition, O&M intends to fund the
repayment of the long-term debt of SMI and Midwest, certain of
the long-term debt of O&M, and the working capital requirements
associated with financing SMI's accounts receivables (see note
4a) with borrowings under the Senior Credit Facility. For
purposes of the pro forma statements, the assumption was made
that the Senior Credit Facility was in place on January 1, 1993
with an average annual interest rate of 3.97%. This adjustment
records pro forma interest expense on borrowings under the Senior
Credit Facility net of interest previously recorded. A .125%
variance on the annual interest rate would increase or decrease
net income by approximately $160,000, net of income tax.
(c) To adjust for reductions in selling, general and administrative
expenses associated with the elimination of duplicate costs.
Management expects that there will be significant cost reductions
as SMI's business directly complements O&M's and that corporate
administrative functions and certain distribution arrangements
will be combined.
(d) SMI and Midwest are qualified as S Corporations under the
Internal Revenue Code as well as in a number of states in which
they file tax returns. The historical financial statements of
SMI and Midwest reflect only income taxes for states that do not
recognize S Corporation status. This adjustment records income
tax expense using an effective rate of 53.1% for SMI and 40.0%
for Midwest, net of previously recorded state income tax expense.
In addition, the adjustment utilizes a 41.9% tax rate to record
the tax effect of the pro forma adjustments except for
adjustments related to the amortization of goodwill.
(e) To record the preferential annual dividend of $4.50 per share on
the 1,150,000 shares of Series B Preferred Stock.
(4) Balance Sheet Adjustments
(a) SMI sells its trade accounts receivables to SFC at a discount and
receives cash for approximately 90% of the discounted eligible
accounts and an interest bearing note for the remaining balance.
Effective with the consummation of the Agreement of Exchange
SMI's trade receivables will no longer be sold to SFC. This
adjustment records pro forma accounts receivables for SMI of $82
million and pro forma borrowings to finance these receivables.
(b) O&M intends to fund the $40.2 million cash portion of the
purchase price from a $350 million Senior Credit Facility with
interest based on LIBOR. In addition, O&M intends to fund the
repayment of the long-term debt of SMI and Midwest, certain of
the long-term debt of O&M, and the working capital requirements
associated with financing SMI's accounts receivables (see note
4a) with borrowings under the Senior Credit Facility. This
adjustment records the net borrowings under these assumptions.
(5) Non-recurring Expenses and Service Charges to Affiliate
The unaudited pro forma combined condensed statements of income
include approximately $1.2 million of non-recurring expenses
associated with SMI's negotiations to sell its business to a
third party. Plans to sell SMI pursuant to these negotiations
were terminated in February, 1993. In addition, the unaudited
pro forma combined condensed statements of income include
approximately $1.3 million of service charges to affiliate that
will not be recurring to the combined company. These service
charges relate to certain warehousing, delivery and
administrative services SMI provided to an affiliate. The net
effect of these non-recurring items increases pro forma primary
and fully diluted net income per O&M common share by less than
$.01.
(6) Restructuring Charges
It is anticipated that certain non-recurring charges will result from
the combination of O&M and SMI which have not been reflected in
the pro forma financial statements. These charges will be
incurred pursuant to a restructuring plan currently under
development and to be reflected as pre-tax restructuring charges
in O&M's income statement during the year ending December 31,
1994.
Simultaneous with the execution of the Agreement of Exchange with SMI,
a portion of the restructuring charge comprised primarily of the
costs related to the write"down of certain O&M software, costs
associated with the closure of certain O&M distribution
facilities and severance costs associated with the termination of
employees will be recorded. It is also anticipated that
additional costs will be recorded as restructuring charges over
the remainder of 1994 as these costs are incurred. The
components of these costs anticipated to be incurred subsequent
to the combination are the direct incremental costs to be
incurred with respect to restructuring corporate administrative
functions, and employee costs associated with relocation and
distribution rationalization.
The total restructuring charges, whether incurred simultaneously with
the closing of the SMI Exchange or later in 1994, are estimated
to total $18.7 million on a pre-tax basis. Of this amount,
approximately $2.5 million would represent a non-cash charge to
earnings.
O&M COMMON STOCK PER SHARE PRICES AND DIVIDENDS
The O&M Common Stock is listed on the NYSE. The following table sets
forth the high and low sales prices per share as reported on the NYSE
Composite Tape and the dividends paid by O&M on the O&M Common Stock for
the below quarterly periods.
High Low Dividend
1991:
First Quarter . . . . . . 13 3/8 9 3/8 .065
Second Quarter. . . . . . 16 12 1/8 .075
Third Quarter . . . . . . 18 3/4 15 1/2 .0525
Fourth Quarter. . . . . . 24 1/4 19 1/2 .0525
1992:
First Quarter . . . . . . 21 3/4 16 7/8 .0525
Second Quarter. . . . . . 19 16 1/2 .065
Third Quarter . . . . . . 20 17 .065
Fourth Quarter. . . . . . 22 3/4 17 3/4 .065
1993:
First Quarter . . . . . . 17 3/8 12 5/8 .0525
Second Quarter. . . . . . 21 12 5/8 .0525
Third Quarter . . . . . . 23 1/4 18 1/4 .0525
Fourth Quarter. . . . . . 23 3/8 18 .0525
1994:
First Quarter . . . . . . 27 1/4 21 5/8 .0525
On December 21, 1993, the last trading day prior to the public
announcement of the execution of the Agreement of Exchange, the last sales
price of a share of O&M Common Stock as reported on the NYSE Composite Tape
was $ 191/8. On March 31, 1994, the last sales price of a share of O&M
Common Stock as reported on the NYSE Composite Tape was $223/4.
<PAGE>
SELECTED FINANCIAL INFORMATION OF O&M
The following selected financial information for 1993, 1992 and 1991
presented below, with the exception of the balance sheet data for 1991, has
been derived from O&M's audited consolidated financial statements included
in the Proxy Statement/Prospectus. The balance sheet data for 1991 and the
summary financial information presented below for 1990 and 1989 has been
derived from audited consolidated financial statements previously filed
with the Commission but not incorporated by reference in this Proxy
Statement/Prospectus. The following information is qualified in its
entirety by and should be read in conjunction with those consolidated
financial statements and related footnotes thereto.
<TABLE>
Year ended December 31,
(In thousands, except per share data) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Income Statement Data(1):
Continuing operations:
Net sales $ 1,396,971 1,177,298 1,021,014 916,709 708,089
Cost of sales 1,249,660 1,052,998 918,304 827,441 641,011
Gross margin 147,311 124,300 102,710 89,268 67,078
Selling, general and administrative
expenses 106,362 90,027 77,082 67,171 57,943
Depreciation and amortization 7,593 5,861 4,977 4,210 2,795
Interest expense, net 2,939 2,472 4,301 5,858 5,078
Total expenses 116,894 98,360 86,360 77,239 65,816
Income before income taxes 30,417 25,940 16,350 12,029 1,262
Provision for income taxes 11,900 10,505 6,681 4,634 628
Net income from continuing
operations 18,517 15,435 9,669 7,395 634
Net income from
continuing operations $ .90 0.78 0.49 0.39 0.03
Cash dividends per share $ .21 0.165 0.132 0.115 0.115
Condensed Balance Sheet Data(2):
Current assets $ 282,163 229,075 266,896 249,425 226,114
Property and equipment, net 23,863 22,037 24,974 22,229 17,306
Other assets 28,296 23,428 19,916 18,579 15,263
Total assets $ 334,322 274,540 311,786 290,233 258,683
Current liabilities $ 143,072 129,249 144,221 131,442 92,805
Long-term debt 50,768 24,986 67,675 71,339 85,324
Other noncurrent liabilities 3,539 3,646 2,799 2,450 2,994
Stockholders' equity 136,943 116,659 97,091 85,002 77,560
Total liabilities and stock-
holders' equity $ 334,322 274,540 311,786 290,233 258,683
</TABLE>
(1) Amounts exclude discontinued operations related to divestitures of
O&M's Wholesale Drug and Specialty Packaging Divisions and the
cumulative effect of changes in accounting principles.
(2) The decreases in total assets and long-term debt in 1992 relate
primarily to the divestitures of O&M's Wholesale Drug and Specialty
Packaging Divisions.
<PAGE>
SELECTED FINANCIAL INFORMATION OF SMI
The following summary sets forth selected financial data for SMI. This
information should be read in conjunction with the Financial Statements and
Notes to Financial Statements of SMI and "- Management's Discussion and
Analysis of Financial Condition and Results of Operations of SMI" appearing
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
Eight months
Year ended ended
December 31, December 31, Year ended April 30,
(In thousands) 1993 1992 1992 1991 1990 1989(2)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data(1):
Net sales $890,477 584,047 752,416 648,729 515,289 359,042
Cost of goods sold 793,879 521,796 664,773 571,631 451,685 320,916
Gross profit 96,598 62,251 87,643 77,098 63,604 38,126
Warehouse, selling and administrative expenses 73,060 47,216 65,966 59,880 50,986 39,468
Depreciation and amortization 7,922 6,082 7,871 6,603 6,461 5,391
Non-recurring expenses 1,184 914 - - - -
Operating income (loss) 14,432 8,039 13,806 10,615 6,157 (6,733)
Discount on sale of trade receivables (3,350) (2,782) (5,312) (5,535) - -
Interest expense (3,536) (2,580) (6,567) (8,844) (15,324) (11,400)
Service charges to affiliate and other(6) 1,677 320 448 892 1,310 555
Income (loss) from continuing operations
before income taxes 9,223 2,997 2,375 (2,872) (7,857) (17,578)
Income taxes(3) 476 234 121 (212) (446) (1,049)
Net income (loss) from continuing
operations $ 8,747 2,763 2,254 (2,660) (7,411) (16,529)
Pro Forma Income Statement Data(4):
Income (loss) from continuing operations
before taxes $ 9,223 2,997 2,375 (2,872) (7,857) (17,578)
Provision (credit) for pro forma income
taxes 4,898 1,898 1,721 (234) (2,248) (6,137)
Pro forma income (loss) from continuing
operations $ 4,325 1,099 654 (2,638) (5,609) (11,441)
Condensed Balance Sheet Data(5):
Current assets $129,371 140,746 136,764 113,000 162,398 134,228
Property and equipment 19,158 21,676 22,641 22,625 21,774 22,505
Other assets 30,191 33,266 34,546 39,412 41,001 43,075
Total assets 178,720 195,688 193,951 175,037 225,173 199,808
Current liabilities 87,163 96,852 88,072 77,504 66,182 47,698
Long-term debt 47,976 60,948 52,942 48,542 121,605 122,499
Stockholders' equity 43,581 37,888 52,937 48,991 37,386 29,611
</TABLE>
(1)Amounts exclude the impact of discontinued operations related to the
divestiture and spin-off of SMI's Surgical Implant Division in
December 1992 and the sale of its General Surgery and Anesthesia
Division in July 1993.
(2)Operating loss reflects approximately $4 million of additional expenses
incurred as a result of integration and start-up expenses associated
with acquired companies, and increased interest expense as a result of
incurring acquisition-related debt and increased working capital
requirements.
(3)SMI has been an S corporation since May 1, 1987, and has not been subject
to federal income taxes since that date. Historical dividends per
share are not presented because dividends were primarily for the
purpose of covering shareholders' tax liabilities.
(4)Pro forma information reflects the pro forma effect of treating SMI as if
it had been taxed as a C corporation for federal and state tax
purposes.
(5)In June 1990, SMI entered into an agreement whereby it sells its trade
accounts receivables (Receivables) to an affiliate, which in turn
issues commercial paper secured by the Receivables. Proceeds from the
sale of Receivables are used to reduce debt. See Note 5 to financial
statements.
(6)The 1993 service charges to affiliate and other amount includes
approximately $1.3 million of service charges to an affiliate that
will not be recurring to the combined company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SMI
Overview and Background
SMI was founded in 1951 under the name Stuart's Drug and Surgical
Supply, Inc. The current shareholders acquired all of SMI's capital stock
along with several related companies on July 15, 1987 and merged these
companies into SMI concurrent with the acquisition.
During fiscal year 1989, SMI embarked on a strategic acquisition
program that would enable it to become a leading distributor of medical
supplies on a national basis. SMI acquired three businesses in 1988 and
1989 which added approximately $150 million to 1989 sales and expanded
SMI's geographic territories into Indiana, Kentucky, the Mid-West, the West
Coast and New England. Between 1990 and 1992 SMI opened new distribution
facilities in or near Phoenix, Seattle, Memphis, Akron, Cincinnati, and
Chicago, often in conjunction with exclusive distribution contracts with
primary health care providers in those areas.
On December 23, 1992, SMI's Board of Directors approved the
divestiture and spin-off of SMI's Surgical Implant division ("SIP") into a
newly created company named Stuart Medical Specialty, Inc., subsequently
renamed National Medical Specialty, Inc. ("NMSI"), as of December 31, 1992.
The SIP division consisted primarily of the sales and marketing of
surgically implanted spinal and orthopedic devices to physicians and
hospitals. The spin-off was recorded at the book value of the net assets
of the SIP division which amounted to $21.2 million. In February 1993, SMI
formally approved a plan whereby its General Surgery and Anesthesia
division ("AIP") would be sold to NMSI. This transaction was completed on
July 30, 1993 for consideration of $2.8 million and the assumption by NMSI
of certain liabilities of the AIP division. Consequently, all financial
information pertaining to the SIP and AIP divisions have been eliminated
for the years under discussion.
In January 1994, SMI acquired the medical supply distribution business
of Midwest, located in Indianapolis, Indiana as discussed in footnote 15 of
the notes to SMI's financial statements.
Change in Fiscal Year
Effective December 31, 1992, SMI elected to change its fiscal year
from the period ended April 30 to a December 31 calendar year. The reasons
for this change include certain tax benefits related to S corporations, the
business's lack of seasonality, and because a calendar year will facilitate
industry comparisons.
Results of Operations
Fiscal Year Ended December 31, 1993 Compared to the Eight Months Ended
December 31, 1992
Revenues for the fiscal year ended December 31, 1993 were $890 million
compared to $584 million (or $876 million annualized) for the eight months
ended December 31, 1992. The modest annualized revenue increase of $14
million or 1.6% reflects market setbacks resulting from the failure in
February 1993 of SMI and Baxter to reach an agreement on the terms and
conditions of a proposed acquisition by Baxter of SMI. Approximately $70
million in revenues associated with the alternate care market in Michigan
and acute care customers in Tennessee and California were lost, primarily
because several customers and sales representatives in these markets left
SMI in reaction to the failed proposed transaction. Moreover, SMI was
virtually unable to bid on new business for a period of four months as a
result of the uncertainty surrounding the failed proposed transaction. SMI
regained momentum in the second half of fiscal 1993 through new business
from significant vendors, further penetration in acute care and VHA
business segments and the addition of new product lines which traditionally
were sold by the manufacturer directly to customers.
Gross margin as a percentage of sales increased .1% from 10.7% for the
eight months ended December 31, 1992 to 10.8% for the fiscal year ended
December 31, 1993. However, the 10.7% for the eight months ended December
31, 1992 reflects the following reductions (i) $600,000 or .1% from
charges related to disputed vendor claims and (ii) $1.4 million or .2%
from a change in SMI's inventory reserve estimate. Without these
reductions, the adjusted gross margin percentage for the eight months ended
December 31, 1992 would have been 11.0%. The .2% decline in gross margin
for the period on an adjusted basis reflects the loss of certain alternate
site business and increased sales to group purchasing organizations with
fixed margins.
Warehouse, selling and administrative expenses, including depreciation
and amortization and non-recurring expenses, collectively referred to
herein as operating expenses, as a percentage of sales remained relatively
unchanged for the fiscal year ended December 31, 1993 compared to the eight
months ended December 31, 1992.
Operating income as a percentage of sales increased from 1.4% for the
eight months ended December 31, 1992 to 1.6% for the fiscal year ended
December 31, 1993. The increased profitability for the period was a result
of the modest increase in sales volume and gross margin described above.
SMI provides certain warehouse, administration, accounting and
information systems services to NMSI for a service charge ($1.3 million for
the fiscal year ended December 31, 1993) under written contracts. As
contemplated by the Agreement of Exchange, these written agreements will
terminate June 30, 1994.
Interest expense and discount on sale of trade receivables, herein
referred to as interest expense, declined from $5.4 million (or $8.0
million annualized) for the eight months ended December 31, 1992 to $6.9
million for the fiscal year ended December 31, 1993. The reduction in
interest expense reflects lower interest rates, improved asset management
and increased cash flow from the return of a $5.1 million federal tax
deposit resulting from SMI's change to a December 31 fiscal year end. See
" " Liquidity and Capital Resources "."
Eight Months Ended December 31, 1992 Compared to Fiscal Year Ended April
30, 1992
Revenues for the eight months ended December 31, 1992 amounted to $584
million (or $876 million annualized), which represented an increase of $124
million or 16% compared to the fiscal year ended April 30, 1992. SMI
experienced strong sales growth in all customer groups, with the majority
of the increase attributable to greater penetration in hospitals under
specific corporate contracts, primarily VHA, and the opening of a new
distribution facility in the Milwaukee/Chicago market. Access to this
marketplace resulted in additional annualized sales of approximately $15
million. In general, SMI's overall sales improvement also reflected
nationwide increased spending for health care services.
Gross margin as a percentage of sales declined .9% from 11.6% for the
fiscal year ended April 30, 1992 to 10.7% for the eight months ended
December 31, 1992. As mentioned above, the adjusted gross margin
percentage for the eight months ended December 31, 1992 of 11.0% is more
representative of the on-going business for the period. Greater
concentrations of lower margin VHA sales and continued influence of
hospital purchasing groups alliances are the principal factors which
contributed to the decline in gross margin percentage.
Operating expenses as a percentage of sales declined from 9.8% for the
fiscal year ended April 30, 1992 to 9.3% for the eight months ended
December 31, 1992 (9.1%, excluding non-recurring expenses of $914,000).
Strong sales growth in the fourth quarter of calendar 1992 and the
synergies realized from combining the operations of a merged company with
SMI's operations during fiscal year ended April 30, 1992 were primarily
responsible for the reduction in expenses as a percentage of sales.
Operating income as a percentage of sales decreased from 1.8% for the
fiscal year ended April 1992 to 1.4% for the eight months ended December
31, 1992. The reduced profitability reflected SMI's reduced gross margin
percentages and non-recurring expenses.
Interest expense declined from $11.9 million for the fiscal year ended
April 30, 1992 to $5.4 million (or $8.0 million annualized) for the eight
months ended December 31, 1992. The reduction in interest expense
reflected lower interest rates, improved asset management and the repayment
of $6.l million on term, real estate and equipment loans throughout the
eight months ended December 31, 1992.
Fiscal Year Ended April 30, 1992 Compared to Fiscal Year Ended April 30,
1991
Revenues increased $103.7 million (16%) from $648.7 million for the
fiscal year ended April 30, 1991 to $752.4 million for the fiscal year
ended April 30, 1992. The majority of the increase was due to sales to
hospitals under specific corporate contracts, other than VHA, particularly
in the West Coast and New England territories. In general, SMI's overall
sales improvement also reflected the nationwide increased spending for
health care services.
As a percentage of sales, gross margin decreased slightly, from 11.9%
in the fiscal year ended April 30, 1991 to 11.6% in the fiscal year ended
April 30, 1992. The increase within the overall sales mix of lower margin
sales to hospital purchasing groups was the primary reason for this margin
reduction.
One of SMI's strategies during the fiscal year ended April 30, 1992
was to control operating expenses through the centralization of support
functions in its Greensburg, Pennsylvania corporate offices and through
productivity improvements brought about by SMI's MIS systems. As a result,
for the fiscal year ended April 30, 1992 operating expenses as a percentage
of sales decreased to 9.8% as compared to 10.2% for the fiscal year ended
April 30, 1991. However, in total dollars, operating expenses increased by
$7.3 million (11.0%) to $73.8 million for the fiscal year ended April 30,
1992, compared to $66.5 million for the fiscal year ended April 30, 1991.
The increase in the total dollars reflected increased occupancy costs for
expanded facilities in several locations, expansion of SMI's information
systems capabilities and inflationary pressures. These increases were
partially offset by the cost control strategies discussed above.
Operating profits increased by $3.2 million to $13.8 million (1.8% of
sales) for the fiscal year ended April 30, 1992, compared to $10.6 million
(1.6% of sales) for the fiscal year ended April 30, 1991. The increased
sales volume and cost controls described above were the primary reasons for
the profit improvement.
Interest expense decreased $2.5 million to $11.9 million for the
fiscal year ended April 30, 1992, compared to $14.4 million for the fiscal
year ended April 30, 1991, primarily due to lower interest rates.
Fiscal Years Ended April 30, 1990 and 1989
As described in " " Overview and Background," SMI made several
acquisitions during fiscal 1989. The combination of increased sales at
lower margins and a $27.9 million increase in operating expenses generated
an operating loss for the fiscal year ended April 30, 1989. Approximately
$19.5 million of the increase in operating expenses resulted from the
aforementioned acquisitions; $15 million of this increase represented the
normal recurring expenses of the new distribution centers, while $4 million
resulted from non-recurring expenses from the Eastern Hospital Supply
business acquisition, including the termination costs of related employment
agreements, moving costs to a new facility and increased costs and expenses
for corporate personnel to facilitate the conversion. The remainder of the
1989 operating expense increase resulted from enhancements to SMI's overall
operating systems, information systems, and management and sales force
capabilities, which were necessary to support a national organization.
Interest expense for 1989 increased by $5.1 million as the result of
additional borrowings to finance the 1989 acquisitions and the increased
working capital required to support the higher sales levels.
The net loss from continuing operations for the fiscal year ended
April 30, 1990 resulted from expenses associated with the opening of two
new distribution facilities and a $3.9 million increase in interest expense
associated with the full year of acquisition financings.
Liquidity and Capital Resources
Asset Management
Through improved asset management, SMI has been able to increase
inventory turnover from approximately six times for the fiscal year ended
April 30, 1990, to approximately seven times for the year ended December
31, 1993.
SMI's operations have required a relatively low investment in property
and equipment with net fixed assets comprising only 11% of total assets at
both December 31, 1992 and December 31, 1993. SMI leases most of its
distribution facilities under operating leases with terms ranging from one
to five years. The lease rates for those facilities are competitive for
the various marketplaces and the use of leases provides SMI with the needed
flexibility to fulfill future growth needs. While no decision has been
made with respect to the need for additional facilities, management
believes that any such needs would be satisfied with leased facilities and
that the impact on the financial statements would not be material.
Net cash flows from operations declined $6.6 million from $21.0
million to $14.4 million for the eight and twelve month periods ended
December 31, 1992 and 1993, respectively. The decline in operating cash
flows primarily reflects an $8 million reduction in accounts payable and
accrued expenses offset by an $1.8 million increase in inventory and other
assets.
Leverage
SMI has financed its operations primarily through cash generated from
operations and from borrowings under term and revolving facilities from a
group of commercial banks. Borrowings under SMI's revolving credit
facility vary during the year based upon the cash needs of SMI. At
December 31, 1993, the amount outstanding under the revolving credit
facility was $46 million. The facility is secured primarily by inventory,
certain property and equipment, and a note receivable from an affiliate,
SFC, and allows for borrowings of the lesser of $85 million or 65% of SMI's
qualifying inventories. Since June 1990, SMI has sold its trade accounts
receivables ("Receivables") on a nonrecourse basis to SFC, which issues
commercial paper to finance its purchase of the Receivables. Effective
with the consummation of the Agreement of Exchange, SMI will no longer sell
its Receivables to SFC. It is anticipated that future working capital
requirements will be financed through debt facilities maintained by O&M
Holding.
SMI believes that cash flow from operations, the sale of Receivables
to SFC and the borrowings under the revolving credit facility provide
sufficient funds to meet SMI's working capital and capital expenditure
requirements.
Inflation
Inflation has affected SMI's sales and operating expenses. It is
SMI's policy to pass through price increases from suppliers. However,
these increases are offset where possible with savings in productivity and
volume.
VHA Agreement
SMI entered into a new supply agreement with VHA in November 1993.
Under the provisions of the new agreement, commencing on April 1, 1994, SMI
began to sell products to VHA-member hospitals and affiliates on a cost-
plus basis that varies based generally upon dollar volume of purchases and
percentage of total products purchased from SMI. Accordingly, as SMI's
sales to and penetration of VHA-member customers increase, the cost-plus
pricing available to such customers decreases. Prior to April 1, 1994,
products were sold on a straight cost-plus basis. Although the new cost-
plus pricing formulation is likely to reduce SMI's overall gross margin,
any such reduction may be offset in whole or in part by the combined effect
of increased sales to and penetration of VHA-member customers resulting
from the new pricing formulation, additional amounts that SMI may charge
such customers for certain value-added services, and operating efficiencies
and economies of scale associated with increased sales to VHA-member
customers.
Healthcare Reform
The current government focus on healthcare reform and the escalating
cost of medical care has increased pressures on all participants in the
healthcare industry to reduce the costs of products and services. The
healthcare industry has recently been characterized by the consolidation of
separate health care providers into larger entities and the growth of
larger and more sophisticated purchasing groups which have demanded
increasingly sophisticated and customized cost-containment and inventory
management programs from medical supply distributors. In addition, these
groups have exerted considerable leverage in reducing pricing. As a result
of the foregoing, SMI's ability to compete effectively and to maintain its
margins will depend to a significant extent on its ability to develop
innovative programs to address its customer's needs for cost-containment
while realizing operating efficiencies, including those resulting from
consolidation of its customer base.
Legal Proceedings
There are no legal proceedings pending to which SMI is a party or to
which any of its properties is subject, other than routine litigation
incidental to its business which is covered by insurance or which is not
expected to have a material adverse affect on SMI. Most of the
manufacturers whose products are distributed or marketed by SMI have
executed indemnification agreements, sometimes called "vendor
endorsements," under which such manufacturers agree to indemnify and hold
SMI harmless from and against any claims, losses or liabilities SMI may
suffer or incur as a result of products liabilities and other claims
arising out of the use of such manufacturers' products.
INFORMATION CONCERNING SMI
Introduction
SMI is the nation's third largest distributor of medical products and
supplies. SMI distributes a wide variety of disposable medical and
surgical products, (e.g. syringes, sutures, pads and latex gloves), as well
as non-technical medical equipment through a network of 16 primary
distribution centers and five satellite distribution centers serving
hospitals, nursing homes, clinics, surgical centers and physicians in 39
states. SMI's business is focused on providing services, including
inventory and information management and other value-added services, to its
suppliers and customers and providing an extensive array of national brand
medical and surgical products to its customers.
General Development of Business
SMI was founded in 1951 as Stuart Drug and Surgical Supply and was
incorporated in Pennsylvania in 1959 under the name Stuart's Drug and
Surgical Supply, Inc. On July 15, 1987, members of the Henry L. Hillman
family, a trust controlled by Mr. Hillman, Howard B. Hillman and Tatnall L.
Hillman acquired Stuart's Drug and Surgical Supply, Inc. and related
companies from its founding family.
Because SMI is an "S Corporation," SMI pays annual dividends to its
shareholders in amounts approximately equal to their federal and state
income tax liability.
Since its founding, SMI has grown by increasing its market share in
territories in which it operates, by expanding into new geographic areas
through acquisitions and by opening new facilities. SMI was originally
founded to provide medical and surgical equipment and supplies to
hospitals, clinics and physicians in southwestern Pennsylvania. Through
the opening of new facilities and a number of acquisitions undertaken
primarily since 1987, SMI now operates in 39 states.
Hospital Customers
Hospitals constitute the largest single customer group of SMI. Sales
to hospital customers grew at a compound rate of 16% over the past three
fiscal years primarily due to an expanded hospital customer base, increased
sales to existing hospital customers and geographic expansion of SMI's
distribution network.
Substantially all of SMI's hospital customers are affiliated with
health care alliances. Health care alliances represent hospital purchaser
groups which concentrate negotiation and buying power with respect to
services such as medical supply. In addition, health care alliances assist
member hospitals in negotiating contract pricing with manufacturers and
distributors for the most commonly used medical products and supplies.
Hospitals typically are members of several health care alliances and are
not obligated to utilize the manufactures or distributors with whom
contract pricing have been negotiated. The health care alliances cannot
ensure that any of their members will utilize any particular distribution
arrangement and do not issue purchase orders or collect funds on behalf of
their member hospitals. Approximately 86% of SMI's sales to health care
alliance members are on a negotiated cost-plus basis.
The largest health care alliance serviced by SMI is VHA, the largest
health care alliance in the United States with approximately 953 locally
owned, not-for-profit hospitals and their affiliates. SMI arranges for the
ordering, storage and/or delivery of medical products that the hospital
members of VHA purchase from manufacturers pursuant to purchasing
agreements with such manufacturers. In addition, SMI makes available to
such hospitals certain additional products and services not covered by such
purchasing agreements.
Since 1988, SMI has been an authorized distribution agent for VHA.
Under SMI's agreement with VHA, on April 1, 1994 products began to be sold
to VHA members and affiliate hospitals on a declining cost-plus basis,
based upon the dollar volume of quarterly purchases, the percentage of
total products purchased from SMI, payment terms and electronic order entry
utilization levels. Prior to April 1, 1994, products were sold on a cost-
plus basis that did not adjust for dollar volumes or level of hospital
penetration. SMI also earns additional fee income under its agreement with
VHA for certain services provided to hospital members and manufacturers.
The agreement with VHA has a three-year term and may be cancelled by either
party upon 90 days written notice.
During SMI's fiscal year ended April 30, 1992, the eight months ended
December 31, 1992 and the fiscal year ended December 31, 1993, no single
customer accounted for 10% or more of SMI's total revenues. Revenues
derived from SMI sales made to member VHA hospitals pursuant to SMI's
agreement with VHA aggregated $350 million (46% of revenues), $283 million
(48% of revenues) and $460 million (52% of revenues) for the fiscal years
ended April 30, 1992, eight months ended December 31, 1992, and fiscal year
ended December 31, 1993, respectively.
Alternate Site Customers
Primarily in its eastern region, SMI also serves alternate site
customers, such as nursing homes, clinics, surgery centers and physicians'
offices. SMI considers this segment of the market to be important to SMI's
strategic growth. Free standing surgical centers, emergency centers,
clinics and other alternate sites are becoming increasingly popular with
health care consumers because of their ability to offer reduced prices and
convenience to health care consumers. The number of private physician
practices, long-term care facilities, specialty diagnostic and treatment
facilities and home health care providers is also increasing. The
evolution of integrated health care facilities where hospitals and
physicians are combining has elevated the need for distributors to service
both markets effectively and efficiently. Currently, the product supply
market for the alternate site sector is highly fragmented with hundreds of
companies providing medical products to these facilities.
Services
SMI provides its hospital customers with a variety of inventory
management services that are designed to help reduce overall inventory
handling and carrying costs. These services include the following:
Electronic Order Entry
SMI's information systems are complemented by an electronic order
entry system that enables customers to transmit orders electronically to
SMI's mainframe system. Approximately 65% of all orders are currently
placed with SMI in this manner. SMI's computer system confirms the order
to the customer and instantly verifies item, price and quantity that will
be shipped. SMI currently provides these services to approximately 750 of
its hospital customers.
Customer Management Reports
SMI produces management reports for its customers, including
forecasting profiles, inventory management reports and historic information
on product utilization and pricing. These reports enhance the ability of
hospitals to reduce their investment in inventory. SMI assists hospital
management in implementing and maintaining contracts with suppliers by
providing contract information such as pricing, contract date and advanced
notification of any contract expirations.
Just-In-Time/Stockless Programs
SMI's Just-In-Time ("JIT") program enables hospital customers to
minimize inventory requirements, reduce or eliminate warehouse space and
reduce the number of personnel required to handle inventory. Under the JIT
inventory program, the hospital receives frequent deliveries from a
distributor thereby enabling it to significantly reduce its inventory.
SMI's stockless program eliminates a customer's on site inventory by
providing direct deliveries to individual hospital departments, often
several times per day and seven days per week. Under SMI's stockless
program, SMI essentially serves as the hospital's storeroom. The benefits
of a stockless program include reducing costs of inventory beyond that
achievable through a JIT program, eliminating the costs to the hospital of
operating a storeroom, reducing costs of product obsolescence and achieving
economies for the hospital in purchasing and materials management.
Other Value-Added Services
SMI also offers many other "value-added" services to its customers,
including consulting services with respect to warehouse operations and
other inventory-related matters, logistic programs designed to enhance
hospital operational efficiencies, rush order deliveries, guaranteed
inventories, small unit delivery, consolidated and electronic invoicing and
electronic price change notification.
Management Information Systems
SMI's management information systems ("MIS Systems") provide the
essential tools that enable SMI to offer a full range of inventory
management and other customized services to its customers. SMI has made
substantial investments to develop and enhance its MIS Systems to meet the
rapidly changing requirements of its customers and suppliers and to provide
continuing opportunities to maximize the efficiency of its operations. The
MIS Systems department has approximately 100 employees. SMI's MIS Systems
enable SMI to control, coordinate and monitor customer order entries, to
coordinate and control all shipping instructions, to monitor inventory
requirements of customers and to forecast customer requirements and
corresponding inventory availability. The MIS Systems also enable SMI to
produce various reports for its customers and suppliers, including updating
reports pertaining to product availability and pricing.
SMI's MIS Systems include electronic data interchange ("EDI") for
communicating with its suppliers and customers. EDI is a method by which
business data may be communicated electronically between computers in
standardized formats (such as purchase orders, invoices, shipping notices
and remittance advice) in lieu of conventional paper documents. The
benefits of EDI include reductions in paper handling, storage requirements,
errors and administrative processing expenses.
Operations
SMI has 16 primary and five satellite distribution centers that carry
inventories to SMI's regional and local markets. SMI's distribution
network is divided into an Eastern, Central and Western region, with five
or more primary distribution centers located in each region. SMI utilizes
a "hub and spoke" distribution system, with SMI's 16 primary distribution
centers each being a "hub" and its five satellite distribution centers
being "spokes," or pickup points, from which inventories initially shipped
from the "hubs" are transported to customers. This type of organization
enables SMI to respond to customer product needs on a timely basis and to
make deliveries on a 24-hour (or more frequent) basis and achieve order
"fill" rates of higher than 95%.
SMI delivers most of its orders and all of its hospital orders with
its own fleet of trailers and tractors. Service is daily (seven days per
week) to a customer, if necessary, and most orders are delivered within 24
to 48 hours. Hospital customers that are on a stockless inventory
management program frequently receive deliveries seven days a week and
several times per day.
SMI maintains inventories of more than 122,000 different medical and
surgical products. SMI employs state-of-the-art systems and techniques in
warehousing, including the use of bar-coded labels that identify location,
routing and inventory picking and replacement. SMI's MIS Systems enable
SMI to achieve efficient inventory management through the constant
production of forecasting report, product utilization reports and pricing
reports. SMI's annual inventory turnover rates have increased from
approximately six times for the fiscal year ended April 30, 1990 to
approximately seven times for the fiscal year ended December 31, 1993.
Purchasing and Suppliers
Purchasing is centralized at SMI's headquarters facility in
Greensburg, Pennsylvania. SMI's computerized inventory management system
and electronic data interchange link-ups with many of its suppliers enable
it to make purchases and manage its own inventories more efficiently.
SMI's inventory management program continuously monitors product
utilization to minimize inventory investment and maximize inventory
turnover.
SMI stocks and distributes medical products from many manufacturers.
The suppliers of medical products distributed by SMI include major
manufacturers that supply national brand products and hundreds of smaller
manufacturers that supply specialty products or more limited product lines.
SMI's largest suppliers include Johnson & Johnson, Inc., Minnesota Mining &
Mfg. Co., Beckton Dickinson & Co., Kendall, Kimberly-Clark Corporation,
Sherwood Medical Company (a subsidiary of American Home Products), Abbott
Laboratories, DeRoyal, C.R. Bard, Hudson, and Proctor and Gamble. For the
fiscal year ended December 31, 1993, more than 6,000 different types of
products purchased from more than six divisions of Johnson & Johnson, Inc.
accounted for approximately 20% of the aggregate cost of the products
purchased by SMI for resale. Product purchases from the ten largest
suppliers in 1993 totaled $450 million, or 52% of SMI's total product
purchases (net of manufacturers' rebates) in 1993.
Sales and Marketing
SMI focuses its marketing efforts on creating "partnerships" with
current and prospective hospital customers to reduce the customer's overall
operating costs. SMI's inventory management services are at the center of
this relationship and are supported by a philosophy of offering maximum
flexibility in meeting customers' needs. This flexibility is made possible
by SMI's centralized and information-driven operational approach in
combination with the efficiencies and economies of scale provided by its
national distribution network.
SMI employs a sales and marketing organization of approximately 120
hospital sales representatives and 26 alternate site sales representatives.
SMI's sales force is supported and augmented by a corporate staff engaged
in marketing, supplier relations, customer relations and product
management. Senior management works closely with local and regional
personnel in the marketing of SMI's inventory management capabilities and
building customer relationships.
Employees
SMI has approximately 1,100 employees, of whom approximately 270 are
located at its headquarters in Greensburg, Pennsylvania, and the balance at
its primary and satellite distribution centers. None of SMI's employees
are members of unions. SMI has never experienced any work stoppage and
believes its relations with its employees are satisfactory.
Facilities
SMI owns or leases offices, warehouses and shipping terminals in a
number of locations throughout the United States. The following table sets
forth the location and square footage of each of the primary and satellite
distribution centers. Primary distribution centers, which are known as
"hubs" in SMI's "hub and spoke" distribution system, contain warehousing
facilities and offer a full range of customer services. Satellite
distribution centers, which are known as "spokes" in the same system, are
either shipping terminals or are customer-specific facilities.
Sq. Footage
Distribution Nature of Owned/ (Approximate)
Center Facility Leased
Greensburg, PA Primary Owned 237,000
(Pittsburgh area)
Denver, CO Primary Leased 85,500
Erlanger, KY Primary Leased 80,500
(Cincinnati area)
Franklin, MA Primary Leased 147,000
(Boston area)
Kent, WA Primary Leased 36,000
(Seattle area)
Memphis, TN Primary Leased 66,000
Phoenix, AZ Primary Leased 41,000
Plymouth, MI Primary Leased 80,500
(Detroit area)
Kansas City, MO Primary Leased 96,000
Northbrook, IL Primary Leased 30,000
(Chicago area)
LaMirada, CA Primary Owned 90,880
(Los Angeles area)
Indianapolis, IN Primary Leased 63,000
Livermore, CA Primary Leased 104,928
(San Francisco area)
Little Rock, AR Primary Leased 29,000
Modagore, OH Primary Leased 27,500
(Akron area)
Allentown, PA Primary Leased 34,000
Earth City, MO Satellite Leased 7,500
(St. Louis area)
Vestal, NY Satellite Leased 3,500
Dunkirk, NY Satellite Leased 3,200
Columbus, OH Satellite Leased 10,000
Fort Wayne, IN Satellite Leased 3,500
SMI believes that its facilities are adequate to carry on its business as
currently conducted.
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF O&M
COMMON STOCK AND O&M HOLDING COMMON STOCK
The following is a summary of material differences between the rights
of holders of O&M Common Stock and O&M Holding Common Stock. Because each
of O&M and O&M Holding is organized under the laws of Virginia, such
differences arise from variations between the respective articles and
bylaws of O&M and O&M Holding.
Business Combinations
The O&M Articles of Incorporation include a provision requiring
special approval of certain business combinations with a person owning 5%
or more of any class of the outstanding capital stock of O&M (an
"Affiliated Shareholder"). A business combination with an Affiliated
Shareholder requires approval by holders of more than two-thirds of the
outstanding shares of O&M capital stock, excluding the shares held by the
Affiliated Shareholder. In addition, the shares held by the Affiliated
Shareholder must be voted in favor of the business combination.
Under a provision of the VSCA enacted in 1987, for a period of three
years after the date on which such person becomes a 10% owner, certain
"affiliated transactions" with a person owning 10% or more of any class of
a corporation's outstanding voting shares must be approved by a majority of
the disinterested directors and holders of two-thirds of the voting shares,
other than shares held by such 10% holder. Under the VSCA, "affiliated
transactions" include mergers, statutory share exchanges for any class of
stock, recapitalizations and sales of assets other than in the ordinary
course of business. In addition, the VSCA provides that a person acquiring
voting shares within certain specified ranges (beginning with 20%) of a
corporation's shares entitled to vote in the election of directors does not
have voting rights with respect to the acquired shares unless such rights
are approved by holders of a majority of the voting shares other than
shares held by the acquiring person.
In view of the above VSCA provisions, the O&M Holding Articles of
Incorporation do not include the shareholder approval requirement with
respect to transactions with an Affiliated Shareholder provided for in the
O&M Articles of Incorporation.
Election of Directors
Each of the O&M Articles of Incorporation and the O&M Holding Articles
of Incorporation provides for a classified board of directors under which
approximately one-third of the total number of directors are elected each
year for three-year terms. In addition, the O&M Holding Articles of
Incorporation provide that, as long as any share of Series B Preferred
Stock remains outstanding, the holders of Series B Preferred Stock will be
entitled to elect the Series B Preferred Stock Director. Such director is
in addition to the number of directors to be elected by the holders of O&M
Holding Common Stock. See " - Operation of O&M Holding After the Exchanges
- - Directors and Officers."
The Agreement of Exchange provides that, as long as the SMI
Shareholders collectively have the right to vote at least 5% of the
outstanding shares of O&M Holding Common Stock, O&M Holding will exercise
all authority under applicable law and subject to fiduciary obligations of
the members of the O&M Holding Board to cause a SMI Shareholders' Nominee
acceptable to the O&M Holding Board to be included in the slate of nominees
recommended by the O&M Holding Board to the holders of O&M Holding Common
Stock for election as directors at annual meetings of shareholders of O&M
Holding. See " - Operation of O&M Holding After the Exchanges - Directors
and Officers."
Voting Rights
The holders of O&M Common Stock have one vote per share on all
matters. The holders of O&M Holding Common Stock will have one vote per
share and will vote together as a single class with the holders of the
Series B Preferred Stock on all matters, except as otherwise provided by
Virginia law, with respect to certain amendments to the O&M Holding
Articles of Incorporation and bylaws and in the election of the Series B
Preferred Stock Director. Each share of Series B Preferred Stock is
entitled to the number of votes equal to the Preferred Conversion Ratio,
which initially will be 4.04. See " - Creation of O&M Holding Company -
Capitalization of O&M Holding."
In the Agreement of Exchange, each of the SMI Shareholders has agreed
that as long as the SMI Shareholders own any shares of Series B Preferred
Stock or the SMI Shareholders and their Affiliates collectively own 5% or
more of the outstanding shares of O&M Holding Common Stock, he will vote
his shares of Series B Preferred Stock or O&M Holding Common Stock, as the
case may be, in the same proportion as the votes cast on such matter by all
other holders of the O&M Holding Common Stock (excluding certain holders of
5% or more of the outstanding shares of O&M Holding Common Stock). Such
voting agreement does not apply to matters that would amend the terms of
the Series B Preferred Stock or would amend the O&M Holding Articles of
Incorporation or bylaws to adversely affect the relative rights and
preferences of the Series B Preferred Stock. See " - The Agreement of
Exchange - Restrictions Applicable to the SMI Shareholders' O&M Holding
Capital Stock - Voting Agreement." In addition, the voting agreement does
not apply to the SMI Shareholders' vote with respect to the election of the
Series B Preferred Stock Director or to the SMI Shareholders' nominee. See
" - Operation of O&M Holding After the Exchanges - Directors and Officers."
Dividends
Holders of O&M Common Stock are entitled to dividends at such rates as
may be determined from time to time by the O&M Board subject to the
preferential rights of any shares of cumulative preferred stock of O&M that
may be outstanding from time to time. No such shares are now outstanding.
No dividends, other than a dividend in O&M Holding Common Stock or Junior
Stock, may be paid or declared to the holders of the O&M Holding Common
Stock unless all accrued dividends on each outstanding share of Series B
Preferred Stock and any dividend preference of any other outstanding series
of Cumulative Preferred Stock have been fully paid or declared and set
apart for payment. The Series B Preferred Stock is entitled to a
cumulative preferential dividend of $4.50 per share. If all accrued
dividends on the outstanding shares of Series B Preferred Stock and any
dividend preference of any other outstanding series of Cumulative Preferred
Stock have been declared and paid or set aside for payment, then the O&M
Holding Board may pay dividends to the holders of O&M Holding Common Stock.
See " - Creation of O&M Holding - Capitalization of O&M Holding - Series B
Preferred Stock - Dividend Rights."
Liquidation
As long as no shares of any series of cumulative preferred stock of
O&M are outstanding, the holders of O&M Common Stock are entitled to all
assets of O&M in the event of any dissolution, liquidation or winding up of
the affairs of O&M. After payment of a $100 per share liquidation
preference plus accrued and unpaid dividends to the holders of the
outstanding shares of Series B Preferred Stock and any other liquidation
preference of any outstanding shares of any series of Cumulative Preferred
Stock, the remaining assets will be paid or distributed to the holders of
O&M Holding Common Stock. See " - Creation of O&M Holding - Capitalization
of O&M Holding - Series B Preferred Stock - Liquidation Rights."
LEGAL OPINIONS
The validity of the shares of O&M Holding Common Stock offered by this
Proxy Statement/Prospectus will be passed upon for O&M and O&M Holding by
Drew St. J. Carneal, Esq., Senior Vice President and Corporate Counsel of
O&M. It is a condition of the Agreement of Exchange that Hunton & Williams
also deliver to O&M an opinion concerning certain federal income tax
consequences of the Exchanges. See " - The Agreement of Exchange -
Conditions to the Exchanges."
EXPERTS
The financial statements of Stuart Medical, Inc. at December 31, 1993
and 1992, and for the year ended December 31, 1993, the eight-month period
ended December 31, 1992, and the years ended April 30, 1992 and 1991,
included herein have been audited by Ernst & Young, independent auditors,
as set forth in their report appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of O&M as of December 31, 1993
and 1992 and for each of the years in the three year period ended December
31, 1993 included herein have been audited by KPMG, independent public
accountants, as set forth in their report thereon included herein. Such
consolidated financial statements are included herein in reliance upon the
report of KPMG and upon the authority of such firm as experts in accounting
and auditing.
PROPOSAL 2: ELECTION OF DIRECTORS
In February, 1994, the O&M Board adopted an amendment to O&M's bylaws,
to become effective on the date of the Annual Meeting, reducing the number
of directors from 12 to 10. This reduction would eliminate vacancies
created due to the death of long-time director W. Roy Smith in September,
1993, and the retirement of Chairman G. Gilmer Minor, Jr. at the time of
the Annual Meeting. A new Chairman will be elected by the O&M Board at its
meeting following the Annual Meeting. The O&M Board will remain divided
into three classes, with one class being elected every year for a term of
three years. Three nominees are expected to be elected at the Annual
Meeting to serve for a term of three years and one nominee to serve for two
years, until their successors are elected and have qualified. The
remaining six directors will continue to serve as set forth below. Each of
the nominees is currently a director of O&M and has agreed to serve if
elected. Unless otherwise directed, a proxy will be voted for the four
nominees shown below. If some unexpected occurrence should, in the
judgment of the O&M Board, make necessary the substitution of some other
person for any of the nominees, the shares represented by proxies will be
voted for such other person as the O&M Board may select, or the O&M Board
may amend the bylaws to reduce the number of directors to the total of the
remaining nominees and any such substitute nominee or nominees in which
case the shares represented by proxies shall be voted for the remaining
nominees and any such substitute nominee or nominees. No proxy can be
voted for more than four persons.
The election of each nominee for director requires the affirmative
vote of the holders of a plurality of the shares of O&M Common Stock cast
in the election of directors. Votes that are withheld and Broker Shares
that are not voted in the election of directors will not be included in
determining the number of votes cast.
The names and ages of the nominees and continuing directors, their
principal occupation or employment during the past five years and other
relevant data regarding them as of March 14, 1994, based on information
received from the respective nominees and continuing directors, are set
forth below. Each of the nominees and the directors has served
continuously since the year he or she joined the O&M Board.
Nominees for Election to the O&M Board
FOR THE THREE-YEAR TERM EXPIRING APRIL 1997:
WILLIAM F. FIFE
DIRECTOR SINCE 1962
PHOTOGRAPH
William F. Fife, 72, served as Executive Vice President of O&M
from 1987 until his retirement in 1991. Mr. Fife has been a
director of O&M since 1962 and is a member of the Audit and
Executive Committees.
JAMES E. UKROP
DIRECTOR SINCE 1987
PHOTOGRAPH
James E. Ukrop, 56, is President and Chief Executive Officer
of Ukrop's Super Markets, Inc., a retail grocery chain. Mr.
Ukrop has been a director since 1987 and is a member of the
Compensation & Benefits and Strategic Planning Committees.
Mr. Ukrop also serves as a member of the Boards of Directors
of Richfood Holdings, Inc. and Legg Mason, Inc.
JAMES E. ROGERS
DIRECTOR SINCE 1991
PHOTOGRAPH
James E. Rogers, 49, is Managing Director of SCI Investors
Inc. and Chairman of Custom Papers Group Inc., a paper
manufacturing company. From 1991 to 1992, Mr. Rogers served
as President and Chief Executive Officer of Specialty Coatings
International Inc. Prior to joining Specialty Coatings
International in 1991, Mr. Rogers served as Senior Vice
President and Group Executive of James River Corporation. Mr.
Rogers has been a director since 1991 and is Chairman of the
Compensation & Benefits Committee and a member of the
Executive and Strategic Planning Committees. Mr. Rogers also
serves on the Boards of Directors of Wellman, Inc. and
Caraustar Industries, Inc.
FOR THE TWO YEAR TERM EXPIRING APRIL 1996:
VERNARD W. HENLEY
DIRECTOR SINCE 1993
PHOTOGRAPH
Vernard W. Henley, 64, is Chairman of the Board, President and
Chief Executive Officer of Consolidated Bank and Trust
Company, Richmond, Virginia. Mr. Henley has been a director
since July, 1993, and is a member of the Audit Committee.
Members of the O&M Board Continuing in Office
TERMS EXPIRING APRIL 1996:
G. GILMER MINOR, III
DIRECTOR SINCE 1980
PHOTOGRAPH
G. Gilmer Minor, III, 53, is President and Chief Executive
Officer of O&M. Mr. Minor has been a director since 1980 and
is Chairman of the Executive Committee and a member of the
Strategic Planning Committee. Mr. Minor also serves as a
member of the Boards of Directors of Crestar Financial
Corporation and Richfood Holdings, Inc. Mr. Minor is the son
of G. Gilmer Minor, Jr., retiring Chairman of the Board, and
nephew of Philip M. Minor, Vice Chairman.
<PAGE>
R.E. CABELL, JR.
DIRECTOR SINCE 1962
PHOTOGRAPH
R.E. Cabell, Jr., 70, Of Counsel with the law firm of
Williams, Mullen, Christian & Dobbins. Mr. Cabell has been a
director since 1962 and is Chairman of the Audit Committee and
a member of the Executive Committee.
TERMS EXPIRING APRIL 1995:
E. MORGAN MASSEY
DIRECTOR SINCE 1988
PHOTOGRAPH
E. Morgan Massey, 67, is President and Chief Executive Officer
of South American Coal, N.V. and Chairman Emeritus of A.T.
Massey Coal Company, Inc., both coal companies. Mr. Massey
served A.T. Massey Coal Company, Inc. as Chairman and Chief
Executive Officer in 1991, and as President and Chief
Executive Officer from 1972 to 1990. Mr. Massey has been a
director since 1988 and is a member of the Audit and Strategic
Planning Committees. Mr. Massey also serves as a member of
the Board of Directors of Fluor Corporation, as Chairman of
the Massey Cancer Center Advisory Board, Richmond,Virginia,
and Vice Chairman of the U.S. Energy Association, Washington,
D.C.
PHILIP M. MINOR
DIRECTOR SINCE 1942
PHOTOGRAPH
Philip M. Minor, 78, is Vice Chairman of the Board of O&M.
Mr. Minor has been a director since 1942 and is a member of
the Audit Committee.
JAMES B. FARINHOLT, JR.
DIRECTOR SINCE 1974
PHOTOGRAPH
James B. Farinholt, Jr., 59, is President of Galleher &
Company, Inc., an investment company. In addition Mr.
Farinholt serves as Special Assistant to the President of
Virginia Commonwealth University, advising on campus
expansion, commercialization of scientific discoveries, and
development of the Virginia Biotechnology Research Park. Mr.
Farinholt has been a director since 1974 and is Chairman of
the Strategic Planning Committee and a member of the Executive
Committee.
ANNE MARIE WHITTEMORE
DIRECTOR SINCE 1991
PHOTOGRAPH
Anne Marie Whittemore, 48, is a partner in the law firm of
McGuire, Woods, Battle & Boothe. Mrs. Whittemore has been a
director since July 1991 and is a member of the Audit and
Compensation & Benefits Committees. Mrs. Whittemore also
serves on the Board of Directors of USF&G Corporation and has
been nominated to the Boards of Directors of James River
Corporation and the T. Rowe Price Income Funds.
<PAGE>
Meetings and Committees of the O&M Board
The O&M Board held nine meetings during the past year. All directors
attended at least 75% of the total meetings of the O&M Board and any
Committees on which they serve. The O&M Board has Executive, Audit,
Compensation & Benefits and Strategic Planning Committees. The O&M Board
does not have a Nominating Committee.
None of the members of the Audit Committee are employees of O&M or its
subsidiaries. The function of the Audit Committee is to oversee O&M"s
financial reporting and internal control structure and to serve as a direct
line of communication among O&M"s independent auditors, the O&M Internal
Audit Department and the O&M Board. The Audit Committee met four times
during the past year.
None of the members of the Compensation and Benefits Committee of the
O&M Board (the "Compensation Committee") are employees of O&M or its
subsidiaries. The function of the Compensation Committee is to recommend
to the O&M Board the salaries and compensation of the executive officers of
O&M, and to make such other studies and recommendations concerning
compensation and compensation policies as may be brought to their attention
for consideration. The Compensation Committee administers the Savings &
Protection Plan, the Employee Stock Purchase Plan, the 1985 and 1993 Stock
Option Plans, the Supplemental Executive Retirement Plan and the Annual
Incentive Plan for employees who are subject to Section 16 of the Exchange
Act. The Compensation Committee met three times during the past year.
Compensation Committee Interlocks and Insider Participation
G. Gilmer Minor, Jr. and William F. Fife, who served as members of the
Compensation Committee until December, 1993, are former officers of O&M.
In 1985, O&M entered into separate agreements with Mr. G. Gilmer
Minor, Jr., Chairman of the Board of O&M, and Mr. Philip M. Minor, Vice
Chairman of the Board of O&M, to perform consulting services of an
executive nature for a two-year period beginning December 31, 1985. In
1991, O&M entered into an agreement with Mr. William F. Fife, a director,
to perform consulting services of an executive nature for a two-year period
beginning May, 1, 1991. Each of the consulting agreements automatically
renews for successive two-year periods, unless terminated by O&M at any
time after the expiration of the initial two-year period upon two years
written notice. O&M may terminate each of the consulting agreements if the
consultant named in that agreement becomes disabled or for cause. Messrs.
G. Gilmer Minor, Jr., Philip M. Minor and William F. Fife have agreed not
to compete with O&M during the term of each of their agreements and for two
years thereafter. Payments made in 1993 pursuant to the contracts with
Messrs. G. Gilmer Minor, Jr., Philip M. Minor and William F. Fife amounted
to $60,000, $44,000 and $60,000, respectively.
Compensation of Directors
Cash Compensation
In 1993, each non-employee director was paid an annual retainer of
$9,000 ($11,500 for committee chairmen), plus $800 for each O&M Board
meeting attended (with an additional $100 if the board of a subsidiary of
which the director is a member meets on the same day as a meeting of the
O&M Board), $800 for each meeting of the O&M Board"s committees and $500
for telephone conference meetings.
Directors Compensation Plan
The Directors Compensation Plan (the "Directors Plan") provides for
automatic, annual grants of options to purchase O&M Common Stock. During
1993, each eligible director was granted options to purchase 1,688 shares
of O&M Common Stock at a per share exercise price of $14.75. In addition,
the Directors Plan allows eligible directors to defer the receipt of all or
part of their director fees. Amounts deferred are "invested" in
bookkeeping accounts that measure earnings and losses based on the
performance of a particular investment. Subject to certain restrictions, a
director will be permitted to take cash distributions in whole or in part
from a deferred fee account either prior to or following the termination of
his or her service as a director. The Directors Plan also allows eligible
directors to receive payment of all or part of their director fees in O&M
Common Stock rather than cash.
O&M COMMON STOCK OWNED BY PRINCIPAL
SHAREHOLDERS AND MANAGEMENT
The following table sets forth as of March 14, 1994 the number of
shares of O&M Common Stock beneficially owned by each director and nominee,
the named executive officers in the Summary Compensation Table, all current
executive officers and directors of O&M as a group and all persons
(including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act) who, to the knowledge of O&M, is the beneficial owner of more
than 5% of O&M Common Stock.
Sole Voting Aggregate
Name of and Investment Percentage
Beneficial Owner Power(1) Other(2) Owned
G. Gilmer Minor, Jr. . . . . . . . . 413,958 -- 2.0
Philip M. Minor . . . . . . . . . . . 443,730 759 2.2
G. Gilmer Minor, III. . . . . . . . . 276,924 13,107 1.4
R. E. Cabell, Jr. . . . . . . . . . . 57,208 5,770 *
James B. Farinholt, Jr. . . . . . . . 6,376 -- *
William F. Fife . . . . . . . . . . . 217,088 115 1.1
Vernard W. Henley . . . . . . . . . . 500 -- *
E. Morgan Massey. . . . . . . . . . . 131,065 -- *
James E. Rogers . . . . . . . . . . . 5,063 -- *
James E. Ukrop. . . . . . . . . . . . 23,103 -- *
Anne Marie Whittemore . . . . . . . 4,876 150 *
Henry A. Berling. . . . . . . . . . . 199,834 8,981 1.0
Robert E. Anderson, III . . . . . . . 61,044 4,269 *
Glenn J. Dozier . . . . . . . . . . . 21,525 14,115 *
Drew St. J. Carneal . . . . . . . . . 25,364 5,321 *
All Executive Officers and Directors
as a group (22 persons). . . . . . 2,006,314 79,863 10.2
FMR Corp., Edward C. Johnson, 3d,
Fidelity Management &
Research Company
83 Devonshire Street
Boston, Mass. 02109 . . . . . . . 429,600 1,595,300(3) 9.93
(1) Includes 245,785 shares which certain officers and directors of
O&M have the right to acquire through the exercise of stock options within
60 days following March 14, 1994.
(2) Includes: (a) shares held by certain relatives; (b) shares held in
various fiduciary capacities; (c) shares held by O&M"s Employee Stock
Purchase Plan and 401(k) Plan; (d) grants of restricted stock through O&M"s
Annual Incentive Plan; and (e) shares that the stockholder has shared power
to dispose of or to direct disposition of. These shares may be deemed to
be beneficially owned under the rules and regulations of the SEC, but the
inclusion of such shares in the table does not constitute an admission of
beneficial ownership.
(3) The number of shares owned is as of February 28, 1994, as reported
in the Schedule 13G filed by FMR Corp. and received by O&M on March 11,
1994.
* Represents less than 1% of the total number of shares outstanding.
Compliance with Section 16(a) of the Exchange Act
O&M's directors, its executive officers, and any persons holding more
than 10% of outstanding O&M Common Stock are required to file reports
concerning their initial ownership of O&M Common Stock and any subsequent
changes in that ownership. O&M believes that the filing requirements were
satisfied, except that Hugh F. Gouldthorpe, Jr. and Richard L. Farinholt,
Vice Presidents of O&M, each reported one transaction six and eight days
late, respectively. In making this disclosure, O&M has relied solely on
written representations of its directors, executive officers and beneficial
owners of more than 10% of O&M Common Stock and copies of the reports that
they have filed with the SEC.
EXECUTIVE COMPENSATION
Report of the Compensation Committee
The Compensation Committee of the O&M Board is currently comprised of
three outside directors. The principal functions of the Compensation
Committee are to oversee the design and competitiveness of O&M"s total
compensation program, to evaluate the performance of O&M"s senior
executives and approve related compensation actions, and to administer
O&M's 1985 and 1993 Stock Option Plans, Supplemental Executive Retirement
Plan, Savings & Protection Plan, and Annual Incentive Plan for employees
who are subject to Section 16 of the Exchange Act, in accordance with the
terms of each respective plan. The Compensation Committee met three times
during calendar year 1993.
The objective of the Compensation Committee is to establish executive
compensation that reflects O&M's performance. The maximum compensation for
executives is therefore dependent on those O&M financial performance
measures that determine shareowner value. O&M also regularly evaluates
executive compensation levels through competitive comparisons against its
peer company group, the same group reflected in the Performance Graph, and
other companies of similar size and operating characteristics. Base salary
levels are somewhat below competitive market levels for like experienced
executives and are combined with incentive compensation opportunities to
reach competitive total compensation levels. This combination is intended
to focus management on the annual and longer-term success of O&M.
The Compensation Committee recognizes it may sometimes be necessary to
sacrifice short-term financial performance to obtain longer-term business
success. This fact leads the Compensation Committee to regularly monitor
the balance between annual and longer-term rewards, and act as needed to
encourage meaningful levels of share ownership among executives.
Early each year the Compensation Committee meets to review key aspects
of the upcoming year"s business plan and establish Annual Incentive Plan
goals for each corporate officer, including the Chief Executive Officer,
senior vice presidents, and vice presidents. Goals under this plan are
weighted to reflect their importance and contribution to desired company
and shareowner outcomes. Annual Incentive Plan goals for named executives
include Return on Average Equity which comprises 80% of total award
potential, and predetermined specific individual performance objectives
which represent the balance of incentive award potential. These
performance objectives are individually designed to enhance the named
executive's job-related skills and accountability in areas assigned to him
including teamwork, service quality and productivity. Individual
performance objectives are developed by the named executives and submitted
to the Compensation Committee for approval. Other performance measures,
including earnings per share, are established along with individually
tailored performance goals for vice presidents. The Compensation Committee
receives periodic updates during the year on business performance in
relation to incentive plan goals, and progress of individual goals,
particularly with respect to senior executives. Discussions of management
contribution and performance are the norm, not the exception, in Committee
meetings.
At the close of each year, the Compensation Committee meets to discuss
financial and other performance compared to Annual Incentive Plan goals and
longer-term business goals. These longer-term goals center around O&M"s
strategic objectives to remain customer oriented in everything it does and
to actively evolve its business consistent with the service needs of
customers and O&M"s markets. In deciding the level of annual salary
increases, incentive payments, and granting of stock options, the
Compensation Committee looks to the Chief Executive Officer for
recommendations on senior executives, and then meets privately (without the
presence of management, including the Chief Executive Officer in relation
to his own compensation) to determine compensation actions for the Chief
Executive Officer. The Compensation Committee"s decision-making process is
benefitted by input from O&M's Human Resources Department, and periodically
from outside advisors, to maintain the desired level of competitiveness and
technically sound compensation and benefit programs.
O&M performance from continuing operations in fiscal 1993 generally
met or exceeded objectives. Sales increased 18.7% to $1.4 billion, profits
grew 20.0% to $18.5 million, with a gross margin of 10.5%. On financial
measures used to determine annual incentive plan awards, return on average
equity advanced to 14.6% from 14.4% in 1992, and earnings per share grew
15.4% over last year to $0.90.
The maximum award payable under O&M"s Annual Incentive Plan to the
Chief Executive Officer for full attainment of all established goals would
be 65% of his base salary. As a result of O&M"s financial performance in
1993, and considering performance on individually tailored objectives for
the year, the Compensation Committee awarded the Chief Executive Officer an
incentive payment of $163,389, representing approximately 50.9% of his base
salary for 1993. The Chief Executive Officer's individual objectives
accomplished in 1993 included establishment of high leadership visibility
and support for O&M's quality process with internal and external customers,
development of a succession plan for senior management, and initiation of
an administrative productivity improvement program. Other senior
executives were awarded annual incentive payments representing a similar
proportion of their maximum annual incentive opportunity to be paid for
fully meeting all goals.
Under O&M"s Annual Incentive Plan, executives are also eligible to
receive a bonus of O&M Common Stock equivalent to 25% of the cash incentive
payment, which becomes vested provided the officer maintains a continuous
employment relationship with O&M for the following three years. The
restricted stock bonus for named executives is dependent on performance
against the same goals and weights as described earlier for the Annual
Incentive Plan. The Chief Executive Officer received 1,776 shares of stock
for 1993 performance results.
Each year, the Compensation Committee considers the desirability of
granting senior executives awards under O&M's Stock Option Plans. The
Plans provide for the use of non-qualified stock options, incentive stock
options, and stock appreciation rights. The decision to grant stock
options is determined by return on average equity and earnings per share
achievement, though no specific performance targets are applied for this
purpose. Stock option levels are a component of competitive total
compensation and include such considerations as salary grade levels,
responsibility levels, and future expectations of responsibilities related
to overall O&M performance. The Compensation Committee believes stock
option grants have historically been effective in helping to focus
executives on enhancing long-term profitability and shareowner value. The
Compensation Committee provided a grant of 30,000 non-qualified stock
option shares to the Chief Executive Officer in 1993, with the number of
shares granted based on a combination of the above factors along with his
leadership and management performance, responsibility level and competitive
practice for companies of similar size and operating characteristics,
including a majority of the Peer Company Group reflected in the Performance
Graph.
Compensation paid to each named executive in 1993 was substantially
less than $1 million. Therefore, no separate policy has been developed for
compensation in excess of $1 million.
The foregoing report has been furnished by Mrs. Whittemore and Messrs.
Rogers and Ukrop.
<PAGE>
Comparison of Five-Year Cumulative Total Return
The following performance graph compares the performance of the O&M
Common Stock to the S&P 500 Index and a Peer Group which includes O&M and
the companies listed below, for O&M's last five fiscal years. The graph
assumes that the value of the investment in the O&M Common Stock and each
index was $100 on December 31, 1988 and that all dividends were reinvested.
(GRAPH AS DEFINED BY THE FOLLOWING DATA POINTS)
1988 1989 1990 1991 1992 1993
OWENS & MINOR 100 91 108 221 244 384
S&P 500 Index 100 132 128 166 179 197
Peer Group (w/RCHF) 100 106 118 174 228 333
Peer Group (w/o RCHF) 100 106 118 174 215 325
* Based on $100 invested 12/31/88 with dividend reinvestment.
The Peer Group selected for purposes of the above graph consists
of companies engaged in the business of distribution, and includes Owens &
Minor, Inc., Arrow Electronics Inc., Bergen Brunswig Corp., Bindley Western
Ind., Cardinal Distribution, Hughes Supply Corp., Moore Medical Corp., Nash
Finch Company, Richfood Holdings, Inc., Rykoff-Sexton Inc., Super Food
Services Inc., United Stationers Inc., and VWR Corp. Richfood Holdings,
Inc., which was not included in the Peer Group last year, has been added to
the Peer Group based on its similarity to O&M in the business of
distribution and having recently reached five years of stock trading
history. The above graph shows the performance of the Peer Group with and
without Richfood Holdings, Inc. ("RCHF").
Summary Compensation Table
The following table shows, for the fiscal years ended December
31, 1993, 1992 and 1991 the cash compensation paid by O&M, as well as
certain other compensation paid or accrued, to O&M"s Chief Executive
Officer and its four other most highly compensated executive officers (the
"Named Executive Officers").
<TABLE>
Long-Term
Annual Compensation Compensation (1)
(a) (b) (c) (d) (e) (f) (g) (h)
Awards
Other All
Annual Restricted Other
Compen- Stock Compen-
Name and sation Awards Options sation
Principal Position Year Salary ($) Bonus ($) ($)(2) ($)(3) (#)(4) ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
G. Gilmer Minor, III 1993 $314,538 $163,389 -- $40,848 30,000 $28,996
President and 1992 302,884 188,000 -- 45,755 15,000 27,842
Chief Executive Officer 1991 251,384 178,750 -- 44,688 30,000 --
Henry A. Berling 1993 170,883 72,391 -- 18,101 15,000 13,999
Senior Vice President 1992 168,964 78,410 -- 18,364 7,500 13,621
Sales & Marketing 1991 149,580 70,734 -- 17,684 15,000 --
Robert E. Anderson, III 1993 162,375 68,357 -- 17,112 15,000 21,149
Senior Vice President 1992 160,615 80,840 -- 18,961 7,500 20,012
Planning & Development 1991 143,361 71,040 -- 17,760 15,000 --
Glenn J. Dozier 1993 147,501 63,404 -- 15,870 15,000 13,377
Senior Vice President 1992 146,769 70,025 -- 16,262 7,500 12,141
Finance & Chief
Financial Officer 1991 129,115 64,800 -- 16,200 15,000 --
Drew St. J. Carneal 1993 139,156 60,150 -- 15,042 15,000 2,710
Senior Vice President 1992 136,675 65,077 -- 15,023 7,500 2,049
Corporate Counsel 1991 121,880 60,404 -- 15,100 15,000 --
and Secretary
</TABLE>
(1) O&M has no Long-Term Incentive Plans as defined by Item 402(a)(7)(iii)
of Regulation S-K.
(2) None of the Named Executive Officers received Other Annual
Compensation in excess of the lesser of $50,000 or 10% of combined salary
and bonus for fiscal years 1993, 1992 or 1991.
(3) Aggregate restricted stock holdings and values at December 31, 1993
for the Named Executive Officers are as follows: (i) Mr. Minor: 6,412
shares, $147,146; (ii) Mr. Berling: 2,556 shares, $58,788; (iii) Mr.
Anderson: 2,602 shares, $59,846; (iv) Mr. Dozier: 2,302 shares, $52,946;
and (v) Mr. Carneal: 2,137 shares, $49,151. Dividends are paid on
restricted stock at the same rate as all shareholders of record.
(4) No SARs were granted in 1993, 1992 or 1991.
(5) Includes in 1993 for (i) Mr. Minor: $2,710 company contributions to
defined contribution plans; $26,286 benefit attributable to company-owned
life insurance policy; (ii) Mr. Berling: $13,999 benefit attributable to
company-owned life insurance policy; (iii) Mr. Anderson: $1,867 company
contributions to defined contribution plans; $19,292 benefit attributable
to company-owned life insurance policy; (iv) Mr. Dozier: $2,574 company
contributions to defined contribution plans; $10,803 benefit attributable
to company-owned life insurance policy; and (v) Mr. Carneal $2,710 company
contributions to defined contribution plans. In accordance with the
transitional provisions of the proxy rules, amounts for 1991 are excluded
from this column.
Executive Severance Agreements
In 1989, the O&M Board authorized O&M to enter into Severance
Agreements (the "Severance Agreements") with certain officers of O&M in
order to encourage key management personnel to remain with O&M and to
avoid distractions regarding potential or actual changes in control of O&M.
The Severance Agreements include senior vice presidents and higher
ranking corporate officers, including the Named Executive Officers, who
have been employed by O&M for a period of at least one year and also vice
presidents who have been employed by O&M for at least ten years and are
approved for participation by the Compensation Committee.
The Severance Agreements provide for the payment of a severance
benefit if such participant"s employment with O&M is terminated for any
reason, other than as a consequence of death, disability, or normal
retirement, within two years after a change in control of O&M (as defined
in the Severance Agreements). The severance benefit is equal to 2.99 times
the average of the participant"s total annual compensation from O&M,
including all bonuses, which was included in gross income for income tax
purposes for the five calendar years preceding the change in control of
O&M, provided, however, no payments will be made to participants which
would be treated as an "excess parachute payment" under Section 280G of the
Internal Revenue Code.
Each Severance Agreement continues in effect through December 31,
1994, and unless notice is given to the contrary, the term is automatically
extended for an additional year at the end of each year.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of options
made during 1993 under O&M's 1985 Stock Option Plan to the Named Executive
Officers. O&M granted no SARs during 1993.
<TABLE>
Grant Date
Individual Grants(1) Value
Number of % of Total
Securities Options Granted Exercise or
Underlying To Employees Base Price Expiration Grant Date
Name Options Granted in Fiscal Year ($/Share) Date Present Value ($)(2)
<S> <C> <C> <C> <C> <C>
G. Gilmer Minor, III 30,000 11.3% $12.875 4/15/98 $119,700
Henry A. Berling 15,000 5.6% $12.875 4/15/98 59,850
Robert E. Anderson, III 15,000 5.6% $12.875 4/15/98 59,850
Glenn J. Dozier 15,000 5.6% $12.875 4/15/98 59,850
Drew St. J. Carneal 15,000 5.6% $12.875 4/15/98 59,850
</TABLE>
(1) Options exercisable beginning on the first anniversary of grant
date, with 40% being exercisable at that time and an additional 30%
becoming exercisable on the second and third anniversary of grant date.
(2) Based upon Black Scholes option valuation model. Volatility is
based on the variance of the rate of return as measured over the most
recent 180 trading days prior to the grant. Other assumptions include a
riskless rate of return of 5.0%, annual dividend yield of 1.41%, and option
maturity of five years.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during 1993, and
unexercised options held by them on December 31, 1993. There were no SARs
exercised during 1993 or outstanding on December 31, 1993.
<TABLE>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Shares Options at FY End FY End
Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
G. Gilmer Minor, III 3,375 $53,414 27,000 / 48,000 $252,000 / $479,250
Henry A. Berling 0 0 21,375 / 24,000 262,938 / 239,625
Robert E. Anderson, III 0 0 21,375 / 24,000 262,938 / 239,625
Glenn J. Dozier 4,725 73,731 15,525 / 24,000 161,776 / 239,625
Drew St. J. Carneal 3,150 31,528 13,500 / 24,000 126,000 / 239,625
</TABLE>
Retirement Plans
Pension Plan
O&M provides retirement benefits under a defined benefit pension plan
(the "Pension Plan") pursuant to which benefits are based upon both length
of service and compensation. All full-time employees of O&M become
participants in the Pension Plan after one year of service and the
attainment of the age of 21 years. Pension Plan benefits are determined
under a formula based on an individual"s earnings and years of credited
service. Funding is determined on an actuarial basis.
The following table shows estimated annual benefits payable at normal
retirement age of 65 years to persons with specified remuneration and years
of service, under the Pension Plan:
Average Average Straight Life Annuity Benefits Based
Compensation on Years of Credited Service
15 yrs. 20 yrs. 25 yrs. 30 yrs. 35 yrs.
$125,000 $21,769 $28,442 $35,114 $41,786 $48,459
150,000 26,255 34,322 42,389 50,456 58,522
175,000 38,741 40,202 49,664 59,125 68,586
200,000 34,636 45,492 56,348 67,203 78,059
225,000 37,704 49,954 62,204 74,455 86,705
250,000 40,772 54,417 68,061 81,706 95,351
275,000 43,840 58,879 79,918 88,957 103,996
300,000 46,907 63,841 79,775 96,208 112,642
(1) Average compensation represents compensation based upon a benefit
formula applied to an employee"s career average earnings, which
approximates the amount of salary set forth in the Summary Compensation
Table. The maximum amount of covered compensation is $235,840, or some
other amount as may be determined by the Secretary of Treasury pursuant to
IRC Section 401(a)(17).
Benefits are computed on a straight-life annuity basis, and are not
subject to offset for Social Security benefits or other amounts. The years
of service credited for the Named Executive Officers under the Pension Plan
are presently as follows: Mr. Minor, III, 30 years; Mr. Berling, 27 years;
Mr. Anderson, 25 years; Mr. Dozier, 4 years; and Mr. Carneal, 5 years.
Supplemental Executive Retirement Plan
O&M provides supplemental retirement benefits to certain employees
selected by the Compensation Committee under the Supplemental Executive
Retirement Plan (the "SERP"). The SERP entitles participants to receive a
specified percentage of the participant"s average base monthly salary
during the five years preceding his retirement (in the case of the Named
Executive Officers, 65%) reduced by the benefit payable under the Pension
Plan and Social Security. The estimated annual benefits payable under the
SERP upon retirement at normal retirement age for the Named Executive
Officers are: Mr. Minor, III, $85,224; Mr. Berling, $38,610; Mr. Anderson,
$37,000; Mr. Dozier, $33,750; and Mr. Carneal, $40,289.
PROPOSAL 3: SELECTION OF INDEPENDENT ACCOUNTANTS
Action will be taken at the meeting to ratify the appointment by the
O&M Board of KPMG as the independent accountants of O&M. The Audit
Committee and the O&M Board recommend that the O&M Shareholders ratify
their employment. Unless otherwise directed, the persons named in the
enclosed form of proxy intend to vote such proxy for the ratification of
the appointment by the O&M Board of KPMG as independent accountants of O&M.
Representatives of KPMG are expected to be present at the Annual
Meeting. They will have the opportunity to make a statement, if they
desire to do so, and will be available to respond to appropriate questions
from O&M Shareholders.
After the Effective Time, it is contemplated that KPMG will serve as
the independent accountants of O&M Holding.
PROPOSALS OF SHAREHOLDERS
In the event that the O&M Plan of Exchange is not approved, O&M
Shareholders wishing to present proposals for action at the O&M Annual
Meeting of Shareholders to be held April 25, 1995, must submit the
proposals to O&M for inclusion in the O&M's 1995 Proxy Statement not later
than December 7, 1994, in writing at the address shown in the heading of
this Proxy Statement/Prospectus.
In the event that the O&M Plan of Exchange is approved, O&M
Shareholders wishing to present proposals for action at the O&M Holding
Annual Meeting of Shareholders to be held April 25, 1995, must submit the
proposals to O&M Holding for inclusion in O&M Holding's 1995 Proxy
Statement not later than December 7, 1994, in writing at the address shown
in the heading of this Proxy Statement/Prospectus.
MISCELLANEOUS
O&M does not know of any other matter to be presented for action by
the O&M Shareholders at the meeting. If any other matter properly comes
before the meeting, it is intended that the persons named in the
accompanying form of proxy will vote thereon in their discretion.
April 6, 1994
BY ORDER OF THE BOARD OF DIRECTORS
DREW ST. J. CARNEAL
Senior Vice President
Corporate Counsel and
Secretary of Owens & Minor, Inc.
INDEX TO FINANCIAL STATEMENTS OF O&M AND SMI
Page
Owens & Minor, Inc., Consolidated
Financial Statements:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . F-4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-6
Stuart Medical, Inc.,
Financial Statements:
Report of Independent Auditors . . . . . . . . . . . . . . . . . .F-18
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . .F-19
Statements of Income . . . . . . . . . . . . . . . . . . . . . . .F-20
Statements of Shareholders' Equity . . . . . . . . . . . . . . . .F-21
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . .F-22
Notes to Financial Statements. . . . . . . . . . . . . . . . . . .F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Owens & Minor, Inc.:
We have audited the accompanying consolidated balance sheets of Owens &
Minor, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1993. 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 audits 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, 1993 and 1992 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the Consolidated Financial Statements, as of
January 1, 1993, the Company changed its method of accounting for income taxes.
KPMG PEAT MARWICK
February 4, 1994
F-1
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 2,048 $ 7,068
Accounts and notes receivable, less allowances of $4,678 in 1993
and $4,442 in 1992................................................................... 144,629 116,984
Merchandise inventories................................................................. 124,848 92,973
Other current assets.................................................................... 10,638 12,050
Total current assets................................................................. 282,163 229,075
Property and equipment, net............................................................... 23,863 22,037
Excess of purchase price over net assets acquired, net.................................... 17,316 14,621
Other assets.............................................................................. 10,980 8,807
Total assets......................................................................... $334,322 $274,540
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 1,494 $ 2,882
Accounts payable........................................................................ 120,699 103,235
Accrued payroll and related liabilities................................................. 5,768 5,674
Other accrued liabilities............................................................... 15,111 17,458
Total current liabilities............................................................ 143,072 129,249
Long-term debt............................................................................ 50,768 24,986
Accrued pension and retirement plan....................................................... 3,539 3,646
Total liabilities.................................................................... 197,379 157,881
Stockholders' equity:
Preferred stock, par value $10.00 per share;
authorized -- 1,000 shares; none issued.............................................. -- --
Series A Participating Cumulative Preferred stock,
par value $10.00 per share;
authorized -- 300 shares; none issued................................................ -- --
Common stock, par value $2.00 per share; authorized -- 30,000 shares;
issued -- 20,285 shares in 1993 and 19,596 shares in 1992............................ 40,569 39,191
Paid-in capital......................................................................... 9,258 8,007
Retained earnings....................................................................... 87,116 69,461
Total stockholders' equity........................................................... 136,943 116,659
Commitments and contingencies
Total liabilities and stockholders' equity........................................... $334,322 $274,540
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Continuing operations:
Net sales................................................. $1,396,971 $1,177,298 $1,021,014
Cost of sales............................................. 1,249,660 1,052,998 918,304
Gross margin........................................... 147,311 124,300 102,710
Selling, general and administrative expenses................ 106,362 90,027 77,082
Depreciation and amortization............................... 7,593 5,861 4,977
Interest expense, net....................................... 2,939 2,472 4,301
Total expenses......................................... 116,894 98,360 86,360
Income before income taxes.................................. 30,417 25,940 16,350
Provision for income taxes.................................. 11,900 10,505 6,681
Net income from continuing operations.................. 18,517 15,435 9,669
Discontinued operations:
Income from discontinued operations, net of taxes......... -- 77 2,358
Gain on disposals, net of other provisions and taxes...... 911 5,610 --
Cumulative effect of change in accounting principles........ 706 (730) --
Net income............................................. $ 20,134 $ 20,392 12,027
Net income per share:
Continuing operations....................................... $ .90 $ .78 $ .49
Discontinued operations..................................... .04 .29 .12
Cumulative effect of change in accounting principles........ .03 (.04) --
Net income per share................................... $ .97 $ 1.03 $ .61
Cash dividends per share.................................... $ .210 $ .165 $ .132
Weighted average common shares and common share
equivalents............................................... 20,675 19,788 19,641
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
COMMON
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Balance December 31, 1990.............................. 8,422 $16,843 $25,554 $42,605 $ 85,002
Net income............................................. -- -- -- 12,027 12,027
Cash dividends ($.132 per share)....................... -- -- -- (2,551) (2,551)
Proceeds from exercised stock options,
including tax benefits realized of $563.............. 190 380 1,996 -- 2,376
Acquisition related payout............................. 26 53 347 -- 400
Stock split (three-for-two)............................ 4,286 8,572 (8,578) -- (6)
Retirement plan liability adjustment................... -- -- -- (157) (157)
Balance December 31, 1991.............................. 12,924 25,848 19,319 51,924 97,091
Net income............................................. -- -- -- 20,392 20,392
Cash dividends ($.165 per share)....................... -- -- -- (3,224) (3,224)
Proceeds from exercised stock options,
including tax benefits realized of $493.............. 85 170 759 -- 929
Common stock issued for incentive plan................. 15 30 269 -- 299
Acquisition related payout............................. 40 79 724 -- 803
Stock split (three-for-two)............................ 6,532 13,064 (13,064) -- --
Retirement plan liability adjustment................... -- -- -- 369 369
Balance December 31, 1992.............................. 19,596 39,191 8,007 69,461 116,659
Net income............................................. -- -- -- 20,134 20,134
Cash dividends ($.210 per share)....................... -- -- -- (4,222) (4,222)
Proceeds from exercised stock options,
including tax benefits realized of $495.............. 119 239 1,256 -- 1,495
Common stock issued for incentive plan................. 31 62 387 -- 449
Pooling of interests with Lyons Physician
Supply Co............................................ 476 951 (1,189) 1,743 1,507
Acquisition related payout............................. 63 126 797 -- 921
Balance December 31, 1993.............................. 20,285 $40,569 $ 9,258 $87,116 $136,943
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
(IN THOUSANDS)
Operating activities
Net income and noncash charges
Net income................................................................ $ 20,134 $ 20,392 $ 12,027
Noncash charges to income:
Gain on disposals of business segments, net............................. (911) (5,610) --
Cumulative effect of change in accounting principles.................... (706) 730 --
Depreciation and amortization........................................... 7,593 5,861 6,070
Provision for losses on accounts and notes receivable................... 497 1,351 1,506
Provision for LIFO reserve.............................................. 661 1,056 3,816
Other, net.............................................................. 897 1,135 554
Cash provided by net income and
noncash charges...................................................... 28,165 24,915 23,973
Changes in working capital
Accounts and notes receivable............................................. (23,424) 5 (11,414)
Merchandise inventories................................................... (28,232) 359 (3,798)
Accounts payable.......................................................... 13,307 (8,885) 3,635
Net change in other current assets
and current liabilities................................................. (258) (10,591) 3,366
Other, net................................................................... 431 (2,112) 904
Cash provided by (used for) operating activities........................ (10,011) 3,691 16,666
Investing activities
Proceeds from disposals of business segments................................. -- 50,920 --
Business acquisitions, net of cash acquired.................................. (2,416) -- (3,052)
Additions to property and equipment.......................................... (6,288) (4,955) (5,947)
Other, net................................................................... (3,377) (2,535) (257)
Cash provided by (used for) investing activities........................ (12,081) 43,430 (9,256)
Financing activities
Cash dividends paid.......................................................... (4,222) (3,224) (2,551)
Additions to long-term debt.................................................. 37,000 -- --
Reductions of long-term debt................................................. (17,471) (44,619) (7,542)
Other short-term financing................................................... 765 6,599 (1,700)
Stock split fractional shares................................................ -- -- (6)
Exercise of options.......................................................... 1,000 436 1,813
Cash provided by (used for) financing activities........................ 17,072 (40,808) (9,986)
Net increase (decrease) in cash and cash equivalents........................... (5,020) 6,313 (2,576)
Cash and cash equivalents at beginning of year................................. 7,068 755 3,331
Cash and cash equivalents at end of year....................................... $ 2,048 $ 7,068 $ 755
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and marketable securities with an
original maturity at the date of purchase of three months or less. The carrying
amount of marketable securities approximates fair value because of the short
maturity of these instruments.
(C) MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market with the
cost of all inventories determined on a last-in, first-out (LIFO) basis.
(D) PROPERTY AND EQUIPMENT
Additions to property and equipment are recorded at cost. At inception,
capital leases are recorded at the lesser of fair value of the leased property
or the discounted present value of the minimum lease payments. The cost of
assets sold or retired and the related amounts of accumulated depreciation and
amortization have been eliminated from the accounts in the year of sale or
retirement and the resulting gain or loss has been reflected in operations.
Normal maintenance and repairs are expensed as incurred, and renovations and
betterments are capitalized.
Depreciation is computed on the straight-line method over the estimated
useful lives of the various assets. Capital leases and leasehold improvements
are amortized by the straight-line method over the shorter of their estimated
useful lives or the term of the lease. Accelerated methods and lives are used
for income tax reporting purposes. Estimated useful lives for financial
reporting purposes are:
<TABLE>
<CAPTION>
ESTIMATED
ASSETS USEFUL LIFE
<S> <C>
Buildings and improvements 20-50 years
Furniture, fixtures and equipment 3-10 years
Vehicles 3-6 years
</TABLE>
(E) EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
The excess of purchase price over net assets acquired (goodwill) is being
amortized on a straight-line basis over 40 years from the dates of acquisition.
(F) COMPUTER SOFTWARE
Computer software, purchased in connection with major system developments,
is capitalized. Additionally, certain software development costs are capitalized
when incurred and when technological feasibility has been established.
Amortization of all capitalized software costs is computed on a
product-by-product basis over the estimated economic life of the product which
ranges from three to five years. Computer software costs are included in other
assets in the Consolidated Balance Sheets.
(G) PENSION AND RETIREMENT PLANS
Annual costs of the Company's pension and retirement plans are determined
actuarially in accordance with Statement of Financial Accounting Standards No.
87, EMPLOYERS' ACCOUNTING FOR PENSIONS.
F-6
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(H) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Annual costs of the Company's postretirement benefits other than pensions
are determined actuarially in accordance with Statement of Financial Accounting
Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS.
(I) INCOME TAXES
The Company uses the asset and liability method in accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. Deferred income taxes result primarily from the use
of different methods for financial reporting and tax purposes.
(J) NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the year.
The assumed conversion of all convertible debentures has not been included in
the computation because the resulting dilution is not material.
NOTE 2 -- BUSINESS ACQUISITIONS AND DIVESTITURES
On December 22, 1993, the Company entered into an agreement with Stuart
Medical, Inc. (Stuart), whereby the companies will combine their two businesses.
Stuart, a distributor of medical/surgical supplies, has distribution centers
located primarily in the West, Midwest and Northeast and had sales for the year
ended December 31, 1993 of $890.5 million (unaudited). In the proposed
transaction, the Company will form a holding company that will own all of the
currently outstanding capital stock of the Company and Stuart.
Under the terms of the agreement, the new holding company would exchange
$40,200,000 in cash and $115,000,000 par value of convertible preferred stock
for all of the capital stock of Stuart. Each outstanding share of the Company's
common stock would be exchanged for one share of common stock of the new holding
company. The Company intends to account for this transaction as a purchase, if
consummated.
The convertible preferred stock will be convertible into approximately
4,650,000 shares of common stock of the new holding company (or about 17.8
percent of the pro forma fully diluted outstanding shares of the new holding
company); entitled to an annual cash dividend of 4.5 percent; and redeemable by
the Company under certain circumstances after three years. The Company will also
refinance Stuart's pro forma debt of $148,000,000 (unaudited).
The Board of Directors of the Company and the requisite shareholders of
Stuart have unanimously approved this transaction. The Company's shareholders
will vote on the proposed transaction at the annual shareholders' meeting with
expected closing of the transaction to occur April 29, 1994. Had this
acquisition been completed on January 1, 1993, on a pro forma basis, net sales,
net income and net income per share for the Company would have been
approximately $2,339,000,000, $24,000,000 and $.93, respectively (all
unaudited).
On May 28, 1993, the Company issued 476,190 shares of its common stock for
all the outstanding common stock of Lyons Physician Supply Company (Lyons) of
Youngstown, Ohio. This merger has been accounted for as a pooling of interests,
and the Company's fiscal 1993 financial statements include the activity of Lyons
as of January 1, 1993.
On June 25, 1993, the Company acquired all of the outstanding common stock
of A. Kuhlman & Co. (Kuhlman's) of Detroit, Michigan. The acquisition was
accounted for as a purchase with the results of Kuhlman's included from the
acquisition date. The cost of the acquisition was approximately $2,900,000 and
exceeded the net book value of the tangible assets acquired and liabilities
assumed by approximately $1,700,000. Pro forma results of this acquisition,
assuming it had been made at the beginning of the year, would not be materially
different from the results reported.
F-7
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS AND DIVESTITURES -- Continued
On February 28, 1992, the Company sold substantially all of the net assets
of its Wholesale Drug Division to Bergen Brunswig Corporation. Accordingly, the
operations of the Wholesale Drug Division have been classified as discontinued
operations for all years presented in the accompanying Consolidated Statements
of Income. The proceeds from the sale of approximately $49,552,000, resulted in
a gain of $9,783,000, net of applicable income tax expense of $6,408,000 for the
year ended December 31, 1992. Net income of this division was $2,270,000 in 1991
and is net of applicable income tax expense of $1,439,000.
On May 29, 1992, the Company sold substantially all of the net assets of
Vangard Labs, Inc., completing the disposition of the Specialty Packaging
Segment, to Medical Technology Systems, Inc. The proceeds from the sale of
approximately $2,000,000, resulted in a loss of $2,858,000, net of applicable
income tax benefit of $1,257,000, for the year ended December 31, 1992. On
December 31, 1990 the principle operating assets of Harbor Medical, Inc., a
portion of the Specialty Packaging Segment, were sold to Sterile Concepts, Inc.
The Specialty Packaging Segment is accounted for as discontinued operations for
all years presented in the accompanying Consolidated Statements of Income. Net
income for this division was $77,000 for the first four months of 1992 and
$88,000 in 1991 and is net of applicable income tax expense of $23,000 and
$15,000, respectively.
The Company periodically re-evaluates the adequacy of its accruals
associated with discontinued operations. In 1993, the Company decreased its loss
provision for discontinued operations by $911,000 based on settlement of
established liabilities and changes in prior estimates of expenses. In 1992, the
loss provision was increased by $1,315,000 for such changes in prior estimates.
Changes in these estimates are included in discontinued operations in the
accompanying Consolidated Statements of Income.
On December 2, 1991, the Company acquired for cash the common stock of
Koley's Medical Supply, Inc. (Koley's) in a business combination accounted for
as a purchase. The acquisition of Koley's, a distributor of medical/surgical
supplies, provided the Company with three distribution centers located in Iowa
and Nebraska. The cost of the acquisition was approximately $3,593,000 and
exceeded the net book value of the tangible assets acquired and liabilities
assumed by approximately $1,637,000. The purchase price was funded through
normal working capital.
The purchase agreement for Koley's specified that the purchase price may be
increased in future years if certain criteria are met. Pursuant to the terms of
this agreement, an additional $1,177,000 was paid in 1993.
NOTE 3 -- MERCHANDISE INVENTORIES
All inventories are valued using the last-in, first-out (LIFO) method of
inventory valuation. If LIFO inventories had been valued at current costs
(FIFO), they would have been greater by the following amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
December 31, 1993.............................................. $ 17,620
December 31, 1992.............................................. $ 16,959
December 31, 1991.............................................. $ 29,196
</TABLE>
F-8
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- PROPERTY AND EQUIPMENT
The Company's investment in property and equipment consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
<S> <C> <C>
(IN THOUSANDS)
Land and buildings.............................................................. $ 4,617 $ 2,720
Furniture, fixtures and equipment............................................... 27,042 23,615
Transportation equipment........................................................ 1,093 788
Capitalized leases.............................................................. 7,776 8,150
Leasehold improvements.......................................................... 5,898 4,866
46,426 40,139
Less: accumulated depreciation.................................................. 17,304 14,262
accumulated amortization of
capitalized leases....................................................... 5,259 3,840
Property and equipment, net..................................................... $23,863 $22,037
</TABLE>
For continuing operations, depreciation expense for property and equipment
for 1993, 1992 and 1991 was $6,368,000, $5,129,000 and $4,115,000, respectively.
NOTE 5 -- ACCOUNTS PAYABLE
The Company's accounts payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
<S> <C> <C>
(IN THOUSANDS)
Trade accounts payable........................................................ $ 99,096 $ 82,397
Drafts payable................................................................ 21,603 20,838
Total accounts payable................................................... $120,699 $103,235
</TABLE>
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
<S> <C> <C>
(IN THOUSANDS)
Revolving credit notes.......................................................... $37,000 $ --
9.3% Senior Notes............................................................... -- 12,000
0% Subordinated Note............................................................ 8,214 7,440
6 1/2% Convertible Subordinated Debenture....................................... 3,500 3,500
Obligations under capitalized leases............................................ 3,548 4,928
52,262 27,868
Current maturities.............................................................. (1,494) (2,882)
Long-term debt.................................................................. $50,768 $24,986
</TABLE>
The Company has a revolving credit agreement that provides for a maximum
borrowing of $40,000,000. The interest rates on the revolving credit notes vary
with, but do not exceed, the prime rate (6.0% as of December 31, 1993). The
agreement expires on May 31, 1996 and any outstanding balances are payable in
full on that date.
F-9
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- LONG-TERM DEBT -- Continued
On May 31, 1989, the Company issued an $11.5 million 0% Subordinated Note
and a $3.5 million 6 1/2% Convertible Subordinated Debenture to partially
finance the National Healthcare acquisition. The 0% Subordinated Note due May
31, 1997 was discounted for financial reporting purposes at an effective rate of
10.4% to $5,215,000 on the date of issuance. The 6 1/2% Convertible Subordinated
Debenture due May 31, 1996 is convertible into approximately 578,250 common
shares. Interest is payable semi-annually on May 31 and November 30. The Company
can redeem all or any portion of the debentures without penalty.
The Company leases certain data processing equipment under capitalized
lease agreements. These leases require monthly payments and expire at various
dates through 1996. Interest is imputed on these leases at rates ranging from
6.5% to 10.5%.
The Company entered into capital leases for additional computer equipment
in the amounts of $1,734,000 and $1,744,000 during 1992 and 1991, respectively.
These represent non-cash investing and financing activities for purposes of the
Consolidated Statements of Cash Flows. There were no new capital leases during
1993.
Under certain of the loan agreements, the Company is required to maintain
tangible net worth at specified levels. Other financial covenants relate to
levels of indebtedness, liquidity and cash flow.
The Company has four bank lines of credit aggregating $62,000,000. At
December 31, 1993, there were no borrowings under these lines.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, except for the convertible
debenture which is valued at book value because the conversion price was
substantially below the current market price, the fair value of long-term debt,
including current maturities, is approximately $53,238,000, as of December 31,
1993.
Cash payments for interest during 1993, 1992 and 1991 were $2,341,000,
$2,126,000 and $5,106,000, respectively.
Maturities of long-term debt for the five years subsequent to 1993 are:
1994 -- $1,494,000; 1995 -- $1,504,000; 1996 -- $41,050,000; 1997 -- $8,214,000;
1998 -- $0.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially all
employees. Employees become participants in the plan after one year of service
and attainment of age 21. Pension benefits are based on years of service and
average compensation. The amount funded for this plan is not less than the
minimum required under federal law nor more than the amount deductible for
federal income tax purposes. Plan assets consist primarily of equity securities,
including 22,963 shares as of December 31, 1993 of the Company's common stock,
and U.S. Government securities.
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 at December 31, 1993 and
1992:
F-10
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- EMPLOYEE BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
PENSION PLAN RETIREMENT PLAN
1993 1992 1993 1992
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested............................................................ $10,984 $ 8,970 $ 1,225 $ 1,279
Non-vested........................................................ 528 1,041 780 499
Total benefits.................................................. 11,512 10,011 2,005 1,778
Additional amounts related to projected salary increases............... 2,110 1,116 1,226 854
Projected benefit obligations for service rendered to date............. 13,622 11,127 3,231 2,632
Plan assets at fair market value....................................... 13,603 11,445 -- --
Plan assets over (under) projected benefit obligations................. (19) 318 (3,231) (2,632)
Unrecognized net (gain) loss from past experience...................... (42) (1,032) 1,080 828
Unrecognized prior service cost (benefit).............................. 479 715 (23) (109)
Unrecognized net (asset) obligation being
recognized over 11 and 17 years,
respectively......................................................... (321) (428) 369 410
Adjustment required to recognize minimum liability under SFAS 87....... -- -- (200) (275)
Accrued pension asset (liability)............................... $ 97 $ (427) $(2,005) $(1,778)
</TABLE>
The components of net pension cost for both plans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Service cost-benefits earned during the year.... $ 1,146 $ 944 $ 864
Interest cost on projected benefit
obligations................................... 1,056 994 865
Actual return on plan assets.................... (1,450) (748) (1,829)
Net amortization and deferral................... 453 (145) 1,103
Net periodic pension cost................ $ 1,205 $ 1,045 $ 1,003
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations are assumed to be 7.5% and 5.5% for 1993,
respectively and 8% and 6% for 1992, respectively. The expected long-term rate
of return on plan assets is 9%.
In 1992, a curtailment gain of $123,000 which resulted from the
dispositions of the business units classified as discontinued operations, was
not reflected in net pension cost in the preceding table, but was included in
gain on disposals in the Consolidated Statements of Income.
Substantially all employees of the Company may become eligible for certain
medical benefits if they remain employed until retirement age and fulfill other
eligibility requirements specified by the plan. The plan is contributory with
retiree contributions adjusted annually.
The Company elected early adoption of the accounting provisions of the
Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This new standard requires that the
expected cost of retiree health benefits be charged to expense during the years
that the employees render service rather than the Company's past practice of
recognizing these costs on a pay-as-you-go basis. As part of adopting the new
standard, the Company recorded in the first quarter of 1992, a one-time,
non-cash charge against earnings of $1,200,000 before taxes and $730,000 after
taxes, or $.04 per share. This cumulative catchup adjustment as of January 1,
1992 represents the discounted present value of expected future retiree health
benefits attributed to employees' service rendered prior to that date.
F-11
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- EMPLOYEE BENEFIT PLANS -- Continued
The following table sets forth the plan's financial status and the amount
recognized in the Company's Consolidated Balance Sheets at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1993 1992
<S> <C> <C>
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees....................................................................... $ (251) $ (208)
Fully eligible active plan participants........................................ (464) (384)
Other active plan participants................................................. (980) (849)
Accumulated postretirement benefit obligation.................................... (1,695) (1,441)
Unrecognized loss from past experience........................................... 64 --
Accrued postretirement benefit liability......................................... $(1,631) $(1,441)
</TABLE>
The components of net postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993 1992
<S> <C> <C>
(IN
THOUSANDS)
Service cost.......................................... $142 $137
Interest.............................................. 122 105
Net periodic postretirement benefit cost......... $264 $242
</TABLE>
For measurement purposes, a 13% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1994; the rate was assumed
to decrease gradually to 6.5% for the year 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $104,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $52,000. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% for 1993 and 8% for 1992.
NOTE 8 -- STOCKHOLDERS' RIGHTS PLAN
On June 22, 1988, the Company adopted a stockholders' rights plan and
distributed a dividend of one right for each outstanding share of common stock.
Each right entitles the holder to buy one unit of a newly authorized series of
preferred stock at an exercise price of $33.33 per right. The rights are
exercisable only if a person or group acquires 20% or more of the Company's
common stock or announces a tender offer for 30% or more of such stock. If a
person or group purchases 30% or more of the common stock, each right will
entitle the holder (except the acquiring person) to acquire preferred stock or,
at the Company's option, common stock having a value equal to twice the right's
exercise price.
If the Company were acquired in a merger or other business combination, or
if 50% of its earning power (as defined) or assets were sold in one transaction
or a series of transactions, each right would entitle the holder (except the
acquiring person) to purchase securities of the surviving company having a
market value equal to twice the exercise price of the right.
If a person or group acquires 20% or more of the Company's common stock,
the Company may issue a share of common stock in exchange for each outstanding
preferred share purchase right (except for rights held by the acquiring person).
The rights, which expire on June 22, 1998, may be redeemed at any time up to 10
days after the announcement that a 20% position has been acquired, unless such
period has been extended by the Board of Directors.
F-12
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- STOCK OPTION PLANS
Under the terms of the Company's stock option plans, 2,383,505 shares of
common stock have been reserved for future issuance. Options may be designated
as either Incentive Stock Options (ISO) or non-qualified stock options. Options
granted under the Plans have an exercise price equal to the fair market value of
the stock on the date of grant and can be exercised up to ten years from date of
grant. As of December 31, 1993, there were 687,038 non-qualified and no ISO
stock options issued and outstanding under the Plans.
The changes in shares under outstanding options for the three years ended
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
SHARES GRANT PRICE
<S> <C> <C>
Year ended December 31, 1993
Outstanding at beginning of year............. 569,748 $ 5.30 -- 14.00
Granted...................................... 282,880 12.88 -- 14.75
Exercised.................................... (120,490) 5.30 -- 14.00
Expired/cancelled............................ (45,100) 5.33 -- 14.00
Outstanding at end of year................... 687,038 $ 5.33 -- 14.75
Exercisable.................................. 295,586
Shares available for additional grants....... 1,696,467
Year ended December 31, 1992
Outstanding at beginning of year............. 570,852 $ 3.55 -- 14.00
Granted...................................... 156,573 12.00 -- 13.08
Exercised.................................... (137,990) 3.55 -- 8.39
Expired/cancelled............................ (19,687) 5.61 -- 14.00
Outstanding at end of year................... 569,748 $ 5.30 -- 14.00
Exercisable.................................. 332,950
Shares available for additional grants....... 284,247
Year ended December 31, 1991
Outstanding at beginning of year............. 755,933 $ 3.55 -- 6.22
Granted...................................... 296,625 8.39 -- 14.00
Exercised.................................... (474,281) 3.55 -- 8.39
Expired/cancelled............................ (7,425) 3.55 -- 5.61
Outstanding at end of year................... 570,852 $ 3.55 -- 14.00
Exercisable.................................. 227,312
Shares available for additional grants....... 441,374
</TABLE>
Stock Appreciation Rights (SARs) may be granted in conjunction with any
option granted under the Plans, and to the extent either is exercised, the other
is cancelled. SARs are payable in cash, common stock or a combination of both,
equal to the appreciation of the underlying shares from the date of grant to
date of exercise, and may be exercised from one up to ten years from date of
grant. As of December 31, 1993, there were no SARs issued and outstanding.
NOTE 10 -- INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, as of January 1, 1993. The cumulative effect of
this change in accounting for income taxes is a favorable adjustment of $706,000
and is reported separately in the Consolidated Statements of Income for the year
ended December 31, 1993. Prior years' financial statements have not been
restated to apply the provisions of Statement 109.
F-13
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- INCOME TAXES -- Continued
The provision for income taxes for continuing operations consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
(IN THOUSANDS)
Current tax provision:
Federal............................................................. $10,405 $ 9,386 $ 6,387
State............................................................... 2,123 2,262 1,435
Total current provision.......................................... 12,528 11,648 7,822
Deferred tax benefit:
Federal............................................................. (555) (916) (928)
State............................................................... (73) (227) (213)
Total deferred benefit........................................... (628) (1,143) (1,141)
Provision for income taxes............................................ $11,900 $10,505 $ 6,681
</TABLE>
A reconciliation of the Federal statutory rate to the Company's effective
income tax rate for continuing operations follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
1993 1992 1991
<S> <C> <C> <C>
Federal statutory rate................................... 35.0% 34.0% 34.0%
Increases (reductions) in the rate resulting from:
State income taxes, net of Federal
income tax benefit.................................. 4.4 5.1 5.7
Other, net............................................. (.3) 1.4 1.2
Effective rate........................................... 39.1% 40.5% 40.9%
</TABLE>
The significant components of deferred income tax benefit attributable to
income from continuing operations for the year ended December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Deferred tax benefit................................................................... $ (432)
Adjustments to deferred tax assets and
liabilities for enacted changes
in tax rates......................................................................... (196)
Total deferred benefit............................................................ $ (628)
</TABLE>
The components of deferred income tax expense (benefit) for continuing
operations for the years ended December 31, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
1992 1991
<S> <C> <C>
(IN THOUSANDS)
Inventories.............................................. $ (135) $ 175
Depreciation............................................. 225 (77)
Employee benefit plans................................... (611) (239)
Allowance for doubtful accounts.......................... (303) (372)
Real estate sale/leaseback............................... 88 (178)
Reserve for fixed assets................................. 126 (274)
Other, net............................................... (533) (176)
Total deferred benefit.............................. $(1,143) $(1,141)
</TABLE>
F-14
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- INCOME TAXES -- Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1993 are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts...................................................... $ 2,702
Accrued liabilities not deductible until paid........................................ 1,998
Employee benefits plans.............................................................. 3,038
Leased assets........................................................................ 3,512
Other................................................................................ 1,641
Total deferred tax assets......................................................... 12,891
Deferred tax liabilities:
Property and equipment............................................................... 4,484
Merchandise inventories.............................................................. 920
Other................................................................................ 1,352
Total deferred tax liabilities.................................................... 6,756
Net deferred tax asset (included in
other current assets and other assets).......................................... $ 6,135
</TABLE>
Management has determined, based on the Company's carryback availability,
history of earnings and its expectation of earnings in future years, that it is
more likely than not that all of the deferred tax asset will be realized.
Therefore, the Company has not recognized a valuation allowance for the gross
deferred tax asset recorded in the accompanying 1993 Consolidated Balance Sheet.
Cash payments for income taxes, including taxes on discontinued operations,
for 1993, 1992 and 1991 were $12,153,000, $21,672,000 and $6,756,000,
respectively.
For income tax purposes, the Company has unused operating loss
carryforwards expiring in 2004 of approximately $640,000 associated with the
National Healthcare acquisition which are available to offset future federal
taxable income.
The tax benefit relating to discontinued operations for the year ended
December 31, 1993, was $333,000.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company has entered into noncancellable lease agreements for certain
office and warehouse facilities and data processing and delivery equipment with
remaining lease terms ranging from one to twelve years. Certain leases include
renewal options, generally for five year increments. At December 31, 1993,
future minimum annual payments under noncancellable leases with original terms
in excess of one year are as follows:
F-15
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- COMMITMENTS AND CONTINGENCIES -- Continued
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
<S> <C> <C>
(IN THOUSANDS)
1994..................................................... $1,760 $ 10,305
1995..................................................... 1,629 9,647
1996..................................................... 561 7,214
1997..................................................... -- 5,403
1998..................................................... -- 4,738
Later years.............................................. -- 9,039
Total minimum lease payments........................ 3,950 $ 46,346
Less imputed interest.................................... 402
Present value of minimum lease payments.................. $3,548
</TABLE>
Minimum lease payments have not been reduced by minimum sublease rentals
aggregating $3,160,000 due in the future under noncancellable subleases.
Rent expense for continuing operations for the years ended December 31,
1993, 1992 and 1991 was $12,857,000, $11,329,000 and $10,468,000, 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. Additionally, no single customer
accounted for 10% or more of the Company's sales during 1993, except for sales
under contract to member hospitals of the VHA, which amounted to $459.6 million
or 32.9% of the Company's total net sales from continuing operations.
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the summarized quarterly financial data for
1993, 1992 and 1991:
<TABLE>
<CAPTION>
YEAR 1993
QUARTER 1ST 2ND 3RD 4TH
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales from continuing operations............................. $317,812 $341,221 $361,959 $375,979
Gross margin..................................................... 33,634 35,654 38,151 39,872
Net income from continuing operations............................ 3,826 4,265 4,790 5,636
Gain on disposals, net of other provisions and taxes............. -- -- -- 911
Cumulative effect of change in accounting principle.............. 706 -- -- --
Net income.................................................. $ 4,532 $ 4,265 $ 4,790 $ 6,547
Net income per share:
Continuing operations.......................................... $ .19 $ .21 $ .23 $ .27
Discontinued operations........................................ -- -- -- .04
Cumulative effect of change in accounting principle............ .03 -- -- --
Net income per share........................................ $ .22 $ .21 $ .23 $ .31
</TABLE>
F-16
<PAGE>
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
YEAR 1992
QUARTER 1ST 2ND 3RD 4TH
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales from continuing operations............................. $282,481 $289,705 $300,018 $305,094
Gross margin..................................................... 28,514 29,778 31,450 34,558
Net income from continuing operations............................ 3,085 3,613 3,952 4,785
Discontinued operations:
Income (loss) from discontinued operations,
net of taxes................................................ 123 (46) -- --
Gain (loss) on disposals, net of
other provisions and taxes.................................. 9,933 (3,080) -- (1,243)
Cumulative effect of change in accounting principle.............. (730) -- -- --
Net income.................................................. $ 12,411 $ 487 $ 3,952 $ 3,542
Net income (loss) per share:
Continuing operations.......................................... $ .16 $ .18 $ .20 $ .24
Discontinued operations........................................ .51 (.16) -- (.06)
Cumulative effect of change in accounting principle............ (.04) -- -- --
Net income per share........................................ $ .63 $ .02 $ .20 $ .18
</TABLE>
<TABLE>
<CAPTION>
YEAR 1991
QUARTER 1ST 2ND 3RD 4TH
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales from continuing operations............................. $239,378 $247,441 $260,382 $273,813
Gross margin..................................................... 23,384 24,493 25,962 28,871
Net income from continuing operations............................ 1,800 2,227 2,699 2,943
Income from discontinued operations, net of taxes................ 533 510 757 558
Net income.................................................. $ 2,333 $ 2,737 $ 3,456 $ 3,501
Net income per share:
Continuing operations.......................................... $ .09 $ .11 $ .14 $ .15
Discontinued operations........................................ .03 .03 .03 .03
Net income per share........................................ $ .12 $ .14 $ .17 $ .18
</TABLE>
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Stuart Medical, Inc.
Greensburg, Pennsylvania
We have audited the accompanying balance sheets of Stuart Medical, Inc. as
of December 31, 1993 and 1992, and the related statements of income,
shareholders' equity, and cash flows for the year ended December 31, 1993, the
eight-month period ended December 31, 1992, and the years ended April 30, 1992
and 1991. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stuart Medical, Inc. at
December 31, 1993 and 1992, and the results of its operations and its cash flows
for the year ended December 31, 1993, the eight-month period ended December 31,
1992, and the years ended April 30, 1992 and 1991 in conformity with generally
accepted accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
February 28, 1994
F-18
<PAGE>
STUART MEDICAL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................................................... $ 5,896 $ 12,517
Note receivable from Stuart's Funding Corporation....................................... 13,520 17,951
Merchandise inventories................................................................. 107,298.. 101,510
Refundable Federal income taxes......................................................... -- 5,116
Net assets of discontinued operations................................................... -- 2,480
Note receivable from affiliate.......................................................... 1,800 --
Prepaid expenses and other.............................................................. 857 1,172
Total Current Assets................................................................. 129,371 140,746
PROPERTY AND EQUIPMENT
Land.................................................................................... 722 722
Buildings and improvements.............................................................. 16,486 16,362
Furniture and equipment................................................................. 19,835 17,968
Automobiles and trucks.................................................................. 6,609 6,346
43,652 41,398
Less-Accumulated depreciation........................................................... 24,494 19,722
Net Property and Equipment.............................................................. 19,158 21,676
OTHER ASSETS
Goodwill................................................................................ 29,617 31,754
Covenants not to compete................................................................ 355 925
Other................................................................................... 219 587
Total Other Assets................................................................... 30,191 33,266
TOTAL ASSETS......................................................................... $178,720 $195,688
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable.................................................................. $ 75,223 $ 84,882
Accrued payroll and employee benefits................................................... 3,501 3,670
Other accrued liabilities............................................................... 6,090 6,154
Due to affiliate........................................................................ 1,897 --
Current portion of long-term debt....................................................... 452 2,146
Total Current Liabilities............................................................ 87,163 96,852
LONG-TERM DEBT, less current portion...................................................... 47,976 60,948
SHAREHOLDERS' EQUITY
Common stock............................................................................ 5 5
Additional paid-in capital.............................................................. 4,026 3,770
Retained earnings....................................................................... 39,550 34,113
Total Shareholders' Equity........................................................... 43,581 37,888
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $178,720 $195,688
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
STUART MEDICAL, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS YEARS ENDED APRIL
YEAR ENDED ENDED 30,
DECEMBER 31, 1993 DECEMBER 31, 1992 1992 1991
<S> <C> <C> <C> <C>
Net sales.......................................... $ 890,477 $ 584,047 $752,416 $648,729
Cost of goods sold................................. 793,879 521,796 664,773 571,631
GROSS PROFIT..................................... 96,598 62,251 87,643 77,098
Warehouse, selling and administrative
expenses......................................... 73,060 47,216 65,966 59,880
Depreciation and amortization...................... 7,922 6,082 7,871 6,603
Non-recurring expenses............................. 1,184 914 -- --
82,166 54,212 73,837 66,483
OPERATING INCOME................................. 14,432 8,039 13,806 10,615
Other income (expense):
Discount on sale of trade receivables............ (3,350) (2,782) (5,312) (5,535)
Interest expense................................. (3,536) (2,580) (6,567) (8,844)
Service charges to affiliate..................... 1,317 -- -- --
Other............................................ 360 320 448 892
(5,209) (5,042) (11,431) (13,487)
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE PROVISION FOR
STATE INCOME TAX................................. 9,223 2,997 2,375 (2,872)
Provision (credit) for state income taxes.......... 476 234 121 (212)
INCOME (LOSS) FROM
CONTINUING OPERATIONS............................ 8,747 2,763 2,254 (2,660)
Income from discontinued operations,
less applicable state
income taxes..................................... 528 8,413 22,409 18,153
NET INCOME....................................... $ 9,275 $ 11,176 $ 24,663 $ 15,493
PRO FORMA (UNAUDITED)
Income (loss) from continuing operations
before income taxes.............................. $ 9,223 $ 2,997 $ 2,375 $ (2,872)
Provision (credit) for pro forma taxes............. 4,898 1,898 1,721 (234)
Income (loss) from continuing operations........... 4,325 1,099 654 (2,638)
Income from discontinued operations
less pro forma taxes............................. 328 5,396 13,739 12,032
Pro Forma Net Income............................... $ 4,653 $ 6,495 $ 14,393 $ 9,394
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
STUART MEDICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C>
BALANCES AT APRIL 30, 1990........................................ $ 6 $ 24,994 $ 12,386 $ 37,386
Net income...................................................... -- -- 15,493 15,493
Shareholder distributions....................................... -- -- (3,888) (3,888)
BALANCES AT APRIL 30, 1991........................................ 6 24,994 23,991 48,991
Net income...................................................... -- -- 24,663 24,663
Shareholder distributions....................................... -- -- (20,717) (20,717)
BALANCES AT APRIL 30, 1992........................................ 6 24,994 27,937 52,937
Net income...................................................... -- -- 11,176 11,176
Shareholder distributions....................................... -- -- (5,000) (5,000)
Spin-off of net assets of
NMSI, Inc. and retirement
of exchanged stock........................................... (1) (21,224) -- (21,225)
BALANCES AT DECEMBER 31, 1992..................................... 5 3,770 34,113 37,888
Net income...................................................... -- -- 9,275 9,275
Excess of sale price over net
assets of discontinued
AIP division................................................. -- 256 -- 256
Shareholder distributions....................................... -- -- (3,838) (3,838)
BALANCES AT DECEMBER 31, 1993..................................... $ 5 $ 4,026 $ 39,550 $ 43,581
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
STUART MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED YEARS ENDED APRIL 30,
DECEMBER 31, 1993 DECEMBER 31, 1992 1992 1991
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 9,275 $ 11,176 $ 24,663 $ 15,493
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization................... 7,922 6,082 7,871 6,603
Changes in working capital:
Accounts receivable.......................... -- -- -- (5,807)
Note receivable from Stuart's Funding
Corp....................................... 4,431 (6,817) (3,413) (7,721)
Inventories and other assets................. (1,759) 20,989 (21,652) (14,741)
Accounts payable and accrued expenses........ (7,995) 8,030 16,527 14,923
Net assets of discontinued operations........ 2,480 (2,480) (1,359) 159
Spin-off of net current assets of NMSI....... -- (16,021) -- --
NET CASH PROVIDED BY
OPERATING ACTIVITIES.................... 14,354 20,959 22,637 8,909
INVESTING ACTIVITIES
Purchase of property and equipment................ (2,727) (2,548) (5,072) (5,380)
Excess sales price over net assets
of discontinued operations...................... 256 -- -- --
Spin-off of net non-current assets of NMSI........ -- (5,204) -- --
NET CASH USED BY
INVESTING ACTIVITIES.................... (2,471) (7,752) (5,072) (5,380)
FINANCING ACTIVITIES
Principal repayments on shareholders' notes....... -- -- (6,750) (2,000)
Proceeds from bank credit facilities.............. 29,000 35,000 40,500 128,500
Principal repayments on bank credit
facilities and other term debt.................. (43,666) (31,054) (35,309) (203,164)
Shareholder distributions......................... (3,838) (5,000) (17,916) (3,888)
Proceeds from sale of receivables................. -- -- -- 77,854
NET CASH USED BY
FINANCING ACTIVITIES.................... (18,504) (1,054) (19,475) (2,698)
INCREASE (DECREASE)
IN CASH................................. (6,621) 12,153 (1,910) 831
Cash at Beginning of period....................... 12,517 364 2,274 1,443
CASH AT END OF PERIOD...................... $ 5,896 $ 12,517 $ 364 $ 2,274
</TABLE>
During the periods ended December 31, 1993 and 1992 and April 30, 1992 and
1991, the Company paid interest of $2,938, $2,329, $7,498, $9,410 and taxes of
$1,190, $1,103, $1,589 and $982.
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 -- BUSINESS COMBINATION AND SUBSEQUENT EVENT
On December 22, 1993, Stuart Medical, Inc. (Company) jointly announced with
Owens & Minor, Inc. (O&M) that they have entered into an Agreement of Exchange
whereby the Companies will combine their two businesses. In the proposed
transaction, O&M will form a holding company that will own all of the currently
outstanding capital stock of the Company and O&M.
Under the terms of the agreement, the new holding company would exchange
$40.2 million in cash and $115 million par value of convertible preferred stock
for 100 percent of the capital stock of the Company. Each outstanding share of
O&M common stock would be exchanged for one share of common stock of the new
holding company.
The convertible preferred stock will be: (A) convertible into approximately
4.65 million shares of common stock of the new holding company (or about 17.8
percent of the pro forma fully diluted outstanding shares of the new holding
company): (B) entitled to an annual cash dividend of 4 1/2 percent: and (C)
redeemable by O&M under certain circumstances after three years.
The transaction is conditioned upon O&M shareholders' approval, the receipt
of O&M of adequate financing, the Securities and Exchange Commission's
declaration of the effectiveness of a registration statement covering the
holding company shares to be issued to O&M shareholders, and the satisfaction of
other customary closing conditions.
The Board of Directors of O&M and the requisite shareholders of the Company
have unanimously approved this transaction. The O&M shareholders' meeting to
vote on the proposed transaction is anticipated to be held in April 1994, with
closing of the transaction expected to occur shortly thereafter.
O&M is presently negotiating a $300 to $350 million line of credit to,
among other things, replace the Company's existing financing facilities. See
Notes 5 and 6.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR: Effective December 31, 1992, the Company elected to
change its fiscal year from the period ended April 30 to a December 31 calendar
year. The reasons for this change include certain tax benefits related to S
Corporations, the business's lack of seasonality, and because a calendar year
will facilitate industry comparisons.
MERCHANDISE INVENTORIES: Inventories, consisting of merchandise held for
resale, are valued at the lower of cost (first-in, first-out method) or market.
Inventories are presented net of reserves for obsolescence of $3.3 million and
$4.7 million at December 31, 1993 and 1992, respectively.
PROPERTY AND EQUIPMENT: Additions to property and equipment are recorded at
cost. The cost of assets sold or retired and the related accumulated
depreciation and amortization have been eliminated from the accounts in the year
of sale or retirement and the resulting gain or loss has been reflected in
operations. Normal maintenance and repairs are expensed as incurred and
renovations and betterments are capitalized.
Depreciation is computed on the straight-line method over the estimated
useful lives of the various assets. Leasehold improvements are amortized by the
straight-line method over the shorter of their estimated useful lives or the
term of the lease. Estimated useful lives for financial reporting purposes are:
<TABLE>
<CAPTION>
ASSETS ESTIMATED USEFUL LIFE
<S> <C>
Building and improvements 15 years
Furniture and equipment 5 years
Vehicles 5 years
</TABLE>
F-23
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- Continued
Depreciation expense was $5.2 million for the year ended December 31, 1993,
$3.9 million for the eight months ended December 31, 1992 and $5.1 million and
$4.5 million for the years ended April 30, 1992 and 1991.
INTANGIBLE ASSETS: Goodwill represents the excess of cost over the fair
values of net assets acquired and is being amortized on a straight-line basis
over twenty-year periods. Accumulated amortization was $12.9 million and $10.8
million at December 31, 1993 and 1992, respectively.
In conjunction with certain acquisitions, the Company entered into
noncompete agreements with the former owners of the acquired companies. The
payments required pursuant to these agreements have been capitalized and are
being amortized over the terms of the agreements, generally three to five years.
Accumulated amortization was $3.0 million and $2.4 million at December 31, 1993
and 1992, respectively.
REFUNDABLE INCOME TAXES: Refundable income taxes represent a deposit
required by the Internal Revenue Service for S Corporations whose fiscal year is
other than a calendar year (see Note 7). As the result of the Company's change
to a calendar year-end effective December 31, 1992, this deposit was no longer
required and was refunded in June, 1993.
NOTE RECEIVABLE FROM STUART'S FUNDING CORPORATION: Note receivable from
Stuart's Funding Corporation results from the sales of trade accounts receivable
(see Note 5) and is presented net of reserves for sales returns and allowances
of $2.4 million and $3.1 million at December 31, 1993 and 1992, respectively.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and
overnight investments in marketable securities. At December 31, 1993 and 1992,
book overdrafts of $6.0 million and $24.6 million, attributable to the float of
the Company's outstanding checks, had been reclassified to accounts payable.
NOTE 3 -- DISCONTINUED OPERATIONS
On December 23, 1992, the Company's Board of Directors approved the
divestiture and spin-off of the Surgical Implant division into a newly created
company named Stuart Medical Specialty, Inc., subsequently renamed National
Medical Specialty, Inc. (NMSI) as of December 31, 1992. The Surgical Implant
division consisted primarily of the sales and marketing of surgically implanted
spinal and orthopedic devices to physicians and hospitals.
The NMSI divestiture and spin-off was effected by the distribution and
issuance of shares of new NMSI common stock pro rata to the shareholders of
record of the Company on December 31, 1992, in exchange for 20% of their
existing shares in the Company. This divestiture and spin-off was accounted for
at the book value of the net assets distributed which amounted to $21.2 million.
In February 1993, the Company's management formally approved a plan whereby
its General Surgery and Anesthesia (AIP) division would be sold to NMSI. This
transaction was concluded on July 30, 1993, for a consideration of $2.8 million
and the assumption by NMSI of certain liabilities of the AIP division. As the
shareholders of NMSI are substantially the same as the shareholders of the
Company, this transaction is considered to be between related parties.
Therefore, rather than recording income on the transactions, the $256,000 excess
of consideration over the basis of assets sold was credited to paid-in capital.
The consideration in the sale was received in a $1.8 million promissory note due
July 30, 1994, bearing interest at prime plus 1%, and the exchange of a $1.0
million receivable. The net assets of the AIP division were $2.5 million at
December 31, 1992, and are reflected in the accompanying balance sheet as "net
assets of discontinued operations."
The statements of income for all periods presented have been restated to
report the results of operations of the Surgical Implant and AIP divisions as
discontinued operations. Summarized information on these divisions for these
periods is as follows:
F-24
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- DISCONTINUED OPERATIONS -- Continued
<TABLE>
<CAPTION>
EIGHT MONTHS YEARS ENDED APRIL
YEAR ENDED ENDED 30,
DECEMBER 31, 1993 DECEMBER 31, 1992 1992 1991
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Sales.............................................. $20,912 $64,173 $117,253 $103,218
Operating income................................... $ 608 $ 9,130 $ 23,564 $ 19,553
Income before state income taxes................... $ 565 $ 9,156 $ 23,612 $ 19,605
Allocated state income taxes....................... 37 743 1,203 1,452
NET INCOME......................................... $ 528 $ 8,413 $ 22,409 $ 18,153
</TABLE>
NOTE 4 -- NON-RECURRING CHARGES
In 1992 non-recurring charges include approximately $600,000 of legal,
accounting, auditing, printing and other professional expenses, incurred in
conjunction with a proposed initial registration statement and public offering.
These costs had been incurred during the period starting in January, 1992 and
were deferred until November, 1992 when the plans for the proposed public
offering were terminated.
Also included in non-recurring charges were certain professional expenses
and other consultative services of approximately $314,000 incurred during the
eight-month period ended December 31, 1992 in connection with negotiating a
proposed agreement to sell the Company to a third party. Plans to sell the
Company pursuant to this proposed agreement were terminated in February, 1993.
Additional non-recurring costs were incurred in 1993 relating to this
transaction which amounted to approximately $1.2 million.
NOTE 5 -- SALE OF ACCOUNTS RECEIVABLE
The Company entered into a Sale and Administration Agreement dated June 19,
1990, subsequently amended and restated September 30, 1993, whereby it sells its
trade accounts receivable (Receivables) to a special purpose company (Stuart's
Funding Corporation) owned by one of the Company's shareholders, which in turn
issues commercial paper secured by Receivables. Stuart's Funding Corporation has
the ability to issue up to $125 million of commercial paper to support this
program under an agreement which runs through November 24, 1994, with provisions
for semiannual renewals. The Sale and Administration Agreement requires the
Company to maintain substantially the same covenants as those described in Note
6. The Company sells its Receivables at a discount and receives cash for
approximately 90% of the discounted eligible Receivables and an interest-bearing
note for the remaining balance. The discount rate varies based upon commercial
paper rates and other factors. The note bears interest at the applicable Federal
rate (short-term).
During the periods ended December 31, 1993 and 1992, and April 30, 1992 and
1991, Receivables from continuing operations totaling $890 million, $584
million, $752 million and $644 million were sold under the agreement, of which
approximately $95 million and $100 million were outstanding at December 31, 1993
and 1992. The Receivables are sold without recourse except the Company is
required to replace or repurchase receivables that are subject to billing errors
or customer returns. The Company services these Receivables for a fee.
F-25
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
<S> <C> <C>
(IN THOUSANDS)
Revolving loan.................................................................. $46,000 $58,000
Term loan....................................................................... -- 1,673
Real estate and equipment loans................................................. 2,428 3,421
48,428 63,094
Less -- Current maturities...................................................... 452 2,146
LONG-TERM DEBT, LESS
CURRENT MATURITIES............................................................ $47,976 $60,948
</TABLE>
The Company has a credit agreement with a group of banks which provides for
revolving loans. This credit agreement, referred to as the Fourth Amended and
Restated Credit Agreement, dated July 30, 1993, provides for revolving loans of
up to $85 million based on 65% of eligible inventory, plus cash equivalents as
defined. The agreement requires the Company, among other things, to (a) restrict
the payment of shareholder distributions based upon net worth levels (as
defined), (b) maintain a minimum net worth (as defined) of 95% of book net worth
at June 30, 1993 plus 50% of net income for subsequent fiscal quarters, (c)
maintain an interest coverage ratio of at least 1.50:1 from October 31, 1993 to
March 31, 1994 and (d) maintain a leverage ratio (as defined) of .625 to 1.0
from July 30, 1993 to December 31, 1994.
At December 31, 1993, net worth exceeded the required levels by $3.9
million.
This agreement is secured by inventory, certain property and equipment and
the note receivable from
Stuart's Funding Corporation (see Note 5). This agreement expires June 30, 1996
and can be extended for additional one year periods subject to bank approval.
The Company can select from several floating interest rate alternatives. At
December 31, 1993, borrowings under this agreement had interest rates based on
LIBOR rate plus 1 1/2% (approximately 5%) and prime plus 1/2% (approximately
6 1/2%). A commitment fee of 3/8% per annum is charged on the unused portion of
the available credit.
The term loan under the credit agreement was repayable in semiannual
installments through December 31, 1993, and was repaid in full on June 30, 1993.
The real estate loans consist of various Pennsylvania Industrial
Development Authority loans and bank loans payable in monthly installments
ranging from $2,200 to $22,200 through 2003. Interest rates range from 3% to
10 1/4%. The loans are collateralized by a mortgage on the related land and
operating facilities with a net book value of approximately $4.9 million at
December 31, 1993. The Pennsylvania Industrial Development Authority loans are
subordinate to the banks' security interest in the collateral.
Maturities of long-term debt for the next five years ended December 31 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1994............................................................. $ 452
1995............................................................. 225
1996............................................................. 46,074
1997............................................................. 76
1998............................................................. 78
Thereafter....................................................... 1,523
$ 48,428
</TABLE>
F-26
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- INCOME TAXES AND PRO FORMA (UNAUDITED) INCOME TAXES
The Company is qualified as an S Corporation under the Internal Revenue
Code, as well as in a number of the states in which it files income tax returns.
Accordingly, previously reported financial statements did not reflect a
provision for either Federal income taxes or certain state income taxes where
the Company's taxable income and expense items were included in the appropriate
tax returns of the Company's shareholders. The Company also transacts business
in a number of states which do not recognize S Corporations or in which the
Company elected to be treated as a taxable corporation and, accordingly, an
income tax provision has been recorded for these states.
Upon completion of the business combination described in Note 1, the
Company will no longer be qualified as an S Corporation and the accompanying
income statements present income taxes on a pro forma (unaudited) basis as if
the Company had been a taxable corporation for all periods presented. The pro
forma income tax provision has been computed on the basis of the liability
method pursuant to Financial Accounting Standard No. 109.
A reconciliation of the Federal statutory rate to the Company's effective
pro forma unaudited income tax rate from continuing operations follows:
<TABLE>
<CAPTION>
EIGHT MONTHS YEARS ENDED
YEAR ENDED ENDED APRIL 30,
DECEMBER 31, 1993 DECEMBER 31, 1992 1992 1991
<S> <C> <C> <C> <C>
Federal Statutory Rate.................................... 34.0% 34.0% 34.0% (34.0%)
State income taxes, net of
Federal tax benefit..................................... 10.0 11.9 5.1 (1.0)
Nondeductible goodwill amortization....................... 7.8 16.2 30.6 25.3
Other, net................................................ 1.3 1.2 2.8 1.6
Effective tax rate........................................ 53.1% 63.3% 72.5% (8.1%)
</TABLE>
Pro forma unaudited accumulated deferred tax benefits amounted to
approximately $6.0 million as of December 31, 1993 and will be recorded by O&M
in purchase accounting subject to recoverability by the combined business of the
new holding company and the Company. These deferred tax benefits result
primarily from book depreciation and inventory adjustments in excess of those
reported for tax purposes.
NOTE 8 -- FINANCIAL INSTRUMENTS
The Company periodically enters into interest rate swaps and interest rate
cap agreements to reduce exposure to changes in interest rates. The interest
differential to be paid or received is accrued and included in interest expense.
At December 31, 1992, the Company had one interest rate swap agreement
outstanding with a commercial bank having a notional amount of $5 million. This
agreement, which matured in January 1993, required the Company to pay a fixed
rate of approximately 9.04%. No interest rate swap agreements were entered into
during 1993.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and cash
investments. The Company's customer base includes many of the nation's acute
care and related health care providers. However, the Company's credit evaluation
process, reasonably short collection terms and the geographical dispersion of
sales transactions help to mitigate this concentration of credit risk. The
Company also has cash investment policies that limit the amount of credit
exposure to any one financial institution and restrict placement of investments
to financial institutions evaluated as highly creditworthy.
F-27
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- EMPLOYEE RETIREMENT BENEFITS
Prior to December 1, 1993, the Company sponsored a retirement/savings plan
which covered substantially all employees. The plan is intended to qualify under
the Internal Revenue Code. Eligible employees could contribute up to 15% of
their compensation to the plan and the Company matched 100% of the employees'
contributions up to a maximum of 3% of the employees' base compensation. The
Company also made discretionary contributions to the plan.
On December 1, 1993, this plan was split into two separate plans. All
assets and liabilities attributable to the 401(k) portion of the plan,
established January 1, 1990, were transferred to the new plan (the Savings Plan
for Stuart Medical, Inc. and National Medical Specialty, Inc.), and the assets
and liabilities attributable to the prior money purchase plan remained in the
retirement/savings plan. Also effective December 1, 1993, the existing plan was
frozen in that contributions are no longer permitted. Under the new 401(k) plan,
employee and Company contribution parameters remain the same as they were prior
to December 1, 1993 under the retirement/savings plan. This plan is intended to
qualify under the Internal Revenue Code.
Total expense under the Company's retirement plan was $709,000 for the year
ended December 31, 1993, $571,000 for the period ended December 31, 1992 and
$595,000 and $759,000 for the years ended April 30, 1992 and 1991, respectively.
Presently, the Company does not provide any other post-retirement benefits
to its employees; and accordingly, Financial Accounting Standard No. 106
regarding other post-retirement benefits did not have any effect on the
Company's reported financial position or results of operations.
NOTE 10 -- LEASES
The Company rents equipment, as well as office and warehouse space under
various operating lease agreements, certain of which provide for renewal
options. Total rental expense was $7.1 million for the year ended December 31,
1993, $3.6 million for the period ended December 31, 1992 and $4.2 million and
$3.2 million for the years ended April 30, 1992 and 1991, respectively.
Future lease payments under operating leases are as follows for the next
five years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1994................................................................... $ 5,969
1995................................................................... 5,032
1996................................................................... 1,934
1997................................................................... 1,623
1998................................................................... 1,036
Thereafter............................................................. --
$ 15,594
</TABLE>
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company purchases a portion of its surgical gloves from an affiliated
entity, Pittsburgh International Medical Supply, Inc. (PIMS), several of whose
shareholders are also shareholders of the Company. The Company had glove
purchases from PIMS of $4.1 million for the year ended December 31, 1993, $1.6
million for the eight months ended December 31, 1992 and $4.7 million and $3.0
million for the years ended April 30, 1992 and 1991, respectively.
The Company provided certain warehousing, administration, accounting,
information systems and occupancy services to its discontinued NMSI divisions
for a fee (see Note 3). The Company also charged the NMSI divisions for working
capital related interest costs during the period ended December 31, 1992. These
inter-
F-28
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- RELATED PARTY TRANSACTIONS -- Continued
divisional charges which amounted to $2.4 million, $4.4 million and $800,000 for
the periods ended December 31, 1992, April 30, 1992 and 1991 were eliminated in
the statements of income.
In 1993, the Company provided warehousing, delivery and administrative
services to its affiliate, NMSI. Charges for these services amounted to $1.3
million and are included in other income.
During NMSI's transition to its own systems, customers are remitting
certain NMSI receivable payments to the Company (NMSI is in the process of
educating customers as to NMSI's lockbox account). Consequently, each month the
Company transfers to NMSI the excess of receivable collections over the service
charge for the prior month. At December 31, 1993, the Company recorded a
liability in the amount of $1.9 million to reflect the excess of receivable
collections over NMSI's service charge.
NOTE 12 -- INDUSTRY SEGMENT REPORTING
The Company serves the health care industry through the sale and
distribution of medical and surgical products and medical equipment.
Substantially all of the Company's operations are conducted within the United
States. Sales to hospital customers under the Company's hospital distribution
agreement with VHA Supply Company, Inc. generated 51%, 48%, 43% and 44% of
Company revenues during the periods ended December 31, 1993 and 1992, and April
30, 1992 and 1991, respectively.
NOTE 13 -- COMMON STOCK
The Company's common stock consists of 10 million shares authorized having
a par value of $.0025 per share, with 2.5 million shares originally issued and
outstanding. As a result of the divestiture and spin-off of NMSI discussed in
Note 3, 2 million shares remain issued and outstanding at December 31, 1992 and
1993.
NOTE 14 -- PHANTOM STOCK PLANS
The Company established phantom stock plans (The Plans) effective January
1, 1993. The Plans are an unfunded deferred compensation arrangement, based on
appreciation of the value of the Company's common stock, for a group of senior
management and highly compensated employees and are exempt from the requirements
of the Employee Retirement Income Security Act of 1974. All phantom rights
(Rights) have been awarded under The Plans. Each Right is intended to correspond
to one share of the Company's common stock (see Note 13). As of December 31,
1993, 173,913 Rights have been awarded and no appreciation was attributed to
these Rights as of that date. The value of the Rights was determined based upon
a number of factors specified in The Plans, including operating earnings. The
consummation of the business combination discussed in Note 1 will result in a
different formula valuation and will trigger a payment to The Plans'
participants.
NOTE 15 -- SUBSEQUENT EVENT
On January 5, 1994, the Company purchased the medical supply distribution
business of Midwest Hospital Supply, Inc. (Midwest) (a subchapter S Corporation)
effective January 1, 1994, for a cash payment of $6.6 million and assumption of
Midwest's outstanding debt obligations in the amount of $3.8 million. Midwest is
located in Indianapolis, Indiana and has annual sales of approximately $50
million.
Unaudited pro forma results of operations are presented below, with pro
forma adjustments to the historical statements for goodwill amortization over 20
years based on a preliminary purchase price allocation, and income taxes at an
assumed effective Federal and State tax rate of 40%.
F-29
<PAGE>
STUART MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUBSEQUENT EVENT -- Continued
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED
DECEMBER 31, 1993
<S> <C>
(IN THOUSANDS)
Net Sales................................................................. $51,787
Cost of goods sold........................................................ 45,812
Gross Profit............................................................ 5,975
Operating expenses........................................................ 4,653
Operating income........................................................ 1,322
Interest expense and other................................................ 319
Net income before pro forma adjustments................................. 1,003
Pro Forma goodwill amortization........................................... 240
Pro Forma income before taxes........................................... 763
Pro Forma income taxes.................................................... 305
Pro Forma net income...................................................... $ 458
</TABLE>
Unaudited pro forma balance sheet information is as follows:
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, 1993
<S> <C>
(IN THOUSANDS)
Current assets............................................................ $ 7,454
Property and equipment.................................................... 237
Goodwill.................................................................. 4,840
Other assets.............................................................. 3
Total assets......................................................... 12,534
Current liabilities....................................................... 5,876
Long-term debt............................................................ 57
Purchase price............................................................ $ 6,601
</TABLE>
F-30
<PAGE>
ANNEX I
PLAN OF EXCHANGE OF
SHARES OF OWENS & MINOR, INC.
FOR SHARES OF O&M HOLDING, INC.
Section 1. Parties to the Exchange
The name of the corporation proposing to exchange its shares is Owens
& Minor, Inc. ("O&M"), a Virginia corporation. The name of the corporation
that is to acquire all outstanding shares of O&M is O&M HOLDING, INC.,
formerly OMI Holding, Inc. ("O&M Holding"), a Virginia corporation.
Section 2. Exchange of Shares
Upon the effective time specified in Articles of Exchange filed with
respect to this Plan of Exchange with the State Corporation Commission of
Virginia (the "Effective Time"), by virtue of this Plan of Exchange and
without any action on the part of the holders thereof:
(a) Each outstanding share of common stock, $2 par value, of O&M
shall automatically be converted into and exchanged for one share
of common stock, $2 par value, of O&M Holding;
(b) Each right outstanding to acquire a share of common stock, $2 par
value, of O&M, whether by stock option, conversion right or
otherwise, shall automatically be converted into and exchanged
for the right to acquire a share of common stock, $2 par value,
of O&M Holding;
(c) Each right outstanding to acquire a share of Series A
Participating Preferred Stock, $10 par value, of O&M shall
automatically be converted into and exchanged for the right to
acquire a share of Series A Participating Preferred Stock, $100
par value, of O&M Holding;
(d) O&M Holding shall become the owner and holder of all outstanding
shares of common stock, $2 par value, of O&M; and
(e) Each outstanding share of common stock, $2 par value, of O&M
Holding outstanding immediately prior to the Effective Time shall
be cancelled and converted into the right to receive $10 from O&M
Holding.
Section 3. Certificates Representing Common Stock
At the Effective Time, each certificate evidencing ownership of
outstanding shares of common stock, $2 par value, of O&M shall
automatically and without any action on the part of the holder thereof be
deemed to evidence an identical number of shares of common stock, $2 par
value, of O&M Holding.
Section 4. Amendment or Termination
With the approval of their respective Board of Directors, the parties
hereto may amend this Plan of Exchange before the Effective Time, provided
that any amendment made subsequent to the submission of this Plan of
Exchange to the shareholders of the parties hereto shall not:
(a) alter or change the amount or kind of shares, securities, cash,
property or rights to be received in exchange for or on conversion of all
or any of the shares of any class or series of such corporation;
(b) alter or change any of the terms and conditions of the plan if
such alteration or change would adversely affect the shares of any class or
series of such corporation; or
(c) alter or change any terms of the Articles of Incorporation of any
corporation whose shareholders must approve this Plan of Exchange.
This Plan of Exchange may be terminated before the Effective Time by
the affirmative vote of a majority of the members of O&M's Board of
Directors whether or not the holders of common stock, $2 par value, of O&M
have cast their votes with regard to the exchange.
<PAGE>
ANNEX II
PLAN OF SHARE EXCHANGE
OF SHARES OF SERIES B PREFERRED
STOCK OF O&M HOLDING, INC.
FOR
SHARES OF COMMON STOCK OF
STUART MEDICAL, INC.
This Plan of Share Exchange ("Plan of Exchange") by and between STUART
MEDICAL, INC., a Pennsylvania corporation ("SMI"), and O&M HOLDING, INC.,
formerly OMI Holding, Inc. ("O&M Holding"), a Virginia corporation.
RECITAL
1. Owens & Minor, Inc., O&M Holding, SMI and certain holders of the
issued and outstanding Common Stock, $.0025 par value per share, of SMI
("SMI Common Stock") are parties to an Agreement of Exchange dated as of
December 22, 1993, as amended and restated on March 31, 1994 (the
"Agreement of Exchange").
2. The respective Boards of Directors of SMI and O&M Holding have by
resolution duly approved the Agreement of Exchange and this Plan of
Exchange, and the Board of Directors of SMI has directed that this Plan of
Exchange be submitted to its shareholders for adoption.
ARTICLE I
EFFECTIVE TIME
After filing of Articles of Exchange with the Department of State of
the Commonwealth of Pennsylvania, at the effective time specified in such
Articles (the "Effective Time"), all of the issued and outstanding shares
of SMI Common Stock shall, by operation of law, be converted into and
exchanged for (the "Exchange") $40,200,000 in cash and 1,150,000 shares of
Series B Preferred Stock, $100 par value per share, of O&M Holding ("O&M
Holding Preferred Stock"), subject to adjustment for Dissenting Shares (as
defined in Section 3.06 hereof) and fractional shares, all pursuant to the
terms and conditions of this Plan of Exchange and of the Agreement of
Exchange.
ARTICLE II
GENERAL EFFECTS OF THE EXCHANGE
The Exchange shall have the effects set forth herein and in Section
1931 of the Pennsylvania Business Corporation Law (the "BCL"). Pursuant to
the Exchange, O&M Holding shall become the owner and holder of all of the
outstanding shares of SMI Common Stock.
ARTICLE III
MANNER AND BASIS OF CONVERTING
SHARES OF SMI; EXCHANGE PROCEDURES
Section 3.01 Effect on Shares. At the Effective Time, by virtue of
the Exchange and without any action on the part of O&M Holding, SMI or any
holder of capital stock of either of them:
(a) Exchange of Outstanding Shares. Each share of SMI Common
Stock outstanding immediately prior to the Effective Time (except for
Dissenting Shares) with respect to which an election to receive cash (a
"Cash Election") has been made and not revoked ("Electing Shares"), and
that has not been prorated pursuant to Section 3.03(c) hereof, shall be
converted into and shall represent the right to receive the Cash
Consideration (as defined in Section 3.02(b) hereof).
(b) Each share of SMI Common Stock outstanding immediately prior
to the Effective Time, except Dissenting Shares and Electing Shares ("Non-
Electing Shares"), shall be converted into and shall represent the right to
receive that fraction of a share of O&M Holding Preferred Stock having a
par value equal to the Preferred Stock Consideration (as defined in Section
3.02(c) hereof).
Section 3.02 Certain Definitions. (a) SMI shall obtain an opinion
as to the aggregate fair market value of the O&M Holding Preferred Stock
("Aggregate Fair Market Value") as of a day that is not more than ten
business days before the Effective Time. The term "Gross Valuation Amount"
shall mean the sum of the Aggregate Fair Market Value plus $40,200,000.
(b) The term "Cash Consideration" shall mean the quotient of the
Gross Valuation Amount divided by 2,000,000.
(c) The term "Preferred Stock Consideration" shall mean the
result of the following formula:
$115,000,000 divided by (2,000,000 - ($40,200,000/Cash Consideration))
Section 3.03 Elections. (a) Any holder of shares of SMI Common
Stock may make a Cash Election for up to 75% of the outstanding shares of
SMI Common Stock held by such holder. A form of election (the "Form of
Election") shall be provided to each holder of SMI Common Stock as early as
practicable before the Effective Time. Any such shareholder's Cash
Election shall have been properly made only if O&M Holding shall have
received, no later than 5:00 p.m. Eastern Time on the last business day
before the Effective Time (the "Election Cutoff Time"), a Form of Election
properly completed and signed and accompanied by certificates for the
shares of SMI Common Stock to which such Form of Election relates, duly
endorsed in blank or otherwise in form acceptable for transfer on the books
of SMI.
(b) Any Form of Election may be revoked or amended only by
written notice from the appropriate holder received by O&M Holding no later
than the Election Cutoff Time.
(c) Anything in this Section 3.03 to the contrary
notwithstanding, in the implementation of this Article III, O&M Holding
shall make cash payments as nearly as practicable equal to but not less
than $40,200,000 in the aggregate (the "Aggregate Cash Consideration"). In
the event the product of the Cash Consideration multiplied by the number of
Electing Shares exceeds the Aggregate Cash Consideration by more than
$1,000, the Aggregate Cash Consideration shall be prorated among the number
of Electing Shares to the end that the cash payments made by O&M Holding
pursuant to Section 3.01 shall exceed by the smallest amount practicable
the Aggregate Cash Consideration, and the remaining shares (or portions
thereof) of Electing Shares shall be deemed to be shares (or portions
thereof) of Non-Electing Shares and shall be converted into shares of O&M
Holding Preferred Stock as provided in Section 3.01(b) hereof. In the
event the product of the Cash Consideration multiplied by the number of
Electing Shares is less than the Aggregate Cash Consideration, a number of
Non-Electing Shares (determined pro rata among the total Non-Electing
Shares) shall be deemed to be Electing Shares to the end that the cash
payments made by O&M Holding pursuant to Section 3.01 shall equal or exceed
by the smallest amount practicable the Aggregate Cash Consideration.
Section 3.04 Fractional Shares. No fractional shares of O&M Holding
Preferred Stock shall be issued in the Exchange. Instead the number of
shares of O&M Holding Preferred Stock that a holder of SMI Common Stock
receives as a result of the Exchange shall be rounded to the nearest full
share (with a fraction of .5 or greater being rounded to the next highest
full share).
Section 3.05 Treasury Shares. Each share of SMI Common Stock held
in the treasury of SMI immediately prior to the Effective Time shall be
automatically cancelled and retired and cease to exist, and no cash or
securities or other payment shall be paid or payable in respect thereof.
Section 3.06 Dissenting Shares. Notwithstanding anything in this
Plan of Exchange to the contrary, shares of SMI Common Stock issued and
outstanding immediately prior to the Effective Time that are held by a
shareholder who objects to the Exchange and complies with all provisions of
the BCL concerning the right of such holders to dissent from the Exchange
and demand appraisal rights of their shares (the "Dissenting Shares") shall
not be converted as described in Section 3.01 but shall from and after the
Effective Time represent only the right to receive such consideration as
may be determined to be due to such Dissenting Holder pursuant to the BCL;
provided, however, that all shares of SMI Common Stock outstanding
immediately prior to the Effective Time and held by a Dissenting Holder who
shall, after the Effective Time, withdraw his demand for appraisal or lose
his right of appraisal, in either case pursuant to the BCL, shall be deemed
to be converted, as of the Effective Time, into the right to receive shares
of O&M Holding Preferred Stock in the amount and otherwise as specified in
Section 3.01(b), without interest.
Section 3.07 Exchange Procedures. At the Effective Time, O&M
Holding shall make available to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represent
outstanding shares of SMI Common Stock (the "Certificates") whose shares
were converted into the right to receive the Cash Consideration or shares
of O&M Holding Preferred Stock, or both, pursuant to Section 3.01 hereof,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to O&M Holding and shall be in such form
and have such other provisions as O&M Holding may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Cash Consideration, certificates representing shares of
O&M Holding Preferred Stock, or both, as the case may be. Upon surrender
of a Certificate for cancellation to O&M Holding, together with such letter
of transmittal, duly executed, and any other required documents, the holder
of such Certificate shall be entitled to receive (subject to deduction of
any required withholding tax) in exchange therefor a check in the amount of
any Cash Consideration that such holder has the right to receive pursuant
to this Article III and a certificate representing that number of shares of
O&M Holding Preferred Stock that such holder has the right to receive
pursuant to the provisions of this Article III, and the Certificates so
surrendered shall forthwith be cancelled. Until surrendered as
contemplated by this Section 3.07, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender any Cash Consideration and the certificate representing
shares of O&M Holding Preferred Stock as contemplated by this Section 3.07.
Section 3.08 Distributions with Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time
with respect to O&M Holding Preferred Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of O&M Holding Preferred Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to the effect of applicable laws, following surrender
of any such Certificate, there shall be paid (subject to deduction of any
required withholding tax) to the record holder of the certificates
representing shares of O&M Holding Preferred Stock issued in exchange
therefor, without interest, (i) any Cash Consideration to which such holder
is entitled, (ii) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
paid with respect to such shares of O&M Holding Preferred Stock and (iii)
at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender, payable with respect
to such shares of O&M Holding Preferred Stock.
ARTICLE IV
TERMINATION
This Plan of Exchange may be terminated and the Exchange contemplated
hereby may be abandoned at any time (notwithstanding approval hereof by the
shareholders of SMI) prior to the Effective Time if the Agreement of
Exchange is terminated in accordance with its terms.
<PAGE>
ANNEX III
AGREEMENT OF EXCHANGE
DATED AS OF DECEMBER 22, 1993,
AS AMENDED AND RESTATED ON MARCH 31, 1994,
BY AND AMONG
STUART MEDICAL, INC.,
OWENS & MINOR, INC.,
O&M HOLDING, INC.
and
CERTAIN SHAREHOLDERS OF
STUART MEDICAL, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Definitions
1.01 "Affiliate". . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 "Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.03 "BCL". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.04 "Balance Sheet Deficiency" . . . . . . . . . . . . . . . . . . 2
1.05 "Balance Sheet Holdback Shares". . . . . . . . . . . . . . . . 2
1.06 "CERCLA" . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.07 "Certificates" . . . . . . . . . . . . . . . . . . . . . . . . 2
1.08 "Closing". . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.09 "Closing Balance Sheet". . . . . . . . . . . . . . . . . . . . 2
1.10 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 "Competing Transaction". . . . . . . . . . . . . . . . . . . . 2
1.12 "Contracts". . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 "E&Y". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.14 "Effective Time" . . . . . . . . . . . . . . . . . . . . . . . 2
1.15 "ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.16 "ERISA Affiliate". . . . . . . . . . . . . . . . . . . . . . . 3
1.17 "Exchanges". . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 "Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 "First C Year" . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 "GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 "Hazardous Materials". . . . . . . . . . . . . . . . . . . . . 3
1.22 "HSR Act". . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.23 "Intellectual Property". . . . . . . . . . . . . . . . . . . . 3
1.24 "J.P. Morgan". . . . . . . . . . . . . . . . . . . . . . . . . 3
1.25 "Knowledge". . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.26 "KPMG" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.27 "Last SMI Year". . . . . . . . . . . . . . . . . . . . . . . . 3
1.28 "Law". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.29 "Leased Property". . . . . . . . . . . . . . . . . . . . . . . 3
1.30 "Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.31 "Midwest". . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.32 "Midwest Accounts Receivable". . . . . . . . . . . . . . . . . 4
1.33 "Midwest Acquisition". . . . . . . . . . . . . . . . . . . . . 4
1.34 "Net Worth Deficiency" . . . . . . . . . . . . . . . . . . . . 4
1.35 "Notice of Objection". . . . . . . . . . . . . . . . . . . . . 4
1.36 "O&M". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.37 "O&M Holding". . . . . . . . . . . . . . . . . . . . . . . . . 4
1.38 "O&M Articles of Exchange" . . . . . . . . . . . . . . . . . . 4
1.39 "O&M Common Stock" . . . . . . . . . . . . . . . . . . . . . . 4
1.40 "O&M Disclosure Schedule". . . . . . . . . . . . . . . . . . . 4
1.41 "O&M Exchange" . . . . . . . . . . . . . . . . . . . . . . . . 4
1.42 "O&M Financial Statements" . . . . . . . . . . . . . . . . . . 4
1.43 "O&M Holding Common Stock" . . . . . . . . . . . . . . . . . . 4
1.44 "O&M Holding Preferred Stock". . . . . . . . . . . . . . . . . 5
1.45 "O&M's Indemnitees". . . . . . . . . . . . . . . . . . . . . . 5
1.46 "O&M Plan of Exchange" . . . . . . . . . . . . . . . . . . . . 5
1.47 "O&M Shareholders' Meeting". . . . . . . . . . . . . . . . . . 5
1.48 "O&M Subsidiaries" . . . . . . . . . . . . . . . . . . . . . . 5
1.49 "PBGC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.50 "Pension Plans". . . . . . . . . . . . . . . . . . . . . . . . 5
1.51 "Permitted Liens". . . . . . . . . . . . . . . . . . . . . . . 5
1.52 "Phantom Stock Plans". . . . . . . . . . . . . . . . . . . . . 5
1.53 "Proxy Statement/Prospectus" . . . . . . . . . . . . . . . . . 5
1.54 "Qualified Pension Plan" . . . . . . . . . . . . . . . . . . . 5
1.55 "RCRA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.56 "Real Property". . . . . . . . . . . . . . . . . . . . . . . . 5
1.57 "Registration Rights Agreement". . . . . . . . . . . . . . . . 6
1.58 "Related Agreements" . . . . . . . . . . . . . . . . . . . . . 6
1.59 "Review Auditors". . . . . . . . . . . . . . . . . . . . . . . 6
1.60 "SMI". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.61 "SMI 401(k) Plan". . . . . . . . . . . . . . . . . . . . . . . 6
1.62 "SMI Articles of Exchange" . . . . . . . . . . . . . . . . . . 6
1.63 "SMI Common Stock" . . . . . . . . . . . . . . . . . . . . . . 6
1.64 "SMI Current Balance Sheet". . . . . . . . . . . . . . . . . . 6
1.65 "SMI Disclosure Schedule". . . . . . . . . . . . . . . . . . . 6
1.66 "SMI Exchange" . . . . . . . . . . . . . . . . . . . . . . . . 6
1.67 "SMI Exchange Consideration" . . . . . . . . . . . . . . . . . 6
1.68 "SMI Financial Statements" . . . . . . . . . . . . . . . . . . 6
1.69 "SMI Funding". . . . . . . . . . . . . . . . . . . . . . . . . 6
1.70 "SMI Plan of Exchange" . . . . . . . . . . . . . . . . . . . . 6
1.71 "Sale and Administration Agreement". . . . . . . . . . . . . . 7
1.72 "SEC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.73 "SEC Reports". . . . . . . . . . . . . . . . . . . . . . . . . 7
1.74 "Securities Act" . . . . . . . . . . . . . . . . . . . . . . . 7
1.75 "Series B Preferred Stock" . . . . . . . . . . . . . . . . . . 7
1.76 "Severance Agreements" . . . . . . . . . . . . . . . . . . . . 7
1.77 "Shareholder" or "Shareholders". . . . . . . . . . . . . . . . 7
1.78 "Shareholders' Indemnitees". . . . . . . . . . . . . . . . . . 7
1.79 "Shareholders' Representative" . . . . . . . . . . . . . . . . 7
1.80 "Specialty". . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.81 "Specialty Litigation" . . . . . . . . . . . . . . . . . . . . 7
1.82 "Specialty Obligations". . . . . . . . . . . . . . . . . . . . 7
1.83 "Subordinated Note". . . . . . . . . . . . . . . . . . . . . . 7
1.84 "Subordinated Note Holdback Shares". . . . . . . . . . . . . . 7
1.85 "Transfer" . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.86 "VHA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.87 "VSCA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.88 "Welfare Plans". . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE II
The Closing
2.01 The Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . 8
2.02 Closing; Filing of Articles of Exchange. . . . . . . . . . . . 8
2.03 Holdback Shares. . . . . . . . . . . . . . . . . . . . . . . . 8
2.04 Voting of Holdback Shares; Dividends; Interest . . . . . . . . 9
2.05 Closing Balance Sheet. . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III
The Exchanges
ARTICLE IV
Representations of SMI and the Shareholders
4.01 Existence and Good Standing. . . . . . . . . . . . . . . . . . 12
4.02 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.03 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.04 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 13
4.05 Subsidiaries, Affiliated Companies and Investments . . . . . . 14
4.06 Financial Statements . . . . . . . . . . . . . . . . . . . . . 14
4.07 No Material Adverse Changes. . . . . . . . . . . . . . . . . . 14
4.08 Books and Records. . . . . . . . . . . . . . . . . . . . . . . 16
4.09 Governmental Authorization . . . . . . . . . . . . . . . . . . 16
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.11 Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.12 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.13 Personal Property, Inventory and Accounts Receivable . . . . . 18
4.14 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.15 Obligations for Money Borrowed . . . . . . . . . . . . . . . . 19
4.16 Employment Agreements and Benefits . . . . . . . . . . . . . . 19
4.17 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 19
4.18 Employee Relations . . . . . . . . . . . . . . . . . . . . . . 21
4.19 Transactions with Affiliates . . . . . . . . . . . . . . . . . 21
4.20 Environmental Compliance . . . . . . . . . . . . . . . . . . . 21
4.21 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.22 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.23 Absence of Certain Practices . . . . . . . . . . . . . . . . . 24
4.24 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 24
4.25 Certain Obligations. . . . . . . . . . . . . . . . . . . . . . 24
4.26 Pricing Audits . . . . . . . . . . . . . . . . . . . . . . . . 24
4.27 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.28 Broker's or Finder's Fees. . . . . . . . . . . . . . . . . . . 24
ARTICLE V
Representations of O&M
5.01 Existence and Good Standing. . . . . . . . . . . . . . . . . . 25
5.02 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 25
5.03 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.04 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 26
5.05 Subsidiaries, Affiliated Companies and Investments . . . . . . 26
5.06 Financial Statements . . . . . . . . . . . . . . . . . . . . . 26
5.07 No Changes . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.08 Books and Records. . . . . . . . . . . . . . . . . . . . . . . 27
5.09 Governmental Authorization . . . . . . . . . . . . . . . . . . 27
5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.11 Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.12 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 27
5.13 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.14 Securities Reports . . . . . . . . . . . . . . . . . . . . . . 28
5.15 Broker's or Finder's Fees. . . . . . . . . . . . . . . . . . . 28
ARTICLE VI
Conduct of Businesses and Certain Other Actions
Pending the Effective Time
6.01 Access to Information Concerning Properties and Records
for Due Diligence Review . . . . . . . . . . . . . . . . . . . 28
6.02 Obligations Concerning Confidentiality . . . . . . . . . . . . 29
6.03 Conduct of Business by SMI Pending the Effective Time. . . . . 30
6.04 HSR Act Filings. . . . . . . . . . . . . . . . . . . . . . . . 31
6.05 No Shopping. . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.06 Shareholders Meeting . . . . . . . . . . . . . . . . . . . . . 32
6.07 Certain Notices. . . . . . . . . . . . . . . . . . . . . . . . 32
6.08 Consents and Approvals . . . . . . . . . . . . . . . . . . . . 32
6.09 Proxy Statement/Prospectus . . . . . . . . . . . . . . . . . . 33
6.10 Shareholders Meeting; Proxy Statement/Prospectus . . . . . . . 33
6.11 Certain Notices. . . . . . . . . . . . . . . . . . . . . . . . 33
6.12 Consents and Approvals . . . . . . . . . . . . . . . . . . . . 34
6.13 Severance Agreements . . . . . . . . . . . . . . . . . . . . . 34
6.14 Phantom Stock Plans. . . . . . . . . . . . . . . . . . . . . . 34
6.15 SMI Funding. . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.16 Supply Agreement . . . . . . . . . . . . . . . . . . . . . . . 35
6.17 Servicing Agreements . . . . . . . . . . . . . . . . . . . . . 35
6.18 Midwest Acquisition. . . . . . . . . . . . . . . . . . . . . . 35
6.19 Fixed Assets Inventory . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VII
Conditions Precedent to Obligations of SMI and the
Shareholders
7.01 O&M Obligations. . . . . . . . . . . . . . . . . . . . . . . . 36
7.02 Accuracy of Representations and Warranties . . . . . . . . . . 36
7.03 Consents and Approvals . . . . . . . . . . . . . . . . . . . . 36
7.04 Court Orders . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.05 HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.06 Actions and Proceedings. . . . . . . . . . . . . . . . . . . . 36
7.07 O&M Shareholder Vote . . . . . . . . . . . . . . . . . . . . . 37
7.08 Completion of Investigation. . . . . . . . . . . . . . . . . . 37
7.09 Deliveries at Closing. . . . . . . . . . . . . . . . . . . . . 37
ARTICLE VIII
Conditions Precedent to the Obligations of O&M and O&M
Holding
8.01 SMI and Shareholders Obligations . . . . . . . . . . . . . . . 38
8.02 Accuracy of Representations and Warranties . . . . . . . . . . 38
8.03 Consents and Approvals . . . . . . . . . . . . . . . . . . . . 38
8.04 Court Orders . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.05 HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.06 Actions and Proceedings. . . . . . . . . . . . . . . . . . . . 38
8.07 O&M Shareholder Vote . . . . . . . . . . . . . . . . . . . . . 39
8.08 Opinion of J. P. Morgan. . . . . . . . . . . . . . . . . . . . 39
8.09 Completion of Investigation. . . . . . . . . . . . . . . . . . 39
8.10 VHA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.11 Opinion Concerning Certain Tax Matters . . . . . . . . . . . . 39
8.12 Title to Real Property . . . . . . . . . . . . . . . . . . . . 39
8.13 Environmental Matters. . . . . . . . . . . . . . . . . . . . . 39
8.14 Refinancing of SMI Indebtedness; Additional O&M
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.15 Registration Statement . . . . . . . . . . . . . . . . . . . . 40
8.16 Deliveries at Closing. . . . . . . . . . . . . . . . . . . . . 40
ARTICLE IX
Indemnification and
Additional Agreements
9.01 The Shareholders' Indemnity. . . . . . . . . . . . . . . . . . 41
9.02 O&M's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . 43
9.03 Acquisition for Investment; Transfer Limitations . . . . . . . 44
9.04 Right of First Refusal . . . . . . . . . . . . . . . . . . . . 44
9.05 Standstill . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.06 Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . 47
9.07 Noncompetition Covenant. . . . . . . . . . . . . . . . . . . . 48
9.08 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.09 Board Nominee. . . . . . . . . . . . . . . . . . . . . . . . . 49
9.10 Financial Statements . . . . . . . . . . . . . . . . . . . . . 49
9.11 Tax Status of Exchanges. . . . . . . . . . . . . . . . . . . . 49
9.12 Shareholders' Representative . . . . . . . . . . . . . . . . . 50
9.13 Books and Records. . . . . . . . . . . . . . . . . . . . . . . 50
9.14 Phantom Stock Plans. . . . . . . . . . . . . . . . . . . . . . 50
9.15 New York Stock Exchange Listing Application. . . . . . . . . . 51
9.16 Midwest Accounts Receivable Guarantee. . . . . . . . . . . . . 51
ARTICLE X
Termination, Amendment and Waiver
10.01 Termination. . . . . . . . . . . . . . . . . . . . . . . 51
10.02 Effect of Termination. . . . . . . . . . . . . . . . . . 52
10.03 Post-Termination Covenants . . . . . . . . . . . . . . . 52
ARTICLE XI
General Provisions
11.01 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 53
11.02 Break-up Fee.. . . . . . . . . . . . . . . . . . . . . . 53
11.03 Publicity. . . . . . . . . . . . . . . . . . . . . . . . 53
11.04 Further Assurances . . . . . . . . . . . . . . . . . . . 54
11.05 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 54
11.06 Descriptive Headings . . . . . . . . . . . . . . . . . . 55
11.07 Parties in Interest. . . . . . . . . . . . . . . . . . . 56
11.08 Severability . . . . . . . . . . . . . . . . . . . . . . 56
11.09 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 56
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . 56
11.11 Amendment. . . . . . . . . . . . . . . . . . . . . . . . 56
11.12 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 56
Exhibit A O&M Plan of Exchange
Exhibit B Registration Rights Agreement
Exhibit C SMI Plan of Exchange
Exhibit D Series B Preferred Stock Terms
Exhibit E Opinion of Hunton & Williams
Exhibit F Opinion of Cohen & Grigsby, P.C.
Exhibit G Opinion of Counsel to the Shareholders
SMI Disclosure Schedule
Item 1.23 Intellectual Property
Item 1.29 Leased Property
Item 1.56 Real Property
Item 1.76 Severance Agreements
Item 4.03 Consents, etc.
Item 4.04 Capitalization of SMI
Item 4.07 Material Adverse Changes
Item 4.10A Litigation
Item 4.10B Specialty Litigation
Item 4.14 Contracts
Item 4.15 Obligations for Money Borrowed
Item 4.16 Employment Agreements
Item 4.17 Employee Benefit Plans
Item 4.18 Employee Relations
Item 4.19 Transactions with Affiliates
Item 4.21 Tax Matters
Item 4.22 Insurance
Item 4.24 Compliance with Laws
Item 4.26 Pricing Audits
O&M Disclosure Schedule
Item 1.48 O&M Subsidiaries
Item 5.03 Consents, etc.
Item 5.10 Litigation
Item 5.12 Compliance with Laws
<PAGE>
AGREEMENT OF EXCHANGE
AGREEMENT OF EXCHANGE (this "Agreement"), dated as of December 22,
1993, as amended and restated on March 31, 1994, among Stuart Medical,
Inc., a Pennsylvania corporation ("SMI"), Owens & Minor, Inc., a Virginia
corporation ("O&M"), O&M Holding, Inc., a Virginia corporation, formerly
OMI Holding, Inc. ("O&M Holding"), and Henry L. Hillman, Elsie H. Hillman
and C. G. Grefenstette, Trustees under the Henry L. Hillman Trust under
agreement of trust dated November 18, 1985, Juliet Lea Hillman Simonds,
Audrey Hillman Fisher, Henry L. Hillman, Jr., William T. Hillman, Howard B.
Hillman and Tatnall L. Hillman, each a shareholder of SMI (each, a
"Shareholder", and collectively, the "Shareholders").
WHEREAS, SMI, O&M Holding and the Shareholders desire to effect a
share exchange pursuant to which all outstanding shares of SMI Common Stock
will be exchanged for 1,150,000 shares of Series B Preferred Stock and
$40,200,000 to be allocated among the holders of SMI Common Stock in
accordance with their elections pursuant to the SMI Plan of Exchange;
WHEREAS, O&M and O&M Holding desire to effect a share exchange
pursuant to which each outstanding share of O&M Common Stock will be
exchanged for one share of O&M Holding Common Stock; and
WHEREAS, O&M, O&M Holding, SMI and the Shareholders acknowledge that
such exchanges are intended to qualify as a transaction described in
Section 351 of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound, SMI, O&M, O&M
Holding and the Shareholders hereby agree as follows:
ARTICLE I
Definitions
1.01 "Affiliate" shall mean, with respect to any person, any person
that directly, or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with such person.
1.02 "Agreement" shall mean this Agreement of Exchange and the Related
Agreements, together with the Exhibits and Schedules attached hereto,
including the SMI Disclosure Schedule and the O&M Disclosure Schedule, as
amended from time to time in accordance with the terms hereof.
1.03 "BCL" shall mean the Pennsylvania Business Corporation Law.
1.04 "Balance Sheet Deficiency" shall mean the excess, if any, of (i)
the sum of the amount, as of April 30, 1994, of (x) any assets reflected on
the Closing Balance Sheet that are not actually owned or in the possession
of SMI at the Effective Time and (y) any liabilities to which SMI was
subject at April 30, 1994, that were not reflected on the Closing Balance
Sheet, over (ii) the sum of (x) the amount of any assets owned and in the
possession of SMI at April 30, 1994, that are not reflected on the Closing
Balance Sheet and (y) the amount of liabilities that as of April 30, 1994,
were actually less than the amount reflected in respect thereof on the
Closing Balance Sheet (limited, in the case of any amount described in this
clause (ii), to the extent such amounts are within the Knowledge of O&M
Holding at the time any of O&M's Indemnitees makes a claim with respect to
a Balance Sheet Deficiency under Section 9.01(a)(v) hereof).
1.05 "Balance Sheet Holdback Shares" shall mean the shares of O&M
Holding Preferred Stock issued and retained pursuant to Section 2.03(a)
hereof.
1.06 "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
1.07 "Certificates" shall mean the certificates that, immediately
prior to the Effective Time, represented shares of SMI Common Stock.
1.08 "Closing" shall mean the conference held at 10:00 a.m. local
time, on the date determined in accordance with Section 2.02 hereof, at the
offices of Hunton & Williams, or such other time and place as the parties
may mutually agree in writing.
1.09 "Closing Balance Sheet" shall mean the audited balance sheet of
SMI as of April 30, 1994 prepared by E&Y in accordance with Section 2.05
hereof.
1.10 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.11 "Competing Transaction" shall have the meaning set forth in
Section 6.05 hereof.
1.12 "Contracts" shall have the meaning set forth in Section 4.14
hereof.
1.13 "E&Y" shall mean Ernst & Young.
1.14 "Effective Time" shall mean the effective time specified in (a)
the SMI Articles of Exchange and (b) the O&M Articles of Exchange.
1.15 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.16 "ERISA Affiliate" shall mean a trade or business, whether or not
incorporated, which, with SMI, would be treated as a single employer under
Section 414 of the Code of ERISA.
1.17 "Exchanges" shall mean, collectively, the O&M Exchange and the
SMI Exchange.
1.18 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.19 "First C Year" shall have the meaning set forth in Section 9.08
hereof.
1.20 "GAAP" shall mean generally accepted accounting principles
applied in a manner consistent with prior periods.
1.21 "Hazardous Materials" shall mean (a) material defined as
"hazardous substances," "hazardous wastes", "solid wastes" or "pollutants"
in CERCLA, RCRA, the Clean Air Act, the Clean Water Act or similar state or
local environmental statutes and (b) petroleum products, pollutants,
contaminants or hazardous or toxic substances, materials or wastes.
1.22 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976.
1.23 "Intellectual Property" shall mean the trademarks, service marks,
trade names, copyrights and other intellectual property owned or used by
SMI listed on Item 1.23 of the SMI Disclosure Schedule.
1.24 "J.P. Morgan" shall mean J.P. Morgan Securities Inc.
1.25 "Knowledge" as to O&M and SMI shall mean the knowledge of any
officer or director of such party after due investigation and as to any
individual, including a Shareholder, shall mean the knowledge of such
person after due investigation.
1.26 "KPMG" shall mean KPMG Peat Marwick.
1.27 "Last SMI Year" shall have the meaning set forth in Section 9.08
hereof.
1.28 "Law" shall mean any federal, state, local or other law or
governmental requirement of any kind, including judgments, decrees or
orders, and the rules, regulations and orders promulgated thereunder.
1.29 "Leased Property" shall mean real property leased by SMI pursuant
to a Contract and listed on Item 1.29 of the SMI Disclosure Schedule.
1.30 "Losses" shall have the meaning set forth in Section 9.01 hereof.
1.31 "Midwest" shall mean Midwest Hospital Supply Company, Inc..
1.32 "Midwest Accounts Receivable" shall mean the accounts receivable
of Midwest that have not been sold to SMI Funding in accordance with
Section 6.15(b) hereof and are reflected on the Closing Balance Sheet.
1.33 "Midwest Acquisition" shall mean the acquisition by SMI of
certain assets and the assumption of certain liabilities of Midwest in
accordance with the terms and provisions of an agreement that is
substantially similar to the Asset Purchase Agreement, draft of December
17, 1993, among Midwest, the shareholders of Midwest and SMI.
1.34 "Net Worth Deficiency" shall mean the amount by which the
shareholders' equity of SMI as reflected on the Closing Balance Sheet is
less than $41,000,000.
1.35 "Notice of Objection" shall have the meaning set forth in Section
2.05 hereof.
1.36 "O&M" shall mean Owens & Minor, Inc., a Virginia corporation.
1.37 "O&M Holding" shall mean O&M Holding, Inc., formerly OMI Holding,
Inc., a Virginia corporation and a wholly owned subsidiary of O&M.
1.38 "O&M Articles of Exchange" shall mean the Articles of Exchange to
be filed by O&M with the Commonwealth of Virginia State Corporation
Commission with respect to the O&M Plan of Exchange.
1.39 "O&M Common Stock" shall mean the Common Stock of O&M, $2.00 par
value per share.
1.40 "O&M Disclosure Schedule" shall mean the disclosure schedule of
O&M attached hereto.
1.41 "O&M Exchange" shall mean the exchange of each outstanding share
of O&M Common Stock for one share of O&M Holding Common Stock pursuant to
the O&M Plan of Exchange.
1.42 "O&M Financial Statements" shall have the meaning set forth in
Section 5.06 hereof.
1.43 "O&M Holding Common Stock" shall mean the Common Stock of O&M
Holding, $2.00 par value per share.
1.44 "O&M Holding Preferred Stock" shall mean the 1,150,000 shares of
Series B Preferred Stock to be issued to the holders of SMI Common Stock
pursuant to the SMI Plan of Exchange.
1.45 "O&M's Indemnitees" shall mean O&M, O&M Holding, SMI and their
respective successors, assigns and representatives.
1.46 "O&M Plan of Exchange" shall mean the plan of exchange with
respect to the O&M Exchange attached hereto as Exhibit A.
1.47 "O&M Shareholders' Meeting" shall mean the annual or special
meeting of the holders of O&M Common Stock held and conducted in accordance
with O&M's Articles of Incorporation and Bylaws, the VSCA and the proxy
rules of the SEC for the approval of the transactions contemplated by this
Agreement, including the O&M Plan of Exchange.
1.48 "O&M Subsidiaries" shall mean the companies listed on Item 1.48
of the O&M Disclosure Schedule.
1.49 "PBGC" shall mean the Pension Benefit Guaranty Corporation.
1.50 "Pension Plans" shall have the meaning set forth in Section 4.17
hereof.
1.51 "Permitted Liens" shall mean: (a) liens for taxes and
assessments that are accrued on the SMI Current Balance Sheet or the
Closing Balance Sheet, as the case may be, that are not due and payable;
(b) liens securing indebtedness reflected on the SMI Current Balance Sheet;
and (c) carrier's, warehousemen's, mechanic's, materialmen's, repairmen's
or other like liens arising in the ordinary course of business and in
respect of obligations which are not due.
1.52 "Phantom Stock Plans" shall mean, collectively, the 1993 Phantom
Stock Plan for Senior Management and the Second 1993 Phantom Stock Plan for
Senior Management.
1.53 "Proxy Statement/Prospectus" shall mean the proxy statement of
O&M to be distributed in connection with the O&M Shareholders' Meeting
pursuant to Regulation 14A of the Exchange Act and the prospectus of O&M
Holding to be distributed in connection with the O&M Exchange pursuant to
the Securities Act.
1.54 "Qualified Pension Plan" shall have the meaning set forth in
Section 4.17 hereof.
1.55 "RCRA" shall mean the Resource Conservation and Recovery Act, as
amended.
1.56 "Real Property" shall mean the property, fixtures and
improvements located thereon and appurtenances thereto owned by SMI listed
on Item 1.56 of the SMI Disclosure Schedule.
1.57 "Registration Rights Agreement" shall mean the agreement attached
hereto as Exhibit B.
1.58 "Related Agreements" shall mean the Registration Rights Agreement
and any other document or agreement delivered pursuant hereto.
1.59 "Review Auditors" shall have the meaning set forth in Section
2.05 hereof.
1.60 "SMI" shall mean Stuart Medical, Inc., a Pennsylvania
corporation.
1.61 "SMI 401(k) Plan" shall mean the Stuart Medical, Inc.
Retirement/Savings Plan.
1.62 "SMI Articles of Exchange" shall mean the Articles of Exchange to
be filed by SMI with the Department of State of the Commonwealth of
Pennsylvania with respect to the SMI Plan of Exchange.
1.63 "SMI Common Stock" shall mean the Common Stock of SMI, $.0025 par
value per share.
1.64 "SMI Current Balance Sheet" shall have the meaning set forth in
Section 4.06 hereof.
1.65 "SMI Disclosure Schedule" shall mean the disclosure schedule of
SMI and the Shareholders attached hereto.
1.66 "SMI Exchange" shall mean the exchange of all outstanding shares
of SMI Common Stock for the SMI Exchange Consideration pursuant to the SMI
Plan of Exchange.
1.67 "SMI Exchange Consideration" shall mean the O&M Holding Preferred
Stock and $40,200,000 in cash to be received by the holders of SMI Common
Stock in exchange for all the outstanding shares of SMI Common Stock
pursuant to the SMI Plan of Exchange, such consideration to be allocated
among the holders of SMI Common Stock in accordance with the SMI Plan of
Exchange.
1.68 "SMI Financial Statements" shall have the meaning set forth in
Section 4.06 hereof.
1.69 "SMI Funding" shall mean Stuart's Funding Corporation, a
Pennsylvania corporation.
1.70 "SMI Plan of Exchange" shall mean the plan of exchange with
respect to the SMI Exchange attached hereto as Exhibit C.
1.71 "Sale and Administration Agreement" shall mean the Amended and
Restated Sale and Administration Agreement between SMI and SMI Funding
dated as of September 30, 1993.
1.72 "SEC" shall mean the Securities and Exchange Commission.
1.73 "SEC Reports" shall have the meaning set forth in Section 5.14
hereof.
1.74 "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.75 "Series B Preferred Stock" shall mean the O&M Holding Series B
Preferred Stock, $100 par value per share, having the rights and
designations substantially as set forth in Exhibit D attached hereto.
1.76 "Severance Agreements" shall mean the agreements with certain
employees of SMI listed on Item 1.76 of the SMI Disclosure Schedule.
1.77 "Shareholder" or "Shareholders" shall mean individually or
collectively Henry L. Hillman, Elsie H. Hillman and C. G. Grefenstette,
Trustees under the Henry L. Hillman Trust under agreement of trust dated
November 18, 1985, Juliet Lea Hillman Simonds, Audrey Hillman Fisher, Henry
L. Hillman, Jr., William T. Hillman, Howard B. Hillman and Tatnall L.
Hillman, each a shareholder of SMI.
1.78 "Shareholders' Indemnitees" shall mean the Shareholders and their
respective successors, assigns and representatives.
1.79 "Shareholders' Representative" shall mean C. G. Grefenstette or
his designee.
1.80 "Specialty" shall mean National Medical Specialty, Inc.
1.81 "Specialty Litigation" shall mean the litigation described on
Item 4.10B of the SMI Disclosure Schedule.
1.82 "Specialty Obligations" shall mean any note or notes and other
obligations payable by Specialty to SMI.
1.83 "Subordinated Note" shall mean the deferred payment note, dated
September 30, 1993, payable to SMI and made by SMI Funding.
1.84 "Subordinated Note Holdback Shares" shall mean the number of
shares of O&M Holding Preferred Stock issued and retained pursuant to
Section 2.03(b) hereof.
1.85 "Transfer" shall mean, when used as a verb, to sell, to transfer,
to pledge, to encumber or to otherwise dispose of, and shall mean, when
used as a noun, sale, transfer, pledge, encumbrance or other disposition.
1.86 "VHA" shall mean Voluntary Hospitals of America, Inc.
1.87 "VSCA" shall mean the Virginia Stock Corporation Act.
1.88 "Welfare Plans" shall have the meaning set forth in Section 4.17
hereof.
ARTICLE II
The Closing
2.01 The Exchanges. At the Effective Time and subject to the terms
and conditions of this Agreement, the VSCA and the BCL, (a) all of the
outstanding shares of SMI Common Stock other than Dissenting Shares (as
defined in the SMI Plan of Exchange) will be exchanged for the SMI Exchange
Consideration and the SMI Exchange Consideration shall be allocated among
the holders of SMI Common Stock in accordance with their elections made
pursuant to the SMI Plan of Exchange and (b) each of the outstanding shares
of O&M Common Stock will be exchanged for one share of O&M Holding Common
Stock.
2.02 Closing; Filing of Articles of Exchange. Upon the terms and
subject to the conditions hereof, as soon as practicable after all of the
conditions to the obligations of the parties hereunder have been satisfied
or waived, the parties shall conduct the Closing for the purpose of
confirming the foregoing. As soon as practicable after the Closing, (a)
SMI shall in the manner required by the BCL deliver to and file with the
Department of State of the Commonwealth of Pennsylvania the duly executed
SMI Articles of Exchange in accordance with the provisions of the BCL, (b)
O&M Holding shall in the manner required by the VSCA deliver to and file
with the Commonwealth of Virginia State Corporation Commission the duly
executed O&M Articles of Exchange in accordance with the VSCA and (c) the
parties hereto shall take all such other action as may be required by law
to make the Exchanges effective.
2.03 Holdback Shares.
(a) At the Effective Time, O&M Holding shall issue and retain,
pending final determination of the Closing Balance Sheet pursuant to the
provisions of Section 2.05 hereof, from the SMI Exchange Consideration to
be received by each Shareholder, certificates representing 3% of that
number of shares (rounded up to the nearest whole share) of the O&M Holding
Preferred Stock that would be issued to such Shareholder if the cash
election permitted by Section 3.02 of the SMI Plan of Exchange were not
exercised by any holder of SMI Common Stock in the SMI Exchange (the
"Balance Sheet Holdback Shares") . The Balance Sheet Holdback Shares shall
be held and delivered as provided in Section 2.05 hereof.
(b) At the Effective Time, O&M Holding shall issue and retain
from the SMI Exchange Consideration to be received by the Shareholders,
certificates representing in the aggregate that number of shares of O&M
Holding Preferred Stock (rounded up to the nearest whole share) determined
by dividing the outstanding principal balance (plus accrued interest
thereon) of the Subordinated Note as of the Effective Time by $100 (the
"Subordinated Note Holdback Shares"). The number of the Subordinated Note
Holdback Shares to be so retained in respect of each Shareholder (rounded
to the nearest whole share) shall be determined by multiplying the
aggregate number of the Subordinated Note Holdback Shares by a fraction,
the numerator of which is the number of shares of the O&M Holding Preferred
Stock that would be issued to such Shareholder in the SMI Exchange if the
cash election permitted by Section 3.02 of the SMI Plan of Exchange were
not exercised by any holder, and the denominator of which is the aggregate
number of shares of the O&M Holding Preferred Stock that would be so issued
to all Shareholders in the SMI Exchange under the same assumption. Upon
payment in full by SMI Funding of the Subordinated Note within 150 days
after the Effective Time (including all accrued interest thereon to the
date of payment), O&M Holding shall promptly deliver to the Shareholder's
Representative the share certificates representing the Subordinated Note
Holdback Shares (including any dividends paid or distributions made with
respect thereto and any interest thereon). In the event SMI Funding fails
to pay in full the Subordinated Note (including accrued interest thereon)
on or before 150 days after the Effective Time, O&M Holding shall (a)
retain and cancel ratably, in the same proportion as the Subordinated Note
Holdback Shares were withheld from the Shareholders, the number of whole
Subordinated Note Holdback Shares (including any dividends paid or
distributions made with respect thereto) that when multiplied by $100
equals or exceeds by less than $100 the unpaid principal amount of the
Subordinated Note (less the accounts receivable reserve reflected on the
Closing Balance Sheet other than any reserve for the Midwest Receivables)
plus any unpaid accrued interest thereon through 150 days after the
Effective Time and (b) shall assign without recourse the Subordinated Note
to the Shareholders' Representative. O&M Holding shall promptly deliver to
the Shareholders' Representative any Subordinated Note Holdback Shares
(including any dividends paid or distributions made with respect thereto
and any interest thereon) not retained and canceled pursuant to the
preceding sentence.
2.04 Voting of Holdback Shares; Dividends; Interest. Each Shareholder
shall have full power to vote his respective Balance Sheet Holdback Shares
and Subordinated Note Holdback Shares in accordance with Section 9.06
hereof. Any dividends paid on or other distributions made with respect to
the Balance Sheet Holdback Shares or the Subordinated Note Holdback Shares
shall be invested by O&M Holding in any of the following securities or
accounts as designated in writing to O&M Holding by the Shareholders'
Representative: (a) direct obligations of the United States of America;
(b) general obligations of any state or political subdivision thereof if
such obligations are rated by at least two nationally recognized rating
agencies as "AA" or higher; and (c) certificates of deposit of any national
bank or state bank member of the Federal Reserve System having an aggregate
capital and surplus of at least $100,000,000.
2.05 Closing Balance Sheet.
(a) Within 60 days after the Effective Time, the Shareholders
shall cause E&Y to prepare a balance sheet of SMI as of April 30, 1994,
(the "Closing Balance Sheet") and the Shareholders shall deliver the
Closing Balance Sheet to O&M Holding together with a certificate signed by
the Shareholders certifying that the Closing Balance Sheet has been
prepared in accordance with GAAP (except for the absence of footnotes) and
this Agreement and fairly presents the assets and liabilities of SMI as of
April 30, 1994. The Closing Balance Sheet shall be prepared in accordance
with GAAP (except for the absence of footnotes); provided that: (i) the
Closing Balance Sheet shall not include (x) any accounts receivable other
than Midwest Accounts Receivable or any accruals for the payments to be
made by SMI with respect to the Phantom Stock Plans in accordance with
Section 6.14 hereof or (y) any accrual of amounts that may be payable with
respect to holders of Dissenting Shares (as defined in the SMI Plan of
Exchange); and (ii) the reserve for obsolescent inventory on the Closing
Balance Sheet shall include, without limitation, the following (except with
respect to inventory acquired from U.S. Surgical that may be exchanged for
other U.S. Surgical inventory without additional cost to SMI):
(A) a reserve for 100% of any item of inventory that
has shown no arm's length and bona fide sales activity for a
period of 12 months before the Effective Time (other than
inventory purchased within 60 days before the Effective
Time);
(B) a reserve for 25% of any item of inventory, the
on-hand quantities of which exceed two times the total
cumulative arm's length and bona fide sales of such item
during the 12 months before the Effective Time, if SMI has
made a substantial purchase of such item of inventory within
12 months prior to the Effective Time; and
(C) a reserve for 100% of any item of inventory, the
on-hand quantities of which exceed two times the total
cumulative arm's length and bona fide sales of such item
during the 12 months prior to the Effective Time, if SMI has
not made a substantial purchase of such item of inventory
within 12 months before the Effective Time.
SMI's inventory shall be valued on a first-in, first-out basis at the lower
of cost or market value. Commencing on April 30, 1994, SMI shall conduct,
and the Shareholders' Representative, or his designee, and E&Y shall
observe, a physical count of SMI's inventory as of April 30, 1994. E&Y
will make its work papers available to SMI, the Shareholders'
Representative, KPMG and O&M Holding's representatives once E&Y has
completed the Closing Balance Sheet.
(b) Within 30 days after delivery of the Closing Balance Sheet
to O&M Holding, O&M Holding may object to such balance sheet by delivering
written notice of such objection ("Notice of Objection") to the
Shareholders' Representative. If no Notice of Objection is delivered in
accordance with the terms hereof, the Closing Balance Sheet shall be final
and binding on the parties to this Agreement without modification. If a
Notice of Objection is delivered in accordance with the terms hereof, the
Shareholders' Representative and O&M Holding shall confer together and
attempt in good faith to agree upon a resolution of the objection. If they
have not agreed upon such a resolution within 15 days after delivery of the
Notice of Objection, the disputed items on the Closing Balance Sheet shall
be referred to independent certified public accountants other than E&Y and
KPMG (the "Review Auditors") selected by mutual agreement of O&M Holding
and the Shareholders' Representative. Within 30 days after the matter is
referred to them, the Review Auditors shall issue a report on their
resolution of the disputed items on the Closing Balance Sheet, which shall
either confirm the correctness thereof or state specifically the
modifications to be made thereto. Upon delivery of such report to O&M
Holding and the Shareholders' Representative, the Closing Balance Sheet
shall be deemed confirmed or modified, as the case may be, in accordance
therewith. The Closing Balance Sheet, as so confirmed or modified, shall
be final and binding on all parties to this Agreement. O&M Holding and the
Shareholders shall cooperate fully with the Review Auditors and, following
the Effective Time, each of O&M Holding, on the one hand, and the
Shareholders, on the other, shall bear one half of the fees and expenses of
the Review Auditors for the work undertaken by them pursuant to this
Section 2.05.
(c) O&M Holding shall retain and cancel, ratably in the same
proportion as the Balance Sheet Holdback Shares were withheld from the
Shareholders, the number of whole Balance Sheet Holdback Shares that, when
multiplied by $100 equals or exceeds by less than $100 any Net Worth
Deficiency and O&M Holding shall retain any dividends paid or distributions
made with respect thereto. No later than ten days after the Closing
Balance Sheet becomes final and binding pursuant to Section 2.05(b) hereof,
O&M Holding shall deliver to the Shareholders' Representative certificates
representing any Balance Sheet Holdback Shares (including any dividends
paid or distributions made with respect thereto and any interest thereon)
not retained and canceled pursuant to the preceding sentence. In the event
the aggregate par value of the Balance Sheet Holdback Shares is less than
the Net Worth Deficiency, then the Shareholders shall be obligated, jointly
and severally, to immediately pay to O&M Holding the amount of such
shortfall.
ARTICLE III
The Exchanges
At the Effective Time, by virtue of the Exchanges and without any
action on the part of SMI, O&M, O&M Holding, or the holders of O&M Common
Stock or SMI Common Stock:
(a) All of the shares of SMI Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of SMI Common
Stock then held in the treasury of SMI) shall, by reason of the SMI
Exchange and without any action by any holder of SMI Common Stock, be
exchanged for the right to receive the SMI Exchange Consideration (subject
to adjustment for any stock split, reverse stock split, stock dividend or
other similar distribution or reclassification with respect to the
outstanding SMI Common Stock or O&M Common Stock, or any issuance of SMI
Common Stock, from the date hereof to the Effective Time, with any
fractional shares of O&M Holding Preferred Stock to which a holder of SMI
Common Stock would otherwise be entitled being rounded to the nearest full
share (with a fraction of .5 or greater being rounded to the next highest
full share)). The SMI Exchange Consideration shall be allocated among the
holders of SMI Common Stock in accordance with such holders' elections made
pursuant to Section 3.02 of the SMI Plan of Exchange.
(b) Each share of SMI Common Stock held in the treasury of SMI
immediately prior to the Effective Time shall be automatically canceled and
retired and cease to exist, and no cash or securities or other property
shall be paid or payable in respect thereof.
(c) Each share of O&M Common Stock validly issued and
outstanding immediately prior to the Effective Time shall, by reason of the
O&M Exchange and without any action by any holder of O&M Common Stock, be
exchanged for the right to receive one share of O&M Holding Common Stock in
accordance with the O&M Plan of Exchange.
ARTICLE IV
Representations of SMI and the Shareholders
SMI and each of the Shareholders, jointly and severally, represent and
warrant as follows:
4.01 Existence and Good Standing. SMI is a corporation duly organized
and validly subsisting under the laws of the Commonwealth of Pennsylvania
and is duly qualified and in good standing to do business in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified would not have a material
adverse effect on SMI's business or financial condition or would not impair
SMI's right to enforce any material agreement to which it is a party. SMI
has full power, authority and legal right to own its property and to carry
on its business as now being conducted. SMI has delivered to O&M true and
complete copies of its Articles of Incorporation, as amended, and Bylaws,
as currently in effect.
4.02 Authorization. SMI has corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. Each of the Shareholders has power and authority to execute and
deliver this Agreement and the Related Agreements and to consummate the
transactions contemplated hereby and thereby. This Agreement constitutes,
and the Related Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and binding agreements of SMI
and each of the Shareholders, respectively, enforceable against SMI and
each of the Shareholders in accordance with their respective terms.
4.03 No Conflict. The execution, delivery and performance of this
Agreement by SMI and the Shareholders does not and will not (a) violate,
conflict with or result in the breach of any provision of the Articles of
Incorporation or Bylaws of SMI, (b) conflict with or violate any Law
applicable to SMI or any of the Shareholders or by which any of its assets,
properties or businesses is bound or affected or (c) except as provided on
Item 4.03 of the SMI Disclosure Schedule, conflict with, result in any
breach of, constitute a default (or event which with the giving of notice
or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension revocation or cancellation of, or result in the
creation of any lien, security interest, charge or encumbrance on any of
the assets or properties of SMI pursuant to, any note, bond, mortgage or
indenture, contract, agreement, lease (including any leases with respect to
the Leased Property), sublease, license, permit, franchise or other
instrument or arrangement to which SMI or any of the Shareholders is a
party or by which any of such assets or properties is bound or affected.
4.04 Capitalization. The authorized capital stock of SMI consists of
10,000,000 shares of Common Stock, $.0025 par value, of which 2,000,000
shares are issued and outstanding. All of the outstanding shares of SMI
Common Stock are owned of record and beneficially by the holders indicated
and in the amounts set forth on Item 4.04 of the SMI Disclosure Schedule.
All such outstanding shares have been duly authorized and validly issued
and are fully paid and non-assessable and free of adverse claims, liens,
options, encumbrances, judgments, or restrictions of any kind, and
preemptive or other rights that entitle or entitled any person to acquire
such shares, and no shares of capital stock are reserved for issuance.
Except as set forth on Item 4.04 of the SMI Disclosure Schedule, there are
no outstanding options, warrants, rights, calls, subscriptions,
commitments, conversion rights, rights of exchange, plans or other
agreements or claims of any character providing for the purchase, issuance
or sale of any shares of the capital stock of SMI. Except as provided on
Item 4.04 of the SMI Disclosure Schedule, there are no shares of SMI Common
Stock held in the treasury of SMI. There are an aggregate of 173,913
Rights (as such term is defined in the Phantom Stock Plans) issued and
outstanding under the Phantom Stock Plans, each of which Rights has an
Initial Value (as such term is defined in the Phantom Stock Plans) of
$69.00. No shares of SMI Common Stock have been issued in violation of
applicable securities laws.
4.05 Subsidiaries, Affiliated Companies and Investments. SMI does not
own, directly or indirectly, of record or beneficially, any capital stock
or other equity or ownership or proprietary interest in any corporation,
partnership, association, trust, joint venture or other entity.
4.06 Financial Statements. SMI has heretofore furnished O&M with (a)
the financial statements including the notes thereto as of and for the
twelve months ended April 30, 1992, and the eight months ended December 31,
1992, which statements include the balance sheets as of those dates, and
the related statements of income, shareholders' equity and cash flows for
the periods then ended, as audited by E&Y and (b) the unaudited balance
sheet of SMI as of October 31, 1993 (the "SMI Current Balance Sheet"),
together with the related statement of income for the ten months then ended
(all such financial statements being referred to collectively as the "SMI
Financial Statements"). The SMI Financial Statements have been prepared in
accordance with GAAP (except as may be noted therein and except for the
absence of footnotes with respect to the SMI Current Balance Sheet) and
fairly present the financial condition of SMI at the respective dates
thereof and the results of operations of SMI and changes in its financial
position for the periods indicated (subject, in the case of the SMI Current
Balance Sheet, to normal, recurring year-end audit adjustments that are not
in the aggregate material).
4.07 No Material Adverse Changes. Since December 31, 1992, the
business of SMI has been operated in the ordinary course and there has been
no change (and to the Knowledge of SMI and the Shareholders, no fact or
condition exists or is contemplated or threatened which might cause such a
change in the future) in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations or
prospects, of SMI, which individually or in the aggregate, have had a
material adverse effect on the business prospects, properties or condition,
financial or otherwise, of SMI; provided, however, that any deterioration
in SMI's condition (financial or otherwise) or relationships with customers
(other than VHA) or employees resulting from (i) SMI's announcement of the
transactions contemplated hereby or (ii) business or personnel policies or
actions (e.g., terminations) which O&M Holding may implement with respect
to SMI following the Effective Time shall not constitute a material adverse
change for these purposes (or for purposes of Section 8.02 hereof).
Without limiting the foregoing, except as set forth on Item 4.07 of the SMI
Disclosure Schedule, since December 31, 1992, there has not been:
(a) any loss, damage, destruction or other casualty materially
and adversely affecting the business prospects, properties, assets or
business of SMI (whether or not covered by insurance);
(b) (i) any increase made or agreed to in the compensation
(including, without limitation, any increase pursuant to any pension,
profit sharing or other plan) payable or to become payable by SMI to any of
its directors, officers, agents, consultants, or any of its employees whose
total compensation after such increase was in excess of $100,000 per annum
other than to the persons listed on Item 4.16 of the SMI Disclosure
Schedule, (ii) any bonus, percentage compensation, service award or other
like benefit having a value in excess of $25,000 granted, made, agreed to
or accrued to the credit of any such director, officer, agent, consultant
or employee other than to the persons listed on Item 4.16 of the SMI
Disclosure Schedule, or (iii) any welfare, pension, retirement or similar
payment or arrangement made or agreed to by SMI for the benefit of any such
director, officer, agent, consultant or employee other than to the persons
listed on Item 4.16 of the SMI Disclosure Schedule;
(c) any change in any method of accounting or accounting
practice of SMI;
(d) any notes or accounts receivable or portions thereof written
off by SMI as uncollectible, if such write offs were either in excess of
the bad debt reserve established therefor in the SMI Current Balance Sheet
or incurred other than in the ordinary course of business;
(e) any issuance or sale of any stock, bonds or other corporate
securities of which SMI is the issuer, or the grant or issuance of any
stock options, warrants, or other rights to purchase securities of SMI;
(f) any direct or indirect redemption, purchase or other
acquisition by SMI of any shares of capital stock of SMI;
(g) any declaration, setting aside or payment of any dividend or
distribution (direct or indirect, whether in cash or property, and whether
characterized as salary, bonus, dividend or otherwise) other than
distributions totaling $3,838,000;
(h) any discharge or satisfaction of any lien or encumbrance or
payment or satisfaction of any obligation or liability (whether absolute,
accrued, contingent or otherwise and whether due or to become due), other
than (x) current liabilities shown on the SMI Current Balance Sheet, (y)
current liabilities incurred since the date of the SMI Current Balance
Sheet in the ordinary course of business and consistent with past practice,
and (z) indebtedness outstanding under the credit agreement identified in
paragraph 1 of Item 4.15 of the SMI Disclosure Schedule;
(i) any sale, assignment, transfer, mortgage, pledge or
encumbrance of any assets (real, personal or mixed, tangible or intangible)
of SMI, cancellation of any debts or claims or waiver of any rights of
substantial value, except, in each case, in the ordinary course of business
and consistent with past practice;
(j) any assumption, guarantee or endorsement by SMI of the
obligations of any other individual or entity or any loans or advances to
any individual or entity except in the normal course of business;
(k) any sale, assignment or transfer of any patents, trademarks,
trade names, copyrights or other similar assets, including applications or
licenses therefor;
(l) any capital expenditures, or commitment to make any capital
expenditures, for additions to property, plant or equipment, not in the
ordinary course of business;
(m) any payment of any amounts or liability incurred to or in
respect of, or sale of any properties or assets (real, personal or mixed,
tangible or intangible) to, or any transaction or any agreement or
arrangement with, any corporation or business in which SMI or any of its
corporate officers or directors, or any affiliate or associate of any such
person, has any direct or indirect ownership interest other than the
transactions listed on Item 4.19 of the SMI Disclosure Schedule;
(n) any material deterioration of relations between SMI and its
customers considered as a whole, including but not limited to the loss, or
to the Knowledge of SMI and the Shareholders, any threatened loss of VHA;
(o) any collective bargaining agreements entered into by SMI;
(p) any other transaction other than in the ordinary course of
business or otherwise contemplated by this Agreement; or
(q) any agreement to do any of the foregoing.
4.08 Books and Records. The minute books of SMI, which have been made
available to O&M, contain accurate and complete records of all corporate
actions taken by the shareholders and Board of Directors (and committees
thereof) of SMI from incorporation to date. The books of accounts and
records of SMI are true, complete and correct in all material respects.
4.09 Governmental Authorization. The execution, delivery and
performance by SMI and the Shareholders of this Agreement, and the
consummation of the transactions contemplated hereby by SMI and the
Shareholders, require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than filings
required to be made under the HSR Act, filings required to be made under
applicable federal and state securities laws and filing of the SMI Articles
of Exchange in connection with the SMI Exchange.
4.10 Litigation. There is no action, suit, proceeding, claim or
investigation pending, or, to the Knowledge of SMI and the Shareholders,
threatened against or affecting SMI which could materially and adversely
affect SMI or which in any manner challenges or seeks to prevent, enjoin,
alter or delay any of the transactions contemplated by this Agreement; to
the Knowledge of SMI and the Shareholders, there is no valid basis for any
such action, proceeding or investigation. Item 4.10A of the SMI Disclosure
Schedule sets forth each pending action, suit, proceeding, claim or
investigation to which SMI is a party, as well as the forum, parties
thereto, a brief description of the subject matter thereof and the amount
of damages claimed. Item 4.10B of the SMI Disclosure Schedule sets forth
each pending action, proceeding, claim or investigation to which SMI is a
party related to any separate line of business formerly, but not now,
conducted by SMI (whether as an unincorporated division or business
function or as a subsidiary), including without limitation Specialty and
the former AIP division. SMI is not subject to any order, judgment, decree
or obligation of any court, arbitrator, governmental department,
commission, board, bureau, agency or instrumentality.
4.11 Liabilities. SMI has no outstanding claims, liabilities or
indebtedness, contingent or otherwise, except as set forth in the SMI
Current Balance Sheet, other than liabilities incurred subsequent to the
date of the SMI Current Balance Sheet in the ordinary course of business
and consistent with past practices. SMI is not in default in respect of
the terms or conditions of any indebtedness in excess of $1,000,000,
regardless of whether SMI has received notice of the existence of any such
default.
4.12 Assets.
(a) Item 1.56 of the SMI Disclosure Schedule contains a complete
and correct list of all of the Real Property owned by SMI. Item 1.29 of
the SMI Disclosure Schedule contains a complete and correct list of all the
Leased Property used by SMI. All buildings, structures and appurtenances
included in the Real Property and the Leased Property: (i) are in good
operating condition and in a state of good maintenance and repair, normal
wear and tear excepted; (ii) are adequate and suitable for the purposes for
which they are presently being used; (iii) comply in all material respects
with existing Law currently applicable to the use of each building as it is
currently being used, including but not limited to, zoning, building and
Occupational Safety and Health Act regulations; and (iv) contain no
asbestos deemed hazardous by Law. There are two underground storage tanks
located on the Real Property and no underground storage tanks located on
the Leased Property.
(b) SMI has good, valid and marketable title to all assets owned
by it (whether real, fee or leasehold, personal or mixed, tangible or
intangible) and used in its business, including without limitation, all
assets reflected in the SMI Financial Statements and all assets acquired by
SMI since October 31, 1993 (except for assets that have been sold or
otherwise disposed of in the ordinary course of business), free and clear
of any and all mortgages, liens, encumbrances, charges, claims,
restrictions, pledges, security interests or impositions other than
Permitted Liens.
(c) Item 1.23 of the SMI Disclosure Schedule contains a complete
and correct list of all of the Intellectual Property owned or used in the
business of SMI. SMI owns all right, title and interest in and to or
otherwise has the right to use the Intellectual Property. There are no
claims or proceedings pending or, to the Knowledge of SMI and the
Shareholders, threatened against SMI asserting that its use of any of the
Intellectual Property infringes on the rights of any other person. SMI has
not licensed or assigned the Intellectual Property to any third party and,
to the Knowledge of SMI and the Shareholders, there are no infringing uses
of any of the Intellectual Property by third parties.
4.13 Personal Property, Inventory and Accounts Receivable.
(a) All of the tangible personal property owned by SMI or used
in its business is in good operating condition and repair, normal wear and
tear excepted, and is sufficient for the operation of the business of SMI
as presently conducted.
(b) SMI's inventory is valued on a first-in, first-out basis at
the lower of cost or market value. All of such inventory shown on the SMI
Financial Statements or acquired after October 31, 1993, but prior to the
Effective Time is, or will be, set forth on the books and records of SMI in
accordance with GAAP applied on a basis consistent with the audited
financial statements of SMI for prior periods. All of such inventory (net
of all inventory reserves shown on the SMI Financial Statements) is useable
or saleable in the ordinary course of business.
(c) The SMI Financial Statements do not reflect any accounts
receivable.
4.14 Contracts. Item 4.14 of the SMI Disclosure Schedule contains a
complete and correct list of each contract, agreement, lease, plan,
purchase order, arrangement or commitment of SMI, whether oral or written
(the "Contracts"), that (a) is a lease of real property, (b) relates to (i)
the purchase of products for resale or delivery to customers of amounts in
excess of $100,000 or having a duration in excess of three years or (ii)
the supply of products to customers with actual sales in calendar year 1992
or expected sales in calendar year 1993 of $1,000,000 or more, (c) relates
to the purchase of goods, equipment or services used in support of SMI's
business or operations of amounts in excess of $20,000 per year and having
a duration in excess of one year, (d) contains covenants pursuant to which
SMI has agreed not to compete with any person or any person has agreed not
to compete with SMI or (e) upon which any substantial part of SMI's
business is dependent or which, if breached, could reasonably be expected
to materially and adversely affect the earnings, assets, financial
condition or operations of SMI. All such Contracts are valid, binding and
in full force and effect, and true and correct copies thereof have been
delivered to O&M. Except as set forth on Item 4.14 of the SMI Disclosure
Schedule, SMI has performed each material term, covenant and condition of
each of the Contracts that is to be performed by it at or before the date
hereof and will perform each material term, covenant and condition of each
Contract to be performed by it prior to the Effective Time. No event has
occurred that would, with the passage of time or compliance with any
applicable notice requirements, constitute a default by SMI under any of
the Contracts and, to the Knowledge of SMI and the Shareholders, no party
to any of the Contracts intends to cancel, terminate or exercise any option
under any of the Contracts. Except as set forth on Item 4.14 of the SMI
Disclosure Schedule, SMI's execution, delivery and performance of this
Agreement will not constitute a breach of or a default under any Contract.
As to those Contracts noted on Item 4.14 of the SMI Disclosure Schedule,
copies of which will be made available to O&M only upon the expiration of
any applicable waiting period provided for by Section 7A of the HSR Act,
such Contracts individually and in the aggregate are properly reflected and
accounted for in the financial records of SMI, will not impose any
otherwise undisclosed additional material financial burdens or risks upon
O&M or are, by their terms, terminable at will by SMI and do not obligate
SMI, and will not obligate O&M, to undertake any activity of questionable
legality or to be in breach or risk of breach of such Contracts in the
ordinary course of SMI's business or, to the Knowledge of the Shareholders,
O&M's ordinary business.
4.15 Obligations for Money Borrowed. Item 4.15 of the SMI Disclosure
Schedule contains a complete and correct list of all liabilities of SMI for
money borrowed. Each such obligation outstanding as of the Effective Time
may be prepaid by SMI after the Effective Time without penalty under the
terms thereof. Except as set forth on Item 4.15 of the SMI Disclosure
Schedule, SMI is not in default under any such obligations and no event has
occurred or is contemplated by SMI or, to the Knowledge of SMI and the
Shareholders, by any other party that would constitute a default or an
event that with the giving of notice or passage of time or both would
constitute a default thereunder. SMI has paid, and through the Effective
Time will pay, all amounts then due and payable under the terms of each
such obligation.
4.16 Employment Agreements and Benefits. Item 4.16 of the SMI
Disclosure Schedule contains a complete and correct list of all agreements
relating to the compensation and other benefits of present and former
employees, salesmen, consultants, contractors and other agents of SMI,
including all collective bargaining agreements and all pension, retirement,
bonus, stock option, profit sharing, health, disability, life insurance,
hospitalization, education, severance, termination or other similar plans
or arrangements (whether or not subject to ERISA), true and complete copies
of which (or true and complete descriptions of which, in the case of oral
agreements) have been delivered to O&M. None of the agreements listed on
Item 4.16 of the SMI Disclosure Schedule will be breached by SMI's
execution, delivery and performance of this Agreement. Except as set forth
on Item 4.16 of the SMI Disclosure Schedule, no such agreement requires O&M
Holding to assume or make payments with respect to any employment,
compensation, fringe benefit, pension, profit sharing or deferred
compensation plan in respect of any employee. Item 4.16 of the SMI
Disclosure Schedule includes a complete list of all officers and employees
paid more than $100,000 by SMI per year.
4.17 Employee Benefit Plans.
(a) Item 4.17 of the SMI Disclosure Schedule contains a list of
each "pension plan" (as defined in Section 3(2) of ERISA) (the "Pension
Plans") and each "welfare plan" (as defined in Section 3(1) of ERISA) (the
"Welfare Plans") now or previously maintained for the benefit of employees
of SMI or to which SMI now contributes or has contributed on behalf of its
employees or the employees of an ERISA Affiliate. Except as provided in
Item 4.17 of the SMI Disclosure Schedule, each such plan is enforceable in
accordance with its terms, and to the Knowledge of SMI and the
Shareholders, no present or former employee, salesman, consultant,
contractor or other agent of SMI or any dependent or beneficiary of such
person has been advised with respect to any such plan in a manner that is
inconsistent with the terms of such plan.
(b) Item 4.17 of the SMI Disclosure Schedule identifies each
Pension Plan that is intended to be qualified (a "Qualified Pension Plan")
under Section 401(a) of the Code. Each Qualified Pension Plan is in
compliance with applicable law as of the date hereof. The Internal Revenue
Service has issued a favorable determination letter with respect to each
Qualified Pension Plan's compliance with Section 401(a) of the Code.
Except as disclosed on Item 4.17 of the SMI Disclosure Schedule, there are
no facts or circumstances that could reasonably be expected to jeopardize
or adversely affect the qualification under Section 401(a) of any Qualified
Pension Plan.
(c) No "prohibited transaction" (as defined in Section 4975 of
the Code) has occurred and no "accumulated funding deficiency" (as defined
in Section 302 of ERISA or Section 412 of the Code), whether or not waived,
exists with respect to any Qualified Pension Plan. No Qualified Pension
Plan currently or previously maintained or contributed to for the benefit
of employees of SMI or an ERISA Affiliate is or was subject to the
provisions of Title IV of ERISA. None of the Qualified Pension Plans has
been completely or partially terminated and there has not been any
"reportable event" (as defined in Section 4043(b) of ERISA) with respect to
any such plans required to be reported to the PBGC by law or regulation.
(d) Each employee plan has been administered in accordance with
its terms. In addition, each employee plan is in compliance with and has
been administered in accordance with, the provisions of ERISA (including
the rulings and regulations promulgated thereunder) and all other
applicable law. All reports, returns and other documentation that are
required to have been filed with the Internal Revenue Service, the
Department of Labor, the PBGC or any other governmental agency (federal,
state or local) with respect to the employee plans have been filed on a
timely basis. Except as set forth in Item 4.17 of the SMI Disclosure
Schedule, no claims or complaints to or by any person or governmental
entity have been filed or, to the knowledge of SMI and each of the
Shareholders, are contemplated or threatened, with respect to any employee
plan.
(e) Neither SMI nor any ERISA Affiliate contributes to or has
ever contributed to or maintained a "multiemployer plan" (as defined in
Section 3(37) of ERISA).
(f) Except as required by Section 601 of ERISA and Section 4980B
of the Code, SMI does not maintain or contribute to any plan or arrangement
which provides or has any liability to provide life insurance, medical or
other benefits under a welfare benefit plan (as defined in Section 3(2) of
ERISA) to any employee or former employee upon his retirement or
termination of employment and SMI has never represented, promised or
contracted (whether in oral or written form) to any employee or former
employee that such benefits would be provided. The execution of and
performance of the transactions contemplated in this Agreement and the
Related Agreements will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event of default under any
benefit plan, policy, arrangement or agreement or any trust or loan that
will or may result in any payment, acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to
fund benefits with respect to any employee.
4.18 Employee Relations. Except as set forth on Item 4.18 of the SMI
Disclosure Schedule, SMI has paid or made provision for payment of all
salaries and wages accrued through the date of this Agreement and is in
material compliance with all federal and state laws respecting employment
and employment practices, terms and conditions of employment, wages and
hours and non-discrimination in employment and is not engaged in any unfair
employment practice. There is no charge pending or, to the Knowledge of
SMI and the Shareholders, threatened before any court or agency alleging
unlawful discrimination in employment practices or any unfair labor
practice by SMI's nor is there a basis for any such claim. SMI has not
experienced any material labor difficulty during the three years
immediately preceding the date of this Agreement.
4.19 Transactions with Affiliates. Except as set forth in Item 4.19
of the SMI Disclosure Schedule, since December 31, 1992, SMI has not, in
the ordinary course of business or otherwise, purchased, leased or
otherwise acquired any property or assets or obtained any services from, or
sold, leased or otherwise disposed of any property or assets or provided
any services to (except with respect to remuneration for services as an
officer or employee of SMI) any officer, employee or Affiliate of SMI.
Except as set forth on Item 4.19 of the SMI Disclosure Schedule, SMI does
not owe any amount or have any contractual obligation or commitment to any
Affiliate (other than compensation for current services not yet due and
payable and reimbursement of expenses arising in the ordinary course of
business) and no Affiliate (including an employee of SMI) owes any amount
or has any contractual obligation to SMI. Except as set forth on Item 4.19
of the SMI Disclosure Schedule, none of the holders of SMI Common Stock has
any interest, direct or indirect, in any property, real or personal,
tangible or intangible, used in or pertaining to the business of SMI except
as a shareholder or employee of SMI.
4.20 Environmental Compliance. SMI is in compliance in all material
respects with all applicable Laws relating to pollution control and
environmental contamination including, but not limited to, all Laws
governing the generation, use, collection, treatment, storage,
transportation, recovery, removal, emission, discharge, or disposal of
Hazardous Materials and all Laws with regard to recordkeeping, notification
and reporting requirements respecting Hazardous Materials. SMI has not
been alleged to be in violation of, nor has it been subject to any
administrative or judicial proceeding pursuant to, such Laws either now or
any time during the past three years. Seller has obtained all
environmental permits, including those related to environmental quality and
the emission, discharge, storage, handling, treatment, use, generation or
transportation of Hazardous Materials. There are no liabilities, known or
unknown, absolute or contingent, related to the Real Property or Leased
Property or the conduct of SMI's business arising in connection with the
generation, use, treatment, storage, release, disposal, emission,
discharge, arranging for disposal or transportation of Hazardous Materials.
SMI has not, and to the Knowledge of SMI and the Shareholders, no other
person has, released from or deposited on the Real Property or Leased
Property any, Hazardous Materials or used the Real Property or Leased
Property as a hazardous waste treatment, storage or disposal site. There
are no facts or circumstances that SMI or the Shareholders reasonably
believe could form the basis for the assertion of any claim against SMI
relating to environmental matters including, but not limited to, any claim
arising from past or present environmental practices asserted under CERCLA,
RCRA, the Clean Air Act, the Clean Water Act or any other federal, state or
local environmental statute, regulation, policy, guideline, order, judgment
or decree. Promptly upon learning thereof, SMI and the Shareholders will
advise O&M of any facts or circumstances that could form the basis for the
assertion of any claim against SMI relating to environmental matters
including, but not limited to, any claim arising from past or present
environmental practices under CERCLA, RCRA, the Clean Air Act, the Clean
Water Act or any other federal, state or local environmental statute.
4.21 Tax Matters. Pursuant to an election made before January 1,
1987, in accordance with Section 1362(a) and (b) of the Code and the
regulations thereunder, SMI continuously has been and is an "S Corporation"
within the meaning of Section 1361(a)(1) of the Code. SMI has filed or, in
the case of returns not yet due, will file all tax returns and reports
required to have been filed by it on or before the date of the Effective
Time, and all material information set forth in such returns or reports is
or (in the case of returns or reports not yet due) will be accurate and
complete. SMI has paid or made adequate provision for or (with respect to
returns or reports not yet due) on or before the date of the Effective Time
will pay or make adequate provision for all taxes, additions to tax,
penalties and interest payable by SMI for all periods covered by those
returns or reports. Except as set forth on Item 4.21 of the SMI Disclosure
Schedule and (solely with respect to liabilities arising after the date
hereof) except as will be accrued on the Closing Balance Sheet, there are,
and on the date of the Effective Time will be, no unpaid taxes, additions
to tax, penalties, or interest payable by SMI or by any other person that
are or could become a lien on any asset, or otherwise adversely affect the
business, properties, or financial condition, of SMI. SMI has collected or
withheld, or will collect or withhold before the date of the Effective
Time, all amounts required to be collected or withheld by it for any taxes
or assessments, and all such amounts have been, or on or before the date of
the Effective Time will have been, paid to the appropriate governmental
agencies or set aside in appropriate accounts for future payment when due.
SMI is in compliance with, and its records contain all information and
documents (including, without limitation, executed Forms W-9) necessary to
comply with, all applicable information reporting and tax withholding
requirements. The balance sheets contained in the SMI Financial Statements
fully and properly reflect, as of the date thereof, the liabilities of SMI
for all accrued taxes, additions to tax, penalties and interest. For
periods ending after October 31, 1993, the books and records of SMI fully
and properly reflect and the Closing Balance Sheet will reflect SMI's
liability for all accrued taxes, additions to tax, penalties and interest.
Except as disclosed in Item 4.21 of the SMI Disclosure Schedule, SMI has
not granted nor is it subject to any waiver of the period of limitations
for the assessment of tax for any currently open taxable period, no unpaid
tax deficiency has been asserted against or with respect to SMI by any
taxing authority, and SMI is not required to include in income any amount
for an adjustment pursuant to Section 481 of the Code or the regulations
thereunder. Item 4.21 of the SMI Disclosure Schedule lists by jurisdiction
the date of the last clearance or audit of SMI by a state or local
authority with respect to sales or income taxes. Item 4.21 of the SMI
Disclosure Schedule describes all material tax elections and consents
affecting SMI. SMI has not made or entered into, and holds no asset
subject to, a consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder or a "safe harbor lease" subject to former Section
168(f)(8) of the Code and the regulations thereunder. None of the
Shareholders is a "foreign person" for purposes of Section 1445 of the
Code.
4.22 Insurance. Item 4.22 of the SMI Disclosure Schedule contains a
complete and correct list of all policies of property, fire and casualty,
product liability, workers' compensation, automobile and other forms of
insurance owned or held by SMI and includes for each such policy its type,
term, limits and retentions, deductibles, name of insurer, annual premiums,
the aggregate remaining unused limits for each such policy giving effect to
claims made and expected to be made thereunder and, for product liability
policies, whether such policy is claims made coverage or occurrence-based
coverage. All such policies (a) are in full force and effect with all
premiums due having been paid in full and are sufficient for compliance by
SMI with all requirements of law and all agreements to which SMI is a
party, (b) are valid, outstanding and enforceable policies, (c) insure
against risks of the kind customarily insured against and (d) provide that
they will remain in full force and effect through the respective dates set
forth in Item 4.22 of the SMI Disclosure Schedule, subject to the
cancellation rights specified in such policies. Except as set forth on
Item 4.22 of the SMI Disclosure, during the last two years, SMI has not
been denied any insurance coverage which it has requested, has made no
material change in the scope or nature of its insurance coverage and has
not received notice of any material increase in premiums for any of such
policies nor of any termination or refusal to renew such policies. All
policies of primary comprehensive general liability insurance and excess
carriers insurance which insure against product liability claims which SMI
has maintained during the past five years are set forth on Item 4.22 of the
SMI Disclosure Schedule including the same information with respect to such
policies as is set forth for SMI's current policies. All vendors to SMI
which maintain vendor's endorsements on their liability insurance policies
are set forth on Item 4.22 of the SMI Disclosure Schedule. During the past
five years, there has been no lapse in coverage of SMI's property, fire and
casualty, product liability, workers' compensation, automobile,
comprehensive general liability or other form of insurance carried by SMI
in the ordinary course of its business.
4.23 Absence of Certain Practices. To the Knowledge of SMI and the
Shareholders, no officer, director, shareholder, employee or agent of SMI
has, directly or indirectly, given or made or agreed to give or make any
improper or illegal commission, payment, gratuity, gift, political
contribution or similar benefit to any customer, supplier, governmental
employee or other person who is or may be in a position to assist or hinder
the business of SMI.
4.24 Compliance with Laws. Except as disclosed on Item 4.24 of the
SMI Disclosure Schedule, SMI is in compliance in all material respects with
all Laws applicable to SMI or its operations. SMI holds all licenses,
certificates and permits from all regulatory authorities that are material
to the conduct of its business, all of which are valid and in full force
and effect.
4.25 Certain Obligations. None of SMI or the Shareholders have any
continuing obligations to Baxter International, Inc. or any Affiliate
thereof pursuant to any written or oral agreement or otherwise.
4.26 Pricing Audits. Item 4.26 of the SMI Disclosure Schedule sets
forth the results of all of SMI's customer pricing audits conducted since
December 31, 1991. Except as disclosed in Item 4.26 of the SMI Disclosure
Schedule, as of the date hereof, there are no customer pricing audits of
SMI being conducted.
4.27 Disclosure. Neither this Agreement nor the SMI Financial
Statements contains any untrue statement of a fact or omits to state a fact
necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they are made, not misleading. To
the Knowledge of SMI and the Shareholders, there is no fact which
materially and adversely affects or could affect the business, prospects or
financial condition of SMI or its properties or assets, which has not been
described in this Agreement or the SMI Financial Statements.
4.28 Broker's or Finder's Fees. No agent, broker, person or firm
acting on behalf of SMI or the Shareholders is or will be entitled to any
commission or broker's or finder's fees from any of the parties hereto, or
from any Affiliate of the parties hereto, in connection with any of the
transactions contemplated by this Agreement.
ARTICLE V
Representations of O&M
O&M hereby represents and warrants as follows:
5.01 Existence and Good Standing.
(a) O&M is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia and is duly
qualified and in good standing to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the
failure to be so qualified would not have a material adverse effect on its
business or financial condition or would not impair O&M's right to enforce
any material agreement to which it is a party. O&M has full power,
authority and legal right to own its property and to carry on its business
as now being conducted. O&M has delivered to SMI true and complete copies
of its Articles of Incorporation, as amended, and Bylaws, as currently in
effect.
(b) O&M Holding is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Virginia.
5.02 Authorization. Each of O&M and O&M Holding has the corporate
power and authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement constitutes and the
Related Agreements (when executed and delivered pursuant hereto for value
received) will constitute the valid and binding agreements of O&M and O&M
Holding enforceable against O&M and O&M Holding in accordance with their
respective terms.
5.03 No Conflict. The execution, delivery and performance of this
Agreement by O&M and O&M Holding do not and will not (a) violate, conflict
with or result in the breach of any provision of the Articles of
Incorporation or Bylaws of O&M or O&M Holding, (b) conflict with or violate
any Law applicable to O&M or O&M Holding or by which any of O&M's assets,
properties or businesses is bound or affected or (c) except as provided by
Item 5.03 of the O&M Disclosure Schedule, conflict with, result in any
breach of, constitute a default (or event which with the giving of notice
or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in the
creation of any lien, security, interest, charge or encumbrance on any of
the assets or properties of O&M pursuant to, any note, bond, mortgage or
indenture, contract, agreement, lease, sublease, license, permit, franchise
or other instrument or arrangement to which O&M is a party or by which any
of such assets or properties is bound or affected.
5.04 Capitalization.
(a) The authorized capital stock of O&M consists of (a)
30,000,000 shares of O&M Common Stock, $2.00 par value, of which (i)
20,282,405 shares are issued and outstanding, (ii) no shares are issued and
held in treasury and (iii) 1,453,524 shares are reserved for issuance upon
the exercise or conversion of options, warrants or convertible securities
granted or issued by O&M and (b) 1,000,000 shares of cumulative Preferred
Stock, $10.00 par value (300,000 shares of which have been designated as
Series A Participating Preferred Stock issuable pursuant to O&M's Rights
Agreement dated as of June 22, 1988 or otherwise by O&M's Board of
Directors), none of which shares are issued and outstanding. All such
outstanding shares have been duly authorized and validly issued and are
fully paid and nonassessable and were issued free of preemptive or similar
rights that entitled any person to acquire such shares.
(b) The authorized capital stock of O&M Holding consists of 100
shares of common stock, $2.00 par value, of which ten shares are issued and
outstanding. All such outstanding shares have been duly authorized and
validly issued and are fully paid and nonassessable and were issued free of
adverse claims, liens, options, encumbrances, judgments, or restrictions of
any kind, and preemptive or other rights that entitled any person to
acquire such shares. The shares of O&M Holding Preferred Stock to be
issued to the holders of SMI Common Stock in the SMI Exchange will be fully
paid and nonassessable and free of adverse claims, liens, options,
encumbrances, judgments, or restrictions of any kind, and preemptive or
other rights that entitle any person to acquire such shares.
5.05 Subsidiaries, Affiliated Companies and Investments. O&M owns,
directly or indirectly, each of the outstanding shares of capital stock of
each of the O&M Subsidiaries. Except for interests in the O&M
Subsidiaries, O&M does not own, directly or indirectly, of record or
beneficially, any capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, association, trust, joint venture
or other entity.
5.06 Financial Statements. The financial statements and schedules of
O&M contained in O&M's Annual Report on Form 10-K for the year ended
December 31, 1992 and in O&M's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1993 (the "O&M Financial Statements")
as filed with the SEC, were prepared in accordance with GAAP, except as may
be noted therein, and fairly present the financial condition of O&M at the
respective dates thereof and the results of operations of O&M for the
periods indicated (subject, in the case of unaudited financial statements
to normal, recurring year-end adjustments that are not in the aggregate
material.)
5.07 No Changes. Since September 30, 1993, the business of O&M and
the O&M Subsidiaries has been operated in the ordinary course consistent
with past practice, and there has not been (and to the Knowledge of O&M, no
fact or condition exists or is contemplated or threatened which might cause
such change in the future) (a) any material adverse change in the
operations, properties or condition (financial or otherwise) of O&M and the
O&M Subsidiaries or (b) any other change in the nature of, or in the manner
of conducting, the business of O&M and the O&M Subsidiaries, other than
changes which neither have had, nor reasonably may be expected to have, a
material adverse effect on the business of O&M and the O&M Subsidiaries
considered as a whole.
5.08 Books and Records. The books of accounts and records of O&M are
true, complete and correct in all material respects.
5.09 Governmental Authorization. The execution, delivery and
performance by O&M and O&M Holding of this Agreement and the consummation
of the transactions contemplated hereby by O&M and O&M Holding, require no
action by or in respect of, or filing with, any governmental body, agency,
official or authority other than fillings required to be made under the HSR
Act, filings required to be made under applicable federal and state
securities laws and filing of the O&M Articles of Exchange in connection
with the O&M Exchange.
5.10 Litigation. There is no action, suit, proceeding, claim or
investigation pending, or, to the Knowledge of O&M, threatened against or
affecting O&M or O&M Holding which could materially and adversely affect
O&M or which in any manner challenges or seeks to prevent, enjoin, alter or
delay any of the transactions contemplated by this Agreement; to the
Knowledge of O&M, there is no valid basis for any such action, proceeding
or investigation. Item 5.10 of the O&M Disclosure Schedule sets forth each
pending action, suit, proceeding, claim or investigation to which O&M or
O&M Holding is a party, as well as the forum, parties thereto, a brief
description of the subject matter thereof and the amount of damages
claimed. O&M Holding is not subject to any order, judgment, decree or
obligation of any court, arbitrator, governmental department, commission,
board, bureau, agency or instrumentality.
5.11 Liabilities. O&M has no outstanding claims, liabilities or
indebtedness, contingent or otherwise, except as set forth in the O&M
Financial Statements, other than liabilities incurred subsequent to
September 30, 1993, in the ordinary course of business and consistent with
past practices. O&M is not in default in respect of the terms or
conditions of any indebtedness, regardless of whether O&M has received
notice of the existence of any such default.
5.12 Compliance with Laws. Except as disclosed on Item 5.12 of the
O&M Disclosure Schedule, O&M is in compliance in all material respects with
all Laws applicable to its operations. O&M holds all licenses,
certificates and permits from all regulatory authorities that are material
to the conduct of its business, all of which are valid and in full force
and effect.
5.13 Disclosure. Neither this Agreement nor the O&M Financial
Statements contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they are made,
not misleading. To the Knowledge of O&M, there is no fact which materially
and adversely affects or could affect the business, prospects or financial
condition of O&M or O&M Holding or their respective properties or assets,
which has not been described in this Agreement, the SEC Reports or the O&M
Financial Statements.
5.14 Securities Reports. O&M has filed, and delivered to SMI complete
copies of, all forms, reports, statements and other documents required to
be filed with the SEC since January 1, 1990 by O&M including, without
limitation, (a) all Annual Reports on Form 10-K, (b) all Quarterly Reports
on Form 10-Q, (c) all proxy statements relating to meetings of shareholders
(whether annual or special), (d) all Current Reports on Form 8-K, (e) all
other reports or registration statements and (f) all amendments and
supplements to all such reports and registration statements (collectively
"SEC Reports"). The SEC Reports did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading.
5.15 Broker's or Finder's Fees. No agent, broker, person or firm
acting on behalf of O&M is or will be entitled to any commission or
broker's or finder's fees from any of the parties hereto, or from any
Affiliate of the parties hereto, in connection with any of the transactions
contemplated by this Agreement except that O&M has retained J. P. Morgan as
its financial advisor.
ARTICLE VI
Conduct of Businesses and Certain Other Actions
Pending the Effective Time
6.01 Access to Information Concerning Properties and Records for Due
Diligence Review. Following the execution and delivery of this Agreement,
SMI shall give, and shall cause its officers, directors and agents to give,
to O&M and its counsel, accountants and other representatives, and O&M
shall give, and shall cause its officers, directors and agents to give, to
SMI and the Shareholders and their counsel, accountants and other
representatives, full access during normal business hours to all of the
offices, properties, books, contracts, commitments, records and affairs of
SMI or O&M, as the case may be, and will promptly furnish copies of all
documents and information concerning the business, operations, properties
and affairs of O&M that SMI or its representatives or of SMI that O&M and
its representatives may reasonably request. SMI, the Shareholders and O&M
agree to jointly plan and conduct such due diligence in a manner reasonably
believed not to adversely affect the relationship and good will of the
employees, customers, vendors and other business partners of SMI and O&M.
Notwithstanding the foregoing, SMI and O&M may restrict the access of the
other to certain commercially sensitive information with respect to
pricing, margins and contractual terms with specific vendors and customers
prior to expiration of the waiting period (and any extensions thereof)
under the HSR Act, provided that reasonable arrangements shall be made for
the conduct of the review of such information promptly following such
expiration and the completion of such review before the mailing of the
Proxy Statement/Prospectus.
6.02 Obligations Concerning Confidentiality.
(a) SMI, the Shareholders and O&M and O&M Holding will treat all
such information obtained from the other in strict confidence and will take
all necessary or appropriate actions to prevent disclosure of such
confidential information to third parties without the prior consent of the
other party and will use all reasonable efforts to cause their Affiliates
and advisors to keep such information confidential; provided, however,
that: (i) any of such information obtained by a party hereto may be
disclosed to the directors, officers, employees, representatives, advisors
and Affiliates of such party solely in connection with this Agreement and
the transactions contemplated hereby (it being understood that such
directors, officers, employees, representatives and advisors shall be
informed by such party of the confidential nature of such information and
shall be directed by such party to treat such information confidentially);
and (ii) any of such information may be disclosed as, in the opinion of
counsel to O&M, is required to be disclosed in the Proxy
Statement/Prospectus or in any report or other filing made by O&M under the
Securities Act or the Exchange Act or, in the reasonable judgment of O&M,
is necessary to be disclosed in connection with obtaining the financing
described in Section 8.14. The foregoing shall not apply to any party with
respect to information which:
(i) was at the time of disclosure generally available
to the public, other than by breach of this provision;
(ii) was in the possession of such party prior to
disclosure by the other party;
(iii) after such disclosure was acquired in good faith
from a third party, who did not obtain it directly or
indirectly from SMI, O&M, or any agent of any such party
unlawfully; or
(iv) was developed independently within the
organization of SMI or O&M, as the case may be, by personnel
not having access to such information.
(b) Notwithstanding anything in paragraph (a) of this Section
6.02, confidential information may be disclosed, if and only to the extent
legally required, in response to legal process or applicable governmental
regulations, provided that the party obligated to disclose such information
first notifies the other party of the obligation to disclose such
confidential information and the party so obligated fully cooperates with
the other party in taking such measures as shall be appropriate and to the
extent and in the manner permissible under applicable Law.
(c) If this Agreement should terminate for any reason, SMI and
the Shareholders will return to O&M all documents obtained by it or its
agents from O&M, containing non-public information concerning O&M and shall
destroy or cause to be destroyed any copies thereof made for SMI or any of
its agents or employees or the Shareholders, and O&M will return to SMI all
documents obtained by it or its agents from SMI or the Shareholders,
containing non-public information concerning SMI or the Shareholders, and
shall destroy or cause to be destroyed any copies thereof made for O&M or
any of its agents or employees.
6.03 Conduct of Business by SMI Pending the Effective Time. SMI
covenants and agrees that, from the date of this Agreement until the
Effective Time or the earlier termination of this Agreement for any reason,
SMI shall conduct its operations in the ordinary course and consistent with
past practices (except for entry into new product lines and markets), and
shall use its best efforts to (a) maintain and preserve its business
organization, (b) retain the services of its key employees and (c) maintain
relationships with customers, suppliers, and other third parties such that
their goodwill and ongoing business shall not be impaired in any material
respect. Without limiting the generality of the foregoing, during the
period from the date hereof until the Effective Time, SMI shall not, except
as otherwise expressly provided in this Agreement, without the prior
written consent of O&M:
(a) do or effect any of the following actions with respect to
the securities of SMI: (i) adjust, split, combine or reclassify its capital
stock; (ii) make, declare or pay any dividend or distribution on or
directly or indirectly redeem, purchase or otherwise acquire, any shares of
its capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock (except with respect to
distributions aggregating (x) $3,000,000, plus (y) 45% of SMI's taxable
income for the period from January 1, 1993 through the Effective Time,
reduced by any distributions previously made with respect to such taxable
income); (iii) grant any person any right to acquire any shares of its
capital stock including rights under the Phantom Plans; (iv) issue, deliver
or sell or agree to issue, deliver or sell any additional shares of its
capital stock or any securities or obligations convertible into or
exchangeable or exercisable for any shares of its capital stock or such
securities; or (v) enter into any agreement, understanding or arrangement
with respect to the sale of capital stock;
(b) sell, transfer, pledge, mortgage, encumber or otherwise
dispose of any of its property or assets other than sales of inventory made
in the ordinary course of business;
(c) make or propose any changes in its Articles of Incorporation
or Bylaws;
(d) merge or consolidate with any other person or acquire a
significant amount of the assets or the capital stock of any other person
other than the Midwest Acquisition;
(e) incur, create, assume or otherwise become liable for any
indebtedness for borrowed money other than in the ordinary course of
business and pursuant to the Midwest Acquisition in accordance with Section
6.18 hereof;
(f) create any subsidiaries;
(g) other than in the ordinary course of business, enter into or
modify any employment, severance, termination or similar agreements or
arrangements with, or grant any bonuses, salary increases, severance or
termination pay to, any officer, director, consultant or employee;
(h) change any method or principle of accounting in a manner
that is inconsistent with past practice;
(i) make or revoke any tax election;
(j) settle any claims, litigation or actions, whether now
pending or hereafter made or brought, unless such settlement does not
result in a material adverse effect on the business or condition (financial
or otherwise) of SMI;
(k) forgive any indebtedness or other obligations of any
Affiliate of SMI or third party to SMI;
(l) make any commitments for capital expenditures other than in
the ordinary course of business; or
(m) agree to commit to do any of the foregoing.
6.04 HSR Act Filings. SMI and O&M agree to make their respective
filings promptly pursuant to the HSR Act, and to use their reasonable best
efforts (which shall not include the obligation of O&M to divest any
business or operations of SMI or O&M other than a divestiture of a de
minimis amount of such business or operations), and to cooperate with each
other in their efforts to effect compliance with the HSR Act. SMI and O&M
will each supply the other party with a draft notification prior to filing,
and a copy of its notification as filed, without exhibits.
6.05 No Shopping. Prior to the Effective Time or termination of this
Agreement pursuant to Section 10.01 hereof, neither SMI or the Shareholders
will, directly or indirectly, through any officer or director of SMI, any
agent or otherwise: (a) solicit, initiate, encourage the submission of,
respond to or discuss inquiries or proposals of offers from any person
relating to any acquisition or purchase of assets of, or any equity
interest in, SMI or the SMI Common Stock or any exchange offer, merger,
consolidation, business combination, sale of substantial assets or of a
substantial amount of assets, sale of securities, liquidation, dissolution
or similar transactions involving SMI or the Shareholders (a "Competing
Transaction"); (b) enter into or participate in any discussions or
negotiations regarding a Competing Transaction, or furnish to any other
person any information with respect to the business, properties or assets
of SMI; or (c) otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek a Competing Transaction. SMI and the Shareholders
shall immediately notify O&M of any proposal relating to a Competing
Transaction or if any inquiry or contact with any person with respect
thereto is made and shall immediately deliver to O&M copies of any such
written proposal or offer and any communications made in response thereto.
6.06 Shareholders Meeting. SMI shall duly call a meeting of the
holders of SMI Common Stock to be held as soon as practicable (or arrange
for action by unanimous written consent) for the purpose of voting on
adoption of the SMI Plan of Exchange and approval of the transactions
contemplated by this Agreement. Each Shareholder covenants and agrees to
vote, or cause to be voted, all shares of SMI Common Stock owned by him in
favor of approval of the SMI Plan of Exchange and approval of the
transactions contemplated by this Agreement.
6.07 Certain Notices. After the date hereof and prior to the
Effective Time, SMI and the Shareholders shall give prompt notice to O&M of
(a) any notice of, or other communication received by SMI relating to, a
default or event which with notice or lapse of time or both would become a
default under its Articles of Incorporation or Bylaws, or any indenture,
loan agreement or other material agreement to which SMI is a party, by
which it or any of its properties is bound or to which it or any of its
properties is subject, (b) any notice or other communication from any third
party received by SMI alleging that the consent of such third party is or
may be required in connection with the transactions contemplated hereby and
(c) any matter which, if it had occurred prior to the date hereof, would
have made any of SMI's and the Shareholders' representations and warranties
incorrect, incomplete or misleading.
6.08 Consents and Approvals. SMI and the Shareholders shall use its
and their respective best efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by
this Agreement, to cooperate with O&M in connection with the foregoing and
to obtain all material consents, waivers, approvals, authorizations or
orders required for the authorization, execution and delivery of this
Agreement and the SMI Plan of Exchange by SMI and the consummation by SMI
of the transactions contemplated hereby and thereby prior to the Effective
Time and to furnish true, correct and complete copies of each thereof to
O&M. Without limiting the foregoing, SMI and each of the Shareholders
shall use its and their respective best efforts: (a) to obtain all
waivers, consents and approvals listed on Item 4.03 of the SMI Disclosure
Schedule; (b) to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any Laws, to defend all
lawsuits or other legal proceedings challenging this Agreement or the
Related Agreements or the consummation of the transactions contemplated
hereby, to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby; and (c) to effect all necessary
registrations and filings and submissions of information requested by
governmental authorities.
6.09 Proxy Statement/Prospectus. SMI and the Shareholders, at the
Shareholders' sole expense, shall furnish to O&M and O&M Holding (a) as
soon as practicable, but in no event later than February 28, 1994, all
financial statements with respect to SMI and Midwest required to be
included in the Proxy Statement/Prospectus and (b) within 45 days after the
date hereof, all other information concerning SMI required for inclusion in
the Proxy Statement/Prospectus, or for any application or other filing to
be made by O&M or O&M Holding pursuant to this Agreement or pursuant to the
rules and regulations of any governmental body in connection with the
transactions contemplated by this Agreement, including without limitation
all filings required to be made under federal laws or state securities
laws, and shall otherwise cooperate with O&M and O&M Holding in connection
therewith. SMI represents and warrants that all information so furnished
to O&M and O&M Holding shall be correct in all material respects and shall
not omit any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and if SMI shall at
any time discover that any such information so furnished shall not be in
compliance with the foregoing, it will immediately notify O&M and O&M
Holding of the same and correct and supplement any such information to the
extent that it is necessary to do so. O&M represents and warrants that all
information in the Proxy Statement/Prospectus other than information
furnished to O&M by SMI and the Shareholders shall be correct in all
material respects and shall not omit any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
6.10 Shareholders Meeting; Proxy Statement/Prospectus. O&M shall duly
call the O&M Shareholders' Meeting to be held as soon as practicable in
accordance with O&M's Bylaws and applicable Law for the purpose of
approving this Agreement and the transactions contemplated hereby,
including the O&M Plan of Exchange, and agrees to use its best efforts to
obtain the necessary adoption and approval thereof by the holders of O&M
Common Stock. As promptly as practicable following the execution and
delivery of this Agreement, O&M and O&M Holding shall prepare and file with
the SEC the Proxy Statement/Prospectus and form of proxy complying in all
respects with the proxy rules of the SEC and shall deliver the Proxy
Statement/Prospectus and form of proxy to its shareholders of record at the
earliest practicable date permitted under such rules for purposes of
soliciting the proxies of the holders of O&M Common Stock for the O&M
Shareholders' Meeting.
6.11 Certain Notices. After the date hereof and prior to the
Effective Time, O&M shall give prompt notice to SMI and the Shareholders of
(a) any notice of, or other communication received by O&M relating to, a
default or event which with notice or lapse of time or both would become a
default under its Articles of Incorporation or Bylaws, or any indenture,
loan agreement or other material agreement to which O&M is a party, by
which it or any of its properties is bound or to which it or any of its
properties is subject, (b) any notice or other communication from any third
party received by O&M alleging that the consent of such third party is or
may be required in connection with the transactions contemplated hereby and
(c) any matter which, if it had occurred prior to the date hereof, would
have made any of O&M's representations and warranties incorrect, incomplete
or misleading.
6.12 Consents and Approvals. Each of O&M and O&M Holding shall use
its best efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement, to
cooperate with SMI in connection with the foregoing and to obtain all
consents, waivers, approvals, authorizations or orders required for the
authorization, execution and delivery of this Agreement by O&M and the
consummation by it of the transactions contemplated hereby and thereby
prior to the Effective Time and to furnish true, correct and complete
copies of each thereof to SMI. Without limiting the foregoing, O&M shall
use its best efforts: (a) to obtain all waivers, consents and approvals
listed on Item 5.03 of the O&M Disclosure Schedule; (b) to obtain all
necessary consents, approvals and authorizations as are required to be
obtained under any Laws, to defend all lawsuits or other legal proceedings
challenging this Agreement or the Related Agreements or the consummation of
the transactions contemplated hereby, to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby; and (c) to
effect all necessary registrations and filings and submissions of
information requested by governmental authorities.
6.13 Severance Agreements. The Shareholders shall obtain from each
person who is a party to a Severance Agreement an agreement of satisfaction
and release of SMI, O&M and O&M Holding with respect thereto in a form
satisfactory to O&M Holding.
6.14 Phantom Stock Plans. SMI shall use its best efforts to obtain
from each participant in the Phantom Stock Plans an agreement of
satisfaction and release effective upon payment by SMI of $1,800,000
pursuant to Section 9.14 hereof in a form satisfactory to O&M.
6.15 SMI Funding.
(a) SMI will continue to sell all of its accounts receivable to
SMI Funding in accordance with the Sale and Administration Agreement
through the close of business on the day immediately preceding the
Effective Time. Before the Effective Time, SMI and SMI Funding will enter
into an agreement satisfactory to them and to O&M Holding providing for the
termination, no later than 150 days after the Effective Time, of the Sale
and Administration Agreement and any agreement relating thereto. Such
agreement also will provide, without limitation, that: (i) as of the close
of business on the day immediately preceding the Effective Time, SMI shall
have no further obligations to sell its receivables to SMI Funding and SMI
Funding shall have no further obligations to purchase such receivables;
(ii) for a period not to exceed 150 days after the Effective Time, SMI will
continue to receive and remit to SMI Funding the proceeds of all SMI
receivables sold to SMI Funding prior to the Effective Time; (iii) from and
after the Effective Time, SMI will have no obligations or liabilities
whatsoever under the Sale and Administration Agreement or any other
agreement relating thereto; and (iv) the following provisions will govern
the application of payments received: (x) all payments on accounts
received or collected by SMI on or after the Effective Time will be
allocated among the receivables sold to SMI Funding and the receivables of
SMI arising on or after the Effective Time in the manner specified in the
remittance advice accompanying such payment; (y) if such allocation is not
so specified in any remittance advice, SMI will contact the customer and
request instructions as to how such payment should be allocated and (z) if
the customer then declines to give such instructions, the amount of such
payment shall be applied against the oldest outstanding invoices.
(b) SMI will use its best efforts to sell all accounts
receivable purchased from Midwest in connection with the Midwest
Acquisition to SMI Funding pursuant to the terms of the Sale and
Administration Agreement.
6.16 Supply Agreement. Prior to the Effective Time, SMI shall have
terminated its supply agreement with Pittsburgh International Medical
Supply and SMI shall have no further obligations under such agreement
thereafter.
6.17 Servicing Agreements. Prior to the Effective Time, SMI and
Specialty shall have agreed in writing that (i) the Servicing Agreement
between them dated July 30, 1993 shall terminate no later than June 30,
1994 with respect to management information systems services and no later
than the Effective Time with respect to all other services provided
thereunder and (ii) the Warehousing Agreement between them dated July 30,
1993 shall terminate no later than June 30, 1994.
6.18 Midwest Acquisition. SMI and O&M acknowledge that SMI has
entered into a letter of intent with respect to the Midwest Acquisition.
The Shareholders agree that they shall cause the Midwest Acquisition to be
consummated for an aggregate purchase price of not more than $12 million
(including the assumption of indebtedness and all payments to any person in
connection with such acquisition) no later than January 15, 1994.
6.19 Fixed Assets Inventory.
(a) On or before January 31, 1994, SMI shall permit O&M and its
representatives, together with SMI, to conduct an inventory of the fixed
assets of SMI of such scope as agreed upon between the parties. SMI agrees
to give O&M and its representatives access during normal business hours to
all of the offices, properties and relevant books and records of SMI in
accordance with the provisions of Section 6.01 hereof for purposes of
conducting any such fixed assets inventory.
(b) SMI shall use its reasonable best efforts to preserve its
fixed assets and prevent theft of its fixed assets, including personal
computers.
6.20 Specialty Obligations. Prior to the Effective Time, Specialty
shall have paid in full the Specialty Obligations, including accrued
interest thereon, if any, to the date of payment.
ARTICLE VII
Conditions Precedent to Obligations of SMI and the Shareholders
The obligations of SMI and the Shareholders under this Agreement are
subject, at the option of SMI and the Shareholders, to the fulfillment at
or prior to the Effective Time of each of the following conditions:
7.01 O&M Obligations. O&M shall have performed each obligation and
covenant to be performed by it hereunder on or prior to the Effective Time.
7.02 Accuracy of Representations and Warranties. The representations
and warranties of O&M set forth in this Agreement shall be true and correct
in all material respects at and as of the Effective Time as if made at and
as of such time, except (a) as explicitly permitted by this Agreement and
(b) to the extent that any such representation or warranty is made as of a
specified date, in which case such representation or warranty shall have
been true and correct as of such date.
7.03 Consents and Approvals. SMI shall have received, each in form
and substance satisfactory to SMI, all authorizations, consents, orders and
approvals of all governmental authorities and officials and all third party
consents listed on Item 4.03 of the SMI Disclosure Schedule and Item 5.03
of the O&M Disclosure Schedule which SMI deems reasonably necessary for the
consummation of the transactions contemplated by this Agreement.
7.04 Court Orders. No preliminary or permanent injunction or other
order, decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission or statute,
rule, regulation or executive order promulgated or enacted by any
governmental authority shall be in effect which would (a) make the
Exchanges or any of the transactions contemplated hereby illegal, (b)
impose limitations on the ability of SMI or O&M to operate their businesses
following the Exchanges other than a de minimus divestiture of SMI's or
O&M's business or operations as provided in Section 6.04 hereof or
(c) otherwise prevent the consummation of the Exchanges or the other
transactions contemplated hereby.
7.05 HSR Act. The waiting period (and any extensions thereof) under
the HSR Act applicable to the SMI Exchange shall have expired or
terminated.
7.06 Actions and Proceedings. No suit, action or proceeding before
any court or any governmental or regulatory authority shall have been
commenced and be pending by any person against SMI, the Shareholders, O&M
or O&M Holding or any of their Affiliates, associates, officers or
directors seeking to restrain, prevent, change or delay in any respect the
transactions contemplated hereby, challenging any of the material terms or
provisions of this Agreement or seeking damages in connection with the
transactions contemplated hereby.
7.07 O&M Shareholder Vote. At O&M's Shareholders' Meeting, the
holders of more than two-thirds of the issued and outstanding shares of O&M
Common Stock shall have voted to approve this Agreement and the
transactions contemplated hereby, including the O&M Plan of Exchange.
7.08 Completion of Investigation. On or before the date the Proxy
Statement/Prospectus is mailed to the holders of O&M Common Stock, SMI and
the Shareholders shall have completed to their reasonable satisfaction, as
determined in good faith, a business and legal investigation of the matters
set forth in the O&M Disclosure Schedule. SMI, the Shareholders, O&M and
O&M Holding shall negotiate in good faith to resolve any issues disclosed
in such investigation.
7.09 Deliveries at Closing. O&M shall have delivered to SMI and the
Shareholders, each properly executed and dated as of the date of Closing:
(a) a certificate of the Chief Executive Officer and Chief
Financial Officer of O&M to the effect that, to their Knowledge, the
conditions specified in Section 7.01 and 7.02 hereof have been fulfilled;
(b) certified resolutions duly adopted by O&M's Board of
Directors approving the execution and delivery of this Agreement and
consummation of the transactions contemplated hereby and certified
resolutions duly adopted by the holders of O&M Common Stock approving this
Agreement and the transactions contemplated hereby, including the O&M Plan
of Exchange;
(c) the opinion of Hunton & Williams, counsel to O&M,
substantially to the effect set forth in Exhibit E attached hereto,
together with such additional opinions as SMI may reasonably request and
subject to such assumptions and qualifications (including reliance on
certificates of officers of O&M and O&M Holding and governmental officials
and opinions of other counsel) as may be customary or reasonable under the
circumstances;
(d) the Registration Rights Agreement; and
(e) a copy of the Amended and Restated Articles of Incorporation
of O&M Holding, in the form in which the same has been delivered to the
Commonwealth of Virginia State Corporation Commission for filing, which
shall reflect that the Series B Preferred Stock will be accorded
substantially the same relative seniority and priority, and will be
entitled to substantially the same rights, under such Amended and Restated
Articles of Incorporation as if the Series B Preferred Stock were to be
issued as an additional series of preferred stock of O&M under its articles
of incorporation as in effect on the date of this Agreement.
ARTICLE VIII
Conditions Precedent to the Obligations of O&M and O&M Holding
The obligations of O&M and O&M Holding under this Agreement are
subject, at the option (except as set forth in Section 11.12 hereof) of O&M
and O&M Holding to the fulfillment at or prior to the Effective Time of
each of the following conditions:
8.01 SMI and Shareholders Obligations. Each of SMI and the
Shareholders shall have performed each obligation and covenant to be
performed by each of them hereunder on or prior to the Effective Time.
8.02 Accuracy of Representations and Warranties. The representations
and warranties of SMI and the Shareholders set forth in this Agreement
shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except (a) as explicitly
permitted by this Agreement and (b) to the extent that any such
representation or warranty is made as of a specified date, in which case
such representation or warranty shall have been true and correct as of such
date.
8.03 Consents and Approvals. O&M shall have received, each in form
and substance satisfactory to O&M, all authorizations, consents, orders and
approvals of all governmental authorities and officials and all third party
consents listed on Item 4.03 of the SMI Disclosure Schedule and Item 5.03
of the O&M Disclosure Schedule which O&M deems reasonably necessary for the
consummation of the transactions contemplated by this Agreement, including
without limitation, the consent of each of O&M's lenders and VHA to the
transactions contemplated by this Agreement on terms reasonably
satisfactory to O&M.
8.04 Court Orders. No preliminary or permanent injunction or other
order, decree or filing issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission or statute,
rule, regulation or executive order promulgated or enacted by any
governmental authority shall be in effect which would (a) make the
Exchanges or any of the transactions contemplated hereby illegal, (b)
impose limitations on the ability of SMI or O&M to operate their businesses
following the Exchanges other than a de minimus divestiture of SMI's or
O&M's business or operations as provided in Section 6.04 hereof or
(c) otherwise prevent the consummation of the Exchanges or the transactions
contemplated hereby.
8.05 HSR Act. The waiting period (and any extensions thereof) under
the HSR Act applicable to the SMI Exchange shall have expired or
terminated.
8.06 Actions and Proceedings. No suit, action or proceeding before
any court or any governmental or regulatory authority shall have been
commenced and be pending by any person against SMI, the Shareholders, O&M
or O&M Holding or any of their Affiliates, associates, officers or
directors seeking to restrain, prevent, change or delay in any respect the
transactions contemplated hereby, challenging any of the material terms or
provisions of this Agreement or seeking damages in connection with the
transactions contemplated hereby.
8.07 O&M Shareholder Vote. At O&M's Shareholders' Meeting, the
holders of more than two-thirds of the issued and outstanding shares of O&M
Common Stock shall have voted to approve this Agreement and the
transactions contemplated hereby, including the O&M Plan of Exchange.
8.08 Opinion of J. P. Morgan. Before the Proxy Statement/Prospectus
is mailed to the holders of O&M Common Stock, the Board of Directors of O&M
shall have received from J. P. Morgan a written opinion addressed to it, in
form and substance reasonably satisfactory to the Board of Directors of O&M
and its counsel, for inclusion in the Proxy Statement/Prospectus, and dated
on or about the date thereof, substantially to the effect that the proposed
consideration to be paid by O&M Holding pursuant to the SMI Exchange is
fair to the holders of O&M Holding Common Stock and O&M Holding from a
financial point of view, and J. P. Morgan shall not have withdrawn such
opinion before the Effective Time.
8.09 Completion of Investigation. On or before the date the Proxy
Statement/Prospectus is mailed to the holders of O&M Common Stock, O&M
shall have completed to its reasonable satisfaction, as determined in good
faith, a business and legal investigation of the matters set forth in the
SMI Disclosure Schedule. SMI, the Shareholders, O&M and O&M Holding shall
negotiate in good faith to resolve any issues disclosed in such
investigation.
8.10 VHA. O&M shall have received assurances from VHA that it does
not intend to terminate or substantially reduce the volume of business
under its contracts with SMI or O&M.
8.11 Opinion Concerning Certain Tax Matters. O&M shall have received
the written opinion of Hunton & Williams to the effect that no gain will be
recognized for federal income tax purposes as a result of the Exchanges by
SMI, O&M Holding, O&M or the holders of O&M Common Stock, and that the
basis of holders of O&M Common Stock in the O&M Holding Common Stock
received in the O&M Exchange will be the same as the basis of the O&M
Common Stock exchanged therefor.
8.12 Title to Real Property. O&M shall have received evidence that
SMI has an owner's title insurance policy in an amount reasonably
satisfactory to O&M insuring that SMI has good and marketable title to the
Real Property and that the Real Property is free and clear of all liens,
objections, charges, pledges and other encumbrances other than Permitted
Liens.
8.13 Environmental Matters. O&M shall have received a copy of an
environmental report prepared by environmental engineers or auditors
selected by O&M and at O&M's expense containing information consistent with
good commercial and engineering practices to the reasonable satisfaction of
O&M that no environmental noncompliance or conditions exist on or with
respect to the Real Property or the Leased Property that could result in
liabilities in excess of $250,000.
8.14 Refinancing of SMI Indebtedness; Additional O&M Indebtedness.
O&M Holding shall have received on or prior to the Effective Time proceeds
of financings that are adequate, in the reasonable opinion of O&M Holding,
for (a) the refinancing of SMI's indebtedness (other than any indebtedness
incurred to make the $3,000,000 distribution described in Section 6.03(a))
and (b) the refinancing of O&M's existing bank loans and all additional
financing necessary for the transactions contemplated hereby, all on terms
reasonably satisfactory to O&M Holding.
8.15 Registration Statement. The registration statement of which the
Proxy Statement/Prospectus constitutes a part shall have become effective
and shall not be subject to any stop order issued by the SEC, and no
action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, or shall
have been threatened and be unresolved.
8.16 Deliveries at Closing. SMI and the Shareholders shall have
delivered to O&M and O&M Holding, each properly executed and dated as of
the date of Closing:
(a) a certificate of the Chief Executive Officer and Chief
Financial Officer of SMI to the effect that, to their Knowledge, the
conditions specified in Sections 8.01 and 8.02 hereof have been fulfilled;
(b) a certificate from each of the Shareholders to the effect
that, to his Knowledge, the conditions specified in Sections 8.01 and
8.02 hereof have been fulfilled;
(c) certified resolutions duly adopted by SMI's Board of
Directors approving the execution and delivery of this Agreement and
consummation of the transactions contemplated hereby and certified
resolutions duly adopted by the Shareholders approving the SMI Plan of
Exchange and the transactions contemplated by this Agreement;
(d) the opinion of Cohen & Grigsby, P.C., counsel to SMI,
substantially to the effect set forth in Exhibit F attached hereto,
together with such additional opinions as O&M may reasonably request and
subject to such assumptions and qualifications (including reliance on
certificates of officers of SMI and governmental officials and opinions of
other counsel) as may be customary or reasonable under the circumstances;
(e) the opinion of H. Vaughan Blaxter, III, or Russell W. Ayres,
III, substantially to the effect set forth in Exhibit G attached hereto,
together with such additional opinions as O&M may reasonably request and
subject to such assumptions and qualifications (including reliance on
certificates of Shareholders and governmental officials and opinions of
other counsel) as may be customary or reasonable under the circumstances;
(f) the Registration Rights Agreement;
(g) releases executed by each of the Shareholders releasing SMI
from any claim he may have against SMI with respect to all matters and
dealings with SMI prior to the date of Closing;
(h) the releases referred to in Sections 6.13 and 6.14 hereof
with respect to the Severance Agreements and the Phantom Stock Plans,
respectively;
(i) the agreement between SMI and SMI Funding referred to in
Section 6.15 hereof;
(j) estoppel certificates in a form reasonably satisfactory to
O&M from each sublessee of Leased Property;
(k) an IRS Form W-9 completed and executed by each Shareholder;
and
(l) a statement executed by each Shareholder providing a good
faith estimate of his or her adjusted basis for federal income tax purposes
in the shares of SMI Common Stock owned by such Shareholder immediately
before the Effective Time.
ARTICLE IX
Indemnification and
Additional Agreements
9.01 The Shareholders' Indemnity.
(a) Each of the Shareholders hereby jointly and severally agrees
to indemnify and hold O&M's Indemnitees harmless from and against, and
agrees to defend promptly O&M's Indemnitees from and reimburse O&M's
Indemnitees for, any and all losses, damages, costs, expenses, liabilities,
obligations and claims of any kind, including, without limitation,
reasonable attorneys' fees and other legal costs and expenses (hereinafter
referred to collectively as "Losses"), that O&M's Indemnitees may at any
time suffer or incur, or become subject to, as a result of or in connection
with: (i) any breach or inaccuracy of any of the representations and
warranties made by SMI or the Shareholders in or pursuant to this
Agreement; (ii) any failure of SMI or any of the Shareholders to carry out,
perform, satisfy and discharge any of its or his covenants, agreements,
undertakings, liabilities or obligations under this Agreement or the
Related Agreements or under any of the documents and instruments delivered
by the Shareholders or SMI pursuant to this Agreement; (iii) the conduct of
the business of SMI at any time before the Effective Time to the extent
such activities result in any loss or liability (including tax obligations)
that is not fully reflected on the Closing Balance Sheet or (except for the
Specialty Litigation) the SMI Disclosure Schedules; provided, that, with
respect to Losses related to the matters disclosed on Item 4.10A of the SMI
Disclosure Schedule, the Shareholders shall indemnify O&M's Indemnitees for
any amount by which the insurance deductible of SMI applicable to such
matter exceeds the deductible, if any, provided for under O&M's insurance
policy applicable to such a matter and in effect at the time of the
occurrence of the event from which such Loss arose; (iv) any Specialty
Litigation and any liability relating to or arising from the sale or other
disposition or operation of any separate line of business formerly (but not
now) conducted by SMI (whether as an unincorporated division or business
function or as a subsidiary, direct or indirect), including without
limitation Specialty and the former AIP division; (v) any Balance Sheet
Deficiency; (vi) any costs, expenses or other liabilities incurred by SMI,
O&M or O&M Holding resulting from the exercise by any holder of SMI Common
Stock of dissenters' rights in connection with the transactions
contemplated by this Agreement to the extent such costs, expenses or other
liabilities exceed the sum of the cash consideration and the aggregate par
value of the O&M Holding Preferred Stock to which such dissenting
shareholder would have been entitled to pursuant to the SMI Plan of
Exchange; (vii) the matter described on Item 4.10 of the SMI Disclosure
Schedule with respect to the SMI 401(k) Plan, including but not limited to
any costs of litigation with respect to such matter and the failure of the
SMI 401(k) Plan to qualify and continue to qualify as a Qualified Pension
Plan as a consequence of such matter described on Item 4.10 of the SMI
Disclosure Schedule or as a consequence of any other matter occurring prior
to the Effective Time; (viii) any obligation under the Phantom Stock Plans
in excess of the amount set forth in Section 9.14 hereof; (ix) the
Severance Agreements; and (x) any and all obligations, expenses or
liabilities incurred by SMI, O&M or O&M Holding relating to or arising out
of the Sale and Administration Agreement or any other agreement relating
thereto (other than the agreement to be entered into by SMI and SMI Funding
pursuant to Section 6.15 hereof); provided, however, that O&M's Indemnitees
shall have no right to be indemnified, held harmless from, defended or
reimbursed under Section 9.01(a)(i) unless such right is asserted (whether
or not such Losses have actually been incurred) within 24 months after the
Effective Time, except there shall be no time limitation with respect to
the representations set forth in Sections 4.01, 4.02, 4.04 and 4.20 hereof,
and the time limit with respect to any matter covered by Section 4.21
hereof shall be 30 days after the expiration of the applicable statute of
limitations with respect to such matter; and provided, further, that with
respect to Losses related to item (vii) hereof, the term O&M's Indemnitees
shall also include the SMI 401(k) Plan, the SMI 401(k) Plan's trust, and
the participants, beneficiaries and alternate payees of the SMI 401(k) Plan
(other than participants who have been trustees of the SMI 401(k) Plan and
beneficiaries and alternate payees of participants who have been trustees
of the SMI 401(k) Plan). Notwithstanding the foregoing, the Shareholders
shall not be required to indemnify O&M's Indemnitees under Section
9.01(a)(i), (ii), (iii) and (v) unless and until the amount of all Losses
(without regard to any potential tax benefits) for which indemnification is
sought with respect thereto shall exceed $1,000,000 and then only to the
extent and in the amount of such excess.
(b) In the event a claim against O&M's Indemnitees arises that
is covered by the indemnity provisions of Section 9.01(a) hereof, notice
shall be given promptly by O&M Holding to the Shareholders' Representative.
Provided that the Shareholders' Representative admits in writing to O&M
Holding that such claim is covered by the indemnity provisions of Section
9.01(a) hereof, the Shareholders' Representative shall have the right to
contest and defend by all appropriate legal proceedings such claim and to
control all settlements (unless O&M Holding agrees to assume the cost of
settlement and to forgo such indemnity) and to select lead counsel to
defend any and all such claims at the sole cost and expense of the
Shareholders; provided, however, that the Shareholders' Representative may
not effect any settlement that could result in any cost, expense or
liability to the O&M Indemnities unless O&M Holding consents in writing to
such settlement and the Shareholders' Representative agrees to indemnify
the O&M Indemnitees therefor. O&M Holding may select counsel to
participate in any defense assumed by the Shareholders, in which event such
counsel shall be at O&M Holding's own cost and expense. In connection with
any such claim, action or proceeding, the parties shall cooperate with each
other and provide each other with access to relevant books and records in
their possession.
9.02 O&M's Indemnity.
(a) Each of O&M Holding and O&M hereby agrees to indemnify and
hold Shareholders' Indemnitees harmless from and against, and agree to
defend promptly Shareholders' Indemnitees from and reimburse Shareholders'
Indemnitees for, any and all Losses that Shareholders' Indemnitees may at
any time suffer or incur, or become subject to, as a result of or in
connection with: (i) any breach or inaccuracy of any of the
representations and warranties made by O&M in or pursuant to this
Agreement; (ii) any failure by O&M to carry out, perform, satisfy and
discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or the Related Agreements and (iii) the
conduct by SMI, O&M or O&M Holding of the business of SMI after the
Effective Time other than with respect to facts, circumstances or
conditions existing as of the Effective Time; provided, however, that
Shareholders' Indemnitees shall have no right to be indemnified, held
harmless from, defended or reimbursed under Section 9.02(a)(i) unless such
right is asserted (whether or not such Losses have actually been incurred)
within 24 months after the Effective Time, except there shall be no time
limitation with respect to the representations set forth in Sections 5.01
and 5.02 hereof. Notwithstanding the foregoing, O&M and O&M Holding shall
not be required to indemnify Shareholders' Indemnitees under this Section
9.02 unless and until the amount of all Losses (without regard to any
potential tax benefits) for which indemnification is sought with respect
thereto shall exceed $1,000,000 and then only to the extent and in the
amount of such excess.
(b) In the event a claim against Shareholders' Indemnitees
arises that is covered by the indemnity provisions of Section 9.02(a)
hereof, notice shall be given promptly by the Shareholders' Representative
to O&M Holding. Provided that O&M Holding admits in writing to the
Shareholders' Representative that such claim is covered by the indemnity
provisions of Section 9.02(a) hereof, O&M Holding shall have the right to
contest and defend by all appropriate legal proceedings such claim and to
control all settlements (unless the Shareholders' Representative agrees to
assume the cost of settlement and to forgo such indemnity) and to select
lead counsel to defend any and all such claims at the sole cost and expense
of O&M Holding; provided, however, that O&M Holding may not effect any
settlement that could result in any cost, expense or liability to the
Shareholders unless the Shareholders' Representative consents in writing to
such settlement and O&M Holding agrees to indemnify the Shareholders
therefor. The Shareholders' Representative may select counsel to
participate on behalf of the Shareholders in any defense assumed by O&M
Holding, in which event the Shareholders' counsel shall be at their own
cost and expense. In connection with any such claim, action or proceeding,
the parties shall cooperate with each other and provide each other with
access to relevant books and records in their possession.
9.03 Acquisition for Investment; Transfer Limitations. Each of the
Shareholders represents and warrants to O&M Holding that he is an
"accredited investor", as defined in Rule 501 under the Securities Act, his
respective shares of O&M Holding Preferred Stock are being acquired in the
SMI Exchange for investment purposes and not with a view toward any resale
or any distribution thereof. No Shareholder may Transfer shares of the O&M
Holding Preferred Stock; provided, however, a Shareholder may Transfer O&M
Holding Preferred Stock (a) by a gift, (b) by descent or distribution, (c)
to beneficiaries pursuant to a trust existing as of the date hereof and (d)
to a Shareholder if, in any such case, the transferee (other than a
charitable institution holding less than 1% of the O&M Holding Common
Stock) expressly agrees in writing to be bound by the terms of Sections
9.03, 9.04, 9.05 and 9.06 hereof. Each Shareholder may only Transfer
shares of O&M Holding Common Stock in compliance with this Section and
Section 9.04 hereof and the Securities Act. Each Shareholder acknowledges
that the shares of O&M Holding Preferred Stock (and the shares of O&M
Holding Common Stock received upon conversion thereof) will be issued
pursuant to an exemption from registration under the Securities Act, and
the certificates representing such shares will bear a legend indicating
that they have not been registered under the Securities Act and may not be
Transferred by such Shareholder, except, in the case of the O&M Holding
Common Stock, in compliance with this Agreement and pursuant to an
effective registration statement or pursuant to an exemption from
registration. In the event a Shareholder determines to Transfer any shares
of O&M Holding Common Stock pursuant to an exemption from registration
under the Securities Act, such Shareholder will, prior to Transferring such
shares, cause counsel selected by such Shareholder but satisfactory to O&M
Holding to deliver an opinion to O&M Holding to the effect that the
Transfer of such shares is exempt from the registration provisions of the
Securities Act or, in the case of a transfer permitted by Rule 144, such
Shareholder will provide evidence satisfactory to O&M Holding that the
Transfer of such shares is exempt from the registration provisions of the
Securities Act.
9.04 Right of First Refusal.
(a) In the event that any Shareholder desires to Transfer to any
third party any shares of O&M Holding Common Stock as permitted by Section
9.03 hereof, he shall give O&M Holding notice ("Notice of Transfer") of his
bona fide intent to sell such shares of O&M Holding Common Stock,
specifying (i) the number of shares to be Transferred, (ii) the prospective
purchasers thereof, (iii) the minimum price and other terms and conditions
of such Transfer, and offering to Transfer such shares of O&M Holding
Common Stock to O&M or its designee(s) at such minimum price and on such
terms and conditions. The Notice of Transfer shall be accompanied by a
copy of the offer from such third party.
(b) If O&M Holding or its designee(s) shall not within 30 days
after receipt of the Notice of Transfer accept such offer in writing with
respect to all the shares of O&M Holding Common Stock specified in such
notice, then, subject to the provisions of paragraphs (c) and (e) hereof,
such Shareholder may Transfer such shares to the prospective purchasers
specified in such Notice of Transfer at a price equal to or above the
minimum price and on other terms and conditions no less favorable to such
Shareholder than those specified in the Notice of Transfer, at any time
within 60 days of the expiration of such 30-day period, but not otherwise.
(c) If such Shareholder shall not have consummated the proposed
Transfer within 60 days after the expiration of the 30-day period referred
to in paragraph (b) above, then he may not Transfer such shares of O&M
Holding Common Stock without again complying with the provisions of this
Section 9.04.
(d) If O&M Holding or its designee(s) shall accept such offer
within 30 days after the receipt of the Notice of Transfer pursuant to
paragraph (b) above, then O&M Holding or its designee(s) shall purchase the
shares of O&M Holding Common Stock specified in such notice as promptly as
is reasonably practicable, but in no event later than 60 days following
such acceptance.
(e) Notwithstanding any other provision in this Section 9.04,
each Shareholder agrees that he will not, without the prior written consent
of O&M Holding, knowingly Transfer any shares of O&M Holding Common Stock
to a competitor of O&M Holding (including any officer, director, employee,
shareholder or Affiliate of such competitor) or to any person (including
such person's Affiliates and any person or entity which is, to his
Knowledge after inquiry of O&M Holding, part of any group which includes
such transferee or any of its Affiliates) that, after giving effect to such
Transfer, would beneficially own 5% or more of the issued and outstanding
shares of O&M Holding Common Stock unless the transferee agrees to be bound
by Sections 9.03, 9.04, 9.05 and 9.06 hereof.
(f) Notwithstanding any provision to the contrary in this
Section 9.04, a Shareholder may Transfer O&M Holding Common Stock without
complying with the provisions of this Section 9.04 (i) by a gift, (ii) by
descent or distribution, (iii) to beneficiaries pursuant to a trust
existing as of the date hereof, or (iv) to a Shareholder; provided, that,
in any such case, the transferee (other than a charitable institution
holding less than 1% of the O&M Holding Common Stock) expressly agrees in
writing to be bound by the terms of Sections 9.03, 9.04, 9.05 and 9.06
hereof and O&M is given prior written notice of such Transfer.
9.05 Standstill. Each Shareholder agrees that so long as (i) he owns
any shares of O&M Holding Preferred Stock or (ii) the Shareholders,
collectively with their respective Affiliates, own 5% or more of the issued
and outstanding shares of O&M Holding Common Stock, without the prior
written consent of O&M Holding, he will not and will cause his Affiliates
not to:
(a) acquire, offer to acquire or agree to acquire, directly or
indirectly, by purchase or otherwise, or initiate contact with any person
with the intent to advise, encourage or assist such or any other person to
purchase or acquire in any manner shares of any class of capital stock of
O&M Holding ("O&M Holding Capital Stock"), or participate with or provide
assistance to any person in the purchase or other acquisition of O&M
Holding Capital Stock;
(b) form, join or in any way participate in a "group" within the
meaning of Section 13(d)(3) of the Exchange Act with respect to O&M Holding
Capital Stock, except insofar as such group consists solely of the
Shareholders;
(c) "solicit" proxies with respect to O&M Holding Capital Stock
under any circumstance; or become a "participant" by taking a position
contrary to that of the Board of Directors of O&M Holding in any contest
relating to the election of directors of O&M Holding or any other matters
submitted to shareholders at an annual meeting or any special meeting (as
such defined terms are used in Regulation 14A under the Act); a Shareholder
shall be deemed to "solicit" or to be such a "participant" if he counsels
or advises or otherwise provides assistance to any person who undertakes or
makes such a "solicitation" or is such a "participant," but shall not, in
any event, be deemed to "solicit" or to be such a "participant" by reason
of exercise of his voting rights with respect to O&M Holding Capital Stock;
(d) deposit any O&M Holding Capital Stock, or any securities
convertible into O&M Holding Capital Stock, in a voting trust, or subject
any O&M Holding Capital Stock, or any securities convertible into O&M
Holding Capital Stock, to a voting or similar agreement, other than as
required by Section 9.06 hereof;
(e) directly or indirectly offer, sell, transfer, pledge or
otherwise dispose of or encumber any O&M Holding Capital Stock, or any
securities convertible into O&M Holding Capital Stock except, subject (in
the cases described in clauses (i) and (ii) below) to prior compliance with
the provisions of Section 9.04 hereof:
(i) sales of O&M Holding Capital Stock pursuant to an
underwritten distribution to the public, registered under the
Securities Act, in which the Shareholders use their best efforts
and direct the underwriters to use their best efforts to effect
as wide a distribution of such O&M Holding Capital Stock as
reasonably practicable and to prevent any one person or group
from purchasing through such offering a number of shares
representing more than 2% of the total number of shares of all
O&M Holding Capital Stock;
(ii) sales of O&M Holding Capital Stock in open market
transactions pursuant to Rule 144 of the General Rules and
Regulations under the Securities Act (provided that any such sale
is in compliance with the requirements of paragraphs (c)(d)(e)(f)
and (g) of such rule notwithstanding the provisions of paragraph
(k) of such rule) and in accordance with Section 9.03 hereof;
(iii) a bona fide pledge of, or the granting of a
security interest in, such O&M Holding Capital Stock to an
institutional lender to secure a bona fide loan or guarantee,
provided that the lender acknowledges in writing that it has
received a copy of this Agreement and agrees that prior to making
any offer to sell, sale, transfer or other disposition of such
O&M Holding Capital Stock, whether upon foreclosure of such
pledge or security interest or otherwise, such lender will give
O&M the opportunity to purchase such O&M Holding Capital Stock in
the manner specified in Section 9.04 hereof; or
(iv) sales of O&M Holding Capital Stock to O&M Holding or to
any person or group designated by O&M Holding; or
(f) initiate, commence or propose, or induce or attempt to
induce or give encouragement to any other person to initiate, commence or
propose, any tender or exchange offer for O&M Holding Capital Stock or any
"affiliated transaction" (as that term is defined in Section 13.1-725 of
the Code of Virginia, as in effect on the date of this Agreement, but with
the phrase "any other Person" substituted for the phrase "any interested
shareholder").
9.06 Voting Agreement. Each Shareholder agrees that, so long as (a)
he owns any shares of O&M Holding Preferred Stock or (b) the Shareholders,
collectively with their respective Affiliates, own 5% or more of the issued
and outstanding shares of O&M Holding Common Stock, he shall vote all
shares of O&M Holding Preferred Stock or O&M Holding Common Stock, as the
case may be, with respect to each matter to be voted upon by the holders of
such shares, in the same proportion as the votes cast on such matter by all
other holders of the O&M Holding Common Stock (excluding for such purposes
shares held by any person or "group" within the meaning of Section 13(d)(3)
of the Exchange Act (other than any employee benefit plan of O&M Holding,
O&M or the O&M Subsidiaries or any person holding shares for or pursuant to
the terms of any such employee benefit plan) which beneficially owns 5% or
more of the issued and outstanding shares of O&M Holding Common Stock);
provided, however, that the provisions of this Section 9.06 shall not apply
with respect to (a) any matter to be voted upon by holders of O&M Holding
Capital Stock that would amend (i) the provisions of the Series B Preferred
Stock or (ii) any other provisions of the Articles of Incorporation or
Bylaws of O&M Holding if such amendment would affect adversely the relative
rights or preferences thereof and (b) the election of any director who may
be elected by the holders of O&M Holding Preferred Stock and any nominee to
the Board of Directors of O&M Holding designated by the Shareholders'
Representative in accordance with Section 9.09 hereof.
9.07 Noncompetition Covenant. Each of the Shareholders agrees that,
except for his ownership of shares of O&M Holding Preferred Stock or O&M
Holding Common Stock and without the prior written consent of O&M Holding,
for a period of three years after the Effective Time (the "Noncompete
Period"), he will not, directly or indirectly, either individually or as an
employee, agent, partner, investor, shareholder, consultant or in any other
capacity participate in or have a financial or other interest in any
business in the United States (the "Noncompete Area") which is competitive
with the business conducted by O&M, SMI or the O&M Subsidiaries as of the
Effective Time; provided, however, that the foregoing shall not preclude
the Shareholders or their respective Affiliates from owning in the
aggregate, directly or indirectly, up to 5% of the issued and outstanding
shares of any class of capital stock of a company, the stock of which is
publicly traded on a national securities exchange or in the over-the-
counter market. The parties acknowledge that the business conducted as of
the date hereof by Specialty is not competitive with the business conducted
by O&M, the O&M Subsidiaries or SMI.
If a judicial determination is made that any provision of this Section
9.07 constitutes an unreasonable or otherwise unenforceable restriction
against the Shareholders, the provisions of this Section 9.07 shall be
rendered void only to the extent that such judicial determination finds
such provisions to be unreasonable or otherwise unenforceable. In this
regard, the parties hereto hereby agree that any judicial authority
construing this provision shall be empowered to sever any portion of the
Noncompete Area or any prohibited business activity from the coverage of
this Section 9.07 and to apply the provisions of this Section 9.07 to the
remaining portion of the Noncompete Area or the remaining business
activities not so severed by such judicial authority.
The Shareholders hereby agree that any remedy at law for any breach of
the provisions contained in this Section 9.07 shall be inadequate and that
O&M Holding shall be entitled to injunctive relief in addition to any other
remedy it might have hereunder.
The running of the Noncompete Period shall be tolled during, and the
Noncompete Period shall be extended by, any period of time during which any
Shareholder violates the terms of this Section 9.07 as determined by a
court of competent jurisdiction.
9.08 Tax Returns.
(a) O&M Holding and the Shareholders acknowledge that the status
of SMI as an "S corporation" will be terminated by the SMI Exchange, that
SMI's taxable year will end at the close of the day before the Effective
Time (the "Last SMI Year"), that SMI's books shall be closed for income tax
purposes as of the close of the Last SMI Year, and that a new taxable year
for SMI will begin on the date of the Effective Time (the "First C Year").
The Shareholders shall cause to be prepared and timely filed (taking into
account permitted extensions of the due date) all income tax returns of SMI
for the Last SMI Year and, if not filed before the day of the Effective
Time, SMI's preceding taxable year (e.g., IRS Form 1120S, Schedule K-
1(1120S) and state income tax returns). A photocopy of each such tax
return shall be furnished to O&M Holding at least 30 days before the due
date (including any extensions) for filing the tax return. The
Shareholders' Representative shall deliver to O&M Holding, with the
photocopy of the proposed IRS Form 1120S for the Last SMI Year, a schedule
updating the tax basis information provided by the Shareholders pursuant to
Section 8.16(l) hereof. If O&M Holding disagrees with the amount or
treatment of any item on any such return, O&M Holding shall notify the
Shareholders' Representative, and O&M Holding and the Shareholders'
Representative shall proceed in good faith to resolve any dispute regarding
the return before the due date. All income tax returns filed after the
date of the Effective Time for taxable years of SMI beginning before such
date shall be based on the same tax accounting methods and elections as
used for its taxable year immediately preceding the year of such return,
except as otherwise required by law or as agreed upon by O&M Holding and
the Shareholders' Representative.
(b) The Shareholders, O&M Holding and SMI will cooperate with
each other to the extent reasonably required to facilitate the preparation
and timely filing of (i) any income tax return of SMI for its Last SMI
Year, the preceding taxable year, or its First C Year and (ii) any tax
information return, report, or statement with respect to the SMI Exchange.
9.09 Board Nominee. Commencing when and continuing for so long as the
Shareholders, collectively, have the right to vote at least 5% of the
outstanding shares of O&M Holding Common Stock, O&M Holding will exercise
all authority under applicable law (subject to the fiduciary obligations of
the Board of Directors of O&M Holding to O&M Holding's shareholders) to
cause one nominee designated by the Shareholders' Representative and
reasonably acceptable to the Board to be included in the slate of nominees
recommended by such Board to O&M Holding's shareholders for election as
directors at each annual meeting of shareholders of O&M Holding.
9.10 Financial Statements. The Shareholders shall cause E&Y to
prepare and deliver to O&M Holding by February 28, 1994 audited balance
sheets as of December 31, 1993 and 1992 and April 30, 1992 and 1991 and
audited statements of income and cash flow for the year ended December 31,
1993, the fiscal years ended April 30, 1992 and 1991 and the eight months
ended December 31, 1992 and any other financial statements of SMI and
Midwest as may be required by Rule 3-05(b) of Regulation S-X of the SEC
audited by E&Y that have not been delivered previously pursuant to Section
6.09 hereof.
9.11 Tax Status of Exchanges. O&M, O&M Holding, SMI and the
Shareholders acknowledge that the Exchanges are intended to qualify as a
transaction described in Section 351 of the Code and that the Exchanges are
intended to be pursuant to a single plan for purposes of Section 351 of the
Code and the regulations thereunder. O&M, O&M Holding, SMI and the
Shareholders covenant that they will report the Exchanges in accordance
with such intent for federal income tax purposes.
9.12 Shareholders' Representative. Each of the Shareholders hereby
appoints C. G. Grefenstette or his designee (as appointed in writing), as
the agent, proxy, and attorney-in-fact for the Shareholders for all
purposes under this Agreement (including without limitation full power and
authority to act on the Shareholders' behalf) (a) to consummate the
transactions contemplated under this Agreement, (b) in the event of such
consummation, to receive on behalf of the Shareholders each of such
Shareholder's SMI Exchange Consideration, (c) to pay in accordance with
Section 11.01 hereof the Shareholders' share of the transaction expenses,
(d) to execute and deliver the Certificates and such further instruments of
assignment as O&M Holding shall reasonably request, (e) to execute and
deliver on behalf of the Shareholders any amendment to this Agreement,
provided that such amendment does not change the definition or manner of
calculating the SMI Exchange Consideration to be received by the holders of
the SMI Common Stock or does not increase the Shareholders' liabilities in
any material respect and does not alter Article IV hereof in a manner
adverse to the Shareholders, and (f) to take all other actions to be taken
by or on behalf of the Shareholders and exercise any and all rights which
the Shareholders are permitted or required to do or exercise under this
Agreement. The Shareholders' Representative shall not be liable to the
Shareholders for any error in judgment for any act or step taken, or
permitted to be taken, in good faith, or for doing anything in connection
herewith, except for his own willful misconduct or gross negligence. As
between themselves and the Shareholders' Representative, the Shareholders,
jointly and severally, agree to indemnify the Shareholders' Representative
against, and hold the Shareholders' Representative harmless from, any and
all losses, costs, damages, expenses, claims and attorneys' fees suffered
or incurred by the Shareholders' Representative as a result of, in
connection with, or arising from or out of, the acts or omissions of the
Shareholders Representative in performance of, or pursuant to, this
Agreement, except such acts or omissions as may result from the
Shareholders' Representative's willful misconduct or gross negligence.
9.13 Books and Records. O&M Holding agrees to cooperate with and make
available to the Shareholders during normal business hours, all books,
records and information relating to SMI that are necessary or useful in
connection with any tax inquiry, audit, investigation or dispute, any
litigation or investigation or any other matter. The Shareholder(s)
requesting any such books, records, information or employees shall bear all
of the out-of-pocket costs and expenses (including, without limitation,
attorneys' fees, but excluding reimbursement for salaries and employee
benefits) reasonably incurred in connection with providing such books,
records, information or employees.
9.14 Phantom Stock Plans. Immediately following the Effective Time,
SMI shall pay to the participants in the Phantom Stock Plans an aggregate
of $1,800,000 in satisfaction in full of SMI's obligations under such plan.
9.15 New York Stock Exchange Listing Application. O&M Holding agrees
to use its best efforts to cause the shares of O&M Holding Common Stock
issuable upon conversion of the O&M Preferred Stock to be listed on the New
York Stock Exchange.
9.16 Midwest Accounts Receivable Guarantee.
(a) SMI shall have the right, at any time after the 150th day
following the Effective Time, to assign to the Shareholders a face amount
of Midwest Receivables (the "Assigned Receivables") equal to the
uncollected portion of any Midwest Receivable included on the Closing
Balance Sheet that has not been collected by SMI within 150 days after the
Effective Time; provided, however, that prior to such reassignment, SMI
shall use reasonable and customary efforts to collect such Midwest
Receivables (which shall not require SMI to employ commercial collection
agencies or file suit). SMI shall deliver to the Shareholders'
Representative all documents that relate to the Assigned Receivables and
any similar documents generated by SMI after the Effective Time. Upon
receipt of a document from SMI transferring the Assigned Receivables to the
Shareholders, the Shareholders shall have the joint and several obligation
to promptly pay to SMI the face amount of the Assigned Receivables (less
any reserve for the Midwest Receivables on the Closing Balance Sheet). SMI
shall cooperate with the Shareholders in any reasonable collection efforts
relating to the Assigned Receivables, including remitting to the
Shareholders' Representative any proceeds received by SMI with respect to
such Assigned Receivables.
(b) All payments on the relevant accounts received by SMI during
the period beginning at the Effective Time and ending on the 150th day
following the Effective Time shall be allocated among the Midwest
Receivables and the relevant accounts receivable arising after the
Effective Time in the manner specified in the remittance advice
accompanying such payment. If such allocation is not so specified in any
remittance advice, SMI will contact the customer and request instructions
as to how such payment should be allocated. If the customer then declines
to give such instructions, the amount of such payment shall be applied
against the oldest outstanding invoices.
ARTICLE X
Termination, Amendment and Waiver
10.01 Termination. This Agreement may be terminated and the
Exchanges may be abandoned, by written notice promptly given to the other
parties hereto, at any time prior to the Effective Time:
(a) By mutual written consent of SMI, the Shareholders, O&M and
O&M Holding;
(b) By SMI and the Shareholders, if O&M enters into a definitive
agreement with respect to (i) any acquisition or purchase of assets of, or
any equity interest in, or any exchange offer, merger, consolidation,
business combination, sale of all or substantially all of the assets, sale
of securities, liquidation, dissolution or similar transactions involving
O&M, or (ii) any acquisition by O&M of another corporation or other entity,
in any such case in which the value of the aggregate consideration to be
paid would exceed $100,000,000;
(c) By SMI and the Shareholders, if O&M fails to perform in any
material respect any of its obligations under this Agreement;
(d) By SMI and the Shareholders, if there has been a material
breach by O&M of any representation and warranty contained in this
Agreement;
(e) By O&M and O&M Holding if there has been a material breach
by SMI or the Shareholders of any representation and warranty contained in
this Agreement except to the extent the material breach of such
representation or warranty shall result in the indemnification therefor by
the Shareholders pursuant to Section 9.01(a)(vii);
(f) By O&M and O&M Holding, if SMI or any of the Shareholders
fails to perform in any material respect any of its obligations under this
Agreement;
(g) By O&M or the Shareholders, if the O&M Exchange is not
approved by the shareholders of O&M at the O&M Shareholders' Meeting; or
(h) By any of SMI, the Shareholders, O&M or O&M Holding, if the
Effective Time shall not have occurred on or before June 30, 1994.
10.02 Effect of Termination. In the event of the termination of
this Agreement as provided in Section 10.01, this Agreement shall forthwith
become void and there shall be no liability on the part of SMI, O&M or the
Shareholders except as set forth in Sections 6.02, 10.03 and 11.02.
Nothing herein shall relieve any party from liability for its breach of
this Agreement, except to the extent that Section 11.02 hereof limits the
amount of such liability under the circumstance specified therein.
10.03 Post-Termination Covenants.
(a) If this Agreement terminates for any reason pursuant to
Section 10.01, no party hereto will utilize the fact that this Agreement
has been terminated in order to disparage the commercial interests,
including without limitation the customer, vendor and employee
relationships, of the other. Each party agrees that, upon any breach of
this covenant by either party, the aggrieved party shall be entitled to
injunctive relief as well as damages.
(b) If this Agreement terminates for any reason pursuant to
Section 10.01, for one year after such termination, neither SMI nor O&M nor
any of their respective Affiliates shall solicit for employment any person
currently employed by the other as long as such employee remains in the
employ of the other party.
ARTICLE XI
General Provisions
11.01 Expenses. Except as provided below, the Shareholders each
shall be responsible for the fees and expenses of SMI's and their
respective counsel, accountants, and other expenses incident to the
negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby incurred after December 10, 1993. For
purposes of this Section 11.01, (a) the fees and expenses of Cohen &
Grigsby, Steptoe & Johnson or any other legal advisors to SMI or the
Shareholders incident to the negotiation and preparation of this Agreement
and the consummation of the transactions contemplated hereby, and (b) any
fees and expenses of E&Y or any other accountants or financial advisors to
SMI or the Shareholders, including preparation of the Closing Balance Sheet
and the financials required by Sections 6.09 and 9.10 hereof (other than
expenses up to a maximum of $216,000 related to the ordinary 1993 year-end
audit conducted in accordance with GAAP which shall be borne by SMI) shall
be the sole obligation of the Shareholders. For purposes of this Section
11.01, the fees and expenses of Hunton & Williams, KPMG, J.P. Morgan or any
other legal or financial advisors to O&M Holding and O&M shall be the sole
obligation of O&M Holding and O&M.
11.02 Break-up Fee. If this Agreement is terminated by SMI or the
Shareholders pursuant to Section 10.01(d) hereof, then O&M shall pay to SMI
as liquidated damages within ten days after the date of such termination
$2,000,000 (by wire transfer of immediately available funds to an account
designated by SMI for such purpose).
If this Agreement is terminated by O&M or O&M Holding pursuant to
Section 10.01(e) hereof, then SMI shall pay to O&M as liquidated damages
within ten days after the date of such termination $2,000,000 (by wire
transfer of immediately available funds to an account designated by O&M for
such purpose).
11.03 Publicity. Except to the extent otherwise expressly
required by Law, prior to the Effective Time no party hereto shall make or
cause to be made any news release or other public statement, including
communications to employees, suppliers, distributors and customers of SMI
or O&M, pertaining to the matters contemplated by this Agreement unless
approved by SMI and O&M, which approval shall not be unreasonably withheld.
Without limiting the foregoing, in all announcements, press releases,
notices to customers, vendors, employees and other third parties, and in
all other communications in which this Agreement and the transactions
contemplated hereby are described by any party hereto, each of SMI and O&M
will, and will instruct their directors, officers, employees, agents and
other representatives to, characterize such transactions as a merger or a
business combination of SMI and O&M.
11.04 Further Assurances. SMI, the Shareholders, O&M and O&M
Holding each agree that at the request of the other parties hereto it will
execute and deliver all such further assignments, endorsements and other
documents and perform all such other acts and things as the other party may
reasonably request to evidence the consummation of the transactions
contemplated by this Agreement.
11.05 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if
delivered personally or sent by certified mail, overnight mail, telecopier
or telex to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
(a) if to SMI or the Shareholders:
C. G. Grefenstette
2000 Grant Building
Pittsburgh, PA 15219
(412) 338-3689
Telecopy: (412) 338-3696
with a copy to:
Cohen & Grigsby, P.C.
2900 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222
(412) 391-3382
Attention: David J. Kalson
Telecopy: (412) 391-3382
(b) if to O&M or O&M Holding:
Owens & Minor, Inc.
4800 Cox Road
Glen Allen, VA 23060
(804) 747-9794
Attention: G. Gilmer Minor, III
Telecopy: (804) 747-9270
with a copy to:
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, VA 23219-4074
(804) 788-8200
Attention: C. Porter Vaughan, III
Telecopy: (804) 788-8218
11.06 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
11.07 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and, except as
provided in Section 9.01(a) hereof, nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
11.08 Severability. If any of the provisions of this Agreement
shall be declared by any court of competent jurisdiction illegal, void or
unenforceable, the other provisions shall not be affected, but shall remain
in full force and effect.
11.09 Miscellaneous. This Agreement (including the Schedules and
Exhibits hereto and the certificates of the parties delivered in connection
herewith and referred to herein) and the Related Agreements: (a)
constitute the entire agreement and supersede all other prior agreements
and undertakings, both written and oral, among the parties, or any of them,
with respect to the subject matter hereof; (b) may not be assigned; and (c)
shall be governed in all respects, including validity, interpretation and
effect, by the internal laws of the Commonwealth of Virginia (other than
the SMI Plan of Exchange which shall be governed by the internal laws of
the Commonwealth of Pennsylvania), without giving effect to the principles
of conflict of laws thereof.
11.10 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
11.11 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of all of the parties hereto.
11.12 Waiver. At any time prior to the Effective Time, any party
hereto may extend the time for the performance of any of the obligations or
other acts of any other parties hereto or waive compliance with any of the
agreements of any other party or with any conditions to its own
obligations, except that the condition set forth in Section 8.11 may not be
waived. Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
11.13 Remedies. The Shareholders acknowledge and agree that O&M
would be irreparably damaged in the event any of the provisions of Sections
9.03 through 9.07 were violated or not performed by the Shareholders in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that O&M shall be entitled to an injunction or
injunctions to prevent breaches of such Sections and to specifically
enforce such Sections and the terms and provisions thereof in any action
instituted in any court of the United States or any state thereof having
subject matter jurisdiction, in addition to any other remedy to which O&M
may be entitled, at law or in equity.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first written above by SMI, O&M and the O&M
Holding, by their respective officers thereunto duly authorized, and by
each of the Shareholders.
STUART MEDICAL, INC.
By: /s/ Mark J. Laskow
Mark J. Laskow
Title: Chairman of the Board
of Directors
OWENS & MINOR, INC.
By: /s/ G. Gilmer Minor, III
G. Gilmer Minor, III
Title: President and Chief
Executive Officer
O&M HOLDING, INC.
By: /s/ G. Gilmer Minor, III
G. Gilmer Minor, III
Title: President
Henry L. Hillman, Elsie H. Hillman and C. G.
Grefenstette, Trustees under the Henry L.
Hillman Trust under agreement of trust dated
November 18, 1985
By /s/ C. G. Grefenstette
Trustee
/s/ C. G. Grefenstette
C. G. Grefenstette, as attorney-in-fact for
Juliet Lea Hillman Simonds, Audrey Hillman
Fisher, Henry L. Hillman, Jr., William T.
Hillman, Howard B. Hillman and Tatnall L.
Hillman
<PAGE>
ANNEX IV
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF O&M HOLDING, INC.
ARTICLE I.
Name
The name of the Corporation shall be O&M HOLDING, INC.
ARTICLE II.
Purposes.
The purposes for which the Corporation is formed are:
1. To buy, sell, distribute and trade in medical and surgical
supplies and equipment, pharmaceuticals, drugs and merchandise of every
sort, class and description at wholesale or at retail, as principal or as
agent, alone or in partnership with any other person, firm or corporation
within and without the Commonwealth of Virginia and the United States of
America and to do and perform every act and to carry on every business
which shall be incidental thereto.
2. In addition, the Corporation shall have the power to
transact any and all lawful business not required to be stated specifically
in the articles of incorporation for which corporations may be incorporated
under Chapter I of Title 13.1 of the Code of Virginia of 1950 as in effect
on the effective date of these Articles or as amended subsequently thereto.
ARTICLE III.
Capital Stock.
The maximum number of authorized shares of the capital stock of
the Corporation shall be Two Hundred Million (200,000,000) shares of Common
Stock of the par value of Two Dollars ($2.00) per share, and Ten Million
(10,000,000) shares of Cumulative Preferred Stock of the par value of One
Hundred Dollars ($100.00) per share, issuable in series as is hereinafter
provided.
The description of the Cumulative Preferred Stock and of the
Common Stock and the designations, preferences and voting powers of such
classes of stock, or restrictions or qualifications thereof and the terms
upon which such stock is to be issued are as follows:
PART A.
Cumulative Preferred Stock.
1. Issuance in Series. The Cumulative Preferred Stock shall
be divided into and issued from time to time in one or more series, each
which series shall be so designated as to distinguish the shares thereof
from all other series and classes. The Board of Directors shall have the
authority to divide the Cumulative Preferred Stock into series by
resolution setting forth the designation and number of shares of each
series and the relative rights and preferences thereof in the following
respects, as to which there may be variation between different series:
(a) The rate of dividend, the time of payment and the dates
from which any dividends shall be cumulative and the extent of
participation rights, if any;
(b) Any right to vote with holders of shares of any other
series or class and any right to vote as a class either
generally or as a condition to specified corporate action,
subject to the limitations of Section 4 of Part A of this
Article III;
(c) The price at which and the terms and conditions upon
which shares may be redeemed;
(d) The amount payable upon shares in the event of
involuntary liquidation;
(e) The amount payable upon shares in the event of
voluntary liquidation;
(f) Sinking fund provisions of the redemption or purchase
of shares, if any;
(g) The terms and conditions upon which shares may be
converted, if the shares of any series are issued with the
privilege of conversion.
The Board of Directors shall have the further authority to
redesignate any shares of any series theretofore established which have not
been issued or which have been issued and retired as shares of some other
series or to change the designation of outstanding shares when desired to
prevent confusion.
All shares of Cumulative Preferred Stock of any one series shall
be identical with each other in all respects except, if so determined by
the Board of Directors, as to the dates from which dividends thereon shall
be cumulative. The shares of Cumulative Preferred Stock shall be equal in
rank with each other regardless of series and shall be identical with each
other in all respects except as hereinabove provided.
2. Preferences over Common Stock. The Cumulative Preferred
Stock as a class shall have preference over the Common Stock as to the
payment of dividends and in the distribution of the assets of the
Corporation in the event of any liquidation and dissolution, whether
voluntary or involuntary. All shares of Cumulative Preferred Stock of
every series shall share ratably in the distribution of assets upon
dissolution if the assets of the Corporation are insufficient to pay the
full liquidation price of all shares of Cumulative Preferred Stock of every
series.
So long as any dividend on any series of Cumulative Preferred
Stock shall be in arrears, no dividend shall be declared and paid on the
Common Stock except dividends payable in shares of Common Stock, nor shall
the Corporation purchase or otherwise acquire for a consideration any
shares of Common Stock.
3. Redemption of Cumulative Preferred Stock. Subject to any
other provision of these Articles of Incorporation to the contrary and to
the right of the Board of Directors to fix in any resolution of serial
designation adopted by it the terms and conditions upon which shares of any
series may be redeemed, in the event of any redemption of shares of
Cumulative Preferred Stock by the Corporation, it may at the option of the
Board of Directors redeem the whole or any part of the Cumulative Preferred
Stock at any time outstanding upon not less than thirty (30) nor more than
sixty (60) days previous notice by mail to the holders of record of the
shares to be redeemed. If less than the whole of a series shall be
redeemed, the shares to be so redeemed shall be determined by lot or in
such other manner as the Board of Directors may determine. If such notice
of redemption shall have been duly given, and if on or before the
redemption date specified in such notice, the funds necessary for such
redemption shall have been deposited in trust with any bank or trust
company in the City of Richmond, Virginia, having capital and unrestricted
surplus aggregating at least TEN MILLION DOLLARS ($10,000,000) named in
such notice, to be applied to the redemption of the Cumulative Preferred
Stock so called for redemption, then from the time of such deposit all
shares of Cumulative Preferred Stock for the redemption of which such
deposit shall have made shall be deemed no longer to be outstanding for any
purpose and all rights with respect to such shares shall thereupon
terminate, except the right to receive the redemption price on deposit, not
without interest thereon. Any interest accrued upon or earned by such
deposit shall be paid to the Corporation. At the end of five (5) years
from the redemption date named in such notice, any funds so deposited which
then remain unclaimed shall be paid to the Corporation free of any trust.
Any holder of Cumulative Preferred Stock so called for redemption as shall
not have received the redemption price prior to such repayment to the
Corporation shall be deemed to be an unsecured creditor of the Corporation
for the amount of the redemption price and shall look only to the
Corporation for the payment thereof, without interest.
4. Voting Rights of Cumulative Preferred Stock. Except as set
forth elsewhere in these Articles of Incorporation and as shall be provided
in any resolution of serial designation adopted by the Board of Directors,
the holders of the Cumulative Preferred Stock shall not be entitled to any
vote except as to matters in respect of which they shall at the time be
indefeasibly vested by statute with such right. The Board of Directors may
grant to holders of any series of Cumulative Preferred Stock the right to
vote as a class for the election of Directors only upon the following terms
and conditions and subject to the following limitations:
(a) Such right to vote as a class for the election of
Directors shall not be exercisable unless and until the
Corporation shall be in arrears for the payment of four (4) or
more dividends on any series of Cumulative Preferred Stock.
(b) The number of Directors elected by holders of
Cumulative Preferred Stock of all series shall not exceed two
(2) in the aggregate.
(c) Such power to elect Directors, if granted to more than
one series, shall apply to all series as a class, and not
separately.
(d) No Director elected by the Cumulative Preferred Stock,
if such power be conferred upon any series of such stock, shall
be classified with the Directors elected by the Common Stock,
but any such Directors so elected by the Cumulative Preferred
Stock shall serve as a separate class to be elected annually and
shall serve in addition to the number of classified Directors
elected by the Common Stock as provided in the bylaws of the
Corporation. They, together with the classified Directors as
provided in the bylaws, shall constitute the Board of Directors.
(e) Immediately upon the payment of all dividends in
arrears, any Director or Directors so elected by the Cumulative
Preferred Stock shall cease to act and shall no longer be
Directors of the Corporation.
5. Series A Preferred Stock. The first series of Cumulative
Preferred Stock shall be designated "Series A Participating Cumulative
Preferred Stock" ("Series A Preferred Stock") and the number of shares
constituting such series shall be 300,000. The preferences, limitations and
relative rights of shares of Series A Preferred Stock shall be as follows:
(a) Dividends and Distributions.
(1) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock
ranking prior and superior to the shares of Series A
Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock in preference to the
holders of Common Stock and of any other junior stock,
shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available
therefor, dividends payable quarterly on the fifteenth day
of each February, May, August and November (each such date
being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment
Date after the first issuance of a share or fraction of a
share of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a)
$6.50 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a
share of Series A Preferred Stock. In the event the
Corporation shall at any time, (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders
of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately
prior to such event.
(2) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (1) above immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend at the rate of
$6.50 per share on the Series A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative
on outstanding shares of Series A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of
issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be
no more than 30 days prior to the date fixed for the
payment thereof.
(b) Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(1) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred
Stock shall entitle the holder thereof to one vote on all
matters submitted to a vote of the shareholders of the
Corporation.
(2) Except as otherwise provided herein, in the
Articles of Incorporation or under applicable law, the
holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock shall vote together as
one voting group on all matters submitted to a vote of
stockholders of the Corporation.
(3) (i) If at any time dividends on any shares of
Series A Preferred Stock shall be in arrears in an amount
equal to six quarterly dividends thereon, the occurrence of
such contingency shall mark the beginning of a period (a
"default period") that shall extend until such time when
all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly
dividend period on all shares of Series A Preferred Stock
then outstanding shall have been declared and paid or set
apart for payment. During each default period, all holders
of the outstanding shares of Series A Preferred Stock
together with any other series of Preferred Stock then
entitled to such a vote under the terms of the Articles of
Incorporation, voting as a separate voting group, shall be
entitled to elect two members of the Board of Directors of
the Corporation.
(ii) During any default period, such voting right
of the holders of Preferred Stock may be exercised
initially at a special meeting called pursuant to
subparagraph (iii) of this Section 5(b)(3) or at any annual
meeting of shareholders, and thereafter at annual meetings
of shareholders, provided that neither such voting right
nor the right of the holders of any other series of
Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless
the holders of ten percent (10%) in number of shares of
Preferred Stock outstanding shall be present in person or
by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of
Preferred Stock of such voting right. At any meeting at
which the holders of Preferred Stock shall exercise such
voting right initially during an existing default period,
they shall have the right, voting as a separate voting
group, to elect Directors to fill such vacancies, if any,
in the Board of Directors as may then exist up to two (2)
Directors, or if such right is exercised at an annual
meeting, to elect two (2) Directors. If the number which
may be so elected at any special meeting does not amount to
the required number, the holders of the Preferred Stock
shall have the right to make such increase in the number of
Directors as shall be necessary to permit the election by
them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect
Directors in any default period and during the continuance
of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the
rights of any equity securities ranking senior to or pari
passu with the Series A Preferred Stock.
(iii) Unless the holders of Preferred Stock
shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of
Directors may order, or any shareholder or shareholders
owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding,
irrespective of series, may request, the calling of a
special meeting of the holders of Preferred Stock, which
meeting shall thereupon be called by the Chairman,
President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to
vote pursuant to this paragraph 5(b)(3)(iii) shall be given
to each holder of record of Preferred Stock by mailing a
copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall
be called for a time not earlier than 10 days and not later
than 60 days after such order or request. In the event such
meeting is not called within 60 days after such order or
request, such meeting may be called on similar notice by
any shareholder or shareholders owning in the aggregate not
less than ten percent (10%) of the total number of shares
of Preferred Stock outstanding. Notwithstanding the
provisions of this paragraph 5(b)(3)(iii), no such special
meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual
meeting of the shareholders.
(iv) In any default period, the holders of Common
Stock, and other classes of stock of the Corporation if
applicable, shall continue to be entitled to elect the
whole number of Directors until the holders of Preferred
Stock shall have exercised their right to elect two (2)
Directors voting as a separate voting group, after the
exercise of which right (x) the Directors so elected by the
holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any
vacancy in the Board of Directors may (except as provided
in paragraph 5(b)(3)(ii)) be filled by vote of a majority
of the remaining Directors theretofore elected by the
voting group which elected the Director whose office shall
have become vacant. References in this paragraph
5(b)(3)(iv) to Directors elected by a particular voting
group shall include Directors elected by such Directors to
fill vacancies as provided in clause (y) of the foregoing
sentence.
(v) Immediately upon the expiration of a default
period, (x) the right of the holders of Preferred Stock, as
a separate voting group, to elect Directors shall cease,
(y) the term of any Directors elected by the holders of
Preferred Stock, as a separate voting group, shall
terminate, and (z) the number of Directors shall be such
number as may be provided for in, or pursuant to, the
Articles of Incorporation or bylaws irrespective of any
increase made pursuant to the provisions of paragraph
5(b)(3)(ii) (such number being subject, however, to change
thereafter in any manner provided by law or in the Articles
of Incorporation or bylaws). Any vacancies in the Board of
Directors affected by the provisions of clauses (y) and (z)
in the preceding sentence may be filled by a majority of
the remaining Directors, even though less than a quorum.
(4) Except as set forth herein or as otherwise
provided in the Articles of Incorporation, holders of
Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
(c) Certain Restrictions.
(1) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as
provided in Section 5(a) are in arrears, thereafter and
until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay or set apart for payment any
dividends (other than dividends payable in shares of any
class or classes of stock of the Corporation ranking junior
to the Series A Preferred Stock) or make any other
distributions on, any class of stock of the Corporation
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
and shall not redeem, purchase or otherwise acquire,
directly or indirectly, whether voluntarily, for a sinking
fund, or otherwise any shares of any class of stock of the
Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that, notwithstanding the
foregoing, the Corporation may at any time redeem, purchase
or otherwise acquire shares of stock of any such junior
class in exchange for, or out of the net cash proceeds from
the concurrent sale of, other shares of stock of any such
junior class;
(ii) declare or pay dividends on or make any
other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, provided
that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock;
(iv) purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or
any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(2) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless
the Corporation could, under paragraph (1) of Section 5(c),
purchase or otherwise acquire such shares at such time and
in such manner.
(d) Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after
the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on
issuance set forth herein.
(e) Liquidation, Dissolution or Winding Up.
(1) Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of
shares of Series A Preferred Stock shall have received $10
per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A
Liquidation Preference"). Following the payment of the full
amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of
shares of Series A Preferred Stock unless, prior thereto,
the holders of shares of Common Stock shall have received
an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100 (as appropriately adjusted as set
forth in subparagraph f(iii) below to reflect such events
as stock splits, stock dividends and recapitalizations with
respect to the Common Stock) (such number in clause (ii)
being hereinafter referred to as the "Adjustment Number").
Following the payment of the full amount of the Series A
Liquidation Preference and the Common Adjustment in respect
of all outstanding shares of Series A Preferred Stock and
Common Stock, respectively, holders of Series A Preferred
Stock and holders of shares of Common Stock shall receive
their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment
Number to 1 with respect to such Series A Preferred Stock
and Common Stock, on a per share basis, respectively.
(2) In the event, however, that there are not
sufficient assets available to permit payment in full of
the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any,
then such remaining assets shall be distributed ratably to
the holders of all such shares in proportion to their
respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the
holders of Common Stock.
(3) In the event the Corporation shall at any time (i)
declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the
Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by
a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to
such event.
(f) Consolidation, Merger, Share Exchange, etc. In case the
Corporation shall enter into any consolidation, merger, share
exchange, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such
case the shares of Series A Preferred Stock shall at the same
time be similarly exchanged or changed in an amount per share
(subject to the provision for adjustment hereinafter set forth)
equal to 100 times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any
time (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number
of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior
to such event.
(g) Redemption. The outstanding shares of Series A
Preferred Stock may be redeemed at the option of the Board of
Directors as a whole, but not in part, at any time, or from time
to time, at a cash price per share equal to (i) the par value
thereof, plus (ii) all dividends which on the redemption date
have accrued on the shares to be redeemed and have not been paid
or declared and a sum sufficient for the payment thereof set
apart, without interest.
(h) Ranking. The Series A Preferred Stock shall rank on a
parity with all other series of Preferred Stock as to the
payment of dividends and the distribution of assets.
(i) Amendment. The Articles of Incorporation shall not be
further amended in any manner that would adversely affect the
preferences, rights or powers of the Series A Preferred Stock
without the affirmative vote of the holders of more than two-
thirds of the outstanding shares of the Series A Preferred
Stock, if any, voting separately as one voting group.
(j) Fractional Shares. Series A Preferred Stock may be
issues of one one-hundredth of a share (and integral multiples
thereof) which shall entitle the holder, in proportion to such
holders' fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Preferred Stock.
6. Series B Preferred Stock. The second series of
Cumulative Preferred Stock shall be designated "Series B Cumulative
Preferred Stock" ("Series B Preferred Stock") and the number of shares
constituting such series shall be 1,150,000. The preferences, limitations
and relative rights of shares of Series B Preferred Stock shall be as
follows:
(a) Dividends and Distributions.
(1) The holders of shares of Series B Preferred Stock,
in preference to the holders of Common Stock and of any
other capital stock of the Corporation ranking junior to
the Series B Preferred Stock as to payment of dividends,
shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available
therefor, a per annum cash dividend of $4.50 per share, and
no more, payable in equal quarterly amounts of $1.125 each
on the last day of each January, April, July and October of
each year, beginning July 31, 1994 (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
to holders of record on the fifteenth day of each such
respective month, commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share
of Series B Preferred Stock.
(2) Dividends shall begin to accrue and be cumulative
on outstanding shares of Series B Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of
issue of such shares of Series B Preferred Stock, unless
the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of
shares of Series B Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series
B Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding.
(b) Voting Rights. The holders of shares of Series B
Preferred Stock shall be entitled to vote on all matters
submitted to a vote of the shareholders of the Corporation,
voting together with the holders of shares of other series
of the Preferred Stock entitled to vote thereon and the
Common Stock as a single voting group. Each share of
Series B Preferred Stock shall entitle the holder thereof
to a number of votes equal to the number of shares of
Common Stock into which such Series B Preferred share could
be converted in accordance with Section 6(g) on the record
date for determining the shareholders entitled to vote; it
being understood that whenever the "Conversion Price" (as
defined in Section 6(g)(1)) is adjusted as provided in
Section 6(g)(5) the number of votes to which each share of
Series B Preferred Stock is entitled shall also be
similarly adjusted.
(c) Certain Restrictions.
(1) Whenever quarterly dividends or other dividends or
distributions payable on Series B Preferred Stock as
provided in Section 6(a) are in arrears, thereafter and
until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series B Preferred
Stock outstanding shall have been paid in full, or declared
and set apart for payment, the Corporation shall not:
(i) declare or pay or set apart for payment any
dividends (other than dividends payable in shares of
any class or classes of stock of the Corporation
ranking junior to Series B Preferred Stock as to
payment of dividends or warrants or rights to acquire
such stock) or make any other distributions on, any
class of stock of the Corporation ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to Series B Preferred Stock
("Junior Stock"), other than distributions of rights
("Rights") pursuant to the Rights Agreement, dated as
of June 22, 1988, between Owens & Minor, Inc. and the
rights agent thereunder, as heretofore amended and as
it may be further amended, in accordance with it terms,
or replaced from time to time (such agreement, as so
amended or replaced, being hereinafter referred to as
the "Rights Agreement"), and shall not redeem, purchase
or otherwise acquire, directly or indirectly, whether
voluntarily, for a sinking fund, or otherwise any
shares of Junior Stock, provided that, notwithstanding
the foregoing, the Corporation may at any time redeem,
purchase or otherwise acquire shares of Junior Stock in
exchange for, or out of the net cash proceeds from the
concurrent sale of, other shares of Junior Stock or
warrants or rights to acquire Junior Stock;
(ii) declare or pay dividends on or make any
other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Preferred
Stock ("Parity Stock"), except dividends paid or
distributions made ratably on Series B Preferred Stock
and all such Parity Stock on which dividends are
payable or in arrears in proportion to the total
amounts of such dividends to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any Parity Stock, provided that
the Corporation may at any time redeem, purchase or
otherwise acquire shares of any Parity Stock in
exchange for shares of any Junior Stock; or
(iv) purchase or otherwise acquire for
consideration any shares of Series B Preferred Stock,
or any shares of Parity Stock, except as permitted by
the Articles of Incorporation of the Corporation or in
accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the
Board of Directors, after consideration of the
respective annual dividend rates, the amount of
dividends in arrears and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and
equitable treatment among the respective series or
classes.
(2) Notwithstanding the foregoing, nothing in this
Section 6(c) shall prevent the Corporation from (i)
declaring a dividend or distribution of Rights or issuing
Rights in connection with the issuance of Series B
Preferred Stock, Junior Stock or Parity Stock, or (ii)
redeeming Rights at a price not to exceed $.01 per Right.
(3) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless
the Corporation could, under paragraph (1) of Section 6(c),
purchase or otherwise acquire such shares at such time and
in such manner.
(d) Reacquired Shares. Any shares of Series B Preferred
Stock purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set
forth herein.
(e) Liquidation, Dissolution or Winding Up.
(1) Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of
stock ranking junior upon liquidation, dissolution or
winding up to Series B Preferred Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock
shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends thereon, whether or not
declared, to the date of such payment, and no more (the
"Series B Liquidation Preference").
(2) In the event, however, that there are not
sufficient assets available to permit payment in full of
the Series B Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any,
then such remaining assets shall be distributed ratably to
the holders of all such shares in proportion to their
respective liquidation preferences.
(f) Redemption. The outstanding shares of Series B
Preferred Stock may be redeemed only at the option of the
Corporation as a whole or in part at any time on or after
April 30, 1997, or from time to time thereafter, at a cash
price per share equal to (i) the par value thereof, plus
(ii) all accrued and unpaid dividends thereon, whether or
not declared, to the redemption date; provided, however,
that: (i) any such redemption made before April 30, 2004
may be made solely to the extent of the sum of (x) the net
proceeds from the sale or issuance by the Corporation for
cash from time to time after January 1, 1994 of shares of
capital stock of the Corporation or any other securities
convertible into, or exchangeable or exercisable for such
capital stock, plus (y) the fair market value (as
determined in good faith by the Board of Directors of the
Corporation) of all such capital stock or other securities
sold or issued by the Corporation from time to time after
January 1, 1994 in exchange for other property (including,
without limitation, any thereof issued in exchange for
stock, securities or assets of other corporations or other
entities); and (ii) any redemption in part may only be made
if the aggregate market value (based on the average of the
closing prices of the Common Stock on the New York Stock
Exchange for the ten trading days immediately preceding the
date the Redemption Notice (as defined below) is given) of
the total number of shares of Common Stock into which the
Series B Preferred Stock to be redeemed are at the time
convertible pursuant to Section (g)(1) is at least
$50,000,000.
Not less than 30 days nor more than 60 days prior to
the date fixed by the Corporation for redemption (the
"Redemption Date"), written notice (the "Redemption
Notice") shall be mailed by the Corporation, postage
prepaid, to each holder of record of the Series B Preferred
Stock at such holder's address as it appears on the stock
transfer books of the Corporation. The Redemption Notice
shall state:
(i) the total number of shares of Series B Preferred
Stock to be redeemed;
(ii) the number of shares of Series B Preferred Stock
held by the holder which the Corporation will redeem;
(iii) the Redemption Date and the redemption price;
(iv) the fact that the holder's conversion rights will
continue until the close of business on the second business
day preceding the Redemption Date;
(v) that the holder is to surrender to the
Corporation, in the manner and at the place designated, his
certificate or certificates representing the shares of
Series B Preferred Stock to be redeemed; and
(vi) if the redemption is in part, the Corporation's
calculations showing compliance with clause (ii) of the
proviso in the first paragraph of this Section 6(f).
(g) Conversion.
(1) Subject to and upon compliance with the provisions
of this Section (g), the holders of a majority of the shares of
Series B Preferred Stock outstanding at the time shall have the
right, at such holders' option and upon written notice to the
Corporation, at any time to convert all of the outstanding
shares of Series B Preferred Stock into the number of fully paid
and nonassessable shares of Common Stock (calculated as to each
conversion, for the purpose of determining the amount of any
cash payments provided in Section (g)(4), to the nearest cent or
to the nearest .01 of a share of Common Stock, as the case may
be, with one-half cent and .005 of a share, respectively, being
rounded upward), obtained by dividing $100 by the Conversion
Price (as defined below) and multiplying such resulting number
by the number of shares of Series B Preferred Stock to be
converted. Such conversion shall be effective at the close of
business on the first business day following the Corporation's
receipt of such notice. Except as provided in paragraph (2), no
shares of Series B Preferred Stock may be converted unless all
outstanding shares of Series B Preferred Stock are surrendered
for conversion.
The term "Conversion Price" shall mean $24.735, as
adjusted in accordance with the provisions of this Section (g).
(2) Notwithstanding the requirement of conversion in
Section (g)(1), any shares of Series B Preferred Stock called
for redemption may be converted at any time before the close of
business on the second business day preceding the Redemption
Date, without causing the conversion of any other shares. Upon
any conversion pursuant to this Section (g)(2), the Corporation
shall pay to the holder of Series B Preferred Stock so converted
an amount in cash equal to all accrued and unpaid dividends on
such shares to and including the date of conversion, whether or
not declared (with such amount being pro rated with respect to
the then current dividend period).
(3) In order to exercise the conversion privilege in
the case of a conversion specified in Section (g)(2), or in
order to receive certificates evidencing Common Stock issuable
upon a conversion specified in Section (g)(1) or (g)(2), the
holder of each share of Series B Preferred Stock to be
converted, or so converted, as the case may be, shall surrender
the certificate representing such share at the office of any
transfer agent for the Common Stock and shall give written
notice to the Corporation at such office that such holder elects
to convert the same, specifying the name or names and
denominations in which such holder wishes the certificate or
certificates for the Common Stock to be issued (which notice may
be in the form of a notice of election to convert which may be
printed on the reverse side of the certificates for the shares
of Series B Preferred Stock). Unless the shares issuable on
conversion are to be issued in the same name as the name in
which such share of Series B Preferred Stock is registered, each
certificate evidencing shares surrendered for conversion shall
be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or his duly
authorized attorney, and by an amount in cash sufficient to pay
any transfer or similar tax.
The holders of shares of Series B Preferred Stock at
the close of business on a Quarterly Dividend Payment Date shall
be entitled to receive any previously declared dividend payable
on such shares on such date notwithstanding the Corporation's
default in payment of the dividend due on such Quarterly
Dividend Payment Date. Except as provided in Section (g)(2) and
above in this Section (g)(3), and without limiting the effect of
Section (g)(5)(b), the Corporation shall not be obligated to
make any payment or allowance for unpaid dividends, whether or
not in arrears, on converted shares or for dividends on the
shares of Common Stock issued upon such conversion, payable in
respect of any period before such conversion.
As promptly as practicable after the surrender of the
certificates for shares of Series B Preferred Stock as provided
above, the Corporation shall issue and shall deliver at the
office of any transfer agent for the Common Stock to such
holder, or on his written order, a certificate or certificates
for the number of full shares of Common Stock issuable upon the
conversion of such shares in accordance with the provisions of
this Section (g), together with a certificate or certificates
representing any shares of Series B Preferred Stock that are not
to be converted but shall have constituted part of the shares of
Series B Preferred Stock represented by the certificate or
certificates so surrendered, and any fractional interest in
respect of a share of Common Stock arising upon such conversion
shall be settled as provided in Section (g)(4).
Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which
the certificates for shares of Series B Preferred Stock shall
have been surrendered and such notice received by the
Corporation as provided above (or such later time as may be
specified in such notice), and the person or persons in whose
name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the
shares represented thereby at such time on such date, and such
conversion shall be at the Conversion Price in effect at such
time on such date, unless the stock transfer books of the
Corporation shall be closed on such date, in which event such
person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next
succeeding day on which such stock transfer books are open, but
such conversion shall be at the Conversion Price in effect on
the date upon which such shares shall have been surrendered and
such notice received by the Corporation. All shares of Common
Stock delivered upon conversion of the shares of Series B
Preferred Stock will upon delivery be duly and validly issued
and fully paid and nonassessable, free of all liens and charges
and not subject to any preemptive rights.
(4) No fractional shares or scrip representing
fractions of shares of Common Stock shall be issued upon
conversion of shares of Series B Preferred Stock. Instead of
any fractional interest in a share of Common Stock that would
otherwise be deliverable upon the conversion of a share of
Series B Preferred Stock, the Corporation shall pay to the
holder of such share of Series B Preferred Stock an amount in
cash (computed to the nearest cent, with one-half cent being
rounded upward) equal to the Conversion Price multiplied by the
fraction of a share of Common Stock represented by such
fractional interest. If more than one share of Series B
Preferred Stock shall be surrendered for conversion at one time
by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis
of the aggregate Conversion Price of the shares of Series B
Preferred Stock so surrendered.
(5) The Conversion Price shall be adjusted (and the
other actions specified herein shall be taken) from time to time
as follows:
(a)
In case the Corporation shall (x) pay a dividend or make a
distribution on the Common Stock in shares of Common Stock,
(y) subdivide the outstanding Common Stock into a greater
number of shares or (z) combine the outstanding Common
Stock into a smaller number of shares, the Conversion Price
shall be adjusted so that the holder of any share of Series
B Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common
Stock of the Corporation that he would have been entitled
to receive after the happening of any of the events
described above had such share been converted immediately
prior to the record date, in the case of a dividend, or the
effective date, in the case of subdivision or combination.
An adjustment made pursuant to this subparagraph (a) shall
become effective immediately after the record date in the
case of a dividend, and shall become effective immediately
after the effective date, in the case of a subdivision or
combination.
(b)
In case the Corporation shall distribute to holders of Common
Stock generally any shares of capital stock of the
Corporation (other than Common Stock) or evidences of its
indebtedness or assets (excluding cash dividends or
distributions paid from retained earnings or other legally
permitted sources of the Corporation or dividends payable
in Common Stock, but including any distribution of
securities or other property pursuant to the Rights
Agreement) or rights or warrants to subscribe for or
purchase any of its securities including any rights issued
at any time under the Rights Agreement (any of the
foregoing being hereinafter in this subparagraph (b) called
the "Securities"), then, in each such case, the Corporation
shall make appropriate provisions to reserve an adequate
amount of such Securities for distribution to the holders
of the shares of Series B Preferred Stock upon the
conversion of the shares of Series B Preferred Stock so
that any such holder converting shares of Series B
Preferred Stock will receive upon such conversion, in
addition to the shares of Common Stock to which such holder
is entitled, the amount and kind of such Securities that
such holder would have received if such holder had,
immediately prior to the record date for the distribution
of the Securities or the event that required the
distribution of the Securities, as the case may be,
converted its shares of Series B Preferred Stock into
Common Stock.
(c)
Whenever the Conversion Price is adjusted as herein
provided, the Corporation shall prepare and retain at its
principal office a certificate, signed by the Chairman of
the Board, any Vice Chairman, the President, any Senior
Vice President or any Vice President of the Corporation,
setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring
such adjustment; provided, however, that the failure of the
Corporation to prepare and retain such officer's
certificate shall not invalidate any corporate action by
the Corporation.
(6) Whenever the Conversion Price is adjusted as
provided in subparagraph (c) of Section (g)(5), the Corporation
shall cause to be mailed to each holder of shares of Series B
Preferred Stock at his then registered address by first-class
mail, postage prepaid, a notice of such adjustment of the
Conversion Price setting forth such adjusted Conversion Price
and the effective date of such adjusted Conversion Price;
provided, however, that the failure of the Corporation to give
such notice shall not invalidate any corporate action by the
Corporation.
(7) The Corporation covenants that it will at all
times reserve and keep available, free from preemptive rights,
out of the aggregate of its authorized but unissued shares of
Common Stock, for the purpose of effecting conversions of shares
of Series B Preferred Stock, the full number of shares of Common
Stock deliverable upon the conversion of all outstanding shares
of Series B Preferred Stock not theretofore converted. For
purposes of this Section (g)(7), the number of shares of Common
Stock that shall be deliverable upon the conversion of all
outstanding shares of Series B Preferred Stock shall be computed
as if at the time of computation all such outstanding shares
were held by a single holder.
(8) The Corporation will pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock on conversions
of shares of Series B Preferred Stock pursuant hereto; provided,
however, that the Corporation shall not be required to pay any
tax that may be payable in respect of any transfer involved in
the issue or delivery of shares of Common Stock in a name other
than that of the holder of shares of Series B Preferred Stock to
be converted and no such issue or delivery shall be made unless
and until the person requesting such issue or delivery has paid
to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such
tax has been paid.
(9) Notwithstanding any other provision herein to the
contrary, if any of the following events occur: (i) any
reclassification or change of outstanding shares of Common Stock
(other than a change in par value, or from par value to no par
value or from no par value to par value, or as a result of
subdivision or combination of the Common Stock), (ii) any
consolidation, merger or combination of the Corporation with or
into another corporation or a statutory share exchange as a
result of which holders of Common Stock shall be entitled to
receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock, or
(iii) any sale or conveyance of all or substantially all the
properties and assets of the Corporation as, or substantially
as, an entirety to any other entity as a result of which holders
of Common Stock shall be entitled to receive stock, securities
or other property or assets (including cash) with respect to or
in exchange for such Common Stock, then appropriate provision
shall be made so that the holder of each share of Series B
Preferred Stock then outstanding shall have the right to convert
such share into the kind and amount of shares of stock and other
securities and property or assets that would have been
receivable upon such reclassification, change, consolidation,
merger, combination, exchange, sale or conveyance by a holder of
the number of shares of Common Stock issuable upon conversion of
such share of Series B Preferred Stock immediately prior to such
reclassification, change, consolidation, merger, combination,
exchange, sale or conveyance. If, in the case of any such
consolidation, merger, combination, exchange, sale or
conveyance, the stock or other securities and property
receivable thereupon by a holder of shares of Common Stock
includes shares of stock, securities or other property or assets
(including cash) of an entity other than the successor or
acquiring entity, as the case may be, in such consolidation,
merger, combination, exchange, sale or conveyance, then the
Corporation shall enter into an agreement with such other entity
for the benefit of the holders of Series B Preferred Stock that
shall contain such provisions to protect the interests of such
holders as the Board of Directors of the Corporation shall
reasonably consider necessary by reason of the foregoing.
(10) Upon any conversion of any shares of Series B
Preferred Stock, the shares of Series B Preferred Stock so
converted shall have the status of authorized and unissued
shares of Preferred Stock, without designation as to series,
until such shares are once more designated as part of a
particular series by the Board of Directors of the Corporation.
(h) Mandatory Conversion. Except as provided in Section
(g)(2), each share of Series B Preferred Stock shall be
converted automatically into the number of shares of Common
Stock determined as provided in Section (g)(1) immediately upon
the conversion of shares of Series B Preferred Stock pursuant to
such Section.
(i) Ranking. The Series B Preferred Stock shall rank on a
parity with all other series of Preferred Stock as to the
payment of dividends and the distribution of assets upon
liquidation.
(j) Series B Director. (1) So long as any share of Series
B Preferred Stock remains outstanding, the Series B Preferred
Stock, voting as a separate voting group, shall be entitled to
elect one member of the Board of Directors of the Corporation.
Such director (the "Series B Director") shall be in addition to
the number of Directors of the Corporation otherwise prescribed
by the Articles of Incorporation or bylaws. Such voting right
of the holders of Series B Preferred Stock may be exercised
initially at a special meeting called pursuant to subparagraph
(2) of this Section 6(j) or at any annual meeting of
shareholders, and thereafter at annual meetings of shareholders,
(or by unanimous written consent in lieu of any such meeting)
provided that such voting right at any such meeting may not be
exercised unless the holders of ten percent (10%) in number of
shares of Series B Preferred Stock outstanding shall be present
in person or by proxy. The absence of a quorum of the holders
of Common Stock at any such meeting shall not affect the
exercise by the holders of Series B Preferred Stock of such
voting right.
(2) Unless the holders of Series B Preferred Stock
shall have previously exercised their right to elect the Series
B Director, the Board of Directors may order, or any holder or
holders owning in the aggregate not less than ten percent (10%)
of the total number of shares of Series B Preferred Stock
outstanding, may request, the calling of a special meeting of
the holders of Series B Preferred Stock for the purpose of
electing the Series B Director, which meeting shall thereupon be
called by the Chairman, President, a Vice-President or the
Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled
to vote pursuant to this Section 6(j) shall be given to each
holder of record of Series B Preferred Stock by mailing a copy
of such notice to him at his last address as the same appears on
the books of the Corporation. Such meeting shall be called for
a time not earlier than 10 days and not later than 60 days after
such order or request. In the event such meeting is not called
within 60 days after such order or request, such meeting may be
called on similar notice by any holder or holders owning in the
aggregate not less than ten percent (10%) of the total number of
shares of Series B Preferred Stock outstanding. Notwithstanding
the provisions of this 6(j), no such special meeting shall be
called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the holders.
Immediately upon the retirement (whether upon redemption,
conversion or otherwise), of all outstanding shares of the
Series B Preferred Stock, (x) the right of the holders of
Preferred Stock, as a separate voting group, to elect a Director
shall cease, (y) the term of the Series B Director shall
terminate, and (z) the number of Directors shall be such number
as may then be provided for in, or pursuant to, the Articles of
Incorporation or bylaws.
(k) Amendment. The Articles of Incorporation shall not be
further amended in any manner that would (i) amend this Section
6 or (ii) adversely affect the preferences, rights or powers of
Series B Preferred Stock without the affirmative vote of the
holders of a majority of the outstanding shares of Series B
Preferred Stock, if any, voting separately as one voting group.
PART B.
Common Stock.
1. Voting Rights. The holders of Common Stock shall to the
exclusion of the holders of Cumulative Preferred Stock have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only as otherwise provided under the applicable
sections of these Articles of Incorporation or by any applicable provision
of law.
2. Dividends. Dividends may be declared and paid and
distributions may be made on the Common Stock and shares of Common Stock
may be purchased or otherwise acquired for value out of any funds of the
Corporation legally available therefore without limit in any amount except
as provided in the sections of these Articles of Incorporation applicable
to cumulative preferred stock. The Corporation may hold or dispose of
shares so purchased from time to time for its corporate purposes or may
retire such shares as provided by law.
3. Distribution of Assets. The holders of the Common Stock in
the event of any dissolution, liquidation or winding up of the affairs of
the Corporation shall be entitled to receive all assets of the Corporation
remaining after satisfaction of the full preferential amounts to which
holders of the Cumulative Preferred Stock are entitled under the provisions
of these Articles of Incorporation, including rights conferred by any
articles of serial designation.
PART C.
Provisions Applicable to all Classes of Stock.
1. Voting Rights. Each shareholder of record of shares of any
class shall be entitled in any meeting of shareholders in which such shares
are entitled to be voted to cast one (1) vote for each share of stock so
held by such shareholder as shown by the stock books of the Corporation and
may cast such vote in person or by proxy.
2. Certain Required Votes. Except as expressly otherwise
required by these Articles of Incorporation or by the Board of Directors
acting pursuant to Subsection C of Section 13.1-707 of the Virginia Stock
Corporation Act, the vote required to approve an amendment or restatement
of these Articles that requires shareholder approval, other than an
amendment or restatement that (i) amends or affects the shareholder vote
required by the Virginia Stock Corporation Act to approve a merger,
statutory share exchange, sale of all or substantially all of the
Corporation's assets or the dissolution of the Corporation or (ii) amends
or affects this Part C or Article IV of these Articles of Incorporation,
shall be a majority of the votes entitled to be cast by each voting group
that is entitled to vote on the matter.
3. Preemptive Rights. No holder of shares of stock of the
Corporation of any class shall have any preemptive right with respect to
shares of that class of stock or of any other class of stock of the
Corporation. Nothing contained herein shall, however, prevent the Board of
Directors in its discretion without any action by the shareholders in
connection with the issuance of any obligations or stock of the Corporation
to grant rights or options for the purchase of shares of the Corporation,
either preferred or common, or to provide for the conversion of shares of
one class of stock of the Corporation into shares of another class having
prior or superior rights and preferences as to dividends or distribution of
assets upon liquidation.
ARTICLE IV.
Number of Directors, Term of Office and Classification.
The Board of Directors shall consist of three (3) directors or
such greater number of directors as shall from time to time be fixed by the
bylaws of the Corporation provided that in the event the holders of
Cumulative Preferred Stock shall become entitled to and shall elect not to
exceed two (2) additional directors as provided in Article III, Part A,
Section 4 above, such director or directors shall be in addition to the
number of directors permitted and subsisting under this section and bylaws
adopted pursuant hereto.
Promptly after these restated Articles of Incorporation shall
become effective, the directors shall be divided into three (3) classes,
each class to be as nearly equal in number as possible. At the first
annual meeting after the effective date of these restated Articles of
Incorporation, the first class of directors shall be elected for a term of
one (1) year, the second class for a term of two (2) years and the third
class for a term of three (3) years. At each annual meeting after such
classification, the number of directors equal to the number of the class
whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting of the shareholders.
ARTICLE V.
Limit on Liability and Indemnification
1. Definitions. For purposes of this Article V, the following
terms shall have the meanings indicated:
(a) "applicant" means the person seeking
indemnification pursuant to this Article V;
(b) "expenses" includes counsel fees;
(c) "liability" means the obligation to pay a
judgment, settlement, penalty, fine, including any
excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with
respect to a proceeding;
(d) "party" includes an individual who was, is,
or is threatened to be made a named defendant or
respondent in a proceeding; and
(e) "proceeding" means any threatened, pending,
or completed action, suit, or proceeding, whether
civil, criminal, administrative or investigative and
whether formal or informal.
2. Limitation of Liability. In any proceeding brought by a
shareholder of the Corporation in the right of the Corporation or brought
by or on behalf of shareholders of the Corporation, no director or officer
of the Corporation shall be liable to the Corporation or its shareholders
for monetary damages with respect to any transaction, occurrence or course
of conduct, whether prior or subsequent to the effective date of this
Article V, except for liability resulting from such person's having engaged
in willful misconduct or a knowing violation of the criminal law or any
federal or state securities law.
3. Indemnification. The Corporation shall indemnify (i) any
person who was or is a party to any proceeding, including a proceeding
brought by a shareholder in the right of the Corporation or brought by or
on behalf of shareholders of the Corporation, by reason of the fact that he
is or was a director or officer of the Corporation, and (ii) any director
or officer who is or was serving at the request of the Corporation as a
director, trustee, partner or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
any liability incurred by him in connection with such proceeding unless he
engaged in willful misconduct or a knowing violation of the criminal law.
A person is considered to be serving an employee benefit plan at the
Corporation's request if his duties to the Corporation also impose duties
on, or otherwise involve services by, him to the plan or to participants in
or beneficiaries of the plan. The Board of Directors is hereby empowered,
by a majority vote of a quorum of disinterested directors, to enter into a
contract to indemnify any director or officer in respect of any proceedings
arising from any act or omission, whether occurring before or after the
execution of such contract.
4. Application; Amendment. The provisions of this Article
shall be applicable to all proceedings commenced after the adoption hereof
by the shareholders of the Corporation, arising from any act or omission,
whether occurring before or after such adoption. No amendment or repeal of
this Article V shall have any effect on the rights provided under this
Article V with respect to any act or omission occurring prior to such
amendment or repeal. The Corporation shall promptly take all such actions,
and make all such determinations, as shall be necessary or appropriate to
comply with its obligation to make any indemnity under this Article V and
shall promptly pay or reimburse all reasonable expenses incurred by any
director or officer in connection with such actions and determinations or
proceedings of any kind arising therefrom.
5. Termination of Proceeding. The termination of any
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption
that the applicant did not meet the standard of conduct described in
section 2 or 3 of this Article V.
6. Determination of Availability. Any indemnification under
this Article V (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the applicant is proper in the circumstances because he
has met the applicable standard of conduct set forth in section 3 of this
Article V.
The determination shall be made:
(a) By the Board of Directors by a majority vote of a
quorum consisting of Directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under subsection
(a) of this section, by a majority vote of a committee duly designated by
the Board of Directors (in which designation Directors who are parties may
participate), consisting solely of two or more directors not at the time
parties to the proceeding;
(c) By special legal counsel:
(i) Selected by the Board of Directors or its
committee in the manner prescribed in subsection (a) or (b) of this
section; or
(ii) If a quorum of the Board of Directors cannot be
obtained under subsection (a) of this section and a committee cannot be
designated under subsection (b) of this section, selected by majority vote
of the full Board of Directors, in which selection directors who are
parties may participate;
(d) By the shareholders, but shares owned by or voted
under the control of Directors who are at the time parties to the
proceeding may not be voted on the determination. Any evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is appropriate, except that if the
determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection
(c) of this section 6 to select counsel. Notwithstanding the foregoing, in
the event there has been a change in the composition of a majority of the
Board of Directors after the date of the alleged act or omission with
respect to which indemnification is claimed, any determination as to
indemnification and advancement of expenses with respect to any claim for
indemnification made pursuant to this Article V shall be made by special
legal counsel agreed upon by the Board of Directors and the applicant. If
the Board of Directors and the applicant are unable to agree upon such
special legal counsel, the Board of Directors and the applicant each shall
select a nominee, and the nominees shall select such special legal counsel.
7. Advances. (a) The Corporation shall pay for or reimburse
the reasonable expenses incurred by any applicant who is a party to a
proceeding in advance of final disposition of the proceeding or the making
of any determination under section 3 of this Article V if the applicant
furnishes the Corporation:
(i) a written statement of his good faith belief
that he has met the standard of conduct described in section 3; and
(ii) a written undertaking, executed personally or
on his behalf, to repay the advance if it is ultimately determined that he
did not meet such standard of conduct.
(b) The undertaking required by paragraph (ii) of
subsection (a) of this section 7 shall be an unlimited general obligation
of the applicant but need not be secured and may be accepted without
reference to financial ability to make repayment.
(c) Authorizations of payments under this section shall
be made by the persons specified in section 6 of this Article V.
8. Indemnification of Others. The Board of Directors is
hereby empowered, by majority vote of a quorum consisting of disinterested
Directors, to cause the Corporation to indemnify or contract to indemnify
any person not specified in section 2 or 3 of this Article V who was or is
a party to any proceeding, by reason of the fact that he is or was an
employee or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, to the same extent as if such person were specified as
one to whom indemnification is granted in section 3 of this Article V. The
provisions of sections 4 through 7 of this Article V shall be applicable to
any indemnification provided hereafter pursuant to this section 8.
9. Insurance. The Corporation may purchase and maintain
insurance to indemnify it against the whole or any portion of the liability
assumed by it in accordance with this Article V and may also procure
insurance, in such amounts as the Board of Directors may determine, on
behalf of any person who is or was a director, officer, employee or agent
of the Corporation, or is serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
any liability asserted against or incurred by him in any such capacity or
arising from his status as such, whether or not the Corporation would have
power to indemnify him against such liability under the provisions of this
Article V.
10. Further Indemnity. Every reference herein to directors,
officers, employees or agents shall include former directors, officers,
employees and agents and their respective heirs, executors and
administrators. The indemnification hereby provided and provided hereafter
pursuant to the power conferred by this Article V on the Board of Directors
shall not be exclusive of any other rights to which any person may be
entitled, including any right under policies of insurance that may be
purchased and maintained by the Corporation or others, with respect to
claims, issues or matters in relation to which the Corporation would not
have the power to indemnify such person under the provisions of this
Article V. Such rights shall not prevent or restrict the power of the
Corporation to make or provide for any further indemnity, or provisions for
determining entitlement to indemnity, pursuant to one or more
indemnification agreements, bylaws, or other arrangements (including,
without limitation, creation of trust funds or security interests funded by
letters of credit or other means) approved by the Board of Directors
(whether or not any of the directors of the Corporation shall be a party to
or beneficiary of any such agreements, bylaws or arrangements); provided,
however, that any provision of such agreements, bylaws or other
arrangements shall not be effective if and to the extent that it is
determined to be contrary to this Article V or applicable laws of the
Commonwealth of Virginia.
11. Severability. Each provision of this Article V shall be
severable, and an adverse determination as to any such provision shall in
no way affect the validity of any other provision.
<PAGE>
(Letterhead of J.P. Morgan Securities Inc.)
April 6, 1994
The Board of Directors
Owens & Minor, Inc.
4800 Cox Road
Glen Allen, VA 23060
Attn: Mr. Glenn J. Dozier
Senior Vice President, Finance
and Chief Financial Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Owens & Minor, Inc. ("O&M") of the consideration to be paid by
O&M Holding, Inc., formerly OMI Holding, Inc. ("O&M Holding"), a recently
formed wholly-owned subsidiary of O&M, to the shareholders (the "SMI
Shareholders") of Stuart Medical, Inc. ("SMI") with respect to the
acquisition by O&M Holding from the SMI Shareholders of all of the issued
and outstanding capital stock of SMI (the "SMI Exchange"). In connection
with the SMI Exchange, each outstanding share of common stock of O&M will
be exchanged for one share of common stock of O&M Holding (the "O&M
Exchange" and, together with the SMI Exchange, the "Exchanges").
Pursuant to the Agreement of Exchange dated as of December 22, 1993, as
amended and restated on March 31, 1994 (together with the exhibits thereto,
the "Agreement") by and among O&M, O&M Holding, the SMI Shareholders and
SMI, the SMI Shareholders will receive for SMI at the closing of the SMI
Exchange: (i) $40,200,000 in cash and (ii) subject to certain holdbacks,
$115,000,000 in face amount of O&M Holding's 4 1/2% convertible voting
preferred stock (the "O&M Holding Preferred Stock").
Please be advised that while certain provisions of the Exchanges are
summarized above, the terms of the Exchanges are more fully described in
the Agreement. As a result, the description of the Exchanges and certain
other information contained herein is qualified in its entirety by
reference to the more detailed information appearing or incorporated by
reference in the Agreement.
In arriving at our opinion, we have reviewed (i) the financial terms of the
Agreement, including the financial terms of the O&M Holding Preferred
Stock, and the financial terms of the acquisition by SMI of certain assets
and liabilities of Midwest Hospital Supply Company, Inc. ("Midwest");
(ii) the proxy statement/prospectus of O&M and O&M Holding with respect to
the Exchanges (the "Proxy Statement/Prospectus") in the form to be mailed
to shareholders of O&M; (iii) certain information concerning the businesses
of SMI and Midwest provided to J.P. Morgan by the managements of O&M and
SMI and certain publicly available information concerning the businesses of
certain other companies engaged in businesses we considered comparable in
certain respects to SMI, and the reported market prices for certain other
companies' securities deemed comparable in certain respects; (iv) publicly
available terms of certain transactions involving companies we considered
comparable in certain respects to SMI and the consideration paid for such
companies; (v) current and historical market prices of the common stock of
O&M; (vi) the audited financial statements of O&M for the fiscal years
ended December 31, 1991, 1992 and 1993, the audited financial statements of
SMI for the fiscal years ended April 30, 1991 and 1992, the eight-month
period ended December 31, 1992 and the fiscal year ended December 31, 1993
and the unaudited financial statements of the commodity supply business of
SMI for the eleven months ended November 30, 1993, and the audited
financial statements of Midwest for the fiscal years ended December 31,
1991 and 1992; and (vii) certain internal financial analyses and forecasts
prepared by O&M and SMI and their respective managements.
In addition, we have held discussions with certain members of the
management of O&M and SMI with respect to certain aspects of the SMI
Exchange, and the past and current business operations of O&M and SMI, the
financial condition and future prospects and operations of O&M Holding, O&M
and SMI, the effects of the SMI Exchange on the financial condition and
future prospects of O&M Holding, O&M and SMI (including financial forecasts
of the combined businesses of O&M, SMI and Midwest), and certain other
matters we believed necessary or appropriate to our inquiry. We have
reviewed such other financial studies and analyses and considered such
other information as we deemed appropriate for the purposes of this
opinion.
In performing such analysis, we have used such valuation methodologies as
we have deemed necessary or appropriate for the purposes of this opinion.
Our view is based on (i) our consideration of the information O&M and SMI
have supplied to us to date, (ii) our understanding of the financial terms
of the Agreement, (iii) our understanding of the currently contemplated
capital structure and the anticipated credit standing of O&M Holding and
its subsidiaries upon consummation of the Exchanges, and (iv) an assumption
that the Exchanges will be consummated within the time periods contemplated
by the Agreement.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by O&M, SMI or the SMI
Shareholders or otherwise reviewed by us. We have not verified the
accuracy or completeness of any such information and we have not conducted
any evaluation or appraisal of any assets or liabilities, nor have any such
valuations or appraisals been provided to us. We did not make any physical
inspection of the properties or assets of O&M, SMI or Midwest. In relying
on financial analyses and forecasts provided to us, we have assumed that
they were reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by the managements of O&M and
SMI as to the expected future results of operations and financial condition
of O&M Holding, O&M and SMI.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect
this opinion and that we do not have any obligation to update, revise, or
reaffirm this opinion.
We are not expressing any opinion herein as to the price at which the
common stock of O&M Holding will trade if and when issued or at any future
time. Factors occurring after the date hereof may affect the value of the
businesses of O&M Holding, O&M and SMI after consummation of the Exchanges,
including but not limited to (i) changes in prevailing interest rates and
other factors which generally influence the price of securities, (ii)
adverse changes in the current capital markets, (iii) the occurrence of
adverse changes in the financial condition, business, assets, results of
operations or prospects of O&M Holding, O&M or SMI, and (iv) actions by or
restrictions of federal, state or other governmental agencies or regulatory
authorities, including recent health care reform proposals.
We have acted as financial advisor to O&M with respect to the proposed SMI
Exchange and have received a fee from O&M for our services, which fee
includes warrants for common stock of O&M ("Warrants"). We also will
receive an additional fee if the proposed SMI Exchange is consummated,
which additional fee also will include Warrants. Please be advised that we
and our affiliates have provided financial advisory, investment banking and
other services to companies in which certain of the SMI Shareholders and
their affiliates have a significant interest, and have received fees for
the rendering of such services.
In the ordinary course of business, we and our affiliates may actively
trade the debt and equity securities of O&M and O&M Holding, for our or
their own accounts, or for the accounts of customers, and accordingly, may
at any time hold a long or short position in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid by O&M Holding in the
proposed SMI Exchange is fair, from a financial point of view, to O&M.
This letter is provided solely for the benefit of the Board of Directors of
O&M in connection with, and for the purposes of, their evaluation of the
SMI Exchange, and is not on behalf of and shall not confer rights or
remedies upon any other person other than the members of the Board of
Directors of O&M or be used for any other purpose. This opinion may not be
used or relied upon by, or disclosed, referred to or communicated by you
(in whole or in part) to any third party for any purpose whatsoever except
with our prior written consent in each instance. This opinion may,
however, be reproduced in full in any proxy statement mailed to
stockholders of O&M to obtain approval of the Exchanges and in any related
filings with Federal and state regulatory agencies and the New York Stock
Exchange, but may not otherwise be disclosed publicly in any manner without
our prior written approval and must be treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ Eric Bjerkholt
Name: Eric H. Bjerkholt
Title: Vice President
<PAGE>
ANNEX VI
GLOSSARY OF CERTAIN TERMS
Affiliate With respect to any person, any person that
directly, or indirectly, through one or more
intermediaries, controls, is controlled by, or
is under common control with such person
Affiliated Shareholder A person owning 5% or more of any class of the
outstanding capital stock of O&M
Aggregate Cash $40,200,000 in cash constituting part of the
Consideration SMI Exchange Consideration
Agreement of Exchange The Agreement of Exchange, dated as of
December 22, 1993, as amended and restated on
March 31, 1994, by and among SMI, O&M, O&M
Holding and the SMI Shareholders
Annual Meeting The annual meeting of the O&M Shareholders to
be held on May 10, 1994
Baxter Baxter International, Inc.
Broker Shares Shares of O&M Common Stock held in street name
Cash Election See page 8 of the Proxy Statement/Prospectus
Closing The conference held at 10:00 a.m. local time,
on the date determined in accordance with
Agreement of Exchange for purposes of
confirming the waiver or satisfaction of the
conditions to the Exchanges
Compensation Committee The Compensation & Benefits Committee of the
O&M Board
Cumulative Preferred 10,000,000 shares of O&M Holding Cumulative
Stock Preferred Stock authorized by the O&M Holding
Articles of Incorporation
Directors Plan Directors Compensation Plan of O&M
Effective Time The effective time of the SMI Articles of
Exchange and the O&M Articles of Exchange
Exchange Act The Securities Exchange Act of 1934, as
amended
Exchanges The O&M Exchange and the SMI Exchange
HSR Act The Hart-Scott-Rodino Antitrust Improvements
Act of 1976
J.P. Morgan J.P. Morgan Securities Inc.
VI-1
Junior Stock Any class of stock of O&M Holding ranking
junior (either as to dividends or upon
liquidation, dissolution or winding up) to the
O&M Holding Series B Preferred Stock
KPMG KPMG Peat Marwick
Midwest Midwest Hospital Supply Company, Inc.
Named Executive Officers O&M's Chief Executive Officer and its four
other most highly compensated executive
officers
NYSE New York Stock Exchange
O&M Owens & Minor, Inc., a Virginia corporation
O&M Articles of Exchange The Articles of Exchange to be filed by O&M
with the SCC
O&M Articles of The Amended and Restated Articles of
Incorporation Incorporation of O&M
O&M Board The Board of Directors of O&M
O&M Common Stock The Common Stock of O&M, $2.00 par value per
share
O&M Exchange The exchange of each outstanding share of O&M
Common Stock for one share of O&M Holding
Common Stock pursuant to the O&M Plan of
Exchange
O&M Holding O&M Holding, Inc., formerly OMI Holding, Inc.,
a Virginia corporation
O&M Holding Articles of The Amended and Restated Articles of
Incorporation Incorporation of O&M Holding that will be in
effect at the Effective Time in the form
attached hereto as Annex IV
O&M Holding Board The Board of Directors of O&M Holding
O&M Holding Capital Stock The capital stock of O&M Holding
O&M Holding Common Stock The Common Stock of O&M Holding, $2.00 par
value per share
O&M Holding Rights The O&M Rights Agreement, as amended as of the
Agreement Effective Time, to provide, among other
things, for O&M Holdings' assumption of the
O&M Rights Agreement
O&M Plan of Exchange The plan of exchange with respect to the O&M
Exchange
O&M Rights Agreement Rights Agreement of O&M dated as of June 22,
1988, as amended
VI-2
O&M Series A Preferred O&M Series A Preferred Stock, $10 par value
Stock per share, having the rights and designations
set forth in the O&M Articles
O&M Shareholders The holders of O&M Common Stock
Opinion of J.P. Morgan See Page (viii) of the Proxy
Statement/Prospectus
PBCL The Pennsylvania Business Corporation Law
Parties O&M, O&M Holding, SMI and the SMI Shareholders
Pennsylvania Department Department of State of the Commonwealth of
of State Pennsylvania
Pension Plan O&M Pension Plan
Permitted Transferees See Page 12 of the Proxy Statement/Prospectus
Plans of Exchange The O&M Plan of Exchange and the SMI Plan of
Exchange
Preferred Conversion Rate of which O&M Holding Series B Preferred
Ratio Stock is converted into O&M Holding Common
Stock
Proposal 1 Approval of the transactions contemplated by
the Agreement of Exchange, including the O&M
Plan of Exchange
Proposal 2 Election of three directors to the O&M Board
to serve until the 1997 Annual Meeting of O&M
Shareholders and one member to the O&M Board
to serve until the 1996 Annual Meeting of O&M
Shareholders
Proposal 3 Ratification of the appointment of KPMG as
Independent Accountants of O&M
Proxy This proxy statement of O&M distributed in
Statement/Prospectus connection with the Annual Meeting pursuant to
the Exchange Act and the prospectus of O&M
Holding distributed in connection with the O&M
Exchange pursuant to the Securities Act
Record Date March 14, 1994
Registration Rights Registration Rights Agreement to be entered
Agreement into by O&M Holding and the SMI Shareholders
Registration Rights Period of seven years after the Effective Time
Period
VI-3
Registration Statement Registration Statement on Form S-4 filed by
O&M Holding Common Stock with respect to
20,448,000 shares of O&M Holding Common Stock
and related Rights to be issued pursuant to
the O&M Plan of Exchange
Rights O&M Holding Series A Preferred Stock Purchase
Rights to be issued pursuant to the O&M
Holding Rights Agreement
SCC Commonwealth of Virginia State Corporation
Commission
SEC The Securities and Exchange Commission
Securities Act The Securities Act of 1933, as amended
Series A Preferred Stock O&M Holding Series A Preferred Stock, $100 par
value per share, having the rights and
designations set forth in the O&M Holding
Articles of Incorporation
Series B Preferred Stock O&M Holding Series B Preferred Stock, $100 par
value per share, having the rights and
designations substantially as set forth in the
O&M Holding Articles of Incorporation
Series B Preferred Stock The member elected to the O&M Holding Board by
Director the holders of the O&M Holding Series B
Preferred Stock
SERP O&M Supplemental Executive Retirement Plan
Severance Agreement Severance Agreements authorized by O&M Board
in 1989 with certain officers of O&M
SFC Stuart's Funding Corporation, an affiliate of
SMI
SMI Stuart Medical, Inc., a Pennsylvania
corporation
SMI Articles of Exchange The Articles of Exchange to be filed by SMI
with the Pennsylvania Department of State with
respect to the SMI Plan of Exchange
SMI Common Stock The Common Stock of SMI, $.0025 par value per
share
SMI Exchange The exchange of all outstanding shares of SMI
Common Stock for the SMI Exchange
Consideration pursuant to the SMI Plan of
Exchange
VI-4
SMI Exchange 1,150,000 shares of Series B Preferred Stock
Consideration and $40,200,000 in cash, adjusted for shares
of SMI Common Stock as to which dissenters'
rights are perfected, to be received by the
holders of SMI Common Stock in exchange for
all the outstanding shares of SMI Common Stock
pursuant to the SMI Plan of Exchange
SMI Plan of Exchange The plan of exchange with respect to the SMI
Exchange
SMI Shareholders The holders of SMI Common Stock who executed
the Agreement of Exchange, specifically Elsie
H. Hillman and C. G. Grefenstette, Trustees
under the Henry L. Hillman Trust under
agreement of trust dated November 18, 1985,
Juliet Lea Hillman Simonds, Audrey Hillman
Fisher, Henry L. Hillman, Jr., William T.
Hillman, Howard B. Hillman and Tatnall L.
Hillman
SMI Shareholders' Nominee Nominee to the O&M Holding Board proposed by
the SMI Shareholders that is reasonably
acceptable to the O&M Holding Board
VHA Voluntary Hospitals of America, Inc.
VSCA Virginia Stock Corporation Act
VI-5
<PAGE>
Map of corporate office location.
<PAGE>
******************************************************************************
APPENDIX
On page (ix) of the Proxy Statement/Prospectus is a map of the United States
showing the locations of:
a) The O&M Corporate Office
b) The O&M Medical/Surgical Division Offices
c) The O&M CDC's
d) The O&M Depot
e) The O&M Combination Medical/Surgical and Wholesale Drug Division Office
f) The Stuart Division Offices
g) The Stuart Breakpoints
On the back page of the Proxy Statement/Prospectus is map showing the location
of the Corporate office in Richmond, Virginia and directions to this office.
