PROSPECTUS
[OWENS & MINOR LOGO]
$150,000,000
10 7/8% SENIOR SUBORDINATED NOTES DUE 2006
INTEREST PAYABLE JUNE 1 AND DECEMBER 1
ISSUE PRICE: 100%
The 10 7/8% Senior Subordinated Notes due 2006 (the "Notes") are being offered
(the "Offering") by Owens & Minor, Inc., a Virginia corporation ("O&M" or the
"Company"). The Notes mature on June 1, 2006, unless previously redeemed.
Interest on the Notes is payable semiannually on June 1 and December 1
commencing December 1, 1996. The Notes are not redeemable prior to June 1, 2001,
except as set forth below. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2001, at the
redemption prices set forth herein, together with accrued and unpaid interest to
the redemption date. In addition, prior to June 1, 1999, the Company may redeem
up to 33 1/3% of the principal amount of the Notes with the cash proceeds
received by the Company from one or more sales of capital stock of the Company
(other than Disqualified Stock (as defined)) at a redemption price of 110.875%
of the principal amount thereof, plus accrued and unpaid interest to the
redemption date; provided, however, that at least $100.0 million in aggregate
principal amount of the Notes remains outstanding immediately after any such
redemption.
Upon a Change of Control (as defined), the Company will be required to make an
offer to purchase all outstanding Notes at 101% of the principal amount thereof
plus accrued and unpaid interest to the purchase date.
The Notes will be general unsecured obligations of the Company and will rank
subordinate in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Notes will be fully and unconditionally
guaranteed on a joint and several basis (the "Guarantees") by all direct and
indirect subsidiaries of the Company, other than O&M Funding Corp. The
guarantors will consist of Owens & Minor Medical, Inc., National Medical Supply
Corporation, Owens & Minor West, Inc., Koley's Medical Supply, Inc., Lyons
Physician Supply Company, A. Kuhlman & Co. and Stuart Medical, Inc. (the
"Guarantors"). The Notes will not be guaranteed by the Company's indirect
subsidiary, O&M Funding Corp., the assets, equity and earnings of which are
inconsequential to the Company. The Guarantees will be general unsecured
obligations of the Guarantors and will rank subordinate in right of payment to
all existing and future Guarantor Senior Indebtedness (as defined). The Notes
and the Guarantees will rank PARI PASSU in right of payment with any other
senior subordinated indebtedness of the Company and the Guarantors,
respectively. At March 31, 1996, as adjusted to give effect to the transactions
described herein under "Use of Proceeds and Refinancing," the Company would have
had approximately $77.3 million of Senior Indebtedness outstanding, all of which
would have been guaranteed by the Guarantors on a senior basis.
The Notes have been approved for listing on the New York Stock Exchange, subject
to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) COMPENSATION (2) COMPANY (1)(3)
Per Note 100.000% 2.750% 97.250%
Total $150,000,000 $4,125,000 $145,875,000
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(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company and the Guarantors jointly and severally have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $400,000.
The Notes are being offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters,
and certain other conditions. The Underwriters withhold the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Notes will be made against payment therefor, in
immediately available funds, on or about May 29, 1996 at the offices of J.P.
Morgan Securities Inc., 60 Wall Street, New York, New York.
J.P. MORGAN & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC CAPITAL MARKETS, INC.
WHEAT FIRST BUTCHER SINGER
May 23, 1996
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[INSERT MAP HERE]
[OWENS AND MINOR LOGO]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company, any Guarantor or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Notes in
any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
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Available Information................................. 4
Incorporation of Certain Documents by Reference....... 4
Prospectus Summary.................................... 5
Risk Factors.......................................... 12
Use of Proceeds and Refinancing....................... 16
Capitalization........................................ 17
Selected Consolidated Financial Data.................. 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 20
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Business.............................................. 27
Management............................................ 36
Description of the Notes.............................. 39
Underwriting.......................................... 59
Legal Matters......................................... 60
Experts............................................... 60
Index to Consolidated Financial Statements............ F-1
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AVAILABLE INFORMATION
The Company 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
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such information can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus does not contain all of the information set forth in the
Registration Statement of which this Prospectus is a part, or any amendments
thereto, certain portions of which have been omitted pursuant to the
Commission's rules and regulations. The information so omitted may be obtained
from the Commission's principal office in Washington, D.C. upon payment of the
fees prescribed by the Commission. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
The Company's principal executive offices are located at 4800 Cox Road, Glen
Allen, Virginia 23060, telephone (804) 747-9794.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-9810) are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1995, including the Company's Form 10-K/A Amendment No. 1 to Form 10-K for
the year ended December 31, 1995; and
(ii) the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1996.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Notes offered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which is incorporated by reference herein modifies or supersedes such
earlier statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will furnish without charge upon request to each person to whom a
copy of this Prospectus is delivered a copy of any or all of the documents
specifically incorporated herein by reference, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests should be addressed to: Drew St. J. Carneal, Owens & Minor,
Inc., P.O. Box 27626, Richmond, Virginia 23261-7626 (telephone 804-747-9794).
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "O&M" OR THE
"COMPANY" ARE TO OWENS & MINOR, INC., A VIRGINIA CORPORATION, AND ITS
CONSOLIDATED SUBSIDIARIES. CAPITALIZED TERMS USED IN THIS SUMMARY UNDER THE
CAPTION " -- THE OFFERING" AND NOT OTHERWISE DEFINED ARE DEFINED BELOW UNDER THE
CAPTION "DESCRIPTION OF THE NOTES -- CERTAIN DEFINITIONS." REFERENCES HEREIN TO
A PARTICULAR FISCAL YEAR OF THE COMPANY SHALL MEAN THE YEAR ENDED DECEMBER 31 OF
THE STATED YEAR.
THE COMPANY
O&M is one of the two largest distributors of medical/surgical supplies in the
United States. The Company distributes approximately 300,000 finished
medical/surgical products produced by approximately 3,000 manufacturers to over
4,000 customers from 48 distribution centers nationwide. The Company's customers
are primarily hospitals, which account for approximately 90% of O&M's net sales,
and also include alternate care facilities such as physicians' offices, clinics,
nursing homes and surgery centers. The majority of the Company's sales consists
of dressings, endoscopic products, intravenous products, needles and syringes,
sterile procedure trays, surgical products and gowns, sutures and urological
products.
The Company has significantly expanded its national presence over the last five
years. This expansion resulted from both internal growth and acquisitions,
including the acquisition of Stuart Medical, Inc. ("Stuart") in May 1994. Since
1991, the Company has grown from 27 distribution centers serving 37 states to 48
distribution centers serving 50 states. Over the same period, the Company's net
sales increased at a 30.7% compound annual rate, from $1.0 billion in 1991 to
$3.0 billion in 1995. For the first quarter of 1996, the Company generated net
sales of $771.3 million, a 3.3% increase from the fourth quarter of 1995.
The Company's income from continuing operations increased at a 38.4% compound
annual rate from $9.7 million in 1991 to $18.5 million in 1993 before decreasing
to $7.9 million in 1994 and a loss of $11.3 million in 1995. For the first
quarter of 1996, income from continuing operations increased to $1.5 million
from a loss of $9.0 million (which loss included a $3.4 million nonrecurring
restructuring charge, net of taxes) in the fourth quarter of 1995. Similarly,
Adjusted EBITDA (as defined) increased at a 39.7% compound annual rate from
$24.5 million in 1991 to $66.8 million in 1994, before decreasing to $41.9
million in 1995. For the first quarter of 1996, Adjusted EBITDA increased to
$13.1 million from $4.0 million in the fourth quarter of 1995.
O&M believes that in 1995 sales of medical/surgical supplies in the United
States approximated $30.0 billion and that approximately half of these sales
were made through distributors, with the balance having been sold directly by
manufacturers. In recent years, the medical/surgical supply distribution
industry has grown due to the rising consumption of medical supplies and the
increasing reliance by manufacturers and customers on distributors. This
increasing reliance is driven by customers seeking to take advantage of cost
savings achievable through the use of distributors. In addition, the healthcare
industry has been characterized by the consolidation of healthcare providers
into larger and more sophisticated entities that are increasingly seeking lower
delivered product costs and incremental services through a broad distribution
network capable of supplying their inventory management needs. These pressures
have in turn driven significant and continuing consolidation within the
medical/surgical supply distribution industry.
The Company is committed to providing its customers and suppliers with the most
responsive, efficient and cost effective distribution system for the delivery of
medical/surgical supplies and services. In order to meet this commitment, the
Company has implemented the following strategy: (i) maintain market leadership
and leverage the benefits of its national distribution capabilities; (ii)
continue to be a low-cost provider of distribution services; (iii) increase
sales to existing customers and obtain new customers by providing responsive
customer service and offering a broad range of inventory management services;
and (iv) enhance relationships with major medical/surgical supply manufacturers.
The Company's strategy is based upon the following competitive strengths:
MARKET LEADER WITH NATIONWIDE DISTRIBUTION CAPABILITIES. The Company believes
that its net sales in 1995 of $3.0 billion represented approximately 20% of the
medical/surgical supply distribution industry. O&M is one of only three
companies capable of distributing a broad line of medical/surgical supplies on a
nationwide basis. The Company's size and market position enable it to serve
large regional and national healthcare providers that wish to negotiate single
contracts with their suppliers, establish close business relationships with and
obtain incentives from its suppliers and benefit from economies of scale. The
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Company intends to achieve ongoing sales growth by increasing penetration of
existing customer accounts and obtaining additional customers both in existing
and new geographic markets. The Company intends to expand selectively into new
markets and to strengthen its operations in established markets by acquiring or
opening distribution centers and increasing capacity and sales efforts at
existing distribution centers.
EFFICIENT, LOW-COST DISTRIBUTOR. The Company believes that the efficient manner
in which it distributes products, including the use of advanced warehousing,
delivery and purchasing techniques, enables its customers to obtain products at
a lower overall inventory carrying cost relative to purchases made directly from
manufacturers or through many of the Company's competitors. A key aspect of this
low-cost strategy is the Company's significant investment in advanced
information technology ("IT") which includes automated warehousing technology
and electronic data interchange ("EDI"). The Company's warehousing techniques,
including the use of radio-frequency hand-held computers and bar-coded labels
that identify location, routing and inventory picking and replacement, allow the
Company to monitor inventory throughout its distribution system. The Company's
focus on the timely exchange of information with its customers and suppliers has
driven the introduction of new services, such as EDI, which expedite
communications between the Company, its customers and its manufacturers thereby
reducing the costs of such transactions as purchasing, invoicing, funds transfer
and contract pricing.
The Company continually strives to lower its operating costs in order to
maintain its position as a low-cost distributor. In 1994 and 1995, the Company
realigned its distribution operations through the closure or consolidation of 12
distribution centers and the opening or expansion of 22 distribution centers. In
addition, current initiatives include reconfiguring warehouse layouts and
implementing an improved inventory forecasting system as well as converting from
a centralized mainframe computer system to client/server technology. The Company
believes that this realignment and these initiatives will lower inventory
levels, reduce operating costs and provide increased levels of customer service.
STRONG CUSTOMER RELATIONSHIPS AND BROAD RANGE OF SERVICES. In 1995, the Company
distributed medical/surgical products to over 4,000 customers. The Company
focuses primarily on the high volume hospital supply market and, in 1995, sales
to hospital customers accounted for approximately 90% of O&M's net sales. O&M
believes that as a result of the large number of purchases relating to surgical
procedures performed in hospitals, hospitals will continue to be the highest
volume users of medical/surgical products. However, the Company recognizes that
alternate care providers, such as physicians' offices, clinics, nursing homes
and surgery centers, represent an important and growing market for
medical/surgical supplies, and the Company will continue to serve this segment.
The Company believes its decentralized approach to customer relationships and
its broad range of services are significant factors in attracting and retaining
customers. The Company's decentralized approach is designed to provide
individualized services to customers by giving the local management at each
distribution center the discretion to set local operating procedures and to
respond to customers' needs quickly and efficiently. Distribution center
management has fiscal responsibility for its unit and the financial results of a
distribution center directly affect its management's compensation.
The Company offers a broad array of services ranging from traditional
distribution, such as twice a week delivery of bulk goods, to enhanced inventory
management services. Such enhanced inventory management services include asset
management consulting services and stockless and just-in-time programs designed
to fill order requirements with a high degree of accuracy while optimizing
inventory levels. The Company's services enable healthcare providers to reduce
inventory carrying costs by efficiently and accurately delivering to them a
complete line of medical/surgical products.
O&M's customer relationships include those with AmeriNet, Inc. ("AmeriNet"),
Brigham & Women's Hospital, Columbia Healthcare Corporation ("Columbia"), The
Hospital of the University of Pennsylvania, Johns Hopkins Health System,
Massachusetts General Hospital, Ohio State University Hospital, Shands Hospital
at The University of Florida, Stanford Health Services, University Hospital
Consortium Services ("UHC"), University of California, Los Angeles Medical
Center ("UCLA"), University of Nebraska Medical Center, University of
Texas -- M.D. Anderson Cancer Center, VHA Inc. ("VHA") and Yale-New Haven
Hospital.
STRONG, LONG-STANDING MANUFACTURER RELATIONSHIPS. The Company is the only
national distributor that does not manufacture or sell products under its own
label and believes that this independence has enabled it to develop strong and
mutually beneficial relationships with its suppliers. The Company believes that
its size, strong, long-standing relationships and independence enable it to
obtain attractive terms from manufacturers, including discounts for prompt
payment, volume incentives and fees for customer sales information.
The Company continues to enhance its relationships with major medical/surgical
supply manufacturers by developing closer, more efficient and interactive
operational connections, such as EDI for purchasing. In addition, over the past
two years, the Company has implemented its continuous inventory replenishment
process ("CRP") with most of its major manufacturers. This
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process, which utilizes computer-to-computer interfaces, allows manufacturers to
monitor daily sales and inventory levels so that they can automatically and
accurately replenish the Company's inventory. In recent years, a significant
increase in the number of stock keeping units ("SKUs") has greatly increased the
inventory requirements of both distributors and healthcare providers. In
response, the Company has recently implemented a joint marketing program with
certain manufacturers, known as FOCUSSM. FOCUSSM will assist the Company's
manufacturers and customers in limiting the number of SKUs carried by
standardizing products within their systems, thereby reducing the number of
comparable inventory items carried and the related cost. See "Business -- Asset
Management."
The Company has relationships with virtually all major manufacturers of
medical/surgical supplies and has long-standing relationships with manufacturers
such as C.R. Bard, Inc. ("C.R. Bard"), Becton Dickinson and Company ("Becton
Dickinson"), Johnson & Johnson Hospital Services, Inc. ("Johnson & Johnson"),
Kendall Healthcare Products ("Kendall"), Kimberly Clark Professional Health Care
("Kimberly Clark") and 3M Health Care ("3M"). O&M is the largest distributor of
each of these manufacturers' medical/surgical products.
RECENT PERFORMANCE
In May 1994, the Company acquired Stuart (the "Stuart Acquisition"), then the
third largest distributor of medical/surgical supplies in the United States,
with 1993 net sales of $890.5 million. In addition to expanding its customer
base, the Stuart Acquisition significantly enhanced the Company's distribution
capabilities in the Northeastern and Midwestern regions of the United States,
thus strengthening the Company's national distribution capabilities.
In conjunction with the Stuart Acquisition, the Company implemented a
restructuring plan designed to eliminate duplicate costs and increase
efficiencies within the combined company. During 1994 and 1995, the Company
incurred $42.8 million of nonrecurring restructuring expenses in connection with
this restructuring plan. These expenses were comprised primarily of costs
associated with eliminating, consolidating, relocating or expanding 12
distribution centers (which were specifically associated with the Stuart
Acquisition), eliminating Stuart's headquarters operations, redesigning and
implementing processes to adopt the best practices and systems of O&M and Stuart
within the combined company and outsourcing the operation of the Company's
mainframe computer system. The implementation of this restructuring plan was
completed during the fourth quarter of 1995.
During 1995, the Company experienced a decline in profitability due to a
decrease in the gross margin percentage and an increase in selling, general and
administrative ("SG&A") expenses as a percentage of net sales. Gross margin as a
percentage of net sales declined to 9.0% in 1995 from 9.7% in 1994. This decline
in the gross margin percentage was primarily attributable to increased sales to
larger accounts that were offered reduced pricing in return for the expectation
of increased volume. To mitigate the decline in the gross margin percentage, the
Company implemented price increases in December 1995 and the first quarter of
1996 that included both direct price increases as well as the introduction of
charges for certain enhanced delivery and management services that were
previously provided to certain customers at no additional cost. These increases
were implemented with the goal of achieving an overall increase in the gross
margin percentage equal to at least one percent of net sales. As a result of
these measures, gross margin as a percentage of net sales increased to 9.6% in
the first quarter of 1996 from 8.7% in the fourth quarter of 1995. Substantially
all of the national healthcare network organizations ("Networks"), group
purchasing organizations ("GPOs") and integrated healthcare systems ("IHSs")
representing the majority of the Company's customers have agreed to the new
price levels. The Company believes that sales growth from new accounts and
penetration of existing accounts will more than offset any business lost as a
result of the price increases, but such growth cannot be assured.
SG&A expenses as a percentage of net sales increased to 7.6% in 1995 from 6.9%
in 1994. This increase in SG&A expenses as a percentage of net sales was
primarily a result of increased personnel costs incurred in connection with new
contracts providing for enhanced service levels and services not previously
provided by the Company, a significant increase in the number of SKUs
distributed by the Company, system conversions, opening or expanding 11
distribution centers and reconfiguring warehouse systems. In an effort to reduce
SG&A expenses, O&M is reducing overtime and temporary employee costs, further
reducing distribution center costs (including through the closure of two and the
downsizing of five distribution centers, which resulted in $3.5 million of the
Company's nonrecurring restructuring charges in the fourth quarter of 1995) and
improving inventory management systems. As a result of these measures, the
Company's SG&A expenses as a percentage of net sales decreased to 7.9% in the
first quarter of 1996 from 8.2% in the fourth quarter of 1995.
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THE REFINANCING
Concurrently with the completion of the Offering, the Company will enter into a
$225.0 million revolving credit facility (the "New Senior Credit Facility") with
a group of commercial banks and will use borrowings under the New Senior Credit
Facility, together with the net proceeds from the Offering, to repay in full
outstanding indebtedness under its existing $425.0 million revolving credit
facility (the "Senior Credit Facility"). Pursuant to securitization agreements
entered into on December 28, 1995 (the "Receivables Financing Facility"), a
special-purpose subsidiary of the Company, is entitled to transfer, without
recourse, certain of the Company's trade receivables and receive up to $75.0
million from such transfer for consideration that reflects a cost of funds at
commercial paper rates plus a charge for administrative and credit support
services. As of March 31, 1996, the Company had received $69.1 million under the
Receivables Financing Facility, the proceeds of which were used to reduce
amounts outstanding under the Senior Credit Facility. Following the completion
of the Offering, the Receivables Financing Facility will be increased to a
maximum of $150.0 million. Proceeds of the Receivables Financing Facility, as so
increased, will be applied to reduce amounts outstanding under the New Senior
Credit Facility. The Offering, the New Senior Credit Facility and the
Receivables Financing Facility are collectively referred to as the
"Refinancing."
THE OFFERING
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SECURITIES OFFERED.......................................... $150.0 million aggregate principal amount of 10 7/8% Senior
Subordinated Notes due 2006.
MATURITY DATE............................................... June 1, 2006.
INTEREST PAYMENT DATES...................................... June 1 and December 1, commencing December 1, 1996.
OPTIONAL REDEMPTION BY THE COMPANY.......................... The Notes are not redeemable prior to June 1, 2001, except as
set forth below. The Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or after June
1, 2001, at the redemption prices set forth herein, together
with accrued and unpaid interest to the redemption date. In
addition, prior to June 1, 1999, the Company may redeem up to
33 1/3% of the principal amount of the Notes with the cash
proceeds received by the Company from one or more sales of
capital stock of the Company (other than Disqualified Stock) at
a redemption price of 110.875% of the principal amount thereof,
plus accrued and unpaid interest to the redemption date;
provided, however, that at least $100.0 million in aggregate
principal amount of the Notes remains outstanding immediately
after any such redemption.
MANDATORY REDEMPTION BY THE COMPANY......................... None.
RANKING..................................................... The Notes will be general unsecured obligations of the Company
and will rank subordinate in right of payment to all existing
and future Senior Indebtedness of the Company, including
indebtedness under the New Senior Credit Facility. The Notes
will rank PARI PASSU in right of payment with any other senior
subordinated indebtedness of the Company.
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GUARANTEES.................................................. The Notes will be fully and unconditionally guaranteed on a
joint and several basis by all direct and indirect subsidiaries
of the Company, other than O&M Funding Corp. ("OMF"). The
Guarantors will consist of Owens & Minor Medical, Inc. ("O&M
Medical"), National Medical Supply Corporation ("National
Medical"), Owens & Minor West, Inc. ("O&M West"), Koley's
Medical Supply, Inc. ("Koley's"), Lyons Physician Supply
Company ("Lyons"), A. Kuhlman & Co. ("Kuhlman") and Stuart. The
Notes will not be guaranteed by the Company's indirect
subsidiary OMF, the assets, equity and earnings of which are
inconsequential to the Company. The Guarantees will be general
unsecured obligations of the Guarantors and will rank
subordinate in right of payment to all existing and future
Guarantor Senior Indebtedness, including the Guarantors'
guarantees of the Company's indebtedness under the New Senior
Credit Facility. The Guarantees will rank PARI PASSU in right
of payment with any other senior subordinated indebtedness of
the Guarantors.
CHANGE OF CONTROL OFFER..................................... Upon a Change of Control, the Company will be required to make
an offer to purchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid interest to
the purchase date. The New Senior Credit Facility will prohibit
the purchase of outstanding Notes prior to payment of the
borrowings under the New Senior Credit Facility. There can be
no assurance that upon a Change of Control the Company will
have sufficient funds to repurchase any of the Notes.
CERTAIN COVENANTS........................................... The Indenture will contain certain covenants that, among other
things, limit the ability of the Company or any of its
Subsidiaries to incur additional Indebtedness, make certain
Restricted Payments and Investments, create Liens, permit
dividend or other payment restrictions to apply to
Subsidiaries, enter into certain transactions with Affiliates
or Related Persons, incur certain senior subordinated
indebtedness or consummate certain merger, consolidation or
similar transactions. In addition, in certain circumstances,
the Company will be required to offer to purchase Notes at 100%
of the principal amount thereof with the net proceeds of
certain asset sales. These covenants are subject to a number of
significant exceptions and qualifications. See "Description of
the Notes."
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data as of and for
the three months ended March 31, 1996 and 1995 and as of and for each of the
five years in the period ended December 31, 1995. The financial data of the
Company as of and for each of the five years in the period ended December 31,
1995 were derived from the Company's audited consolidated financial statements.
The financial data as of and for the three months ended March 31, 1996 and 1995
were derived from unaudited consolidated financial statements of the Company for
such periods, which, in the opinion of management of the Company, reflect all
adjustments (which are comprised only of normal recurring accruals and the use
of estimates) necessary to present fairly the financial position and the results
of operations for the unaudited periods. To conform to the 1995 presentation,
certain amounts in prior years' financial data have been reclassified. The data
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto appearing elsewhere and
incorporated by reference herein.
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THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31, (1)
1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT RATIOS
STATEMENTS OF OPERATIONS DATA:
Net sales $771,312 $747,095 $2,976,486 $2,395,803 $1,396,971 $1,177,298 $1,021,014
Cost of goods sold 697,133 674,187 2,708,668 2,163,459 1,249,660 1,052,998 918,304
Gross margin 74,179 72,908 267,818 232,344 147,311 124,300 102,710
Selling, general and administrative
expenses 61,040 53,561 225,897 165,564 107,771 91,371 78,191
Depreciation and amortization 3,930 3,516 15,416 13,034 7,593 5,861 4,977
Interest expense, net(2) 5,800 5,391 25,538 10,155 1,530 1,128 3,192
Discount on accounts receivable
securitization 744 -- 641 -- -- -- --
Nonrecurring restructuring expenses(3) -- 2,661 16,734 29,594 -- -- --
Income (loss) from continuing operations
before income taxes 2,665 7,779 (16,408) 13,997 30,417 25,940 16,350
Income tax provision (benefit) 1,146 3,166 (5,100) 6,078 11,900 10,505 6,681
Income (loss) from continuing operations $ 1,519 $ 4,613 $ (11,308) $ 7,919 $ 18,517 $ 15,435 $ 9,669
Net income (loss) $ 1,519 $ 4,613 $ (11,308) $ 7,919 $ 20,134 $ 20,392 $ 12,027
BALANCE SHEET DATA (END OF PERIOD):
Working capital $325,712 $355,216 $ 331,663 $ 281,788 $ 139,091 $ 99,826 $ 122,675
Total assets 848,401 918,343 857,803 868,560 334,322 274,540 311,786
Long-term debt 313,206 323,304 323,308 248,427 50,768 24,986 67,675
Shareholders' equity 237,695 258,621 235,271 256,176 136,943 116,659 97,091
SUPPLEMENTAL NON-GAAP DATA:
Adjusted EBITDA(4) $ 13,139 $ 19,347 $ 41,921 $ 66,780 $ 39,540 $ 32,929 $ 24,519
Capital expenditures 3,732 4,397 21,272 8,220 9,741 7,549 6,254
HISTORICAL RATIOS:
Adjusted EBITDA to interest expense,
net(4) 2.01 3.59 1.60 6.58 25.84 29.19 7.68
Adjusted EBITDA minus capital
expenditures to interest expense, net
(deficiency)(4) 1.44 2.77 $ (5,530) 5.77 19.48 22.50 5.72
Earnings to fixed charges
(deficiency)(5) 1.31 2.03 $ (16,408) 1.81 6.23 6.29 3.45
PRO FORMA RATIOS:
Adjusted EBITDA to interest expense,
net(4) 1.67 1.34
Adjusted EBITDA minus capital
expenditures to interest expense, net
(deficiency)(4) 1.20 $ (10,677)
Earnings to fixed charges
(deficiency)(5) 1.11 $ (22,877)
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
10
<PAGE>
(1) See Note 2 of Notes to Consolidated Financial Statements for a discussion of
acquisitions and divestitures that may affect comparability of data.
(2) Interest expense, net, consists of interest expense net of finance charges
received from customers of $1.2 million and $0.5 million for the first
quarters of 1996 and 1995, respectively, and $3.8 million, $2.0 million,
$1.4 million, $1.3 million and $1.1 million for the years ended December 31,
1995, 1994, 1993, 1992 and 1991, respectively.
(3) In the first quarter of 1995 and the years ended December 31, 1995 and 1994,
the Company incurred $2.7 million, $16.7 million and $29.6 million,
respectively, of nonrecurring restructuring expenses related to its
restructuring plan developed in conjunction with the Stuart Acquisition and
the decision to close or downsize certain facilities in 1996. See Note 3 of
Notes to Consolidated Financial Statements.
(4) Adjusted EBITDA represents income from continuing operations before income
taxes, nonrecurring restructuring expenses, discount on accounts receivable
securitization, interest expense, net, and depreciation and amortization.
The Company has included Adjusted EBITDA to provide additional information
related to the Company's ability to service debt. Adjusted EBITDA should not
be considered as an alternative measure of the Company's net income, cash
flow (both of which are determined in accordance with generally accepted
accounting principles), operating performance or liquidity. For purposes of
these ratios, interest expense, net, consists of interest expense net of
finance charges received from customers and discount on accounts receivable
securitization. The pro forma ratios give effect to the Refinancing
(excluding $113,125 and $452,500 for the first quarter of 1996 and the year
ended December 31, 1995, respectively, of amortization of deferred debt
issuance costs).
(5) For purposes of computing this ratio, earnings consist of income (loss) from
continuing operations before income taxes and fixed charges. Fixed charges
consist of interest expense, discount on accounts receivable securitization,
amortization of debt issuance costs and one-third of rental expense (the
portion considered representative of the interest factor). The pro forma
ratio gives effect to the Offering and the application of the net proceeds
therefrom to reduce outstanding indebtedness under the Senior Credit
Facility (but not the other aspects of the Refinancing).
11
<PAGE>
RISK FACTORS
Prospective investors should consider carefully all the information contained
and incorporated by reference in this Prospectus, including the following risk
factors. This Prospectus contains forward-looking statements which are
inherently uncertain. Actual results and events may differ significantly from
those discussed in such forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, the following
risk factors.
ABSENCE OF PROFITABLE OPERATIONS IN RECENT PERIODS
While the Company historically has been profitable, in the six months ended
December 31, 1995, the Company sustained a pretax loss of $27.1 million and a
net loss of $17.6 million (prior to payment of the dividend on the Company's
outstanding preferred stock). The Company attributes these losses to declining
gross margins and increasing SG&A expenses. While the Company has implemented
certain measures to improve its operating performance, there can be no assurance
that these measures will be successful. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL LEVERAGE
The Company has had and after the consummation of the Refinancing will continue
to have substantial indebtedness. As of March 31, 1996, after giving effect to
the Refinancing, the Company's total indebtedness would have been $238.3
million. As of such date, the Company's shareholders' equity was $237.7 million,
resulting in a pro forma total debt-to-total capitalization ratio of 50.1%. The
Notes will be general unsecured obligations of the Company and will rank
subordinate in right of payment to all existing and future Senior Indebtedness,
including indebtedness under the New Senior Credit Facility. As of March 31,
1996, after giving effect to the Refinancing, the aggregate amount of Senior
Indebtedness would have been approximately $77.3 million, all of which would
have been borrowings under the New Senior Credit Facility. As of such date, the
Company would have had, subject to certain restrictions, the ability to draw up
to an additional $147.7 million of indebtedness under the New Senior Credit
Facility. The Notes will rank senior in right of payment to the Company's $10.2
million 0% Subordinated Note. The Notes will not be secured by any assets of the
Company or the Guarantors. See " -- Subordination of the Notes; Asset
Encumbrances." The Indenture will limit but not restrict the ability of the
Company and its subsidiaries to incur additional indebtedness, including Senior
Indebtedness. See "Description of the Notes."
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
debt service requirements, general corporate purposes or other purposes may be
restricted or limited; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of the Company's interest
expense; (iii) the Company is more highly leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and (iv)
the Company's borrowings under the New Senior Credit Facility will accrue
interest at a variable rate and charges under the Receivables Financing Facility
reflect a variable rate, which, to the extent the Company has not entered into
interest rate swap and cap agreements, could result in increased expense in the
event of higher prevailing interest rates.
The Company's ability to make interest payments on the Notes will be dependent
on the Company's future operating performance, which itself is dependent on a
number of factors, many of which are beyond the Company's control. The Company's
ability to repay the Notes at maturity will depend upon these same factors and
the ability of the Company to raise additional funds. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
DEPENDENCE ON SALES TO CERTAIN CUSTOMERS
For 1995, sales to member hospitals of VHA, a Network, represented approximately
39.6% of the Company's net sales. During such year, Columbia, the largest
investor-owned healthcare organization in the United States, and member
hospitals of AmeriNet, a GPO, accounted for approximately 8.4% and 5.6%,
respectively, of the Company's net sales. No other Network, GPO, IHS or
individual customer accounted for as much as 5% of the Company's net sales
during such year. Although the termination of the Company's relationship with
VHA or AmeriNet would not necessarily result in the loss of all of the member
hospitals of such Network or GPO as customers, such termination or the loss of
Columbia as a customer could adversely affect the Company's results of
operations. See "Business -- Customers."
12
<PAGE>
COMPETITION
The medical/surgical supply distribution industry in the United States is highly
competitive and consists of (i) three major, nationwide distributors, including
the Company, Baxter International Inc. ("Baxter") and General Medical
Corporation ("General Medical"), (ii) a few smaller, nationwide distributors and
(iii) a number of regional and local distributors. The Company is one of the two
largest distributors of medical/surgical supplies in the United States.
Competition within the medical/surgical supply distribution industry exists with
respect to total delivered product cost, product availability and the ability to
fill orders accurately, delivery time, efficient computer communication
capabilities, services provided, breadth of product line and the ability to meet
special requirements of customers. Further consolidation of medical/surgical
supply distributors is expected to continue through the purchase of smaller
distributors by larger companies as a result of competitive pressures in the
marketplace. Increased competition from these and future competitors, including
those having greater financial and other resources than the Company, could
reduce sales and prices, adversely affecting the Company's results of
operations. See "Business -- Industry Overview" and "Business -- Competition."
HEALTHCARE REFORM
In recent years, there have been a number of government initiatives to reduce
healthcare costs. Congress and various state legislatures have proposed changes
in law and regulation that could effect major restructuring of the healthcare
industry. Changes in governmental support of healthcare services, the methods by
which such services are delivered, the prices for such services or other
legislation or regulations governing such services or mandated benefits may have
a material adverse effect on the Company's results of operations. See
"Business -- Regulation."
HOLDING COMPANY STRUCTURE
The Company conducts business through its direct subsidiaries, O&M Medical and
Stuart, and its indirect subsidiaries and has no operations of its own. The
Company will be dependent on the cash flow from its subsidiaries in order to
meet its debt service obligations, including its obligations under the Notes.
The Company's direct and indirect Guarantor subsidiaries consist of O&M Medical,
Stuart, National Medical, O&M West, Koley's, Lyons and Kuhlman. The Company's
only non-Guarantor subsidiary is OMF. For a discussion of the enforceability of
such Guarantees, see " -- Fraudulent Conveyance Considerations."
As a result of the holding company structure of the Company, the holders of the
Notes will effectively rank junior to all creditors of each subsidiary of the
Company that is not a Guarantor or as to which its Guarantee is not enforceable
with respect to the assets of such subsidiaries. In the event of the
dissolution, bankruptcy, liquidation or reorganization of any such subsidiary,
the holders of the Notes will not receive any amounts in respect of the Notes
until after the payment in full of the claims of the creditors of such
subsidiary, including trade creditors.
RESTRICTIVE COVENANTS IN THE NEW SENIOR CREDIT FACILITY
The New Senior Credit Facility will contain material restrictions on the
operation of the Company's business, including covenants restricting or
limiting, among other things, the ability of the Company and certain
subsidiaries to incur indebtedness; create liens on their property; guarantee
obligations; alter the character of their business; consolidate, merge or
purchase or sell assets; make investments or advance funds; prepay indebtedness;
and transact business with affiliates. The New Senior Credit Facility also will
contain certain financial covenants, including covenants relating to tangible
net worth, cash flow coverage, current ratio, leverage ratio and fixed charge
coverage ratio, as well as customary events of default. A breach of one or more
covenants under such facility could result in the inability of the Company to
borrow additional amounts under the New Senior Credit Facility and possibly an
acceleration of the Company's obligations thereunder. In addition, a default
under the Notes will constitute a default under the New Senior Credit Facility.
During 1995 and early 1996, the Company sought and obtained waivers of
non-compliance with, and amendments to, certain financial covenants, including
covenants regarding consolidated net worth, fixed charge coverage ratio,
leverage ratio and consolidated operating EBITDA (as defined in the Senior
Credit Facility), contained in the instruments relating to the Senior Credit
Facility. Prior to the Company's obtaining waivers, such non-compliance also
could have prevented further use by the Company of the Receivables Financing
Facility and certain interest rate swap and cap agreements entered into by the
Company with respect to borrowings under the Senior Credit Facility. There can
be no assurance that in the future the Company will not be required to seek
waivers of non-compliance or amendments to the New Senior Credit Facility or
other credit agreements in effect from time to time, or, if it is required to do
so, that it will be able to obtain such waivers. See "Use of Proceeds and
Refinancing."
13
<PAGE>
SUBORDINATION OF THE NOTES; ASSET ENCUMBRANCES
The payment of principal of, premium, if any, and interest on the Notes will be
subordinated, to the extent set forth in the Indenture, to the prior payment in
full of all existing and future Senior Indebtedness of the Company, which
includes the indebtedness under the New Senior Credit Facility, and all payments
under the Guarantees will be subordinated, to the extent set forth in the
Indenture, to the prior payment in full of all existing and future Guarantor
Senior Indebtedness, which will include the Guarantors' guarantee of the
indebtedness under the New Senior Credit Facility. Therefore, in the event of
the liquidation, dissolution, reorganization or any similar proceeding regarding
the Company, the assets of the Company will be available to pay obligations on
the Notes only after Senior Indebtedness of the Company has been paid in full,
and there may not be sufficient assets to pay amounts due on all or any of the
Notes. In addition, the Company may not pay principal of, premium, if any, or
interest on or any other amounts owing in respect of the Notes, make any deposit
pursuant to defeasance provisions or purchase, redeem or otherwise retire the
Notes if any Senior Indebtedness is not paid when due or any other default on
Senior Indebtedness occurs and the maturity of such indebtedness is accelerated
in accordance with its terms, unless such default has been cured or waived, any
such acceleration has been rescinded or such indebtedness has been repaid in
full. Moreover, under certain circumstances, if any non-payment default exists
with respect to certain Senior Indebtedness, the Company may not make any
payments on the Notes for a specified period of time, unless such default is
cured or waived or such indebtedness has been repaid in full. Similar provisions
apply in the case of the Guarantees. See "Description of the
Notes -- Subordination." As of March 31, 1996, after giving effect to the
Refinancing, the aggregate amount of Senior Indebtedness of the Company would
have been approximately $77.3 million, and the Company would have had, subject
to certain restrictions, the ability to draw up to an additional $147.7 million
of Senior Indebtedness under the New Senior Credit Facility.
The Notes will not be secured by any of the Company's assets. Under the
Indenture, subject to certain limitations, the Company is permitted to incur
additional Senior Indebtedness that may be secured by assets of the Company. If
the Company becomes insolvent or is liquidated, or if payment under any secured
indebtedness is accelerated, the lenders under any secured Senior Indebtedness
would be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to instruments governing such indebtedness.
Accordingly, such lenders would have a prior claim on such of the Company's
assets. In any event, because the Notes will not be secured by any of the
Company's assets, it is possible that there would be no assets remaining from
which claims of the holders of the Notes could be satisfied or, if any such
assets remained, such assets might be insufficient to satisfy such claims fully.
See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition, Liquidity and
Capital Resources," "Description of the Notes -- Subordination" and Notes to
Consolidated Financial Statements.
FRAUDULENT CONVEYANCE CONSIDERATIONS
Each Guarantor's Guarantee of the obligations of the Company under the Notes may
be subject to review under relevant federal and state fraudulent conveyance
statutes in a bankruptcy, reorganization or rehabilitation case or similar
proceeding or a lawsuit by or on behalf of unpaid creditors of such Guarantor.
If a court were to find under relevant fraudulent conveyance statutes that, at
the time the Notes were issued, (a) a Guarantor guaranteed the Notes with the
intent of hindering, delaying or defrauding current or future creditors or (b)
(i) a Guarantor received less than reasonably equivalent value or fair
consideration for guaranteeing the Notes and (ii)(A) was insolvent or was
rendered insolvent by reason of such Guarantee, (B) was engaged, or about to
engage, in a business or transaction for which its assets constituted
unreasonably small capital or (C) intended to incur, or believed that it would
incur, obligations beyond its ability to pay as such obligations matured (as all
of the foregoing terms are defined in or interpreted under such fraudulent
conveyance statutes), such court could avoid or subordinate such Guarantee to
presently existing and future indebtedness of such Guarantor and take other
action detrimental to the holders of the Notes, including, under certain
circumstances, invalidating such Guarantee. See "Description of the Notes -- The
Guarantees."
To the extent any Guarantee was avoided as a fraudulent conveyance, limited as
described above or held unenforceable for any other reason, holders of the Notes
would, to such extent, cease to have a claim in respect of such Guarantee and,
to such extent, would be creditors solely of the Company and any Guarantor whose
Guarantee was not avoided, limited or held unenforceable. In such event, the
claims of the holders of the Notes against the issuer of an avoided, limited or
unenforceable Guarantee would be subject to the prior payment of all liabilities
of such Guarantor. There can be no assurance that, after providing for all prior
claims, there would be sufficient assets to satisfy the claims of the holders of
the Notes.
14
<PAGE>
NO MARKET FOR THE NOTES
Although the Notes have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, the Notes are a new issue of
securities, have no established trading market and may not be widely
distributed. Although the Underwriters have informed the Company that they
currently intend to make a market in the Notes, they are not obligated to do so,
and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Notes. See "Underwriting."
15
<PAGE>
USE OF PROCEEDS AND REFINANCING
The net proceeds to the Company from the sale of the Notes offered hereby (after
deducting underwriting discounts and commissions and other expenses of the
Offering) will be approximately $145.5 million. Such net proceeds will be used
to repay a portion of the Company's outstanding indebtedness under the Senior
Credit Facility. As of March 31, 1996, borrowings under the Senior Credit
Facility totaled approximately $303.0 million and are expected to be
approximately $310.0 million at the time of completion of the Offering. The
Senior Credit Facility expires in April 1999. Borrowings under the Senior Credit
Facility bear a floating rate of interest based on the prime rate of
NationsBank, N.A. or the London Interbank Offered Rate ("LIBOR"). As of March
31, 1996, giving effect to the interest rate swap and cap agreements entered
into by the Company, the effective interest rate for the Senior Credit Facility
was 7.6%.
Concurrently with the completion of the Offering, the Company will enter into
the New Senior Credit Facility with a group of commercial banks and will use
borrowings of approximately $164.5 million under the New Senior Credit Facility,
together with the net proceeds of the Offering of approximately $145.5 million,
to repay in full outstanding indebtedness under the Senior Credit Facility.
Borrowings under the New Senior Credit Facility will be general unsecured
obligations of the Company, will rank senior in right of payment to the Notes
and will be guaranteed by the Guarantors, which guarantees will be general
unsecured obligations of the Guarantors and will rank senior in right of payment
to the Guarantees. The New Senior Credit Facility will be a five-year facility.
Borrowings under the New Senior Credit Facility will bear a floating rate of
interest based on the prime rate of NationsBank, N.A. or LIBOR, which rate would
have been 8.4% as of March 31, 1996, giving effect to the interest rate swap and
cap agreements referred to above and the Refinancing. As of March 31, 1996,
after giving effect to the Refinancing, the aggregate amount outstanding under
the New Senior Credit Facility would have been approximately $77.3 million.
The New Senior Credit Facility will contain customary events of default,
including default upon a change of control of the Company. It also will contain
covenants limiting, among other things, the ability of the Company and certain
subsidiaries to incur indebtedness, create liens on their property, guarantee
obligations, alter the character of their business, consolidate, merge or
purchase or sell assets, make investments or advance funds, prepay indebtedness
and transact business with affiliates. The New Senior Credit Facility also will
contain certain financial covenants, including covenants relating to tangible
net worth, cash flow coverage, current ratio, leverage ratio and fixed charge
coverage ratio.
Under the Receivables Financing Facility, OMF, a special-purpose subsidiary of
the Company, is entitled, through December 1996, to transfer certain of the
Company's trade receivables and receive up to $75.0 million from such transfer
for consideration that reflects a cost of funds at commercial paper rates plus a
charge for administrative and credit support services. As of March 31, 1996, the
Company had received $69.1 million under the Receivables Financing Facility, the
proceeds of which were used to reduce amounts outstanding under the Senior
Credit Facility. Draws under the Receivables Financing Facility result in the
absolute transfer, without recourse, of the trade receivables to an unaffiliated
entity. Following the completion of the Offering, the Receivables Financing
Facility will be increased to a maximum of $150.0 million and the facility will
be available for use by the Company through May 1999. Proceeds of the
Receivables Financing Facility of approximately $80.9 million, as so increased,
will be applied to reduce amounts outstanding under the New Senior Credit
Facility. The Company expects to receive the additional funds under the
Receivables Financing Facility promptly following consummation of the increase
in the Receivables Financing Facility to $150.0 million. The Company intends to
seek extensions of the Receivables Financing Facility subsequent to May 1999. In
the event funds are not available under the Receivables Financing Facility, it
would be necessary for the Company to secure alternative financing from other
sources and there can be no assurances as to availability of alternative
financing at such time.
16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company at
March 31, 1996, and as adjusted to give effect to the application of the net
proceeds from the Offering together with borrowings under the New Senior Credit
Facility to repay outstanding indebtedness under the Senior Credit Facility and
to the application of additional proceeds from the Receivables Financing
Facility to reduce amounts outstanding under the New Senior Credit Facility. See
"Use of Proceeds and Refinancing."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS ACTUAL AS ADJUSTED (1)
<S> <C> <C>
SHORT-TERM INDEBTEDNESS:
Current maturities of long-term indebtedness $ 722 $ 722
LONG-TERM INDEBTEDNESS, LESS CURRENT MATURITIES:
Notes payable to banks (Senior Credit Facility and New Senior Credit Facility) 303,000 77,325
10 7/8% Senior Subordinated Notes due 2006 -- 150,000
0% Subordinated Note 10,206 10,206
Total long-term indebtedness 313,206 237,531
Total indebtedness 313,928 238,253
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $100 per share; authorized -- 10,000 shares
Series A; Participating Cumulative Preferred Stock; none issued -- --
Series B; Cumulative Preferred Stock; 4.5%, convertible; issued and outstanding 1,150
shares 115,000 115,000
Common Stock, par value $2 per share; authorized -- 200,000 shares; issued and
outstanding -- 31,739 shares 63,478 63,478
Paid-in capital 3,978 3,978
Retained earnings 55,239 55,239
Total shareholders' equity 237,695 237,695
Total capitalization $551,623 $ 475,948
</TABLE>
(1) The Receivables Financing Facility is not reflected on the balance sheet as
indebtedness because the Company transfers, without recourse, the trade
receivables. As of March 31, 1996, the Company had received $69.1 million
under the Receivables Financing Facility, the proceeds of which were used to
reduce amounts outstanding under the Senior Credit Facility.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data as of and for
the three months ended March 31, 1996 and 1995 and as of and for each of the
five years in the period ended December 31, 1995. The financial data of the
Company as of and for each of the five years in the period ended December 31,
1995 were derived from the Company's audited consolidated financial statements.
The financial data as of and for the three months ended March 31, 1996 and 1995
were derived from unaudited consolidated financial statements of the Company for
such periods, which, in the opinion of management of the Company, reflect all
adjustments (which are comprised only of normal recurring accruals and the use
of estimates) necessary to present fairly the financial position and the results
of operations for the unaudited periods. To conform to the 1995 presentation,
certain amounts in prior years' financial data have been reclassified. The data
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto appearing elsewhere and
incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31, (1)
1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT RATIOS
STATEMENTS OF OPERATIONS DATA:
Net sales $771,312 $747,095 $2,976,486 $2,395,803 $1,396,971 $1,177,298 $1,021,014
Cost of goods sold 697,133 674,187 2,708,668 2,163,459 1,249,660 1,052,998 918,304
Gross margin 74,179 72,908 267,818 232,344 147,311 124,300 102,710
Selling, general and administrative
expenses 61,040 53,561 225,897 165,564 107,771 91,371 78,191
Depreciation and amortization 3,930 3,516 15,416 13,034 7,593 5,861 4,977
Interest expense, net(2) 5,800 5,391 25,538 10,155 1,530 1,128 3,192
Discount on accounts receivable
securitization 744 -- 641 -- -- -- --
Nonrecurring restructuring expenses(3) -- 2,661 16,734 29,594 -- -- --
Total expenses 71,514 65,129 284,226 218,347 116,894 98,360 86,360
Income (loss) before income taxes 2,665 7,779 (16,408) 13,997 30,417 25,940 16,350
Income tax provision (benefit) 1,146 3,166 (5,100) 6,078 11,900 10,505 6,681
Income (loss) from continuing
operations 1,519 4,613 (11,308) 7,919 18,517 15,435 9,669
Discontinued operations -- -- -- -- 911 5,687 2,358
Cumulative effect of change in
accounting principles -- -- -- -- 706 (730) --
Net income (loss) 1,519 4,613 (11,308) 7,919 20,134 20,392 12,027
Dividends on preferred stock 1,294 1,294 5,175 3,309 -- -- --
Net income (loss) attributable to
common stock $ 225 $ 3,319 $ (16,483) $ 4,610 $ 20,134 $ 20,392 $ 12,027
BALANCE SHEET DATA (END OF PERIOD):
Working capital $325,712 $355,216 $ 331,663 $ 281,788 $ 139,091 $ 99,826 $ 122,675
Total assets 848,401 918,343 857,803 868,560 334,322 274,540 311,786
Long-term debt 313,206 323,304 323,308 248,427 50,768 24,986 67,675
Shareholders' equity 237,695 258,621 235,271 256,176 136,943 116,659 97,091
SUPPLEMENTAL NON-GAAP DATA:
Adjusted EBITDA(4) $ 13,139 $ 19,347 $ 41,921 $ 66,780 $ 39,540 $ 32,929 $ 24,519
Capital expenditures 3,732 4,397 21,272 8,220 9,741 7,549 6,254
HISTORICAL RATIOS:
Adjusted EBITDA to interest expense,
net(4) 2.01 3.59 1.60 6.58 25.84 29.19 7.68
Adjusted EBITDA minus capital
expenditures to interest expense, net
(deficiency)(4) 1.44 2.77 $ (5,530) 5.77 19.48 22.50 5.72
Earnings to fixed charges
(deficiency)(5) 1.31 2.03 $ (16,408) 1.81 6.23 6.29 3.45
PRO FORMA RATIOS:
Adjusted EBITDA to interest expense,
net(4) 1.67 1.34
Adjusted EBITDA minus capital
expenditures to interest expense, net
(deficiency)(4) 1.20 $ (10,677)
Earnings to fixed charges
(deficiency)(5) 1.11 $ (22,877)
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
18
<PAGE>
(1) See Note 2 of Notes to Consolidated Financial Statements for a discussion of
acquisitions and divestitures that may affect comparability of data.
(2) Interest expense, net, consists of interest expense net of finance charges
received from customers of $1.2 million and $0.5 million for the first
quarters of 1996 and 1995, respectively, and $3.8 million, $2.0 million,
$1.4 million, $1.3 million and $1.1 million for the years ended December 31,
1995, 1994, 1993, 1992 and 1991, respectively.
(3) In the first quarter of 1995 and the years ended December 31, 1995 and 1994,
respectively, the Company incurred $2.7 million, $16.7 million and $29.6
million, respectively, of nonrecurring restructuring expenses related to its
restructuring plan developed in conjunction with the Stuart Acquisition and
the decision to close or downsize certain facilities in 1996. See Note 3 of
Notes to Consolidated Financial Statements.
(4) Adjusted EBITDA represents income from continuing operations before income
taxes, nonrecurring restructuring expenses, discount on accounts receivable
securitization, interest expense, net, and depreciation and amortization.
The Company has included Adjusted EBITDA to provide additional information
related to the Company's ability to service debt. Adjusted EBITDA should not
be considered as an alternative measure of the Company's net income, cash
flow (both of which are determined in accordance with generally accepted
accounting principles), operating performance or liquidity. For purposes of
these ratios, interest expense, net, consists of interest expense net of
finance charges received from customers and discount on accounts receivables
securitization. The pro forma ratios give effect to the Refinancing
(excluding $113,125 and $452,500 for the first quarter of 1996 and the year
ended December 31, 1995, respectively, of amortization of deferred debt
issuance costs).
(5) For purposes of computing this ratio, earnings consist of income (loss) from
continuing operations before income taxes and fixed charges. Fixed charges
consist of interest expense, discount on accounts receivable securitization,
amortization of debt issuance costs and one-third of rental expense (the
portion considered representative of the interest factor). The pro forma
ratio gives effect to the Offering and the application of the net proceeds
therefrom to reduce outstanding indebtedness under the Senior Credit
Facility (but not the other aspects of the Refinancing).
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
O&M is one of the two largest distributors of medical/surgical supplies in the
United States. The Company distributes approximately 300,000 finished
medical/surgical products produced by approximately 3,000 manufacturers to over
4,000 customers from 48 distribution centers nationwide. The Company's customers
are primarily hospitals, which account for approximately 90% of O&M's net sales,
and also include alternate care facilities such as physicians' offices, clinics,
nursing homes and surgery centers. The majority of the Company's sales consists
of dressings, endoscopic products, intravenous products, needles and syringes,
sterile procedure trays, surgical products and gowns, sutures and urological
products.
In May 1994, the Company acquired Stuart, then the third largest distributor of
medical/surgical supplies in the United States, with 1993 net sales of $890.5
million. In addition to expanding its customer base, the Stuart Acquisition
significantly enhanced the Company's distribution capabilities in the
Northeastern and Midwestern regions of the United States, thus strengthening the
Company's national distribution capabilities.
In conjunction with the Stuart Acquisition, the Company implemented a
restructuring plan designed to eliminate duplicate costs and increase
efficiencies within the combined company. During 1994 and 1995, the Company
incurred approximately $42.8 million of nonrecurring restructuring expenses in
connection with this restructuring plan. These expenses were comprised primarily
of costs associated with eliminating, consolidating, relocating or expanding 12
distribution centers (which were specifically associated with the Stuart
Acquisition), eliminating Stuart's headquarters operations, redesigning and
implementing processes to adopt the best practices and systems of O&M and Stuart
within the combined company and outsourcing the operation of the Company's
mainframe computer system. The implementation of the restructuring plan was
completed during the fourth quarter of 1995.
During 1995, the Company experienced a decline in profitability due to a
decrease in the gross margin percentage and an increase in SG&A expenses as a
percentage of net sales. The decline in the gross margin percentage was
primarily attributable to increased sales to larger accounts that were offered
reduced pricing in return for the expectation of increased volume. To mitigate
the decline in the gross margin percentage, the Company implemented price
increases in December 1995 and the first quarter of 1996 that included both
direct price increases as well as the introduction of charges for certain
enhanced delivery and management services that were previously provided to
certain customers at no additional cost. These increases were implemented with
the goal of achieving an overall increase in the gross margin percentage equal
to at least one percent of net sales. As a result of these measures, gross
margin as a percentage of net sales increased to 9.6% in the first quarter of
1996 from 8.7% in the fourth quarter of 1995. Substantially all of the Networks,
GPOs and IHSs representing the majority of the Company's customers have agreed
to the new price levels. The Company believes that sales growth from new
accounts and penetration of existing accounts will more than offset any business
lost as a result of the price increases, but such growth cannot be assured.
The increase in SG&A expenses as a percentage of net sales was primarily a
result of increased personnel costs incurred in connection with new contracts
providing for enhanced service levels and services not previously provided by
the Company, a significant increase in the number of SKUs distributed by the
Company, system conversions, opening or expanding 11 distribution centers and
reconfiguring warehouse systems. In an effort to reduce SG&A expenses, O&M is
reducing overtime and temporary employee costs, further reducing distribution
center costs (including through the closure of two and the downsizing of five
distribution centers, which resulted in $3.5 million of the Company's
nonrecurring restructuring charges in the fourth quarter of 1995) and improving
inventory management systems. As a result of these measures, the Company's SG&A
expenses as a percentage of net sales decreased to 7.9% in the first quarter of
1996 from 8.2% in the fourth quarter of 1995.
20
<PAGE>
RESULTS OF OPERATIONS
The following table presents the Company's consolidated statements of operations
on a percentage of net sales basis.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 90.4 90.2 91.0 90.3 89.5
Gross margin 9.6 9.8 9.0 9.7 10.5
Selling, general and administrative expenses 7.9 7.2 7.6 6.9 7.7
Depreciation and amortization 0.5 0.5 0.5 0.6 0.5
Interest expense, net 0.8 0.7 0.9 0.4 0.1
Discount on accounts receivable securitization 0.1 -- -- -- --
Nonrecurring restructuring expenses -- 0.4 0.6 1.2 --
Total expenses 9.3 8.8 9.6 9.1 8.3
Income (loss) before income taxes 0.3 1.0 (0.6) 0.6 2.2
Income tax provision (benefit) 0.1 0.4 (0.2) 0.3 0.9
Income (loss) from continuing operations 0.2 0.6 (0.4) 0.3 1.3
Discontinued operations and cumulative effect of change in accounting
principle -- -- -- -- 0.1
Net income (loss) 0.2% 0.6% (0.4)% 0.3% 1.4%
Supplemental Non-GAAP Data:
Adjusted EBITDA 1.7% 2.6% 1.4% 2.8% 2.8%
</TABLE>
FIRST QUARTER OF 1996 COMPARED WITH FIRST QUARTER OF 1995
NET SALES. Net sales increased 3.2% to $771.3 million in the first quarter of
1996 from $747.1 million in the first quarter of 1995 and $746.7 million in the
fourth quarter of 1995. Approximately 50% of each of these increases was due to
new accounts and increased penetration of existing accounts. The remainder was
due to price increases from manufacturers passed on to customers and the price
increases implemented by the Company during December 1995 and the first quarter
of 1996. The Company believes that sales growth from new accounts and further
penetration of existing accounts have more than offset, and will continue to
offset, any business lost as a result of the price increases, but such growth
and penetration cannot be assured.
GROSS MARGIN. Gross margin as a percentage of net sales declined to 9.6% in the
first quarter of 1996 from 9.8% in the first quarter of 1995, but increased from
8.7% in the fourth quarter of 1995. The decrease from the first quarter of 1995
to the first quarter of 1996 was the result of an increase in sales to larger
accounts that were offered reduced pricing in return for the expectation of
increased volume, partially offset by the implementation of price increases
during the fourth quarter of 1995 and the first quarter of 1996. The Company
expects that its gross margin will increase as a percentage of net sales as the
full impact of the price increases are realized in subsequent quarters. During
the first quarter of 1996, the Company's LIFO (last-in, first-out) reserve
increased by $2.7 million as compared to a $1.0 million increase in the first
quarter of 1995. The increase is due primarily to higher inventory levels and
price increases from manufacturers. The increases in the LIFO reserve did not
have a significant impact on gross margin because the Company passes through
price increases from manufacturers to its customers. The Company also
anticipates growth in gross margin and net sales through increased utilization
of an activity-based cost system that charges incremental fees for additional
distribution and enhanced inventory management services such as more frequent
deliveries and distribution of products in small units of measure. The Company
believes the activity-based cost system will allow the Company's customers to
make more informed decisions about the services they choose to purchase. There
can be no assurance that the Company's pricing methods will produce increases in
net sales or gross margin as a percentage of net sales in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of
net sales increased to 7.9% in the first quarter of 1996 from 7.2% in the first
quarter of 1995, but declined from 8.2% in the fourth quarter of 1995. The
increase in SG&A expenses as a percentage of net sales as compared to the first
quarter of 1995 was primarily a result of increased personnel costs incurred in
connection with new contracts providing for enhanced service levels and services
not previously provided by the Company, a significant increase in the number of
SKUs distributed by the Company, system conversions, opening or expanding 11
distribution centers and reconfiguring warehouse systems.
21
<PAGE>
The decline in SG&A expenses as a percentage of net sales in the first quarter
of 1996 as compared to the fourth quarter of 1995 was a result of the completion
of 22 warehouse reconfigurations during 1995 and the continued implementation of
the following SG&A expense reduction initiatives. O&M has reduced overtime and
temporary employee costs by improving productivity through performance tracking
systems and functional best practices training programs. The Company expects to
further reduce distribution center costs through the closure of two and the
downsizing of five distribution centers which will be completed during the
second quarter of 1996 (which resulted in $3.5 million of the Company's
nonrecurring restructuring charges in the fourth quarter of 1995). The
distribution center closures and downsizings should better align distribution
center size and location with customer needs, establish operational efficiencies
and reduce administrative costs. Finally, the Company continues to improve
inventory management by completing the implementation of a new inventory
forecasting system, reconfiguring warehouse systems and limiting the number of
SKUs from multiple manufacturers distributed by the Company through the
standardization of products. The Company intends to focus on the standardization
of SKUs during 1996 and in future periods. Although the Company expects that
limiting the number of equivalent SKUs distributed by the Company will enable it
to reduce the handling costs of inventory, the impact of the Company's
standardization initiatives cannot be assured.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 11.8%
in the first quarter of 1996 compared to the first quarter of 1995. This
increase was due primarily to the Company's continued investment in improved IT.
The Company anticipates similar increases in depreciation and amortization in
1996 associated with additional capital investment in IT.
INTEREST EXPENSE, NET. Interest expense, net of finance charge income of $1.2
million and $0.5 million in the first quarter of 1996 and the first quarter of
1995, respectively, increased from $5.4 million in the first quarter of 1995 to
$5.8 million in the first quarter of 1996 primarily due to higher borrowing
levels to fund increased working capital requirements and higher interest rates.
Finance charge income represents payments from customers for past due balances
on their accounts.
Management has taken, and will continue to take, action to reduce interest
expense, including (i) completing the implementation of the Company's new
inventory forecasting system in all distribution centers by mid-1996, (ii)
limiting the number of SKUs from multiple manufacturers distributed by the
Company and (iii) reducing the Company's effective interest rate through the
off-balance sheet receivables securitization discussed below in the liquidity
section. Total financing costs including the discount on the receivables
securitization has declined from the fourth quarter of 1995 by $1.4 million.
INCOME TAXES. The Company had an income tax provision of $1.1 million in the
first quarter of 1996 (representing an effective tax rate of 43.0%) compared
with an income tax provision of $3.2 million in the first quarter of 1995
(representing an effective tax rate of 40.7%). The increase in effective tax
rate was due to the Company's lower earnings level increasing the impact of
certain nondeductible expenses such as goodwill amortization.
NET INCOME (LOSS). The Company earned net income of $1.5 million in the first
quarter of 1996 compared to net income of $4.6 million in the first quarter of
1995. As previously discussed, the decline was due to the combination of a
decline in gross margin as a percentage of net sales, an increase in SG&A
expenses and an increase in interest expense. Although the Company has shown
improvement from its fourth quarter 1995 net loss of $9.0 million (which loss
included a $3.4 million nonrecurring restructuring charge, net of taxes) and the
Company continues to pursue the initiatives previously discussed in an effort to
improve the earnings of the Company, the impact of these initiatives on net
income cannot be assured.
ADJUSTED EBITDA. Adjusted EBITDA as a percentage of net sales declined to 1.7%
in the first quarter of 1996 from 2.6% in the first quarter of 1995, but
increased from 0.5% in the fourth quarter of 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 24.2% to $3.0 billion in 1995 from $2.4 billion
in 1994. Assuming the Stuart Acquisition had occurred January 1, 1994, the
increase would have been approximately 8.2% due to the additional sales volume
from contracts entered into in 1993 and 1994 with large healthcare providers,
such as Columbia, the United States Department of Defense and AmHS/Premier/Sun
Health ("Premier"), and price increases from manufacturers which are normally
passed on to customers.
GROSS MARGIN. Gross margin as a percentage of net sales declined to 9.0% in 1995
from 9.7% in 1994. The decrease was a result of the increase in sales to larger
accounts that were offered reduced pricing in return for the expectation of
increased volume. Gross margin was also negatively impacted in 1995 due to the
increase in inventory levels requiring a LIFO (last-in, first-out) reserve. The
reserve increased by $3.7 million in 1995 compared to $0.7 million in 1994. The
Company has initiated several plans to offset the decline in the gross margin
percentage, including recent price increases and the increasing utilization of
an activity-based cost system designed to identify costs associated with certain
delivery and management services to ensure
22
<PAGE>
that the Company charges its customers appropriately for incremental services
such as more frequent deliveries and distribution of products in small units of
measure. Substantially all of the Networks, GPOs and IHSs representing the
majority of the Company's customers have agreed to the new price levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of
net sales increased to 7.6% in 1995 from 6.9% in 1994. The increase in SG&A
expenses as a percentage of net sales was primarily a result of increased
personnel costs incurred in connection with new contracts providing for enhanced
service levels and services not previously provided by the Company, a
significant increase in the number of SKUs distributed by the Company, system
conversions, opening or expanding 11 distribution centers and reconfiguring
warehouse systems. SG&A expenses as a percentage of net sales also increased as
a result of the Company's sales, marketing and operational efforts designed to
maintain the VHA customer base and the concentration of management's effort to
integrate the operations of Stuart. In an effort to reduce SG&A expenses, O&M is
implementing the following measures (i) reduction of overtime and temporary
employee costs by improving productivity through performance tracking systems
and functional best practices training programs, (ii) further reduction of
distribution center costs through the closure of two and the downsizing of five
distribution centers (which resulted in $3.5 million of the Company's
nonrecurring restructuring charges in the fourth quarter of 1995), and (iii)
improvement of inventory management by completing the implementation of a new
inventory forecasting system, reconfiguring warehouse systems and limiting the
number of SKUs from multiple manufacturers distributed by the Company through
the standardization of products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 18.3%
in 1995 compared to 1994. This increase was due primarily to the Company's
continued investment in improved IT and the amortization of goodwill and
depreciation associated with the Stuart Acquisition. The Company anticipates
similar increases in depreciation and amortization in 1996 associated with
additional capital investment in IT.
INTEREST EXPENSE, NET. Interest expense, net of finance charge income of $3.8
million and $2.0 million in 1995 and 1994, respectively, increased from $10.2
million in 1994 to $25.5 million in 1995 primarily due to an increase in debt to
finance the Stuart Acquisition, high inventory levels, the Company's
restructuring plan and technology initiatives, as well as due to higher interest
rates. Finance charge income represents payments from customers for past due
balances on their accounts.
Management has taken action to reduce interest expense, including (i) completing
the implementation of the Company's new inventory forecasting system in all
distribution centers by mid-1996, (ii) limiting the number of SKUs from multiple
manufacturers distributed by the Company and (iii) reducing its effective
interest rate through alternative financing such as the off-balance sheet
receivables securitization discussed below in the liquidity section.
NONRECURRING RESTRUCTURING EXPENSES. During 1995, the Company incurred $13.2
million of nonrecurring restructuring expenses related to the Company's
restructuring plan developed in connection with the Stuart Acquisition and its
related decision to outsource the management and operation of its mainframe
computer system. The restructuring plan was completed during the fourth quarter
of 1995. During the fourth quarter of 1995, the Company incurred additional
nonrecurring restructuring charges of $3.5 million associated with its decision
to close or downsize seven distribution centers in 1995 and 1996. These expenses
were comprised primarily of costs associated with a reduction of employees
(approximately $1.7 million), the write-down of non-cash assets (approximately
$0.9 million) and other related exit costs (approximately $0.9 million). At
December 31, 1995, the associated accrued liability balance was approximately
$2.6 million.
INCOME TAXES. The Company had an income tax provision of $6.1 million in 1994
(representing an effective tax rate of 43.4%) compared with an income tax
benefit of $5.1 million in 1995. A complete reconciliation of the statutory
income tax rate to the Company's effective income tax rate is provided in Note
11 of Notes to Consolidated Financial Statements.
NET INCOME (LOSS). The Company incurred a net loss of $11.3 million in 1995
compared to net income of $7.9 million in 1994. Excluding the nonrecurring
restructuring expenses and the related tax benefit, the Company incurred a net
loss of $1.0 million in 1995. As previously discussed, the loss incurred during
1995 was due to the combination of a decline in gross margin percentage, an
increase in SG&A expenses and an increase in interest expense. Although the
initiatives previously discussed have been undertaken in an effort to improve
the earnings of the Company, their impact cannot be assured.
ADJUSTED EBITDA. Adjusted EBITDA as a percentage of net sales declined to 1.4%
in 1995 from 2.8% in 1994. Management is undertaking the actions discussed above
under gross margin and SG&A expenses to improve Adjusted EBITDA as a percentage
of net sales.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales increased 71.5% to $2.4 billion in 1994 from $1.4 billion
in 1993. Assuming the Stuart Acquisition occurred January 1, 1993, the increase
would have been approximately 16.6%. The 16.6% increase was due primarily to new
contracts with large healthcare providers, such as Columbia, the United States
Department of Defense and Premier; a new distribution agreement with VHA, the
Company's largest contract, which provided incentives to member hospitals to
increase purchases from the Company; and the continued product line expansion by
the Company. Sales under the VHA agreement grew to approximately $960.0 million,
or 40.0% of net sales, in 1994 from approximately $459.6 million, or 32.9% of
net sales, in 1993.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 9.7% in
1994 from 10.5% in 1993. The decrease was a result of the sales increases from
large lower margin contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased to 6.9% of
net sales in 1994 from 7.7% in 1993. This decrease was primarily the result of
the initial synergies obtained from the Stuart Acquisition and the sales volume
increases from large customers, such as VHA, Columbia and Premier.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 71.7%
in 1994 as compared to 1993, due primarily to the additional goodwill
amortization and depreciation expenses related to the Stuart Acquisition and the
depreciation of the Company's continued investment in new and improved IT.
INTEREST EXPENSE, NET. Interest expense, net of finance charge income of $2.0
million, increased $8.6 million to $10.2 million in 1994. The increase was due
primarily to the debt increase related to the Stuart Acquisition and the
increase in the Company's average interest rate on the Senior Credit Facility
from 3.8% in 1993 to 5.6% in 1994. The rate increase was due to the overall rate
increases in the lending markets. During 1994, the Company entered into interest
rate swap and cap agreements to fix the interest rate on a portion of the Senior
Credit Facility.
NONRECURRING RESTRUCTURING EXPENSES. As a result of the Stuart Acquisition and
the Company's related decision to outsource the operation of its mainframe
computer system, the Company implemented a restructuring plan. The plan was
designed to eliminate duplicate costs within the Company by closing overlapping
facilities and redesigning ineffective processes. During 1994, the Company
incurred approximately $29.6 million of nonrecurring expenses related to the
plan. These expenses were comprised primarily of (i) duplicate facility costs
(approximately $15.2 million), including the cost of maintaining duplicate
personnel and duplicate locations and the cost of converting Stuart divisions to
O&M systems and processes, (ii) costs associated with redesigning and
implementing processes and systems that optimize warehouse resources and
revising existing processes and systems to utilize the most efficient practices
of both companies to increase efficiencies within the combined company
(approximately $7.1 million), including the development of both a client/server
strategy and the requirements for forecasting and warehouse management systems,
both necessary to accommodate the needs of the combined company, and (iii) costs
associated with the conversion to an outsourced mainframe computer
(approximately $7.3 million), including the cost of termination of leases and
the incremental cost of transferring software licenses.
INCOME TAXES. The effective tax rate increased by 4.3 percentage points to 43.4%
in 1994, due primarily to the nondeductible goodwill arising out of the Stuart
Acquisition. A complete reconciliation of the statutory income tax rate to the
Company's effective income tax rate is provided in Note 11 of Notes to
Consolidated Financial Statements.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations decreased
by $10.6 million due to the nonrecurring restructuring expenses previously
discussed. Excluding these expenses, the Company's income from continuing
operations increased by $7.3 million or 39.3%.
ADJUSTED EBITDA. Adjusted EBITDA as a percentage of net sales for each of 1994
and 1993 was 2.8%.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Company's liquidity position improved significantly during the
first quarter of 1996. The increase was the result of improved earnings, reduced
working capital requirements and the availability of additional financing
sources. During 1995, several factors unfavorably impacted the Company's
liquidity, including (i) increased working capital requirements, (ii) decreased
earnings, (iii) restructuring expenses, and (iv) increased capital expenditures.
The Company's use of cash for operating activities in prior years reflects the
significant growth of the Company during those years. Cash was invested in
additional inventory necessary for increased sales levels and higher receivables
levels resulting therefrom. Due to the decline in growth of the Company in the
first quarter of 1996, operating activities became a source of cash flow.
Changes in trends of the
24
<PAGE>
Company's cash used for operating activities are expected to be consistent with
future growth and acquisition activities. The Company funded a majority of these
cash requirements through bank borrowings under the Senior Credit Facility. At
March 31, 1996, the Company had approximately $122.0 million of unused credit
under the Senior Credit Facility.
On December 28, 1995, the Company entered into the Receivables Financing
Facility to diversify its financing sources and to reduce its cost of funds.
Pursuant to the Receivables Financing Facility, OMF, a special-purpose, wholly
owned, non-operating subsidiary of the Company, is entitled to receive up to
$75.0 million from an unrelated third party purchaser for consideration that
reflects a cost of funds at commercial paper rates plus a charge for
administrative and credit support services. As of March 31, 1996, the Company
had received approximately $69.1 million under the Receivables Financing
Facility, the proceeds of which were used to reduce amounts outstanding under
the Senior Credit Facility.
Concurrently with the completion of the Offering, the Company will enter into
the $225.0 million New Senior Credit Facility and will use borrowings under the
New Senior Credit Facility, together with the net proceeds from the Offering, to
repay in full outstanding indebtedness under the Senior Credit Facility.
Following the completion of the Offering, the Receivables Financing Facility
will be increased to a maximum of $150.0 million, the proceeds of which will be
used to reduce amounts outstanding under the New Senior Credit Facility. See
"Use of Proceeds and Refinancing." The Company expects that borrowings under the
New Senior Credit Facility and proceeds from the Receivables Financing Facility
will be sufficient to fund its working capital needs and long-term strategic
growth plan, however this cannot be assured.
The Notes will be general unsecured obligations of the Company and will be
guaranteed on a joint and several basis by all of the subsidiaries of the
Company except for OMF. Separate financial statements of the Guarantors are not
presented herein because the Guarantors will jointly and severally guarantee the
Notes and the aggregate net assets, earnings and equity of the Guarantors are
substantially equivalent to the net assets, earnings and equity of the Company
on a consolidated basis except for the de minimis assets, equity and earnings of
OMF. The Company has no operations separate from its investment in its
subsidiaries and all Guarantors are wholly owned subsidiaries. Separate
financial statements for the Company and each of its subsidiaries are not
presented as management believes that such financial statements are not material
to investors.
To reduce the potential impact of increases in interest rates in the period
before the issuance of the Notes, in March, April and May 1996, the Company
entered into interest rate cap agreements with an aggregate notional value of
$150.0 million. Under the interest rate cap agreements, the Company will receive
from the bank counterparties on the determination dates the amounts by which the
interest rate of the United States Government 10-Year Treasury Note exceeds
various rates ranging from 6.8% to 7.0%. The determination dates of the
transactions are May 30, 1996 and May 31, 1996.
During 1995 and early 1996, the Company sought and obtained waivers of
non-compliance with, and amendments to, certain financial covenants included in
the Senior Credit Facility. Prior to the Company's obtaining waivers, such
non-compliance also could have prevented further use by the Company of the
Receivables Financing Facility and certain interest rate swap and cap agreements
entered into by the Company with respect to borrowings under the Senior Credit
Facility. As of March 31, 1996, the Company was in compliance with all of the
financial covenants included in the Senior Credit Facility. There can be no
assurance that in the future the Company will not be required to seek waivers of
non-compliance or amendments to the New Senior Credit Facility or other credit
agreements in effect from time to time or, if it is required to do so, that it
will be able to obtain such waivers. See "Use of Proceeds and Refinancing."
WORKING CAPITAL MANAGEMENT. For the first quarter of 1996, the Company's
three-month average working capital turnover improved to 9.4 times from 8.3
times in the fourth quarter of 1995. This improvement was due to increased
inventory turnover. On a three-month average, inventory turnover increased to
8.7 times from 8.2 times. This improvement was due to the continued
implementation of the Company's client/server-based forecasting system scheduled
for completion by the middle of 1996 and the limitation of the number of SKUs
from multiple manufacturers distributed by the Company. In an effort to reduce
accounts receivable levels, the Company has strengthened its methods of
monitoring and enforcing contract payment terms and has tied a portion of its
new sales force incentive program to reducing days sales outstanding. In 1995,
the Company experienced a significant decline in working capital turnover with
average working capital turnover of 8.3 times in the fourth quarter of 1995.
This decline was the result of (i) increased service levels, (ii) increases in
the number of SKUs carried by the Company, (iii) new customers, (iv) activities
associated with rationalization of distribution centers, (v) the development and
implementation of new computer systems, (vi) negotiation of favorable discount
terms with vendors, which provide enhanced gross margin, but shorten payment
terms, and (vii) the timing of purchasing patterns.
CAPITAL EXPENDITURES. Capital expenditures were approximately $3.7 million in
the first quarter of 1996, of which approximately $3.1 million was for computer
systems, including the continued conversion of certain applications from a
mainframe computer system to client/server technology. Approximately 75% of the
Company's $25.0 million of capital expenditures
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planned for 1996 will be for IT. The Company expects to continue to make this
level of investment for the forseeable future. These capital expenditures are
expected to be funded through cash flows from operations.
INFLATION. Inflation has not had a significant effect on the Company's results
of operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, in October 1995. SFAS 123
prescribes accounting and reporting standards for all stock-based compensation
plans. The new standard allows companies to continue to follow present
accounting rules, which often result in no compensation expense being recorded,
or to adopt the SFAS 123 fair-value-based method. The fair-value-based method
will generally result in higher compensation expense based on the estimated fair
value of stock-based awards on the grant date. Companies electing to continue
following present accounting rules will be required to provide pro forma
disclosures of net income and earnings per share as if the fair-value-based
method had been adopted. The Company intends to continue following present
accounting rules and to implement the new disclosure requirements in 1996 as
required. The adoption of SFAS 123, therefore, will not impact the financial
condition or results of operations of the Company.
In March 1995, FASB issued Statement of Financial Accounting Standards No. 121
("SFAS 121"), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which is effective for fiscal years
beginning after December 31, 1995. SFAS 121 prescribes accounting standards for
(i) the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and (ii) long-lived assets
and certain identifiable intangibles to be disposed of. This standard requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 in 1996 has not had a material impact on
the financial condition or results of operations of the Company.
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BUSINESS
THE COMPANY
O&M is one of the two largest distributors of medical/surgical supplies in the
United States. The Company distributes approximately 300,000 finished
medical/surgical products produced by approximately 3,000 manufacturers to over
4,000 customers from 48 distribution centers nationwide. The Company's customers
are primarily hospitals, which account for approximately 90% of O&M's net sales,
and also include alternate care facilities such as physicians' offices, clinics,
nursing homes and surgery centers. The majority of the Company's sales consists
of dressings, endoscopic products, intravenous products, needles and syringes,
sterile procedure trays, surgical products and gowns, sutures and urological
products.
The Company has significantly expanded its national presence over the last five
years. This expansion resulted from both internal growth and acquisitions,
including the acquisition of Stuart in May 1994. For a discussion of other
recent acquisitions, see Note 2 to Notes to Consolidated Financial Statements.
Since 1991, the Company has grown from 27 distribution centers serving 37 states
to 48 distribution centers serving 50 states. Over the same period, the
Company's net sales increased at a 30.7% compound annual rate, from $1.0 billion
in 1991 to $3.0 billion in 1995. For the first quarter of 1996, the Company
generated net sales of $771.3 million, a 3.3% increase from the fourth quarter
of 1995.
The Company's income from continuing operations increased at a 38.4% compound
annual rate from $9.7 million in 1991 to $18.5 million in 1993 before decreasing
to $7.9 million in 1994 and a loss of $11.3 million in 1995. For the first
quarter of 1996, income from continuing operations increased to $1.5 million
from a loss of $9.0 million (which loss included a $3.4 million nonrecurring
restructuring charge, net of taxes) in the fourth quarter of 1995. Similarly,
Adjusted EBITDA increased at a 39.7% compound annual rate from $24.5 million in
1991 to $66.8 million in 1994, before decreasing to $41.9 million in 1995. For
the first quarter of 1996, Adjusted EBITDA increased to $13.1 million from $4.0
million in the fourth quarter of 1995.
The Company is committed to providing its customers and suppliers with the most
responsive, efficient and cost effective distribution system for the delivery of
medical/surgical supplies and services. In order to meet this commitment, the
Company has implemented the following strategy: (i) maintain market leadership
and leverage the benefits of its national distribution capabilities; (ii)
continue to be a low-cost provider of distribution services; (iii) increase
sales to existing customers and obtain new customers by providing responsive
customer service and offering a broad range of inventory management services;
and (iv) enhance relationships with major medical/surgical supply manufacturers.
The Company's strategy is based upon the following competitive strengths:
MARKET LEADER WITH NATIONWIDE DISTRIBUTION CAPABILITIES. The Company believes
that its net sales in 1995 of $3.0 billion represented approximately 20% of the
medical/surgical supply distribution industry. O&M is one of only three
companies capable of distributing a broad line of medical/surgical supplies on a
nationwide basis. The Company's size and market position enable it to serve
large regional and national healthcare providers that wish to negotiate single
contracts with their suppliers, establish close business relationships with and
obtain incentives from its suppliers and benefit from economies of scale. The
Company intends to achieve ongoing sales growth by increasing penetration of
existing customer accounts and obtaining additional customers both in existing
and new geographic markets. The Company intends to expand selectively into new
markets and to strengthen its operations in established markets by acquiring or
opening distribution centers and increasing capacity and sales efforts at
existing distribution centers.
EFFICIENT, LOW-COST DISTRIBUTOR. The Company believes that the efficient manner
in which it distributes products, including the use of advanced warehousing,
delivery and purchasing techniques, enables its customers to obtain products at
a lower overall inventory carrying cost relative to purchases made directly from
manufacturers or through many of the Company's competitors. A key aspect of this
low-cost strategy is the Company's significant investment in advanced IT which
includes automated warehousing technology and EDI. The Company's warehousing
techniques, including the use of radio-frequency hand-held computers and
bar-coded labels that identify location, routing and inventory picking and
replacement, allow the Company to monitor inventory throughout its distribution
system. The Company's focus on the timely exchange of information with its
customers and suppliers has driven the introduction of new services, such as
EDI, which expedite communications between the Company, its customers and its
manufacturers thereby reducing the costs of such transactions as purchasing,
invoicing, funds transfer and contract pricing.
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The Company continually strives to lower its operating costs in order to
maintain its position as a low-cost distributor. In 1994 and 1995, the Company
realigned its distribution operations through the closure or consolidation of 12
distribution centers and the opening or expansion of 22 distribution centers. In
addition, current initiatives include reconfiguring warehouse layouts and
implementing an improved inventory forecasting system as well as converting from
a centralized mainframe computer system to client/server technology. The Company
believes that this realignment and these initiatives will allow lower inventory
levels, reduce operating costs and provide increased levels of customer service.
STRONG CUSTOMER RELATIONSHIPS AND BROAD RANGE OF SERVICES. In 1995, the Company
distributed medical/surgical products to over 4,000 customers. The Company
focuses primarily on the high volume hospital supply market and, in 1995, sales
to hospital customers accounted for approximately 90% of O&M's net sales. O&M
believes that as a result of the large number of purchases relating to surgical
procedures performed in hospitals, hospitals will continue to be the highest
volume users of medical/surgical products. However, the Company recognizes that
alternate care providers, such as physicians' offices, clinics, nursing homes
and surgery centers, represent an important and growing market for
medical/surgical supplies, and the Company will continue to serve this segment.
The Company believes its decentralized approach to customer relationships and
its broad range of services are significant factors in attracting and retaining
customers. The Company's decentralized approach is designed to provide
individualized services to customers by giving the local management at each
distribution center the discretion to set local operating procedures and to
respond to customers' needs quickly and efficiently. Distribution center
management has fiscal responsibility for its unit and the financial results of a
distribution center directly affect its management's compensation.
The Company offers a broad array of services ranging from traditional
distribution, such as twice a week delivery of bulk goods, to enhanced inventory
management services. Such enhanced inventory management services include asset
management consulting services and stockless and just-in-time programs designed
to fill order requirements with a high degree of accuracy while optimizing
inventory levels. The Company's services enable healthcare providers to reduce
inventory carrying costs by efficiently and accurately delivering to them a
complete line of medical/surgical products.
O&M's customer relationships include those with AmeriNet, Brigham & Women's
Hospital, Columbia, The Hospital of the University of Pennsylvania, Johns
Hopkins Health System, Massachusetts General Hospital, Ohio State University
Hospital, Shands Hospital at The University of Florida, Stanford Health
Services, UHC, UCLA, University of Nebraska Medical Center, University of
Texas -- M.D. Anderson Cancer Center, VHA and Yale-New Haven Hospital.
STRONG, LONG-STANDING MANUFACTURER RELATIONSHIPS. The Company is the only
national distributor that does not manufacture or sell products under its own
label and believes that this independence has enabled it to develop strong and
mutually beneficial relationships with its suppliers. The Company believes that
its size, strong, long-standing relationships and independence enable it to
obtain attractive terms from manufacturers, including discounts for prompt
payment, volume incentives and fees for customer sales information.
The Company continues to enhance its relationships with major medical/surgical
supply manufacturers by developing closer, more efficient and interactive
operational connections, such as EDI for purchasing. In addition, over the past
two years, the Company has implemented CRP with most of its major manufacturers.
This process, which utilizes computer-to-computer interfaces, allows
manufacturers to monitor daily sales and inventory levels so that they can
automatically and accurately replenish the Company's inventory. In recent years,
a significant increase in the number of SKUs has greatly increased the inventory
requirements of both distributors and healthcare providers. In response, the
Company has recently implemented a joint marketing program with certain
manufacturers, known as FOCUSSM. FOCUSSM will assist the Company's manufacturers
and customers in reducing the number of SKUs carried by standardizing products
within their systems, thereby reducing the number of comparable inventory items
carried and the related cost. See " -- Asset Management."
The Company has relationships with virtually all major manufacturers of
medical/surgical supplies and has long-standing relationships with manufacturers
such as C.R. Bard, Becton Dickinson, Johnson & Johnson, Kendall, Kimberly Clark
and 3M. O&M is the largest distributor of each of these manufacturers'
medical/surgical products.
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INDUSTRY OVERVIEW
Distributors of medical/surgical supplies provide a wide variety of disposable
medical and surgical products to healthcare providers, including hospitals, IHSs
and alternate care providers. For a discussion of Networks, GPOs and IHSs and
relevant pricing arrangements with these entities, see " -- Customers" and
" -- Contracts and Pricing." Medical/surgical supplies do not include
pharmaceuticals. The Company believes that in 1995 sales of medical/surgical
supplies in the United States approximated $30.0 billion and that approximately
half of these sales were made through distributors, with the balance having been
sold directly by manufacturers. In 1995, hospitals and alternate care facilities
purchased approximately $23.0 billion and $7.0 billion, respectively, of
medical/surgical supplies. Sales of medical/surgical supplies are estimated to
have grown at a compound annual growth rate of approximately 7% over the last
three years. Factors contributing to this growth include an aging population,
the availability of new healthcare procedures and new product introductions.
The healthcare industry has been characterized by the consolidation of
healthcare providers into larger and more sophisticated entities that are
increasingly seeking lower delivered product costs and incremental services
through a broad distribution network capable of supplying their inventory
management needs. The economies of scale that a distributor can generate by
servicing a number of facilities should allow it to perform this service at a
lower cost than an individual healthcare provider or manufacturer. Customers
also benefit from a complete range of enhanced inventory management services
developed by medical/surgical supply distributors that include CRP, asset
management consulting and stockless and just-in-time inventory programs.
The above trends have driven significant and continuing consolidation in the
medical/surgical supply distribution industry since the mid-1980s. The Company
believes that large distributors with national geographic capabilities and broad
product offerings are capturing market share from regional and local
distributors. As the industry continues to consolidate, large distributors are
selectively acquiring regional and local distributors whose facilities can
provide access to new metropolitan areas or expand geographic coverage to serve
existing national accounts more effectively.
The traditional role of a distributor involves warehousing and delivering
medical/surgical supplies to a customer's loading dock. Increasingly,
distributors have assumed the additional roles of asset managers and information
managers. Larger distributors are offering a wide array of customized asset
management services that many smaller distributors are unable to provide. In
addition, as the ability of medical/surgical supply distributors to manage
information becomes an increasingly important factor, the larger, national
distributors will have a distinct advantage. The quality of information
generated by a national distributor, in terms of its ability to discern
utilization patterns across a broad spectrum of products, customers and
locations, will be more useful to both manufacturers and customers than that of
a local or regional distributor.
CUSTOMERS
The Company currently markets its distribution services to several types of
healthcare providers, including hospitals, IHSs and alternate care providers.
O&M contracts with these providers directly and through Networks and GPOs. In
1995, sales to hospital customers accounted for approximately 90% of O&M's net
sales, and sales to alternate care providers accounted for approximately 10% of
O&M's net sales. Sales to the Company's top ten Network or GPO customers
represented approximately 60% of its net sales in 1995.
NATIONAL HEALTHCARE NETWORKS AND GROUP PURCHASING ORGANIZATIONS. Networks and
GPOs are entities that act on behalf of a group of healthcare providers to
obtain pricing and other benefits that the individual members may not be able to
obtain. Hospitals, physicians and other types of healthcare providers have
joined Networks and GPOs to obtain services from medical/surgical supply
distributors ranging from discounted product pricing to logistical and clinical
support in exchange for a fee. Networks and GPOs negotiate directly with both
medical/surgical supply manufacturers and distributors on behalf of their
members, establishing exclusive or multi-vendor relationships.
Because the combined purchasing volumes of their member institutions are very
large, Networks and GPOs have the buying power to negotiate price discounts for
the most commonly used medical/surgical products and logistical services.
Accordingly, O&M believes that successful relationships with Networks and GPOs
are central to the Company's ability to maintain market share.
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Networks and GPOs do not issue purchase orders or collect funds on behalf of
their members, and they cannot ensure that members will purchase their supplies
from a given vendor. However, the buying power of Networks and GPOs is such that
they are able to negotiate price discounts without having to guarantee minimum
purchasing volumes. Members may belong to more than one Network or GPO, and they
are also free to negotiate directly with distributors and manufacturers. As a
result, healthcare providers often select the best pricing and other benefits
from among those offered through several Networks and GPOs. Despite the
inability of most Networks and GPOs to compel members to use O&M when it is the
Network's or the GPO's primary distributor, O&M believes that, in such
circumstances, the incentives for Network or GPO members to buy supplies through
the Network's or GPO's contract with the Company are strong, and that these
contracts yield significant sales volumes. The Company plans to continue to
maintain and strengthen its relationships with selected Networks and GPOs as a
means of securing its leading market position. The Company's Network or GPO
customers include VHA, AmeriNet and UHC.
Since 1985, the Company has been a distributor for VHA, the nation's second
largest Network for not-for-profit hospitals, representing over 1,200 healthcare
organizations. In November 1994, VHA added Baxter as its fourth authorized VHA
distributor and initiated a policy permitting the other three authorized VHA
distributors, including the Company, to distribute certain Baxter-manufactured
products. During 1995, members of VHA were given the opportunity to select one
of four medical/surgical supply distributors as their authorized VHA
distributor. The Company retained over 85% of its previous sales volume to VHA
members. The loss of volume to VHA members has been partially offset by the gain
in distributing Baxter's self-manufactured products to VHA members and by
increasing market share within VHA facilities. Sales through VHA and AmeriNet
represented approximately 39.6% and 5.6%, respectively, of the Company's net
sales in 1995.
INTEGRATED HEALTHCARE SYSTEMS. An IHS is an organization which is composed of
several healthcare providers that jointly offer a variety of healthcare services
in a given market. These providers may be individual not-for-profit or
investor-owned entities that are joined by a formal business arrangement, or
they may all be part of the same legal entity. An IHS is distinguished by the
fact that it is typically a network of different types of healthcare providers
that are strategically located within a defined service area, and seek to offer
a broad spectrum of healthcare services and comprehensive geographic coverage to
a particular local market. Although an IHS may include alternate care
facilities, hospitals remain the key component of any IHS.
O&M believes that IHSs will become increasingly important because of their
expanding role in healthcare delivery and cost containment and their reliance
upon the hospital, O&M's traditional customer, as a key component of their
organizations. Individual healthcare providers within a multiple-entity IHS may
be able to contract individually for distribution services; however, O&M
believes that the providers' shared economic interests create strong incentives
for participation in distribution contracts which are established at the system
level. Additionally, single-entity IHSs are usually committed to using the
primary distributor designated at the corporate level because they are all part
of the same legal entity. Because the IHSs frequently rely on cost containment
as a competitive advantage, IHSs have become an important source of demand for
O&M's enhanced inventory management and other value-added services.
In February 1994, the Company was selected by Columbia, an investor-owned system
of hospitals and alternate care facilities, as its primary distributor of
medical/surgical supplies. Pursuant to its agreement with Columbia, the Company
provides distribution and other inventory management process services to
Columbia hospitals and other healthcare facilities. Columbia is the Company's
largest customer owning over 300 hospitals and IHSs throughout the United
States. Sales to Columbia represented approximately 8.4% of the Company's net
sales in 1995. Other than VHA, AmeriNet and Columbia, no Network, GPO, IHS or
individual customer accounted for as much as 5% of the Company's net sales
during such year.
INDIVIDUAL PROVIDERS. In addition to contracting with healthcare providers at
the IHS level and indirectly through Networks and GPOs, O&M contracts directly
with healthcare providers, which include individual hospitals and alternate care
facilities. Approximately 20% of the Company's net sales in 1995 resulted from
sales to individual providers. In 1995, hospitals represented approximately 90%
of the Company's net sales. Not-for-profit hospitals represented a majority of
these facilities. The Company targets high-volume independent hospitals and
those which are part of larger healthcare systems such as IHSs. The Company also
markets to alternate care providers that are primarily owned by, or members of,
an IHS. Sales to such alternate care customers comprised approximately 10% of
the Company's net sales in 1995. The Company's hospital customers include,
Brigham & Women's Hospital, The Hospital of the University of Pennsylvania,
Johns Hopkins Health System, Massachusetts General Hospital, Ohio State
University Hospital, Shands Hospital at The University of Florida, Stanford
Health Services, UCLA, University of Nebraska Medical Center, University of
Texas -- M.D. Anderson Cancer Center and Yale-New Haven Hospital.
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CONTRACTS AND PRICING
Industry practice is for the healthcare providers to negotiate product pricing
directly with manufacturers and then negotiate distribution pricing terms with
distributors. Contracts in the medical/surgical supply distribution industry set
forth the price at which products will be distributed, but generally do not
require minimum volume purchases by customers and are terminable by the customer
upon short notice. Accordingly, most of the Company's contracts with customers
do not guarantee minimum sales volumes.
The majority of the Company's contracts, including the Company's contracts with
most Networks, GPOs, IHSs and individual providers, compensate the Company on a
fixed cost-plus percentage basis, under which a negotiated percentage
distributor fee is added to the product cost agreed to by the customer and the
manufacturer. In April 1994, however, the Company began to sell products to
VHA-member hospitals and affiliates on a variable cost-plus percentage basis
that varies according to the services rendered, the dollar volume of purchases
and the percentage of the institution's total purchase volume that is directed
to the Company. The Company has since entered into this type of pricing
arrangement with other Networks and GPOs. As the Company's sales to a Network or
GPO member institution grow, the cost-plus pricing charged to such customers
decreases. The Company has recently negotiated contracts that charge incremental
fees for additional distribution and enhanced inventory management services such
as frequent deliveries and distribution of products in small units of measure.
Although the Company's marketing and sales personnel based in the distribution
centers negotiate local contracts and pricing levels with customers, management
has established minimum pricing levels.
SERVICES
The Company's core competency is the timely and accurate delivery of bulk
medical/surgical supplies at low cost. In addition to these core distribution
services, the Company offers flexible delivery alternatives supported by
inventory management services to meet the varying needs of its customers.
EDI is an integral component of the Company's business strategy. EDI includes
computer-to-computer electronic data interchange for business transactions such
as purchasing, invoicing, funds transfer and contract pricing. The Company
encourages all customers to use EDI for product orders and, in some cases,
imposes additional charges on customers who do not use EDI for purchasing.
Approximately 75% of items ordered by the Company's customers are made through
EDI. By expediting communication between the Company and its customers and
manufacturers and reducing the use of paper for purchasing and invoicing, EDI
enhances efficiencies and generates cost savings.
EDI and the Company's IT systems enable the Company to offer its customers the
following services to minimize their inventory holding requirements. The Company
offers these services at an additional charge to its customers.
(Bullet) PANDAC(R). Since 1968, the Company has offered the PANDAC(R) wound
closure management system that provides customers with an accurate
evaluation of their current wound closure inventories and usage
levels in order to reduce costs for wound closure products. The
Company guarantees that PANDAC(R) will generate a minimum of 5%
savings in total wound closure inventory expenditures during its
first year of use.
(Bullet) INTERACTIVE VALUE MODEL(TM). The Interactive Value Model(TM) is a
software program that uses an interactive question and answer
format to calculate potential cost savings achievable through the
use of O&M's distribution services.
(Bullet) STOCKPOINT(TM). Stockpoint(TM) is a just-in-time inventory
management program designed to provide customers with delivery of
products in a cost-efficient combination of bulk and lowest unit of
measure.
(Bullet) PALLET ARCHITECTURE LOCATION SYSTEM. The Pallet Architecture
Location System provides a customized approach to the delivery of
products by expediting the "put-away" functions at customer's
stockrooms.
(Bullet) TRACEPAK(TM). The Company, in partnership with DeRoyal Industries,
Inc., packages medical/surgical supplies under the TracePak(TM)
name for use by healthcare providers for specific medical/surgical
procedures. TracePak(TM) reduces the time spent by healthcare
personnel assembling medical/surgical supplies for such procedures.
(Bullet) NET/GAIN(SM). The Company and Henry Schein, Inc. are developing a
program called Net/GAIN(SM) to permit physician practices
associated with an IHS to order medical and other supplies from the
customized Net/GAIN(SM) product selection or from Henry Schein,
Inc.'s extensive catalogue of products.
(Bullet) COST TRAK(SM). Cost Trak(SM) is an activity-based costing program
utilized to price value-added services accurately. By identifying
costs associated with activities, Cost Trak(SM) enables customers
to select the most cost-effective services.
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SALES AND MARKETING
The Company's sales and marketing force is organized on a decentralized basis in
order to provide individualized services to customers by giving the local sales
force at each distribution center the discretion to respond to customers' needs
quickly and efficiently. The sales and marketing force, which is divided into
three tiers, consists of approximately 300 locally based sales personnel. In
order to ensure that all of the Company's customers receive high levels of
customer service, each tier of the sales force is dedicated to specific
functions, including: developing relationships with large hospitals and IHS
customers; targeting increased penetration of existing accounts; and providing
daily support services. Corporate personnel and IT employees work closely with
the local sales force to support the marketing of O&M's inventory management
capabilities and the strengthening of customer relationships.
All sales and marketing personnel receive performance based compensation aligned
with customer satisfaction and O&M's expectations. In addition, the Company,
with the support of its suppliers, emphasizes quality and IT in comprehensive
training programs for its sales and marketing force to sharpen customer service
skills. In order to respond rapidly to its customers needs, all marketing and
sales personnel are equipped with laptop computers that provide access to (i)
order, inventory and payment status, (ii) customized reporting and data analysis
and (iii) computer programs, such as the Interactive Value Model(TM) and
PANDAC(R).
SUPPLIERS
The Company is the only national distributor that does not manufacture or sell
products under its own label, and believes that this independence has enabled it
to develop strong and mutually beneficial relationships with its suppliers. The
Company believes that its size, strong, long-standing relationships and
independence enable it to obtain attractive terms from manufacturers, including
discounts for prompt payment, volume incentives and fees for customer sales
information. These terms contribute significantly to the Company's gross margin.
The Company has relationships with virtually all major manufacturers of
medical/surgical supplies and has long-standing relationships with manufacturers
such as C.R. Bard, Becton Dickinson, Johnson & Johnson, Kendall, Kimberly Clark
and 3M. O&M is the largest distributor of each of these manufacturers'
medical/surgical products. Approximately 18.3% and 5.3% of the Company's net
sales in 1995 were sales of Johnson & Johnson and Becton Dickinson products,
respectively. In 1995, no other manufacturer accounted for more than 5% of the
Company's net sales.
ASSET MANAGEMENT
INVENTORY
Due to the Company's significant investment in inventory to meet the rapid
delivery requirements of its customers, efficient asset management is essential
to the Company's profitability. O&M maintains inventories of approximately
300,000 finished medical/surgical products (up from less than 100,000 in 1992)
produced by approximately 3,000 manufacturers. The significant increase in the
number of SKUs has challenged distributors and healthcare providers to create
more efficient inventory management systems.
The Company has responded to the significant increase in the number of SKUs by
improving warehousing techniques, including the use of radio-frequency,
hand-held computers and bar-coded labels that identify location, routing and
inventory picking and replacement, which allow the Company to monitor inventory
throughout its distribution systems. The Company is implementing additional
programs to manage inventory including a state-of-the-art inventory forecasting
system, warehouse slotting and reconfiguration techniques, CRP, FOCUS(SM) and
vendor certification programs. The forecasting system uses historical
information for the three prior years to predict the future demand for
particular items thereby reducing the cost of carrying unnecessary inventory and
increasing inventory turnover. As of March 31, 1996, 27 of the Company's
distribution centers utilized the inventory forecasting system and the remaining
distribution centers are expected to be utilizing it by mid-1996. The Company
recently implemented FOCUS(SM), a joint marketing program with certain
manufacturers. FOCUS(SM) will assist the Company's manufacturers and customers
in limiting the number of SKUs carried by standardizing products within their
systems, thereby reducing the number of comparable inventory items carried and
the related cost. In its initial stage, FOCUS(SM) will target the most commonly
used inventory items. The Company has initiated a vendor certification program
that will require "preferred manufacturers" to satisfy minimum requirements such
as purchasing by EDI, exceeding minimum fill rates and offering a flexible
returned goods policy. O&M believes the increased efficiency resulting from
vendor certification will reduce SG&A expenses.
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ACCOUNTS RECEIVABLE
The Company's average days sales outstanding have been significantly less than
the industry average as determined by the National Health Care Credit Group. The
Company actively manages its accounts receivable to minimize credit risk and
does not believe that credit risk associated with accounts receivable poses a
risk to its results of operations. As part of the Refinancing, the Company
entered into the Receivables Financing Facility. See "Use of Proceeds and
Refinancing."
COMPETITION
The medical/surgical supply distribution industry in the United States is highly
competitive and consists of (i) three major, nationwide distributors, including
the Company, Baxter and General Medical, (ii) a few smaller, nationwide
distributors and (iii) a number of regional and local distributors. Competition
within the medical/surgical supply distribution industry exists with respect to
total delivered product cost, product availability and the ability to fill
orders accurately, delivery time, efficient computer communication capabilities,
services provided, breadth of product line and the ability to meet special
requirements of customers.
Regional and local distributors often provide high levels of customer service
but are constrained by relatively high operating costs that are passed on to
customers. The Company believes that the higher costs associated with purchasing
through regional and local distributors will result in opportunities for the
Company to augment its market share as customers continue to seek to lower
costs.
Baxter manufactures medical/surgical supplies and distributes its own products
as well as the products of other manufacturers primarily to the hospital and IHS
market. General Medical distributes medical/surgical products under its own
label as well as the products of other manufacturers. General Medical services
alternate care facilities, such as physicians' offices, clinics, nursing homes
and surgery centers, in addition to serving hospital customers and the wholesale
hospital market.
In November 1995, Baxter announced its intention to distribute to its
shareholders the stock of its subsidiary that conducts cost management, United
States distribution and surgical products operations. The Company does not
believe the Baxter restructuring will have a significant effect on the Company's
competitive position in the industry.
DISTRIBUTION
The Company employs a decentralized approach to sales and customer service,
operating 48 distribution centers throughout the United States. The Company's
distribution centers currently provide products and services to customers in 50
states and the District of Columbia. The range of products and customer and
administrative services provided by a particular distribution facility are
determined by the characteristics of the market it serves. Most distribution
centers are managed as separate profit centers. Most functions, including
purchasing, customer service, warehousing, sales, delivery and basic financial
tasks, are conducted at the distribution center and are monitored by corporate
personnel. The Company believes that the decentralized nature of its
distribution system provides customers with flexible and individualized service
and contributes to overall cost reductions.
The Company delivers most medical/surgical supplies with a leased fleet of
trucks. Parcel services are used to transport all other medical/surgical
supplies. Distribution centers generally service hospitals and other customers
within a 100 to 150 mile radius. The frequency of deliveries from distribution
centers to principal accounts varies by customer account.
O&M continuously reevaluates the efficiency of its distribution system. During
1994 and 1995, the Company realigned its distribution operations through the
closure or consolidation of 12 distribution centers and the opening or expansion
of 22 distribution centers. The Company anticipates further reduction of costs
through the closure of two and the downsizing of five distribution centers in
1995 and 1996.
O&M believes that its facilities are adequate to carry on its business as
currently conducted. Except for the Greensburg, Pennsylvania and Youngstown,
Ohio facilities, which are owned by the Company and held for sale and leaseback,
all of the Company's distribution centers are leased from unaffiliated third
parties.
33
<PAGE>
INFORMATION TECHNOLOGY
O&M continuously invests in advanced IT, which includes automated warehousing
technology and EDI, to increase efficiencies and facilitate the exchange of
information with its customers and suppliers and thereby reduce costs to the
Company, its suppliers and customers. Following the Stuart Acquisition, the
Company expended significant resources to integrate Stuart's systems with those
of the Company, including incorporating certain aspects of Stuart's IT, and to
outsource the operation of the Company's mainframe computer system to Integrated
Systems Solutions Corporation, an affiliate of International Business Machines
Corporation. In 1994, the Company began a major initiative to convert its
mainframe computer system to client/server technology.
The conversion to client/server technology will be completed over the next
several years. The client/server technology will have several applications,
including inventory forecasting, procurement, warehousing, order processing,
accounts receivable, accounts payable and contract management. The Company began
to implement the first of these applications, the inventory forecasting
application, in the fourth quarter of 1995 and 27 distribution centers utilized
this application as of March 31, 1996. The remaining distribution centers are
expected to be utilizing this inventory forecasting application by mid-1996.
Through client/server technology, the Company expects to improve significantly
the efficiency of each distribution center. The Company's commitment to IT will
enable it to serve profitably larger volumes of business and more complex
contracts.
REGULATION
The medical/surgical supply distribution industry is subject to regulation by
federal, state and local governmental agencies. Each of the Company's
distribution centers is licensed to distribute medical/surgical supply products
as well as certain pharmaceutical and related products. The Company must comply
with regulations, including operating and security standards for each of its
distribution centers, of the Food and Drug Administration, the Drug Enforcement
Agency, the Occupational Safety and Health Administration, state boards of
pharmacy and, in certain areas, state boards of health. The Company believes
that it is in material compliance with all statutes and regulations applicable
to distributors of medical/surgical supply products and pharmaceutical and
related products, as well as other general employee health and safety laws and
regulations.
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 Company does not
believe that the continuation of these trends will have a significant effect on
the Company's results of operations or financial condition.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 3,150 full and 100
part-time employees. Approximately 40 employees are currently covered by a
collective bargaining agreement at one of the Company's distribution centers.
The Company believes that its relations with its employees are good.
O&M believes that on-going employee training is critical to employee
performance. The Company emphasizes quality and technology in training programs
designed to increase employee efficiency by sharpening overall customer service
skills and by focusing on functional best practices.
LEGAL AND ADMINISTRATIVE
In May 1994, the Company acquired all the outstanding capital stock of Stuart
through a statutory share exchange. Accordingly, Stuart, as a wholly owned
subsidiary of the Company, retains all of its pre-acquisition liabilities.
Beginning in 1994 and continuing to the present, Stuart has been named as a
defendant along with manufacturers, healthcare providers and others in
approximately 215 lawsuits, filed in various federal and state courts by
multiple plaintiffs, based on alleged injuries attributable to the implantation
of internal spinal fixation devices distributed by a specialty products division
of Stuart from the early 1980s to December 1992 and prior to O&M's acquisition
of Stuart in 1994. Most of the cases seek monetary damages in varying amounts.
The great majority of these cases allege compensatory and punitive damages in an
unspecified amount stated to be in excess of the jurisdictional minimum for the
courts in which such cases are filed. A smaller group of cases seek specified
damages ranging from $50,000 to $15,000,000. Many of these cases also seek the
creation of a fund for medical research, prejudgment and post-judgment interest
and costs of suit. Substantially all of these cases have been transferred to,
and consolidated for pretrial proceedings in, the Eastern District of
Pennsylvania in Philadelphia under the style MDL DOCKET NO. 1014: IN RE
ORTHOPEDIC BONE SCREW PRODUCTS LIABILITY LITIGATION. All such cases are in the
preliminary stages. In addition, a motion has been filed to add Stuart and a
number of other parties as additional defendants in approximately 10 additional
lawsuits involving multiple plaintiffs. The Company believes that Stuart may be
named as a defendant in additional similar lawsuits in the future.
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<PAGE>
Stuart did not manufacture the internal spinal fixation devices. Based upon
management's analysis of indemnification agreements between Stuart and the
manufacturers involved, the Company believes that Stuart is entitled to
indemnification by the manufacturers of the devices with respect to claims
alleging defects in the products. The cases described above are being defended
by the manufacturers' insurance carriers. The Company and Stuart are also
contractually entitled to indemnification by the former shareholders of Stuart
for any liabilities and related expenses incurred by the Company or Stuart in
connection with the foregoing litigation. Because of the preliminary status of
the lawsuits, the Company is unable at this time to determine with certainty
whether Stuart may be held liable. In the event Stuart were to be held liable,
the Company believes that Stuart's available insurance coverage together with
the indemnification rights discussed above are adequate to cover any losses
should they occur, and accordingly has created no reserve therefor. The Company
is not aware of any uncertainty as to the availability and adequacy of such
insurance or indemnification, although there can be no assurance that the
manufacturers and former shareholders will have sufficient financial resources
in the future to meet such obligations. The Company believes that, with or
without regard to such indemnification or insurance, the likelihood is remote
that any liability resulting from such litigation would have a material adverse
effect on the Company's financial condition or results of operations.
The Company is party to various other legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, based on its analysis of the indemnification
agreements and insurance coverage available to the manufacturers as described
above, management believes the outcome of these proceedings will not have a
material adverse effect on the Company's financial condition or results of
operations.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions and a brief description of the
business experience of the Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
<S> <C> <C>
G. Gilmer Minor, III 55 Chairman of the Board, President, Chief Executive Officer
Craig R. Smith 44 Executive Vice President and Chief Operating Officer
Robert E. Anderson, III 61 Executive Vice President, Planning and Business Development
Henry A. Berling 53 Executive Vice President, Partnership Development
Drew St. J. Carneal 57 Senior Vice President, General Counsel and Secretary
Glenn J. Dozier 46 Senior Vice President, Finance, Chief Financial Officer
Josiah Bunting, III 55 Director
R. E. Cabell, Jr. 72 Director
James B. Farinholt, Jr. 61 Director
William F. Fife 74 Director
C. G. Grefenstette 68 Director
Vernard W. Henley 66 Director
E. Morgan Massey 69 Director
James E. Rogers 50 Director
James E. Ukrop 58 Director
Anne Marie Whittemore 50 Director
</TABLE>
G. GILMER MINOR, III has been employed by the Company for 33 years since 1963
and has served as President since 1981 and Chief Executive Officer since 1984.
In May 1994, he was elected Chairman of the Board. Mr. Minor also serves as a
member of the Boards of Directors of Crestar Financial Corporation and Richfood
Holdings, Inc.
CRAIG R. SMITH has been employed by the Company and National Healthcare and
Hospital Supply Corporation, which was acquired by the Company in 1989, for 13
years. From 1990 to 1992, Mr. Smith served as Group Vice President for the
western region. In January 1993, Mr. Smith assumed responsibilities of Senior
Vice President, Distribution. Later in 1993, Mr. Smith assumed the new role of
Senior Vice President, Distribution and Information Systems, and, in 1994, he
was elected Executive Vice President, Distribution and Information Systems. In
February 1995, Mr. Smith was promoted to Chief Operating Officer.
ROBERT E. ANDERSON, III has been employed by the Company for 29 years since
1967. Mr. Anderson was employed by the Company in the Medical/Surgical Division
in sales and marketing and was elected Vice President in 1981. In October 1987,
he was elected Senior Vice President, Corporate Development. In April 1991, Mr.
Anderson was elected Senior Vice President, Marketing and Planning. In 1992, Mr.
Anderson assumed a new role as Senior Vice President, Planning and Development
and in 1994, he was elected Executive Vice President, Planning and Development.
In May 1995, Mr. Anderson was elected Executive Vice President, Planning and
Business Development.
HENRY A. BERLING has been employed by the Company for 30 years since 1966. Mr.
Berling was employed by the Company in the Medical/Surgical Division and was
elected Vice President in 1981 and Senior Vice President, Sales and Marketing,
in 1987. In 1989, he was elected Senior Vice President and Chief Operating
Officer. In 1991, Mr. Berling assumed a new role as Senior Vice President, Sales
and Distribution. In 1992, Mr. Berling assumed the role of Senior Vice
President, Sales and Marketing and in 1994, he was elected Executive Vice
President, Sales and Customer Development. In May 1995, Mr. Berling was elected
Executive Vice President, Partnership Development.
DREW ST. J. CARNEAL has been employed by the Company for seven years since 1989,
when he joined the Company as Vice President and Corporate Counsel. From 1985 to
1988, he served as the Richmond City Attorney and, prior to that date, he was a
partner in the law firm of Cabell, Moncure and Carneal. In 1989, he was elected
Secretary, and in March 1990, Senior Vice President, Corporate Counsel and
Secretary. In May 1995, the title Corporate Counsel was changed to General
Counsel.
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<PAGE>
GLENN J. DOZIER has been employed by the Company for six years since 1990 in the
position of Senior Vice President, Finance, Chief Financial Officer. In April
1991, he assumed the additional responsibility of Senior Vice President,
Operations and Systems. In 1992, Mr. Dozier assumed a new role of Senior Vice
President, Finance and Information Systems and Chief Financial Officer. In 1993,
Mr. Dozier assumed the role of Senior Vice President, Finance, Chief Financial
Officer. Prior to joining the Company, Mr. Dozier had been Chief Financial
Officer and Vice President of Administration and Control since 1987 for AMF
Bowling, Inc.
JOSIAH BUNTING, III is Superintendent of the Virginia Military Institute,
Lexington, Virginia. From 1987 to 1995, he served as Headmaster of The
Lawrenceville School. General Bunting has been a director since 1995 and is a
member of the Audit and Strategic Planning Committees.
R.E. CABELL, JR. is retired (Of Counsel) from 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. Mr. Cabell also
serves on the Board of Directors of the C.F. Sauer Company and is a Trustee of
Hampden-Sydney College.
JAMES B. FARINHOLT, JR. is Special Assistant to the President for Business
Development at Virginia Commonwealth University, including advising on
commercialization of scientific discoveries. Additionally, he is Executive Vice
President and Executive Director of the Virginia Biotechnology Research Park,
which is affiliated with the University. From 1978 to 1995, Mr. Farinholt served
as President of Galleher & Company, Inc., an investment company. Mr. Farinholt
has been a director since 1974 and is Chairman of the Strategic Planning
Committee and a member of the Audit and Executive Committees.
WILLIAM F. FIFE served as Executive Vice President of the Company from 1987
until his retirement in 1991. Mr. Fife has been a director of the Company since
1962 and is a member of the Audit and Executive Committees.
C. G. GREFENSTETTE is Chairman and Chief Executive Officer of The Hillman
Company, diversified investments and operations. From 1989 to 1993, Mr.
Grefenstette served as President and Chief Executive Officer of The Hillman
Company. Mr. Grefenstette also serves on the Boards of Directors of The Hillman
Company, The Hillman Foundation, The Polk Foundation, Inc., Duquesne University
and PNC Bank Corp. Mr. Grefenstette has been a director of the Company since
1994 and is a member of the Audit and Strategic Planning Committees.
VERNARD W. HENLEY is Chairman of the Board and Chief Executive Officer of
Consolidated Bank and Trust Company, Richmond, Virginia. Mr. Henley has been a
director since 1993 and is a member of the Audit and Compensation & Benefits
Committees.
E. MORGAN MASSEY is Chairman of Inter-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 Compensation & Benefits and
Strategic Planning Committees. Mr. Massey also serves on the Massey Cancer
Center Advisory Board, Richmond, Virginia, as Vice Chairman of the U.S. Energy
Association, Washington, D.C. and as a member of the Board of the University of
Virginia Engineering Foundation. He is also Vice Chairman of the Marine Advisory
Council of the Virginia Institute for Marine Science.
JAMES E. ROGERS is a Partner 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.
JAMES E. UKROP is Vice Chairman 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.
ANNE MARIE WHITTEMORE is a partner in the law firm of McGuire, Woods, Battle &
Boothe, L.L.P. Mrs. Whittemore has been a director since 1991 and is a member of
the Executive and Compensation & Benefits Committees. Mrs. Whittemore also
serves on the Boards of Directors of USF&G Corporation, James River Corporation,
T. Rowe Price Associates, Inc. and Albemarle Corporation.
37
<PAGE>
As of March 31, 1996, the Company had outstanding 31,739,212 shares of Common
Stock, par value $2.00 per share ("Common Stock"), 1,150,000 shares of Series B
Preferred Stock, par value $100 per share ("Series B Preferred Stock"), and no
shares of Series A Preferred Stock. As of April 19, 1996, all directors,
executive officers and officers as a group beneficially owned approximately
23.6% of the outstanding shares of Common Stock. In January 1996, the 1,150,000
shares of Series B Preferred Stock, which originally were issued to the former
shareholders of Stuart were acquired by Wilmington Securities, Inc. ("WS"). WS
is a private investment company and an indirect, wholly owned subsidiary of The
Hillman Company, a firm engaged in diversified investments and operations which
is controlled by a trust for the benefit of Henry L. Hillman (the "HLH Trust").
The trustees of the HLH Trust are Henry L. Hillman, Elsie Hilliard Hillman and
Mr. Grefenstette (the "HLH Trustees"). The HLH Trustees share voting and
investment power with respect to the shares held of record by WS and may be
deemed to be the beneficial owners of such shares. Mr. Grefenstette is the
director elected by the holders of the Series B Preferred Stock.
38
<PAGE>
DESCRIPTION OF THE NOTES
As used below in this "Description of the Notes" section, the "Company" means
Owens & Minor, Inc., but not any of its subsidiaries, unless otherwise
specified. The Notes are to be issued under an Indenture, to be dated as of May
29, 1996 (the "Indenture"), among the Company, the Guarantors and Crestar Bank,
as Trustee (the "Trustee"). The Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
statements under this caption relating to the Notes, the Guarantees and the
Indenture are summaries and do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are incorporated by reference as a part of
such summaries or terms, which are qualified in their entirety by such
reference. A copy of the proposed form of Indenture has been filed with the
Commission as an exhibit to the Registration Statement of which this Prospectus
is a part.
GENERAL
The Notes will be general unsecured senior subordinated obligations of the
Company, will be limited to $150 million aggregate principal amount and will
rank subordinate in right of payment to all existing and future Senior
Indebtedness of the Company and will be effectively subordinated to all existing
and future indebtedness and other liabilities of subsidiaries of the Company
which are not Guarantors. The Notes will rank PARI PASSU in right of payment
with all other senior subordinated indebtedness of the Company. The Notes will
be guaranteed on a joint and several basis by each of the Guarantors pursuant to
the Guarantees described below. The Guarantees will be general unsecured senior
subordinated obligations of the Guarantors and will rank subordinate in right of
payment to all existing and future Guarantor Senior Indebtedness. The Guarantees
will rank PARI PASSU in right of payment with all other existing and future
senior subordinated indebtedness of the Guarantors. At March 31, 1996, as
adjusted to give effect to the transactions described herein under "Use of
Proceeds and Refinancing," the Company would have had approximately $77.3
million of Senior Indebtedness outstanding, all of which would have been
borrowings under the Senior Credit Facility, which would have been guaranteed by
the Guarantors on a senior basis. Secured creditors of the Company or any
Guarantor will have a claim on the assets which secure such obligations prior to
claims of the Holders of the Notes against those assets.
The Notes will mature on June 1, 2006 and will bear interest at the rate per
annum shown on the front cover of this Prospectus from the date of issuance or
from the most recent interest payment date to which interest has been paid or
provided for. Interest will be payable semiannually on June 1 and December 1 of
each year, commencing December 1, 1996, to the Person in whose name a Note is
registered at the close of business on the preceding May 15 or November 15
(each, a "Record Date"), as the case may be. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months. Holders must
surrender the Notes to the paying agent for the Notes to collect principal
payments. The Company will pay principal and interest by check and may mail
interest checks to a Holder's registered address.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
Initially, the Trustee will act as paying agent and registrar for the Notes. The
Notes may be presented for registration of transfer and exchange at the offices
of the registrar for the Notes.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of the Company, in whole
or in part, at any time on or after June 1, 2001 and prior to maturity, upon not
less than 30 nor more than 60 days' notice mailed to each Holder of Notes to be
redeemed at his address appearing in the register for the Notes, in amounts of
$1,000 or an integral multiple of $1,000, at the following redemption prices
(expressed as percentages of principal amount) plus accrued interest to but
excluding the date fixed for redemption (subject to the right of Holders of
record on the relevant Record Date to receive interest due on an interest
payment date that is on or prior to the date fixed for redemption), if redeemed
during the 12-month period beginning June 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001 105.4375%
2002 103.6250
2003 101.8125
2004 and thereafter 100.0000
</TABLE>
39
<PAGE>
In addition, prior to June 1, 1999, the Company may redeem up to 33 1/3% of the
principal amount of the Notes with the net cash proceeds received by the Company
from a public offering of Capital Stock of the Company (other than Disqualified
Stock), at a redemption price (expressed as a percentage of the principal
amount) of 110.875% of the principal amount thereof, plus accrued and unpaid
interest to the date fixed for redemption; provided, however, that at least $100
million in aggregate principal amount of the Notes remains outstanding
immediately after any such redemption (excluding any Notes owned by the Company
or any of its Affiliates). Notice of redemption pursuant to this paragraph must
be mailed to holders of Notes not later than 60 days following the consummation
of such public offering.
Selection of Notes for any partial redemption shall be made by the Trustee, in
accordance with the rules of any national securities exchange on which the Notes
may be listed or, if the Notes are not so listed, PRO RATA or by lot or in such
other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. Notice of redemption will be mailed before the date fixed
for redemption to each holder of Notes to be redeemed at his or her registered
address. On and after the date fixed for redemption, interest will cease to
accrue on Notes or portions thereof called for redemption.
The Notes will not have the benefit of any sinking fund.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, to the extent and in the manner provided in
the Indenture, to the prior payment in full of all Senior Indebtedness.
Upon any payment or distribution of assets or securities of the Company of any
kind or character, whether in cash, property or securities, upon any dissolution
or winding-up or total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due or to become due with respect to Senior
Indebtedness (including any interest accruing subsequent to an event of
bankruptcy to the extent that such interest is an allowed claim enforceable
against the debtor under the Bankruptcy Law) shall first be paid in full, or
payment provided for, before the Holders of the Notes or the Trustee on behalf
of such Holders shall be entitled to receive any payment by the Company of the
principal of, premium, if any, or interest on the Notes, or any payment to
acquire any of the Notes for cash, property or securities, or any distribution
with respect to the Notes of any cash, property or securities. Before any
payment may be made by, or on behalf of, the Company of the principal of,
premium, if any, or interest on the Notes upon any such dissolution or
winding-up or liquidation or reorganization, any payment or distribution of
assets or securities of the Company of any kind or character, whether in cash,
property or securities, to which the Holders of the Notes or the Trustee on
their behalf would be entitled, but for the subordination provisions of the
Indenture, shall be made by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, directly to the holders of the Senior Indebtedness (PRO RATA to
such holders on the basis of the respective amounts of Senior Indebtedness held
by such holders) or their representatives or to the trustee or trustees under
any indenture pursuant to which any of such Senior Indebtedness may have been
issued, as their respective interests may appear, to the extent necessary to pay
all such Senior Indebtedness in full after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment by or on behalf of the Company of principal of,
premium, if any, or interest on the Notes, whether pursuant to the terms of the
Notes, upon acceleration or otherwise, will be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Designated Senior Indebtedness, whether at maturity, on
account of mandatory redemption or prepayment, acceleration or otherwise (and
the Trustee has received written notice thereof), and such default shall not
have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Designated Senior Indebtedness. In addition,
during the continuance of any non-payment default or non-payment event of
default with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may be accelerated, and upon receipt by the Trustee of written
notice (a "Payment Blockage Notice") from the holder or holders of such
Designated Senior Indebtedness or the trustee or agent acting on behalf of such
Designated Senior Indebtedness, then, unless and until such default or event of
default has been cured or waived or has ceased to exist or such Designated
Senior Indebtedness has been discharged or repaid in full, no direct or indirect
payment will be made by or on behalf of the Company of principal of, premium, if
any, or interest on the Notes, except from those funds held in trust for the
benefit of the Holders of any Notes to such Holders, during a period (a "Payment
Blockage Period") commencing on the date of receipt of such notice by the
Trustee and ending 179 days thereafter. Notwithstanding anything in the
subordination provisions of the Indenture or the Notes to the contrary, (x) in
no event will a Payment Blockage Period extend beyond 179 days from the date the
Payment Blockage Notice in respect thereof was given and (y) in no event will a
Payment Blockage Notice be effective for purposes thereof unless and until
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<PAGE>
360 days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice. Not more than one Payment Blockage Period may be commenced with
respect to the Notes during any period of 360 consecutive days. No default or
event of default that existed or was continuing on the date of commencement of
any Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period may be, or be made, the basis for the
commencement of any other Payment Blockage Period by the holder or holders of
such Designated Senior Indebtedness or the trustee or agent acting on behalf of
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such default or event of default has been cured or
waived for a period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the Notes
by reason of the provisions of the Indenture described under this
"Subordination" heading will not be construed as preventing the occurrence of an
Event of Default described in clause (a), (b) or (c) of the first paragraph
under " -- Events of Default."
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full, and the Company may be unable
to fully meet its obligations with respect to the Notes. Subject to the
restrictions set forth in the Indenture, in the future the Company may issue
additional Senior Indebtedness.
THE GUARANTEES
The Indenture will provide that each of the Guarantors will unconditionally
guarantee on a joint and several basis all of the Company's obligations under
the Notes, including its obligations to pay principal, premium, if any, and
interest with respect to the Notes. The obligations of each Guarantor are
limited to the maximum amount which, after giving effect to all other contingent
and fixed liabilities of such Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount PRO RATA, based on the net
assets of each Guarantor determined in accordance with GAAP. Except as provided
in " -- Covenants" below, the Company is not restricted from selling or
otherwise disposing of any of the Guarantors.
The Indenture will provide that each Subsidiary of the Company in existence on
the Issue Date (other than any Securitization Subsidiary) and each Material
Subsidiary whether organized or acquired after the Issue Date (other than any
Securitization Subsidiary) will become a Guarantor; PROVIDED, HOWEVER, that any
Material Subsidiary acquired after the Issue Date which is prohibited from
entering into a Guarantee pursuant to restrictions contained in any debt
instrument or other agreement in existence at the time such Material Subsidiary
was so acquired and not entered into in anticipation or contemplation of such
acquisition shall not be required to become a Guarantor so long as any such
restriction is in existence and to the extent of any such restriction.
The Indenture will provide that if the Notes are defeased in accordance with the
terms of the Indenture, or if all or substantially all of the assets of any
Guarantor or all of the Capital Stock of any Guarantor is sold (including by
issuance or otherwise) by the Company or any of its Subsidiaries in a
transaction constituting an Asset Disposition, and if (x) the Net Available
Proceeds from such Asset Disposition are used in accordance with the covenant
described under " -- Covenants -- Limitation on Certain Asset Dispositions" or
(y) the Company delivers to the Trustee an Officers' Certificate to the effect
that the Net Available Proceeds from such Asset Disposition shall be used in
accordance with the covenant described under " -- Covenants -- Limitation on
Certain Asset Dispositions" and within the time limits specified by such
covenant, then such Guarantor (in the event of a sale or other disposition of
all of the Capital Stock of such Guarantor) or the corporation acquiring such
assets (in the event of a sale or other disposition of all or substantially all
of the assets of such Guarantor) shall be released and discharged of its
Guarantee obligations.
The obligations of each Guarantor under its Guarantee are subordinated to the
prior payment in full of all Guarantor Senior Indebtedness of such Guarantor to
substantially the same extent as the Notes are subordinated to Senior
Indebtedness.
41
<PAGE>
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to, Incur, directly or indirectly, any Indebtedness, except:
(i) Indebtedness of the Company or its Subsidiaries, if immediately after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the net proceeds thereof, the Consolidated Cash Flow Ratio of the Company for
the four full fiscal quarters for which quarterly or annual financial statements
are available next preceding the Incurrence of such Indebtedness, calculated on
a pro forma basis as if such Indebtedness had been Incurred on the first day of
such four full fiscal quarters, would be greater than 2.00 to 1.00 if such
Indebtedness is Incurred on or before December 31, 1997 and 2.25 to 1.00 if such
Indebtedness is Incurred after December 31, 1997; (ii) Indebtedness of the
Company, and guarantees of such Indebtedness by any Guarantor, Incurred under
the Senior Credit Facility in an aggregate principal amount outstanding at any
one time not to exceed the greater of (x) $225 million or (y) the sum of (A) 85%
of Eligible Accounts Receivable and (B) 50% of Eligible Inventory; (iii)
Indebtedness owed by the Company to any Wholly Owned Subsidiary of the Company
or Indebtedness owed by a Subsidiary of the Company to the Company or a Wholly
Owned Subsidiary of the Company (other than a Securitization Subsidiary);
PROVIDED, HOWEVER, upon either (I) the transfer or other disposition by such
Wholly Owned Subsidiary or the Company of any Indebtedness so permitted under
this clause (iii) to a Person other than the Company or another Wholly Owned
Subsidiary of the Company (other than a Securitization Subsidiary) or (II) the
issuance (other than directors' qualifying shares), sale, transfer or other
disposition of shares of Capital Stock or other ownership interests (including
by consolidation or merger) of such Wholly Owned Subsidiary to a Person other
than the Company or another such Wholly Owned Subsidiary of the Company (other
than a Securitization Subsidiary), the provisions of this clause (iii) shall no
longer be applicable to such Indebtedness and such Indebtedness shall be deemed
to have been Incurred at the time of any such issuance, sale, transfer or other
disposition, as the case may be; (iv) Indebtedness of the Company or its
Subsidiaries under any interest rate or currency swap agreement to the extent
entered into to hedge any other Indebtedness permitted under the Indenture and
any interest rate swap agreement entered into in connection with any Qualified
Securitization Transaction; (v) Indebtedness Incurred to renew, extend,
refinance or refund (collectively for purposes of this clause (v) to "refund")
any Indebtedness outstanding on the Issue Date and Indebtedness Incurred under
the prior clause (i) above or the Notes; provided, however, that (I) such
Indebtedness does not exceed the principal amount (or accrual amount, if less)
of Indebtedness so refunded plus the amount of any premium required to be paid
in connection with such refunding pursuant to the terms of the Indebtedness
refunded or the amount of any premium reasonably determined by the Company as
necessary to accomplish such refunding by means of a tender offer, exchange
offer, or privately negotiated repurchase, plus the expenses of the Company or
such Subsidiary incurred in connection therewith and (II)(A) in the case of any
refunding of Indebtedness that is PARI PASSU with the Notes, such refunding
Indebtedness is made PARI PASSU with or subordinate in right of payment to the
Notes, and, in the case of any refunding of Indebtedness that is subordinate in
right of payment to the Notes, such refunding Indebtedness is subordinate in
right of payment to the Notes on terms no less favorable to the Holders than
those contained in the Indebtedness being refunded, (B) in either case, the
refunding Indebtedness by its terms, or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, does not have an
Average Life that is less than the remaining Average Life of the Indebtedness
being refunded and does not permit redemption or other retirement (including
pursuant to any required offer to purchase to be made by the Company or a
Subsidiary of the Company) of such Indebtedness at the option of the holder
thereof prior to the final stated maturity of the Indebtedness being refunded,
other than a redemption or other retirement at the option of the holder of such
Indebtedness (including pursuant to a required offer to purchase made by the
Company or a Subsidiary of the Company) which is conditioned upon a change of
control of the Company pursuant to provisions substantially similar to those
contained in the Indenture described under " -- Change of Control" below and (C)
any Indebtedness Incurred to refund any other Indebtedness is Incurred by the
obligor on the Indebtedness being refunded or by the Company; (vi) Indebtedness
of the Company or its Subsidiaries, not otherwise permitted to be Incurred
pursuant to clauses (i) through (v) above, which, together with any other
outstanding Indebtedness Incurred pursuant to this clause (vi), has an aggregate
principal amount not in excess of $15 million at any time outstanding; and (vii)
Indebtedness of the Company under the Notes and Indebtedness of the Guarantors
under the Guarantees.
Notwithstanding anything in the Indenture to the contrary, the consummation of
any Qualified Securitization Transaction shall not be deemed to be the
Incurrence of Indebtedness by the Company or by any Subsidiary of the Company.
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LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Indenture will provide that (i) the Company will not directly or indirectly
Incur any Indebtedness that by its terms would expressly rank senior in right of
payment to the Notes and expressly rank subordinate in right of payment to any
Senior Indebtedness and (ii) the Company will not permit any Guarantor to and no
Guarantor will directly or indirectly Incur any Indebtedness that by its terms
would expressly rank senior in right of payment to the Guarantee of such
Guarantor and expressly rank subordinate in right of payment to any Guarantor
Senior Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, (i) declare or pay any dividend, or
make any distribution of any kind or character (whether in cash, property or
securities), in respect of any class of its Capital Stock or to the holders
thereof, excluding any (x) dividends or distributions payable solely in shares
of its Capital Stock (other than Disqualified Stock) or in options, warrants or
other rights to acquire its Capital Stock (other than Disqualified Stock), or
(y) in the case of any Subsidiary of the Company, dividends or distributions
payable to the Company or a Subsidiary of the Company (other than a
Securitization Subsidiary), (ii) purchase, redeem, or otherwise acquire or
retire for value shares of Capital Stock of the Company or any of its
Subsidiaries, any options, warrants or rights to purchase or acquire shares of
Capital Stock of the Company or any of its Subsidiaries or any securities
convertible or exchangeable into shares of Capital Stock of the Company or any
of its Subsidiaries, excluding any such shares of Capital Stock, options,
warrants, rights or securities which are owned by the Company or a Subsidiary of
the Company (other than a Securitization Subsidiary), (iii) make any Investment
in (other than a Permitted Investment), or payment on a guarantee of any
obligation of, any Person, other than the Company or a Wholly Owned Subsidiary
of the Company, or (iv) redeem, defease, repurchase, retire or otherwise acquire
or retire for value, prior to any scheduled maturity, repayment or sinking fund
payment, Indebtedness which is subordinate in right of payment to the Notes
(each of the transactions described in clauses (i) through (iv) (other than any
exception to any such clause) being a "Restricted Payment") if at the time
thereof: (1) an Event of Default, or an event that with the passing of time or
giving of notice, or both, would constitute an Event of Default, shall have
occurred and be continuing, or (2) upon giving effect to such Restricted
Payment, the Company could not Incur at least $1.00 of additional Indebtedness
pursuant to the terms of the Indenture described in clause (i) of
" -- Limitation on Indebtedness" above, or (3) upon giving effect to such
Restricted Payment, the aggregate of all Restricted Payments made on or after
the Issue Date exceeds the sum of: (a) 50% of cumulative Consolidated Net Income
of the Company (or, in the case cumulative Consolidated Net Income of the
Company shall be negative, less 100% of such deficit) since the end of the
fiscal quarter in which the Issue Date occurs through the last day of the fiscal
quarter for which financial statements are available; plus (b) 100% of the
aggregate net proceeds received after the Issue Date, including the fair market
value of property other than cash (determined in good faith by the Board of
Directors of the Company as evidenced by a resolution of such Board of Directors
filed with the Trustee), from the issuance of Capital Stock (other than
Disqualified Stock) of the Company and warrants, rights or options on Capital
Stock (other than Disqualified Stock) of the Company (other than in respect of
any such issuance to a Subsidiary of the Company) and the principal amount of
Indebtedness of the Company or any of its Subsidiaries (other than a
Securitization Subsidiary) that has been converted into or exchanged for Capital
Stock of the Company which Indebtedness was Incurred after the Issue Date; plus
(c) in the case of the disposition or repayment of any Investment constituting a
Restricted Payment made after the Issue Date, an amount equal to the lesser of
the return of capital with respect to such Investment and the cost of such
Investment, in either case, less the cost of the disposition of such Investment;
PROVIDED, HOWEVER, that at the time any such Investment is made the Company
delivers to the Trustee a resolution of its Board of Directors to the effect
that, for purposes of this " -- Limitation on Restricted Payments" covenant,
such Investment constitutes a Restricted Payment made after the Issue Date; plus
(d) $4 million.
The foregoing provision will not be violated by (i) any dividend on any class of
Capital Stock of the Company or any Subsidiary of the Company paid within 60
days after the declaration thereof if, on the date when the dividend was
declared, the Company or such Subsidiary, as the case may be, could have paid
such dividend in accordance with the provisions of the Indenture, (ii) the
renewal, extension, refunding or refinancing of any Indebtedness otherwise
permitted pursuant to the terms of the Indenture described in clause (v) of
" -- Limitation on Indebtedness" above, (iii) the exchange or conversion of any
Indebtedness of the Company or any Subsidiary of the Company (other than a
Securitization Subsidiary) for or into Capital Stock of the Company (other than
Disqualified Stock of the Company), (iv) any payments, loans or other advances
made pursuant to any employee benefit plans (including plans for the benefit of
directors) or employment agreements or other compensation arrangements, in each
case as approved by the Board of Directors of the Company in its good faith
judgment, (v) the redemption of the Company's rights issued pursuant to the
Amended and Restated Rights Agreement dated as of May 10, 1994, between the
Company and Wachovia Bank of North Carolina, N.A., as Rights Agent, in an amount
per right issued thereunder not to exceed
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that in effect on the Issue Date, (vi) so long as no Default or Event of Default
has occurred and is continuing, any investment made with the proceeds of a
substantially concurrent sale of Capital Stock of the Company (other than
Disqualified Stock); PROVIDED, HOWEVER, that the proceeds of such sale of
Capital Stock shall not be (and have not been) included in subclause (b) of
clause (3) of the preceding paragraph, (vii) so long as no Default or Event of
Default has occurred and is continuing, additional Investments constituting
Restricted Payments in Persons or entities in the same line of business as the
Company as of the Issue Date in an aggregate outstanding amount (valued at the
cost thereof) not to exceed at any time $4 million, (viii) the redemption,
repurchase, retirement or other acquisition of any Capital Stock of the Company
in exchange for or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of Capital Stock of the Company
(other than Disqualified Stock); PROVIDED, HOWEVER, that the proceeds of such
sale of Capital Stock shall not be (and have not been) included in subclause (b)
of clause (3) of the preceding paragraph or (ix) so long as no Default or Event
of Default has occurred and is continuing, the payment of cash dividends on (A)
the Company's 4 1/2% Series B Cumulative Preferred Stock outstanding on the
Issue Date in accordance with the terms of the Articles of Incorporation of the
Company as in effect on the Issue Date and (B) the Company's Common Stock not to
exceed $1.5 million in any fiscal quarter of the Company plus 4.5(cents) per
quarter per share of Common Stock of the Company issued on conversion of the
outstanding shares of the Company's 4 1/2% Series B Cumulative Preferred Stock
(subject to adjustment). Each Restricted Payment described in clauses (i),
(iii), (iv), (v), (vii) and (ix) of the previous sentence shall be taken into
account for purposes of computing the aggregate amount of all Restricted
Payments pursuant to clause (3) of the preceding paragraph.
LIMITATIONS CONCERNING DISTRIBUTIONS AND TRANSFERS BY SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist any consensual encumbrance or restriction on the ability of any
Subsidiary of the Company to (i) pay, directly or indirectly, dividends or make
any other distributions in respect of its Capital Stock or pay any Indebtedness
or other obligation owed to the Company or any Subsidiary of the Company, (ii)
make loans or advances to the Company or any Subsidiary of the Company or
guarantee any Indebtedness of the Company or any of its Subsidiaries or (iii)
transfer any of its property or assets to the Company or any Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of (a) any agreement in effect on the Issue Date (including pursuant to
the Senior Credit Facility and agreements entered into in connection therewith)
as any such agreement is in effect on such date, (b) any agreement relating to
any Indebtedness Incurred by such Subsidiary prior to the date on which such
Subsidiary was acquired by the Company and outstanding on such date and not
Incurred in anticipation or contemplation of becoming a Subsidiary and provided
such encumbrance or restriction shall not apply to any assets of the Company or
its Subsidiaries other than such Subsidiary, (c) customary provisions contained
in an agreement which has been entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Subsidiary;
PROVIDED, HOWEVER, that such encumbrance or restriction is applicable only to
such Subsidiary or assets, (d) an agreement effecting a renewal, exchange,
refunding, amendment or extension of Indebtedness Incurred pursuant to an
agreement referred to in clause (a) or (b) above; PROVIDED, HOWEVER, that the
provisions contained in such renewal, exchange, refunding, amendment or
extension agreement relating to such encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement that is the subject thereof in the reasonable judgment of the Board of
Directors of the Company as evidenced by a resolution of such Board of Directors
filed with the Trustee, (e) the Indenture, (f) applicable law, (g) customary
provisions restricting subletting or assignment of any lease governing any
leasehold interest of any Subsidiary of the Company, (h) Indebtedness or any
other contractual requirements (including pursuant to any corporate governance
documents in the nature of a charter or by-laws) of a Securitization Subsidiary
arising in connection with a Qualified Securitization Transaction; PROVIDED,
HOWEVER, that any such encumbrance or restriction applies only to such
Securitization Subsidiary, (i) purchase money obligations for property acquired
in the ordinary course of business that impose restrictions of the type referred
to in clause (iii) of this covenant or (j) restrictions of the type referred to
in clause (iii) of this covenant contained in security agreements securing
Indebtedness of a Subsidiary of the Company to the extent that such Liens were
otherwise incurred in accordance with " -- Limitation on Liens" below and
restrict the transfer of property subject to such agreements.
LIMITATION ON LIENS
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to, Incur any Lien on or with respect to any property or assets
of the Company or any Subsidiary of the Company owned on the Issue Date or
thereafter acquired or on the income or profits thereof to secure Indebtedness
without making, or causing such Subsidiary to make, effective provision for
securing the Notes (and, if the Company shall so determine, any other
Indebtedness of the Company or such Subsidiary, including Indebtedness which is
subordinate in right of payment to the Notes; PROVIDED, HOWEVER, that Liens
securing the Notes and any Indebtedness PARI PASSU with the Notes are senior to
such Liens securing such subordinated
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Indebtedness) equally and ratably with such Indebtedness or, in the event such
Indebtedness is subordinate in right of payment to the Notes or the Guarantees,
prior to such Indebtedness, as to such property or assets for so long as such
Indebtedness shall be so secured. The foregoing restrictions shall not apply to
(i) Liens securing Senior Indebtedness of the Company or Guarantor Senior
Indebtedness; (ii) Liens securing only the Notes; (iii) Liens in favor of the
Company; (iv) Liens to secure Indebtedness Incurred for the purpose of financing
all or any part of the purchase price or the cost of construction or improvement
of the property subject to such Liens; PROVIDED, HOWEVER, that (a) the aggregate
principal amount of any Indebtedness secured by such a Lien does not exceed 100%
of such purchase price or cost, (b) such Lien does not extend to or cover any
other property other than such item of property and any improvements on such
item, (c) the Indebtedness secured by such Lien is Incurred by the Company or
its Subsidiary within 180 days of the acquisition, construction or improvement
of such property and (d) the Incurrence of such Indebtedness is permitted by the
provisions of the Indenture described under " -- Limitation on Indebtedness"
above; (v) Liens on property existing immediately prior to the time of
acquisition thereof (and not created in anticipation or contemplation of the
financing of such acquisition); (vi) Liens on property of a Person existing at
the time such Person is merged with or into or consolidated with the Company or
any Subsidiary of the Company (and not created in anticipation or contemplation
thereof); (vii) Liens on property of the Company or any Subsidiary of the
Company in favor of the United States of America, any state thereof, or any
instrumentality of either to secure payments pursuant to any contract or
statute; (viii) Liens granted in connection with any Qualified Securitization
Transaction; (ix) Liens existing on the Issue Date securing Indebtedness
existing on the Issue Date; (x) Liens to secure Indebtedness Incurred to extend,
renew, refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, any Indebtedness secured by Liens referred to
in the foregoing clauses (i)-(ix) so long as such Liens do not extend to any
other property and the principal amount of Indebtedness so secured is not
increased except for the amount of any premium required to be paid in connection
with such renewal, refinancing or refunding pursuant to the terms of the
Indebtedness renewed, refinanced or refunded or the amount of any premium
reasonably determined by the Company as necessary to accomplish such renewal,
refinancing or refunding by means of a tender offer, exchange offer or privately
negotiated repurchase, plus the expenses of the Company or such Subsidiary
incurred in connection with such renewal, refinancing or refunding; and (xi)
Liens in favor of the Trustee as provided for in the Indenture on money or
property held or collected by the Trustee in its capacity as Trustee.
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, make one or more Asset Dispositions
for aggregate consideration of, or in respect of assets having an aggregate fair
market value of, $5 million or more in any 12-month period, unless: (i) the
Company or the Subsidiary, as the case may be, receives consideration for such
Asset Disposition at least equal to the fair market value of the assets sold or
disposed of as determined by the Board of Directors of the Company in good faith
and evidenced by a resolution of such Board of Directors filed with the Trustee;
(ii) not less than 75% of the consideration for the disposition consists of cash
or readily marketable cash equivalents or the assumption of Indebtedness (other
than non-recourse Indebtedness or any Indebtedness subordinated to the Notes) of
the Company or such Subsidiary or other obligations relating to such assets (and
release of the Company or such Subsidiary from all liability on the Indebtedness
or other obligations assumed); and (iii) all Net Available Proceeds, less any
amounts invested within 360 days of such Asset Disposition in assets related to
the business of the Company (including the Capital Stock of another Person
(other than the Company or any Person that is a Subsidiary of the Company
immediately prior to such investment); PROVIDED, HOWEVER, that immediately after
giving effect to any such investment (and not prior thereto) such Person shall
be a Subsidiary of the Company (other than a Securitization Subsidiary)), are
applied, on or prior to the 360th day after such Asset Disposition, unless and
to the extent that the Company shall determine to make an Offer to Purchase,
either to (A) the permanent reduction and prepayment of any Senior Indebtedness
then outstanding (including a permanent reduction of commitments in respect
thereof) or (B) the permanent reduction and repayment of any Guarantor Senior
Indebtedness then outstanding of any Subsidiary of the Company (including a
permanent reduction of commitments in respect thereof). Any Net Available
Proceeds from any Asset Disposition which is subject to the immediately
preceding sentence that are not applied as provided in the immediately preceding
sentence shall be used promptly after the expiration of the 360th day after such
Asset Disposition, or promptly after the Company shall have earlier determined
to not apply any Net Available Proceeds therefrom as provided in subclauses (A)
or (B) of clause (iii) of the immediately preceding sentence, to make an Offer
to Purchase outstanding Notes at a purchase price in cash equal to 100% of their
principal amount plus accrued interest to the Purchase Date. Notwithstanding the
foregoing, the Company may defer making any Offer to Purchase outstanding Notes
until there are aggregate unutilized Net Available Proceeds from Asset
Dispositions otherwise subject to the two immediately preceding sentences equal
to or in excess of $5 million (at which time, the entire unutilized Net
Available Proceeds from Asset Dispositions otherwise subject to the two
immediately preceding sentences, and not just the amount in excess of $5
million, shall be applied as required pursuant to this paragraph). If any
Indebtedness of the Company ranking PARI PASSU with the Notes requires that
prepayment of, or an offer to
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prepay, such Indebtedness be made with any Net Available Proceeds, the Company
may apply such Net Available Proceeds pro rata (based on the aggregate principal
amount of the Notes then outstanding and the aggregate principal amount (or
accreted value, if less) of all such other Indebtedness then outstanding) to the
making of an Offer to Purchase the Notes in accordance with the foregoing
provisions and the prepayment or the offer to prepay such PARI PASSU
Indebtedness. The Company shall make a further Offer to Purchase Notes in an
amount equal to any such Net Available Proceeds not utilized to actually prepay
such other Indebtedness at a purchase price in cash equal to 100% of the
principal amount of the Notes plus accrued interest to the Purchase Date if the
amount not so utilized equals or exceeds $5 million. Any remaining Net Available
Proceeds following the completion of the required Offer to Purchase may be used
by the Company for any other purpose (subject to the other provisions of the
Indenture) and the amount of Net Available Proceeds then required to be
otherwise applied in accordance with this covenant shall be reset to zero,
subject to any subsequent Asset Disposition. These provisions will not apply to
a transaction consummated in compliance with the provisions of the Indenture
described under " -- Mergers, Consolidations and Certain Sales of Assets" below.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF SUBSIDIARIES
The Indenture will provide that the Company (a) will not, and will not permit
any Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of
any shares of Capital Stock of such Subsidiary or any other Subsidiary (other
than to the Company or a Wholly Owned Subsidiary of the Company (other than a
Securitization Subsidiary)), except that the Company and any Subsidiary may, in
any single transaction, sell all, but not less than all, of the issued and
outstanding Capital Stock of any Subsidiary to any Person, subject to complying
with the provisions of the Indenture described under " -- Limitation on Certain
Asset Dispositions" above and (b) will not permit any Subsidiary of the Company
to issue shares of its Capital Stock (other than directors' qualifying shares),
or securities convertible into, or warrants, rights or options to subscribe for
or purchase shares of, its Capital Stock to any Person other than to the Company
or a Wholly Owned Subsidiary of the Company (other than a Securitization
Subsidiary).
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries to enter into directly or indirectly any transaction with an
Affiliate or Related Person of the Company (other than the Company or a
Subsidiary of the Company), including, without limitation, the purchase, sale,
lease or exchange of property, the rendering of any service, or the making of
any guarantee, loan, advance or Investment, either directly or indirectly,
involving aggregate consideration in excess of $500,000 unless (i) a majority of
the disinterested directors of the Board of Directors of the Company determines,
in its good faith judgment evidenced by a resolution of such Board of Directors
filed with the Trustee, that such transaction is in the best interests of the
Company or such Subsidiary, as the case may be; and (ii) such transaction is, in
the opinion of a majority of the disinterested directors of the Board of
Directors of the Company evidenced by a resolution of such Board of Directors
filed with the Trustee, on terms no less favorable to the Company or such
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or a
Related Person. The provisions of this covenant shall not apply to (i) any
Qualified Securitization Transaction, (ii) any employment agreement entered into
by the Company or any of its Subsidiaries in the ordinary course of business,
(iii) transactions permitted by the provisions of the Indenture described above
under the caption " -- Limitation on Restricted Payments" above, (iv) the
payment of reasonable fees to directors of the Company or its Subsidiaries and
(v) Investments in employees in the ordinary course of business.
CHANGE OF CONTROL
Within 30 days following the date of the consummation of a transaction resulting
in a Change of Control, the Company will commence an Offer to Purchase all
outstanding Notes at a purchase price in cash equal to 101% of their principal
amount plus accrued interest to the Purchase Date. Such Offer to Purchase will
be consummated not earlier than 30 days and not later than 60 days after the
commencement thereof. Each Holder shall be entitled to tender all or any portion
of the Notes owned by such Holder pursuant to the Offer to Purchase, subject to
the requirement that any portion of a Note tendered must bear an integral
multiple of $1,000 principal amount. A "Change of Control" will be deemed to
have occurred in the event that (whether or not otherwise permitted by the
Indenture), after the Issue Date (a) any Person or any Persons acting together
that would constitute a
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group (for purposes of Section 13(d) of the Exchange Act, or any successor
provision thereto) (a "Group"), together with any Affiliates or Related Persons
thereof, shall "beneficially own" (as defined in Rule 13d-3 under the Exchange
Act, or any successor provision thereto) at least 35% of the voting power of the
outstanding Voting Stock of the Company; (b) any sale, lease or other transfer
(in one transaction or a series of related transactions) is made by the Company
or any of its Subsidiaries of all or substantially all of the consolidated
assets of the Company to any Person other than a Wholly Owned Subsidiary of the
Company which is a Guarantor (other than a Securitization Subsidiary); (c)
Continuing Directors cease to constitute at least a majority of the Board of
Directors of the Company; or (d) the stockholders of the Company approve any
plan or proposal for the liquidation or dissolution of the Company.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
With respect to the sale of assets referred to in the definition of "Change of
Control," the phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control. The ability of the Company to pay cash to the
Holders of Notes upon a Change of Control may be limited by its then existing
financial resources. The Senior Credit Facility will contain certain covenants
prohibiting, or requiring waiver or consent of the lenders thereunder prior to,
the repurchase of the Notes upon a Change of Control and future debt agreements
of the Company may provide the same. If the Company does not obtain such waiver
or consent or repay such Indebtedness, the Company will remain prohibited from
repurchasing the Notes. In such event, the Company's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture which
would in turn constitute a default under the Senior Credit Facility and possibly
other Senior Indebtedness. In such circumstances, the subordination provisions
of the Indenture would likely restrict payments to the Holders of the Notes.
None of the provisions relating to a repurchase upon a Change of Control are
waivable by the Board of Directors of the Company or the Trustee.
The foregoing provisions will not prevent the Company from entering into a
transaction of the types described above with management or their affiliates. In
addition, such provisions may not necessarily afford the Holders of the Notes
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the Holders because such transactions may not
involve a shift in voting power or beneficial ownership, or even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control to trigger the provisions.
PROVISION OF FINANCIAL INFORMATION
Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange
Act, or any successor provision thereto, the Company shall file with the
Commission the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if the Company were so
required, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required so to file such documents if the Company were so required. The
Company shall also in any event (a) within 15 days of each Required Filing Date
(i) transmit by mail to all Holders, as their names and addresses appear in the
Note Register, without cost to such Holders, and (ii) file with the Trustee,
copies of the annual reports, quarterly reports and other documents which the
Company is required to file with the Commission pursuant to the preceding
sentence, and (b) if, notwithstanding the preceding sentence, filing such
documents by the Company with the Commission is not permitted under the Exchange
Act, promptly upon written request supply copies of such documents to any
prospective Holder.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
Neither the Company nor any Subsidiary will consolidate or merge with or into
any Person, and the Company will not, and will not permit any of its
Subsidiaries to, sell, assign, lease, convey or otherwise dispose of all or
substantially all of the Company's consolidated assets (as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution) to, any Person
unless, in each such case: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Company or such Subsidiary, as the
case may be), or to which such sale, assignment, lease, conveyance or other
disposition shall have been made (the "Surviving Entity"), is a corporation
organized and existing
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under the laws of the United States, any state thereof or the District of
Columbia; (ii) the Surviving Entity assumes by supplemental indenture all of the
obligations of the Company or such Subsidiary, as the case may be, on the Notes
or such Subsidiary's Guarantee, as the case may be, and under the Indenture;
(iii) immediately after giving effect to such transaction and the use of any net
proceeds therefrom on a pro forma basis, the Consolidated Net Worth of the
Company or the Surviving Entity (in the case of any transaction involving the
Company), as the case may be, would be at least equal to the Consolidated Net
Worth of the Company immediately prior to such transaction; (iv) immediately
after giving effect to such transaction and the use of any net proceeds
therefrom on a pro forma basis, the Company or the Surviving Entity (in the case
of any transaction involving the Company), as the case may be, could Incur at
least $1.00 of Indebtedness pursuant to clause (i) of the provisions of the
Indenture described under " -- Limitation on Indebtedness" above; (v)
immediately before and after giving effect to such transaction and treating any
Indebtedness which becomes an obligation of the Company or any of its
Subsidiaries as a result of such transaction as having been incurred by the
Company or such Subsidiary, as the case may be, at the time of the transaction,
no Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default shall have occurred and be
continuing; and (vi) if, as a result of any such transaction, property or assets
of the Company or a Subsidiary would become subject to a Lien not excepted from
the provisions of the Indenture described under " -- Limitation on Liens" above,
the Company, any such Subsidiary or the Surviving Entity, as the case may be,
shall have secured the Notes as required by said covenant. The provisions of
this paragraph shall not apply to any merger of a Subsidiary of the Company with
or into the Company or a Wholly Owned Subsidiary of the Company (other than a
Securitization Subsidiary) or any transaction pursuant to which a Guarantor's
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under " -- Limitation on Certain Asset Dispositions"
above.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to pay
principal of (or premium, if any, on) any Note when due (whether or not
prohibited by the provisions of the Indenture described under
" -- Subordination" above); (b) failure to pay any interest on any Note when
due, continued for 30 days (whether or not prohibited by the provisions of the
Indenture described under " -- Subordination" above); (c) default in the payment
of principal of and interest on Notes required to be purchased pursuant to an
Offer to Purchase as described under " -- Covenants -- Change of Control" and
" -- Covenants -- Limitation on Certain Asset Dispositions" above when due and
payable (whether or not prohibited by the provisions of the Indenture described
under " -- Subordination" above); (d) failure to perform or comply with any of
the provisions described under " -- Covenants -- Mergers, Consolidations and
Certain Sales of Assets" above; (e) failure to perform any other covenant or
agreement of the Company under the Indenture or the Notes continued for 30 days
after written notice to the Company by the Trustee or Holders of at least 25% in
aggregate principal amount of outstanding Notes; (f) default under the terms of
one or more instruments evidencing or securing Indebtedness of the Company or
any Subsidiary of the Company having an outstanding principal amount of $10
million or more individually or in the aggregate that has resulted in the
acceleration of the payment of such Indebtedness or failure to pay principal
when due at the stated maturity of any such Indebtedness; (g) the rendering of a
final judgment or judgments (not subject to appeal) against the Company or any
Subsidiary of the Company in an amount of $5 million or more (net of any amounts
covered by reputable and creditworthy insurance companies) which remains
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired; (h) certain events of bankruptcy, insolvency or
reorganization affecting the Company or any Material Subsidiary; and (i) the
Guarantee of any Guarantor which is a Material Subsidiary ceases to be in full
force and effect (other than in accordance with the terms of such Guarantee and
the Indenture) or is declared null and void and unenforceable or found to be
invalid or any Guarantor which is a Material Subsidiary denies its liability
under its Guarantee (other than by reason of a release of such Guarantor from
its Guarantee in accordance with the terms of the Indenture and such Guarantee).
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default (as defined) shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
If an Event of Default (other than an Event of Default with respect to the
Company described in clause (h) of the preceding paragraph) shall occur and be
continuing, either the Trustee or the Holders of at least 25% in aggregate
principal amount of the outstanding Notes may accelerate the maturity of all
Notes; PROVIDED, HOWEVER, that after such acceleration, but before a judgment or
decree based on acceleration, the Holders of a majority in aggregate principal
amount of outstanding Notes may,
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under certain circumstances, rescind and annul such acceleration if all Events
of Default, other than the non-payment of accelerated principal, have been cured
or waived as provided in the Indenture. If an Event of Default specified in
clause (h) of the preceding paragraph with respect to the Company occurs, the
outstanding Notes will IPSO FACTO become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder. For
information as to waiver of defaults, see " -- Modification and Waiver."
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the Holders thereof notice of all uncured Defaults or Events of Default known to
it; PROVIDED, HOWEVER, that, except in the case of an Event of Default or a
Default in payment with respect to the Notes or a Default or Event of Default in
complying with " -- Covenants-Mergers, Consolidations and Certain Sales of
Assets," the Trustee shall be protected in withholding such notice if and so
long as the Board of Directors or responsible officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders of the Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the Holders of at least 25% in aggregate principal amount of
the outstanding Notes shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as Trustee, and the
Trustee shall not have received from the Holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a Holder of a
Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Company will be required to furnish to the Trustee annually a statement as
to the performance by it of certain of its obligations under the Indenture and
as to any default in such performance.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its and the Guarantors' substantive obligations in
respect of the Notes by delivering all outstanding Notes to the Trustee for
cancellation and paying all sums payable by it on account of principal of,
premium, if any, and interest on all Notes or otherwise. In addition to the
foregoing, the Company may, provided that no Default or Event of Default has
occurred and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default specified in clause (h) of " -- Events of Default"
above, any time on or prior to the 95th calendar day after the date of such
deposit (it being understood that this condition shall not be deemed satisfied
until after such 95th day)) and provided that no default under any Senior
Indebtedness would result therefrom, terminate its and the Guarantors'
substantive obligations in respect of the Notes (except for its obligations to
pay the principal of (and premium, if any, on) and the interest on the Notes and
the Guarantors' guarantee thereof) by (i) depositing with the Trustee, under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without reinvestment) to pay all remaining indebtedness
on the Notes, (ii) delivering to the Trustee either an Opinion of Counsel or a
ruling directed to the Trustee from the Internal Revenue Service to the effect
that the Holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and termination of
obligations, (iii) delivering to the Trustee an Opinion of Counsel to the effect
that the Company's exercise of its option under this paragraph will not result
in any of the Company, the Trustee or the trust created by the Company's deposit
of funds pursuant to this provision becoming or being deemed to be an
"investment company" under the Investment Company Act of 1940, as amended, and
(iv) complying with certain other requirements set forth in the Indenture. In
addition, the Company may, provided that no Default or Event of Default has
occurred, and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default specified in clause (h) of " -- Events of Default"
above, any time on or prior to the 95th calendar day after the date of such
deposit (it being understood that this condition shall not be deemed satisfied
until after such 95th day)) and provided that no default under any Senior
Indebtedness would result therefrom, terminate all of its and the Guarantors'
substantive obligations in respect of the Notes (including its obligations to
pay the principal of (and premium, if any, on) and interest on the Notes and the
Guarantors' guarantee thereof) by (i) depositing with the Trustee, under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without reinvestment) to pay all remaining indebtedness
on the Notes, (ii) delivering to the Trustee either a ruling directed to the
Trustee from the Internal Revenue Service to the effect that the Holders of the
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such deposit and termination of obligations or an Opinion of Counsel
based upon such a ruling addressed to the Trustee or a change in the applicable
Federal tax law since the date of the Indenture, to such effect, (iii)
delivering to the Trustee an Opinion of Counsel to the effect that the Company's
exercise of its option under this paragraph will not result in any of the
Company, the Trustee or the trust created by the Company's deposit of funds
pursuant to this provision becoming or being
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deemed to be an "investment company" under the Investment Company Act of 1940,
as amended, and (iv) complying with certain other requirements set forth in the
Indenture.
The Company may make an irrevocable deposit pursuant to this provision only if
at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the Senior Indebtedness and
the Company has delivered to the Trustee and any Paying Agent an Officers'
Certificate to that effect.
GOVERNING LAW
The Indenture, the Notes and the Guarantees will be governed by the laws of the
State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and the
Trustee with the consent of the Holders of a majority in aggregate principal
amount of the outstanding Notes; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the Holder of each Note affected thereby,
(a) change the Stated Maturity of the principal of or any installment of
interest on any Note or alter the optional redemption or repurchase provisions
of any Note or the Indenture in a manner adverse to the holders of the Notes,
(b) reduce the principal amount of (or the premium) of any Note, (c) reduce the
rate of or extend the time for payment of interest on any Note, (d) change the
place or currency of payment of principal of (or premium) or interest on any
Note, (e) modify any provisions of the Indenture relating to the waiver of past
defaults (other than to add sections of the Indenture subject thereto) or the
right of the holders to institute suit for the enforcement of any payment on or
with respect to any Note or Guarantee or the modification and amendment of the
Indenture and the Notes (other than to add sections of the Indenture or the
Notes which may not be amended, supplemented or waived without the consent of
each holder affected), (f) reduce the percentage of the principal amount of
outstanding Notes necessary for amendment to or waiver of compliance with any
provision of the Indenture or the Notes or for waiver of any Default, (g) waive
a default in the payment of principal of, interest on, or redemption payment
with respect to, any Note (except a recision of acceleration of the Notes by the
Holders as provided in the Indenture and a waiver of the payment default that
resulted from such acceleration), (h) modify the ranking or priority of the
Notes or the Guarantee of any Guarantor which is a Material Subsidiary or modify
the definition of Senior Indebtedness or Guarantor Senior Indebtedness or amend
or modify the subordination provisions of the Indenture in any manner adverse to
the Holders, (i) release any Guarantor which is a Material Subsidiary from any
of its obligations under its Guarantee or the Indenture otherwise than in
accordance with the Indenture, or (j) modify the provisions relating to any
Offer to Purchase required under the covenants described under
" -- Covenants -- Limitation on Certain Asset Dispositions" or
" -- Covenants -- Change of Control" in a manner materially adverse to the
Holders.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the outstanding Notes, on behalf of all Holders of
Notes, may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Note tendered pursuant to an Offer to Purchase, or a default in
respect of a provision that under the Indenture cannot be modified or amended
without the consent of the Holder of each outstanding Note affected.
THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, any Guarantor or any other obligor upon the
Notes, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claim as security or otherwise.
The Trustee is permitted to engage in other transactions with the Company or an
Affiliate of the Company; PROVIDED, HOWEVER, that if it acquires any conflicting
interest (as defined in the Indenture or in the Trust Indenture Act), it must
eliminate such conflict or resign.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with any specified Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET DISPOSITION" means any sale, transfer or other disposition (including,
without limitation, by merger, consolidation or sale-and-leaseback transaction)
of (i) shares of Capital Stock of a Subsidiary of the Company (other than
directors' qualifying shares) or (ii) property or assets of the Company or any
Subsidiary of the Company; PROVIDED, HOWEVER, that an Asset Disposition shall
not include (a) any sale, transfer or other disposition of shares of Capital
Stock, property or assets by a Subsidiary of the Company to the Company or to
any Wholly Owned Subsidiary of the Company (other than a Securitization
Subsidiary), (b) any sale, transfer or other disposition of defaulted
receivables for collection or any sale, transfer or other disposition of
property or assets in the ordinary course of business, (c) any isolated sale,
transfer or other disposition that does not involve aggregate consideration in
excess of $250,000 individually, (d) the grant in the ordinary course of
business of any non-exclusive license of patents, trademarks, registrations
therefor and other similar intellectual property, (e) any Lien (or foreclosure
thereon) securing Indebtedness to the extent that such Lien is granted in
compliance with " -- Covenants -- Limitation on Liens" above, (f) any Restricted
Payment permitted by " -- Covenants -- Limitation on Restricted Payments" above,
(g) any disposition of assets or property in the ordinary course of business to
the extent such property or assets are obsolete, worn-out or no longer useful in
the Company's or any of its Subsidiaries' business or (h) any Qualified
Securitization Transaction.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness for borrowed money or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the dates of each successive scheduled principal or liquidation
value payments of such Indebtedness or Preferred Stock, respectively, and the
amount of such principal or liquidation value payments, by (ii) the sum of all
such principal or liquidation value payments.
"CAPITAL LEASE OBLIGATIONS" of any Person means the obligations to pay rent or
other amounts under a lease of (or other Indebtedness arrangements conveying the
right to use) real or personal property of such Person which are required to be
classified and accounted for as a capital lease or liability on the face of a
balance sheet of such Person in accordance with GAAP. The amount of such
obligations shall be the capitalized amount thereof in accordance with GAAP and
the stated maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person (including any Preferred Stock outstanding on the Issue Date).
"COMMON STOCK" of any Person means Capital Stock of such Person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" of any Person means for any
period the Consolidated Net Income of such Person for such period increased (to
the extent Consolidated Net Income for such period has been reduced thereby) by
the sum of (without duplication) (i) Consolidated Interest Expense of such
Person for such period, plus (ii) Consolidated Income Tax Expense of such Person
for such period, plus (iii) the consolidated depreciation and amortization
expense included in the income statement of such Person for such period, plus
(iv) any other non-cash charges to the extent deducted from or reflected in
Consolidated Net Income except for any non-cash charges that represent accruals
of, or reserves for, cash disbursements to be made in any future accounting
period.
"CONSOLIDATED CASH FLOW RATIO" of any Person means for any period the ratio of
(i) Consolidated Cash Flow Available for Fixed Charges of such Person for such
period to (ii) the sum of (A) Consolidated Interest Expense of such Person for
such period, plus (B) the annual interest expense with respect to any
Indebtedness proposed to be Incurred by such Person or its Subsidiaries, minus
(C) Consolidated Interest Expense of such Person to the extent included in
clause (ii)(A) with respect to any Indebtedness that will no longer be
outstanding as a result of the Incurrence of the Indebtedness proposed to be
Incurred, plus (D) the annual interest expense with respect to any other
Indebtedness Incurred by such Person or its Subsidiaries since the end of such
period to the extent not included in clause (ii)(A), minus (E) Consolidated
Interest Expense of such Person to the extent included in
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clause (ii)(A) with respect to any Indebtedness that no longer is outstanding as
a result of the Incurrence of the Indebtedness referred to in clause (ii)(D);
PROVIDED, HOWEVER, that in making such computation, the Consolidated Interest
Expense of such Person attributable to interest on any Indebtedness bearing a
floating interest rate shall be computed on a pro forma basis as if the rate in
effect on the date of computation (after giving effect to any hedge in respect
of such Indebtedness that will, by its terms, remain in effect until the earlier
of the maturity of such Indebtedness or the date one year after the date of such
determination) had been the applicable rate for the entire period; PROVIDED,
FURTHER, HOWEVER, that, in the event such Person or any of its Subsidiaries has
made any Asset Dispositions or acquisitions of assets not in the ordinary course
of business (including acquisitions of other Persons by merger, consolidation or
purchase of Capital Stock) during or after such period and on or prior to the
date of measurement, such computation shall be made on a pro forma basis as if
the Asset Dispositions or acquisitions had taken place on the first day of such
period. Calculations of pro forma amounts in accordance with this definition
shall be done in accordance with Rule 11-02 of Regulation S-X under the
Securities Act of 1933 or any successor provision.
"CONSOLIDATED INCOME TAX EXPENSE" of any Person means for any period the
consolidated provision for income taxes of such Person for such period
calculated on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" for any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest or finance charge income) of such Person for such
period calculated on a consolidated basis in accordance with GAAP, plus discount
on receivables sold or other discount related to any receivables securitization
transaction (including any Qualified Securitization Transaction).
"CONSOLIDATED NET INCOME" of any Person means for any period the consolidated
net income (or loss) of such Person for such period determined on a consolidated
basis in accordance with GAAP; PROVIDED, HOWEVER, that there shall be excluded
therefrom (a) the net income (or loss) of any Person acquired by such Person or
a Subsidiary of such Person in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (but not net loss) of
any Subsidiary of such Person which is subject to restrictions which prevent or
limit the payment of dividends or the making of distributions to such Person to
the extent of such restrictions (regardless of any waiver thereof), (c) the net
income of any Person that is not a Subsidiary of such Person, except to the
extent of the amount of dividends or other distributions representing such
Person's proportionate share of such other Person's net income for such period
actually paid in cash to such Person by such other Person during such period,
(d) gains or losses on Asset Dispositions by such Person or its Subsidiaries,
(e) all extraordinary gains and extraordinary losses determined in accordance
with GAAP and (f) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings (or losses) of the successor corporation prior to such consolidation,
merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Stock of
such Person.
"CONTINUING DIRECTOR" means a director who either was a member of the Board of
Directors of the Company on the Issue Date or who became a director of the
Company subsequent to the Issue Date and whose election, or nomination for
election by the Company's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Company, either by a
specific vote or by approval of the proxy statement issued by the Company on
behalf of the entire Board of Directors of the Company in which such individual
is named as nominee for director.
"DEFAULT" means any event that is, or after notice or lapse of time or both
would become, an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Credit Facility
is outstanding, the Senior Indebtedness incurred under the Senior Credit
Facility and (ii) thereafter, any other Senior Indebtedness which has at the
time of initial issuance an aggregate outstanding principal amount in excess of
$15 million which has been designated as Designated Senior Indebtedness by the
Board of Directors of the Company at the time of initial issuance in a
resolution delivered to the Trustee.
"DISQUALIFIED STOCK" of any Person means any Capital Stock of such Person which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the final maturity of the Notes.
"ELIGIBLE ACCOUNTS RECEIVABLE" means the face value of all "eligible
receivables" of the Company and its Subsidiaries party to any credit agreement
constituting the Senior Credit Facility (as such term is defined for purposes of
such credit agreement).
"ELIGIBLE INVENTORY" means the face value of all "eligible inventory" of the
Company and its Subsidiaries party to any credit agreement constituting the
Senior Credit Facility (as such term is defined for purposes of such credit
agreement).
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and the
rules and regulations promulgated by the Commission thereunder.
"GAAP" means generally accepted accounting principles, consistently applied, as
in effect on the Issue Date in the United States of America, as set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as is approved by a significant segment of the accounting
profession.
"GUARANTEE" by any Person means any obligation, contingent or otherwise, of such
Person guaranteeing any Indebtedness of any other Person (the "primary obligor")
in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such Indebtedness, (ii) to purchase property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of such
Indebtedness, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness (and "guaranteed,"
"guaranteeing" and "guarantor" shall have meanings correlative to the
foregoing); PROVIDED, HOWEVER, that the guarantee by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"GUARANTEE" means the guarantee of the Notes by each Guarantor under the
Indenture.
"GUARANTOR SENIOR INDEBTEDNESS" means, with respect to any Guarantor, at any
date, (i) the maximum amount of all Indebtedness of such Guarantor under the
Senior Credit Facility, including principal, premium, if any, and interest on
such Indebtedness and all other amounts due on or in connection with such
Indebtedness including all charges, fees and expenses (without regard to any
limitation set forth in the terms thereof and whether or not such Indebtedness
is invalidated or set aside or otherwise legally unenforceable, unless due to
willful misconduct or bad faith on the part of the lenders under the Senior
Credit Facility or their agent), (ii) all other Indebtedness of such Guarantor
for borrowed money, including principal, premium, if any, and interest on such
Indebtedness, unless the instrument under which such Indebtedness of such
Guarantor for borrowed money is created, incurred, assumed or guaranteed
expressly provides that such Indebtedness for borrowed money is not senior or
superior in right of payment to the Guarantee of such Guarantor, and all
renewals, extensions, modifications, amendments or refinancings thereof and
(iii) all interest on any Indebtedness referred to in clauses (i) and (ii)
during the pendency of any bankruptcy or insolvency proceeding, whether or not
allowed thereunder. Notwithstanding the foregoing, Guarantor Senior Indebtedness
shall not include (a) Indebtedness which is pursuant to its terms or any
agreement relating thereto or by operation of law subordinated or junior in
right of payment or otherwise to any other Indebtedness of such Guarantor
(without regard, with respect to the Senior Credit Facility, to any limitation
set forth in the terms thereof and other than, with respect to the Senior Credit
Facility, due to the legal invalidity thereof, unless due to the willful
misconduct or bad faith on the part of the lenders under the Senior Credit
Facility or their agent); PROVIDED, HOWEVER, that no Indebtedness of such
Guarantor shall be deemed to be subordinated or junior in right of payment or
otherwise to any other Indebtedness of such Guarantor solely by reason of such
other Indebtedness being secured and such Indebtedness not being secured, (b)
the Guarantees, (c) any Indebtedness of such Guarantor to any of its
Subsidiaries, (d) any Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of the Bankruptcy Code, is without recourse
to such Guarantor, and (e) any Indebtedness or other obligation of such
Guarantor pursuant to or in connection with any Qualified Securitization
Transaction (whether entered into before or after the Issue Date).
"GUARANTORS" means (i) each of Owens & Minor Medical, Inc., a Virginia
corporation; National Medical Supply Corporation, a Delaware corporation; Owens
& Minor West, Inc., a California corporation; Koley's Medical Supply, Inc., a
Nebraska corporation; Lyons Physician Supply Company, an Ohio corporation; A.
Kuhlman & Co., a Michigan corporation; and Stuart Medical, Inc., a Pennsylvania
corporation; and (ii) each Material Subsidiary (other than a Securitization
Subsidiary), whether formed or acquired after the Issue Date; PROVIDED, HOWEVER,
that any Material Subsidiary acquired after the Issue Date which is prohibited
from entering into a Guarantee pursuant to restrictions contained in any debt
instrument in existence at the time such Material Subsidiary was so acquired and
not entered into in anticipation or contemplation of such acquisition shall not
be required to become a Guarantor so long as any such restriction is in
existence and to the extent of any such restriction.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company (or is merged into or consolidates with the Company or any of its
Subsidiaries), whether or not such Indebtedness was incurred in
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<PAGE>
connection with, or in contemplation of, such Person becoming a Subsidiary of
the Company (or being merged into or consolidated with the Company or any of its
Subsidiaries), shall be deemed Incurred at the time any such Person becomes a
Subsidiary of the Company or merges into or consolidates with the Company or any
of its Subsidiaries.
"INDEBTEDNESS" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business which are not overdue or which are being contested
in good faith), (v) every Capital Lease Obligation of such Person, (vi) every
net obligation under interest rate swap or similar agreements or foreign
currency hedge, exchange or similar agreements of such Person and (vii) every
obligation of the type referred to in clauses (i) through (vi) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable for, directly or indirectly,
as obligor, guarantor or otherwise. Indebtedness shall include the liquidation
preference and any mandatory redemption payment obligations in respect of any
Disqualified Stock of the Company, and any Preferred Stock of a Subsidiary of
the Company. Indebtedness shall never be calculated taking into account any cash
and cash equivalents held by such Person. Indebtedness shall not include (A)
obligations of the Company or its Subsidiaries in respect of loans against life
insurance policies of which any of them is the owner not in excess of the
aggregate cash values thereof, (B) guarantees entered into prior to the Issue
Date by the Company or its Subsidiaries in respect of Indebtedness of their
customers in an aggregate amount of not more than $1 million or (C) the
obligations of the Company or its Subsidiaries in respect of any Qualified
Securitization Transaction.
"INITIAL SECURITIZATION" means the transactions entered into in connection with
the Amended and Restated Receivables Purchase Agreement dated as of May 28,
1996, among O&M Funding Corp., the Company, Receivables Capital Corporation and
Bank of America National Trust and Savings Association, as further amended,
restated, supplemented or otherwise modified from time to time.
"INVESTMENT" by any Person means any direct or indirect loan, advance, guarantee
or other extension of credit or capital contribution to (by means of transfers
of cash or other property to others or payments for property or services for the
account or use of others, or otherwise), or purchase or acquisition of Capital
Stock, bonds, notes, debentures or other securities or evidence of Indebtedness
issued by any other Person.
"ISSUE DATE" means the original issue date of the Notes.
"LIEN" means, with respect to any property or assets, any mortgage or deed of
trust, pledge, hypothecation, assignment, security interest, lien, charge,
easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, preference, priority or other security agreement
with respect to such property or assets (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"MATERIAL SUBSIDIARY" means any Subsidiary of the Company which would constitute
a "significant subsidiary" of the Company as defined in Rule 1.02 of Regulation
S-X promulgated by the Commission.
"NET AVAILABLE PROCEEDS" from any Asset Disposition by any Person means cash or
readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption by the acquiror of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form) therefrom by such Person, including any
cash received by way of deferred payment or upon the monetization or other
disposition of any non-cash consideration (including notes or other securities)
received in connection with such Asset Disposition, net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred and
all federal, state, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Subsidiaries on any Indebtedness which is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all payments made with
respect to liabilities associated with the assets which are the subject of the
Asset Disposition, including, without limitation, trade payables and other
accrued liabilities, (iv) appropriate amounts to be provided by such Person or
any Subsidiary thereof, as the case may be, as a reserve in accordance with GAAP
against any liabilities associated with such assets and retained by such Person
or any Subsidiary thereof, as the case may be, after such Asset Disposition,
including, without limitation, liabilities under any indemnification obligations
and severance and other employee
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<PAGE>
termination costs associated with such Asset Disposition, until such time as
such amounts are no longer reserved or such reserve is no longer necessary (at
which time any remaining amounts will become Net Available Proceeds to be
allocated in accordance with the provisions of clause (iii) of the covenant of
the Indenture described under " -- Covenants -- Limitation on Certain Asset
Dispositions") and (v) all distributions and other payments made to minority
interest holders in Subsidiaries of such Person or joint ventures as a result of
such Asset Disposition.
"O&M FUNDING CORP." means O&M Funding Corp., a Virginia corporation, and its
successors.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by the Company by
first class mail, postage prepaid, to each Holder at his address appearing in
the register for the Notes on the date of the Offer offering to purchase up to
the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be not less than 30
days nor more than 60 days after the date of such Offer and a settlement date
(the "Purchase Date") for purchase of Notes within five Business Days after the
Expiration Date. The Company shall notify the Trustee at least 15 Business Days
(or such shorter period as is acceptable to the Trustee) prior to the mailing of
the Offer of the Company's obligation to make an Offer to Purchase, and the
Offer shall be mailed by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. The Offer shall contain
all the information required by applicable law to be included therein. The Offer
shall contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase is
being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to Purchase)
(the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to
the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes registered in
the name of such Holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal amount;
(6) the place or places where Notes are to be surrendered for tender pursuant
to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased by the
Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and payable
upon each Note being accepted for payment pursuant to the Offer to Purchase
and that interest thereon shall cease to accrue on and after the Purchase
Date;
(9) that each Holder electing to tender all or any portion of a Note pursuant
to the Offer to Purchase will be required to surrender such Note at the
place or places specified in the Offer prior to the close of business on
the Expiration Date (such Note being, if the Company or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of Notes
tendered if the Company (or its Paying Agent) receives, not later than the
close of business on the fifth Business Day next preceding the Expiration
Date, a telegram, telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Note the Holder tendered,
the certificate number of the Note the Holder tendered and a statement that
such Holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, the Company shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a PRO RATA basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
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<PAGE>
(12) that in the case of any Holder whose Note is purchased only in part, the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with the
provisions above pertaining to any Offer.
"PERMITTED INVESTMENTS" means (i) Investments in marketable, direct obligations
issued or guaranteed by the United States of America, or any governmental entity
or agency or political subdivision thereof (PROVIDED, that the good faith and
credit of the United States of America is pledged in support thereof), maturing
within one year of the date of purchase; (ii) Investments in commercial paper
issued by corporations or financial institutions maturing within 180 days from
the date of the original issue thereof, and rated "P-1" or better by Moody's
Investors Service or "A-1" or better by Standard & Poor's Corporation or an
equivalent rating or better by any other nationally recognized securities rating
agency; (iii) Investments in certificates of deposit issued or acceptances
accepted by or guaranteed by any bank or trust company organized under the laws
of the United States of America or any state thereof or the District of
Columbia, in each case having capital, surplus and undivided profits totalling
more than $500,000,000, maturing within one year of the date of purchase; (iv)
Investments representing Capital Stock or obligations issued to the Company or
any of its Subsidiaries in the course of the good faith settlement of claims
against any other Person or by reason of a composition or readjustment of debt
or a reorganization of any debtor of the Company or any of its Subsidiaries; (v)
deposits, including interest-bearing deposits, maintained in the ordinary course
of business in banks; (vi) any acquisition of the Capital Stock of any Person;
PROVIDED, HOWEVER, that after giving effect to any such acquisition such Person
shall become a Subsidiary of the Company; (vii) trade receivables and prepaid
expenses, in each case arising in the ordinary course of business; PROVIDED,
HOWEVER, that such receivables and prepaid expenses would be recorded as assets
of such Person in accordance with GAAP; (viii) endorsements for collection or
deposit in the ordinary course of business by such Person of bank drafts and
similar negotiable instruments of such other Person received as payment for
ordinary course of business trade receivables; (ix) any interest swap or hedging
obligation with an unaffiliated Person otherwise permitted by the Indenture; (x)
Investments received as consideration for an Asset Disposition in compliance
with the provisions of the Indenture described under
" -- Covenants -- Limitation on Certain Asset Dispositions" above; (xi)
Investments for which the sole consideration provided is Capital Stock of the
Company (other than Disqualified Stock); (xii) loans and advances to employees
made in the ordinary course of business; (xiii) Investments outstanding on the
Issue Date; and (xiv) Investments made in any Securitization Subsidiary or
Special Purpose Vehicle in connection with and required pursuant to the terms of
any Qualified Securitization Transaction.
"PERSON" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PREFERRED STOCK", as applied to the Capital Stock of any Person, means Capital
Stock of such Person of any class or classes (however designated) that ranks
prior, as to the payment of dividends or as to the distribution of assets upon
any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"PURCHASE DATE" has the meaning set forth in the definition of "Offer to
Purchase" above.
"QUALIFIED SECURITIZATION TRANSACTION" means the Initial Securitization and any
other transaction or series of transactions that has been or may be entered into
by the Company or any of its Subsidiaries in connection with or reasonably
related to a transaction or series of transactions in which the Company or any
of its Subsidiaries may sell, convey or otherwise transfer to (i) a
Securitization Subsidiary or (ii) any other Person, or may grant a security
interest in, any Receivables and Receivables Related Assets or interests therein
secured by the merchandise or services financed thereby (whether such
Receivables and Receivables Related Assets are then existing or arising in the
future) of the Company or any of its Subsidiaries, and any assets related
thereto including, without limitation, all security interests in merchandise or
services financed thereby, all collections received (including recoveries) and
proceeds of such Receivables and Receivables Related Assets, and other assets
which are customarily sold or in respect of which security interests are
customarily granted in connection with securitization transactions involving
such assets.
"RECEIVABLES" means any right of payment, whether constituting an account,
chattel paper, instrument, general intangible or otherwise, arising in
connection with the sale, lease or financing by the Company or any Subsidiary of
the Company of merchandise or rendering of services, and monies due thereunder.
"RECEIVABLES RELATED ASSETS" means (i) any rights arising under the
documentation governing or relating to Receivables (including rights in respect
of Liens securing such Receivables and other credit support in respect of such
Receivables), (ii) any proceeds of such Receivables and any lockboxes or
accounts in which such proceeds are deposited, (iii) spread accounts and
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<PAGE>
other similar accounts (and any amounts on deposit therein) established in
connection with a Qualified Securitization Transaction, (iv) any warranty,
indemnity, dilution and other intercompany claim arising out of the
documentation evidencing such Qualified Securitization Transaction and (v) other
assets that are customarily transferred or in respect of which security
interests are customarily granted in connection with asset securitization
transactions involving accounts receivable.
"RELATED PERSON" of any Person means any other Person directly or indirectly
owning (a) 5% or more of the outstanding Common Stock of such Person (or, in the
case of a Person that is not a corporation, 5% or more of the equity interest in
such Person) or (b) 5% or more of the combined voting power of the Voting Stock
of such Person.
"SECURITIZATION SUBSIDIARY" means O&M Funding Corp. and any other Wholly Owned
Subsidiary of the Company which engages in no activities other than those
reasonably related to or in connection with the entering into of securitization
transactions and which is designated by the Board of Directors of the Company
(as provided below) as a Securitization Subsidiary provided that with respect to
O&M Funding Corp. or any such other Wholly Owned Subsidiary (a) no portion of
the indebtedness or any other obligations (contingent or otherwise) of any such
Subsidiary (i) is guaranteed by the Company or any other Subsidiary of the
Company other than pursuant to Standard Securitization Obligations, (ii) is
recourse to or obligates the Company or any other Subsidiary of the Company in
any way other than pursuant to Standard Securitization Obligations or (iii)
subjects the Company or any other Subsidiary of the Company, directly or
indirectly, contingently or otherwise, to any Lien or to the satisfaction
thereof, other than pursuant to Standard Securitization Obligations, (b) neither
the Company nor any other Subsidiary of the Company (i) provides any credit
support to or (ii) has any material contract, agreement, arrangement or
understanding no less favorable to the Company or such Subsidiary than could be
obtained from an unrelated person (other than, in the case of subclauses (i) and
(ii) of this clause (b), entered into in the ordinary course of business in
connection with a Qualified Securitization Transaction and intercompany notes
relating to the sale of Receivables to such Securitization Subsidiary) with any
such Subsidiary and (c) neither the Company nor any Subsidiary of the Company
has any obligation to maintain or preserve the financial condition of any such
Subsidiary or to cause such entity to achieve certain levels of operating
results. Any such designation by the Board of Directors of the Company (other
than with respect to O&M Funding Corp.) shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the resolutions of the Board of
Directors of the Company giving effect to such designation.
"SENIOR CREDIT FACILITY" means the Credit Agreement, dated as of May 24, 1996,
among the Company as borrower thereunder, any Subsidiaries of the Company as
guarantors thereunder and NationsBank, N.A., as agent on behalf of itself and
the other lenders named therein, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor whether by or with
the same or any other lender, creditors, group of lenders or group of creditors
and including related notes, guarantee agreements and other instruments and
agreements executed in connection therewith.
"SENIOR INDEBTEDNESS" means, at any date, (i) all Indebtedness of the Company
under the Senior Credit Facility, including principal, premium, if any, and
interest on such Indebtedness and all other amounts due on or in connection with
such Indebtedness including all charges, fees and expenses, (ii) all other
Indebtedness of the Company for borrowed money, including principal, premium, if
any, and interest on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is created, incurred, assumed or
guaranteed expressly provides that such Indebtedness for money borrowed is not
senior or superior in right of payment to the Notes, and all renewals,
extensions, modifications, amendments or refinancings thereof and (iii) all
interest on any Indebtedness referred to in clauses (i) and (ii) accruing during
the pendency of any bankruptcy or insolvency proceeding, whether or not allowed
thereunder. Notwithstanding the foregoing, Senior Indebtedness shall not include
(a) Indebtedness which is pursuant to its terms or any agreement relating
thereto or by operation of law subordinated or junior in right of payment or
otherwise to any other Indebtedness of the Company; PROVIDED, HOWEVER, that no
Indebtedness of the Company shall be deemed to be subordinate or junior in right
of payment or otherwise to any other Indebtedness of the Company solely by
reason of such other Indebtedness being secured and such Indebtedness not being
secured, (b) the Notes, (c) any Indebtedness of the Company to any Subsidiary of
the Company, (d) any Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of the Bankruptcy Code, is without recourse
to the Company, and (e) any Indebtedness or other obligation of the Company
pursuant to or in connection with any Qualified Securitization Transaction
(whether entered into before or after the Issue Date).
"SPECIAL PURPOSE VEHICLE" means a trust, partnership or other entity established
by the Company or its Subsidiaries to implement a Qualified Securitization
Transaction.
"STANDARD SECURITIZATION OBLIGATIONS" means representations, warranties,
covenants and indemnities (including those related to servicing) entered into by
the Company or any Subsidiary which are reasonably customary in Qualified
Securitization Transactions.
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"SUBSIDIARY" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more other Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and voting power relating to the
policies, management and affairs thereof; PROVIDED, HOWEVER, that any Special
Purpose Vehicle shall not be a Subsidiary of the Company for purposes of the
Indenture.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended.
"VOTING STOCK" of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person all of
the outstanding Capital Stock or other ownership interests of which (other than
directors' qualifying shares) shall at the time be owned by such Person or by
one or more Wholly Owned Subsidiaries of such Person or by such Person and one
or more Wholly Owned Subsidiaries of such Person.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated May 23, 1996 (the "Underwriting Agreement"), J.P. Morgan
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
NationsBanc Capital Markets, Inc., Wheat, First Securities, Inc., Davenport &
Co. of Virginia, Inc. and Scott & Stringfellow, Inc. (collectively, the
"Underwriters") have severally agreed to purchase from the Company, and the
Company has agreed to sell to them, severally, the principal amount of Notes set
forth opposite their names below. Under the terms and conditions of the
Underwriting Agreement, the Underwriters are obligated to take and pay for the
entire principal amount of the Notes, if any Notes are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C>
J.P. Morgan Securities Inc. $ 70,500,000
Donaldson, Lufkin & Jenrette Securities Corporation 49,350,000
NationsBanc Capital Markets, Inc. 14,100,000
Wheat, First Securities, Inc. 7,050,000
Davenport & Co. of Virginia, Inc. 6,300,000
Scott & Stringfellow, Inc. 2,700,000
Total $150,000,000
</TABLE>
The Underwriters propose initially to offer the Notes directly to the public at
the price set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession not in excess of 0.275% of the principal amount
of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of 0.100% of the principal amount of the Notes to
certain other dealers. After the initial public offering of the Notes, the
initial public offering price and such concessions may be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Although the Notes have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, there is currently no trading
market for the Notes. The Company has been advised by the Underwriters that the
Underwriters currently intend to make a market in the Notes; however, the
Underwriters are not obligated to do so and may discontinue any such market
making at any time without notice. No assurance can be given as to the
development or liquidity of any trading market for the Notes.
Certain of the Underwriters or their affiliates have provided investment banking
and other financial services for the Company in the past and may do so in the
future.
NationsBank, N.A., an affiliate of NationsBanc Capital Markets, Inc., is a
lender, an Agent and the Administrative Agent under the Senior Credit Facility
and has received customary fees for acting in such capacities. NationsBank, N.A.
will be a lender, an Agent and the Administrative Agent under the New Senior
Credit Facility and will receive customary fees for acting in such capacities.
Upon application of the net proceeds of the Offering as described under "Use of
Proceeds and Refinancing," NationsBank, N.A. will receive in excess of 10% of
the net proceeds of the Offering. Pursuant to paragraph (c)(8) of Article III,
Section 44 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), such receipt by NationsBank, N.A.
requires that the Offering be made in compliance with certain requirements of
Schedule E ("Schedule E") to the Bylaws of the NASD. In this regard, the
Offering is being made pursuant to such paragraph (c)(8) and will comply with
such requirements of Schedule E, and Wheat, First Securities, Inc. will act as
"qualified independent underwriter" within the meaning of Schedule E and is
assuming the responsibilities of acting as a qualified independent underwriter
in pricing the Offering and conducting due diligence.
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LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia. Certain legal matters in connection with the Notes
offered hereby will be passed upon for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New
York. Cahill Gordon & Reindel will rely as to all matters of Virginia law on the
opinion of Hunton & Williams.
EXPERTS
The consolidated financial statements and schedule of Owens & Minor, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, have been included and incorporated
by reference herein and elsewhere in the Registration Statement in reliance upon
the reports of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
and incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
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<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Audited Financial Statements
Independent Auditors' Report......................................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994......................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994
and 1993........................................................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994
and 1993........................................................................................................... F-5
Notes to Consolidated Financial Statements........................................................................... F-6
Unaudited First Quarter 1996 Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995............................................... F-18
Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995............................. F-19
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995............................. F-20
Notes to Consolidated Financial Statements........................................................................... F-21
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Owens & Minor, Inc.:
We have audited the accompanying consolidated balance sheets of Owens & Minor,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations and cash flows for each of the years in
the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Owens & Minor, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 2, 1996 except as to Note 7,
which is as of March 1, 1996
F-2
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents $ 215 $ 513
Accounts and notes receivable, net of allowance of
$6,010 in 1995 and $5,340 in 1994 265,238 290,240
Merchandise inventories 326,380 323,851
Other current assets 32,069 26,222
Total current assets 623,902 640,826
Property and equipment, net 39,049 38,620
Excess of purchase price over net assets acquired, net 171,911 175,956
Other assets, net 22,941 13,158
Total assets $857,803 $868,560
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 4,055 $ 236
Accounts payable 241,048 296,878
Accrued payroll and related liabilities 5,534 11,294
Other accrued liabilities 41,602 50,630
Total current liabilities 292,239 359,038
Long-term debt 323,308 248,427
Accrued pension and retirement plans 6,985 4,919
Total liabilities 622,532 612,384
Shareholders' equity:
Preferred stock, par value $100 per share; authorized -- 10,000 shares
Series A; Participating Cumulative Preferred Stock; none issued -- --
Series B; Cumulative Preferred Stock; 4.5%, convertible; issued -- 1,150 shares 115,000 115,000
Common stock, par value $2 per share; authorized -- 200,000 shares; issued -- 30,862 shares
in 1995 and 30,764 shares in 1994 61,724 61,528
Paid-in capital 2,144 1,207
Retained earnings 56,403 78,441
Total shareholders' equity 235,271 256,176
Total liabilities and shareholders' equity $857,803 $868,560
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
(In thousands, except per share data)
Net sales $2,976,486 $2,395,803 $1,396,971
Cost of goods sold 2,708,668 2,163,459 1,249,660
Gross margin 267,818 232,344 147,311
Selling, general and administrative expenses 225,897 165,564 107,771
Depreciation and amortization 15,416 13,034 7,593
Interest expense, net 25,538 10,155 1,530
Discount on accounts receivable securitization 641 -- --
Nonrecurring restructuring expenses 16,734 29,594 --
Total expenses 284,226 218,347 116,894
Income (loss) before income taxes (16,408) 13,997 30,417
Income tax provision (benefit) (5,100) 6,078 11,900
Income (loss) from continuing operations (11,308) 7,919 18,517
Discontinued operations -- -- 911
Cumulative effect of change in accounting principle -- -- 706
Net income (loss) (11,308) 7,919 20,134
Dividends on preferred stock 5,175 3,309 --
Net income (loss) attributable to common stock $ (16,483) $ 4,610 $ 20,134
Net income (loss) per common share:
Continuing operations $ (.53) $ .15 $ .60
Discontinued operations -- -- .03
Cumulative effect of change in accounting principle -- -- .02
Net income (loss) per common share $ (.53) $ .15 $ .65
Cash dividends per common share $ .18 $ .17 $ .14
Weighted average common shares and common share equivalents 30,820 31,108 31,013
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
(In thousands)
Operating Activities
Net income (loss) $ (11,308) $ 7,919 $ 20,134
Adjustments to reconcile net income to cash used for operating activities
Depreciation and amortization 15,416 13,034 7,593
Provision for losses on accounts and notes receivable 827 1,149 497
Provision for LIFO reserve 3,700 671 661
Gain on disposals of business segments, net -- -- (911)
Cumulative effect of change in accounting principle -- -- (706)
Other, net 2,581 1,093 897
Change in operating assets and liabilities, net of effects from acquisitions
Accounts and notes receivable 24,175 (144,917) (23,424)
Merchandise inventories (6,229) (81,318) (28,232)
Accounts payable (17,107) 22,375 13,307
Net change in other current assets and current liabilities (18,753) 25,323 (258)
Other, net (4,732) 790 431
Cash used for operating activities (11,430) (153,881) (10,011)
Investing Activities
Business acquisitions, net of cash acquired -- (40,608) (2,416)
Additions to property and equipment (13,876) (6,634) (6,288)
Additions to computer software (7,396) (1,586) (3,453)
Proceeds from sale of property and equipment 3,597 73 76
Cash used for investing activities (17,675) (48,755) (12,081)
Financing Activities
Additions to long-term debt 77,970 197,088 37,000
Reductions of long-term debt (242) (55,032) (17,471)
Other short-term financing, net (38,723) 65,426 765
Cash dividends paid (10,730) (7,664) (4,222)
Exercise of stock options 532 1,283 1,000
Cash provided by financing activities 28,807 201,101 17,072
Net decrease in cash and cash equivalents (298) (1,535) (5,020)
Cash and cash equivalents at beginning of year 513 2,048 7,068
Cash and cash equivalents at end of year $ 215 $ 513 $ 2,048
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies
Basis of Presentation
Owens & Minor, Inc. is one of the two largest distributors of medical/surgical
supplies in the United States. The consolidated financial statements include the
accounts of Owens & Minor, Inc. and its wholly owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated. The
preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management assumptions and
estimates that affect amounts reported. Actual results may differ from these
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and marketable securities with an
original maturity or maturity at acquisition of three months or less. Cash and
cash equivalents are stated at cost, which approximates market value.
Merchandise Inventories
As of December 31, 1995, the Company's merchandise inventories were valued on a
last-in, first-out (LIFO) basis. At December 31, 1994, 64% of the Company's
inventories was valued on a LIFO basis with the remainder valued on a first-in,
first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost or, if acquired under capital leases,
at the lower of the present value of minimum lease payments or fair market value
at the inception of the lease. Normal maintenance and repairs are expensed as
incurred, and renovations and betterments are capitalized. Depreciation and
amortization are provided for financial reporting purposes on the straight-line
method over the estimated useful lives of the assets or, for capital leases and
leasehold improvements, over the terms of the lease, if shorter. In general, the
estimated useful lives for computing depreciation and amortization are: 40 years
for buildings and improvements; 4 to 8 years for warehouse equipment; and 3 to 8
years for computer, office and other equipment. Accelerated methods of
depreciation are used for income tax purposes.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired (goodwill) is amortized on
a straight-line basis over 40 years from the dates of acquisition. As of
December 31, 1995 and 1994, goodwill was $181,118 and $180,615, respectively,
and the related accumulated goodwill amortization was $9,207 and $4,659,
respectively. Based upon management's assessment of future cash flows of
acquired businesses, the carrying value of goodwill at December 31, 1995 has not
been impaired. The assessment of the recoverability of goodwill will be impacted
if estimated future cash flows are not achieved.
Computer Software
The Company's computer software expenditures are applicable to software for
internal use. Certain software development costs are capitalized when incurred
and only after technological feasibility has been established. Technological
feasibility is determined based upon completion of a detailed program design,
or, if such is not pursued, then a product design and a working model.
Amortization of all capitalized software costs begins after the software is
available for use in the Company's operations and is computed on a
product-by-product basis over the estimated economic life of the product from 3
to 5 years. Computer software costs are included in other assets, net, in the
Consolidated Balance Sheets. Unamortized software at December 31, 1995 and 1994
was $8,600 and $3,500, respectively. Depreciation and amortization expense
includes $2,200, $2,000 and $700, respectively, of software amortization for the
years ended December 31, 1995, 1994 and 1993.
F-6
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(1) Summary of Significant Accounting Policies -- Continued
Revenue Recognition
Revenue from product sales is generally recognized at the time the product is
shipped. Service revenue is recognized over the contractual period as the
services are performed.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing the net income (loss)
attributable to common stock by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period. The
convertible preferred stock is considered a common stock equivalent; however, it
has been excluded from the number of weighted average shares due to the dilutive
effect of the preferred dividend. The assumed conversion of all convertible
debentures has not been included in the computation because the resulting
dilution is not material.
Derivative Financial Instruments
The Company enters into interest rate swap and cap agreements to manage interest
rate risk of variable rate debt and not for trading purposes. The differences
paid or received on the interest rate swaps and the amortization of the cap fees
are included in interest expense.
Reclassifications
Certain amounts in prior years' consolidated financial statements and related
notes have been reclassified to conform to the 1995 presentation.
(2) Business Acquisitions and Divestitures
On May 10, 1994, the Company paid an aggregate purchase price of $155,200,
consisting of $40,200 in cash and 1,150 shares of 4.5%, $100 par value, Series B
Cumulative Preferred Stock, for all the capital stock of Stuart Medical, Inc.
(Stuart), a distributor of medical/surgical supplies. The Series B Cumulative
Preferred Stock is convertible into approximately 7,000 shares of common stock.
The transaction was accounted for as a purchase and, accordingly, the operating
results of Stuart have been included in the Company's consolidated operating
results since May 1, 1994. The purchase price exceeded the net assets acquired
by approximately $159,000, which is being amortized on a straight-line basis
over 40 years.
The following unaudited pro forma results of operations for the years ended
December 31, 1994 and 1993 assume the Stuart acquisition occurred January 1,
1993. The amounts reflect adjustments, such as increased interest expense on
acquisition debt, amortization of the excess of purchase price over net assets
acquired, reversal of nonrecurring restructuring expenses and related income tax
effects.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
<S> <C> <C>
Net sales $2,718,000 $2,331,000
Net income $ 28,100 $ 24,200
Net income per common share $ .74 $ .62
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the Stuart acquisition had been in effect for both years presented.
In addition, they are not intended to be a projection of future results. As part
of the Stuart acquisition, the Company initiated a plan to close certain
facilities and terminate certain employees of the former Stuart operations. The
costs of this plan were included as a liability assumed from the acquisition and
included in the allocation of the purchase price. During 1995, the Company
incurred substantially all of the costs of exiting the former Stuart operations
and charged approximately $6,500 against established acquisition liabilities.
On October 1, 1994, the Company acquired substantially all the assets of Emery
Medical Supply, Inc. (Emery) of Denver, Colorado for cash. The acquisition was
accounted for as a purchase with the results of Emery included from the
acquisition date.
F-7
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(2) Business Acquisitions and Divestitures -- Continued
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.
In 1993, the Company issued 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 1993
consolidated financial statements include the activity of Lyons as of January 1,
1993. Also in 1993, the Company acquired all the outstanding common stock of A.
Kuhlman & Co. (Kuhlman) of Detroit, Michigan. The acquisition was accounted for
as a purchase with the results of Kuhlman included from the acquisition date.
The cost of the acquisition was approximately $2,900 and exceeded the net assets
acquired by approximately $1,700. 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.
The Company periodically re-evaluates the adequacy of its accruals associated
with the 1992 discontinued operations related to its wholesale drug and
specialty packaging segments. Accordingly, in 1993, the Company decreased its
loss provision for discontinued operations by $911, net of taxes, based on
settlement of previously established liabilities and changes in prior estimates
of expenses.
(3) Nonrecurring Restructuring Expenses
During 1995 and 1994, the Company incurred $16,734 and $29,594, respectively, of
nonrecurring restructuring expenses related to two restructuring plans. Under
the first plan, the Company incurred $13,189 and $29,594 in 1995 and 1994,
respectively, of nonrecurring restructuring expenses in connection with the
Stuart acquisition and the Company's related decision to contract out the
management and operation of its mainframe computer system. These expenses were
comprised primarily of duplicate facility costs (approximately $9,300 and
$15,200 in 1995 and 1994, respectively), including the costs of maintaining
duplicate personnel and duplicate locations and the costs of converting Stuart
divisions to the Company's systems and processes; costs associated with
redesigning and implementing processes and systems that optimize warehouse
resources and revising existing processes and systems to utilize the most
efficient practices of both companies to increase efficiencies within the
combined company (approximately $3,900 and $7,100 in 1995 and 1994,
respectively), including the development of both a client/server strategy and
the requirements for forecasting and warehouse management systems, both
necessary to accomodate the needs of the combined companies; and costs
associated with the conversion to an outsourced mainframe computer
(approximately $7,300 in 1994), including the cost of terminating leases and the
incremental costs of transferring software licenses. The nonrecurring expenses
include non-cash asset write-downs of approximately $3,200 in 1994 and accrued
liabilities of $1,418 and $2,100 at December 31, 1995 and 1994, respectively.
Under the second plan, which was implemented in December 1995, the Company
incurred $3,545 of nonrecurring restructuring expenses in connection with the
closing of two distribution centers and the downsizing of five distribution
centers. These expenses were comprised primarily of costs associated with a
reduction of employees (approximately $1,700), the write-down of non-cash assets
(approximately $900) and other related exit costs (approximately $900). At
December 31, 1995, the associated accrued liability balance was $2,631.
(4) Merchandise Inventories
As of December 31, 1995, all of the Company's merchandise inventories were
valued on a last-in, first-out (LIFO) basis. If LIFO inventories had been valued
on a current cost or first-in, first-out (FIFO) basis, they would have been
greater by $21,991, $18,291 and $17,620 in 1995, 1994 and 1993, respectively. In
1995, the Company recorded a $2,000 provision for specifically identified
slow-moving inventory.
F-8
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(5) Property and Equipment
The Company's investment in property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Warehouse equipment $ 22,489 $ 17,375
Computer equipment 19,056 14,056
Office equipment and other 11,138 10,234
Land and buildings 9,891 13,589
Leasehold improvements 7,100 6,891
69,674 62,145
Accumulated depreciation and amortization (30,625) (23,525)
Property and equipment, net $ 39,049 $ 38,620
</TABLE>
Depreciation expense for property and equipment for 1995, 1994 and 1993 was
$8,523, $7,704 and $6,368, respectively.
(6) Accounts Payable
Accounts payable balances were $241,048 and $296,878 as of December 31, 1995 and
1994, respectively, of which $192,742 and $209,849, respectively, were trade
accounts payable and $48,306 and $87,029, respectively, were drafts payable.
Drafts payable are checks written in excess of bank balances to be funded upon
clearing the bank.
(7) Long-Term Debt and Refinancing
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Revolving credit notes under Senior Credit Agreement $313,300 $235,300
0% Subordinated Note 10,008 9,067
Convertible Subordinated Debenture 3,333 3,333
Other 722 963
327,363 248,663
Current maturities (4,055) (236)
Long-term debt $323,308 $248,427
</TABLE>
Concurrently with the Stuart acquisition in 1994, the Company entered into a
$350,000 Senior Credit Agreement with interest based on, at the Company's
discretion, the London Interbank Offered Rate (LIBOR) or the Prime Rate. The
proceeds were used to fund the $40,200 cash paid in the acquisition, repay
certain long-term indebtedness of Stuart and fund working capital requirements.
On February 28, 1995, the Senior Credit Agreement was amended to provide an
increase in principal amount up to $425,000. The proceeds from the increase were
used primarily to fund the Company's working capital and capital expenditure
needs. Under certain provisions of the Senior Credit Agreement, the Company is
required to maintain tangible net worth, liquidity and cash flow at specified
levels. The Senior Credit Agreement also limits the amount of indebtedness the
Company may incur. The Senior Credit Agreement expires in April 1999. In October
1995 and in the first quarter of 1996, the Company sought and obtained waivers
of non-compliance with, and amendments to, certain financial covenants included
in the Senior Credit Agreement.
During 1995 and 1994, the Company entered into interest rate swap and cap
agreements to reduce the potential impact of increases in interest rates under
the Senior Credit Agreement. Under the swap agreements, the Company pays the
counterparties a fixed interest rate, ranging from 6.35%-7.72%, and the
counterparties pay the Company interest at a variable rate based on either the
three-month or the six-month LIBOR. The differences paid or received on the
interest rate swaps and the amortization of the cap fees are included in
interest expense, net. The total notional amount of the interest rate swaps was
$105,000 at
F-9
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(7) Long-Term Debt and Refinancing -- Continued
December 31, 1995 and $55,000 at December 31, 1994, and the term of the
agreements ranged from two to three years. Under the interest rate cap
agreements, the Company receives from the counterparties amounts by which the
three-month LIBOR exceeds 6.5% based on the notional amounts of the cap
agreements which totaled $20,000 at December 31, 1995 and 1994. The term of
these agreements is two years. The Company is exposed to certain losses in the
event of nonperformance by the counterparties to these agreements. However, the
Company's exposure is not material and nonperformance is not anticipated. Based
on estimates of the prices obtained from a dealer at which the interest rate
swap and cap agreements could be settled, the Company had unrealized losses of
approximately $2,984 and $48, respectively, as of December 31, 1995, and
unrealized gains of approximately $1,547 and $266, respectively, as of December
31, 1994.
On May 31, 1989, the Company issued an $11,500, 0% Subordinated Note and a
$3,500, 6.5% Convertible Subordinated Debenture to partially finance the
acquisition of National Healthcare and Hospital Supply Corporation. The 0%
Subordinated Note due May 31, 1997 was discounted for financial reporting
purposes at an effective rate of 10.4% to $5,215 on the date of issuance. In
1994, the 6.5% Convertible Subordinated Debenture was exchanged for a $3,333,
9.1% Convertible Subordinated Debenture due May 1996 which is convertible into
approximately 867 common shares. The Company can redeem all or any portion of
the convertible debenture without penalty.
Based on the borrowing rates currently available to the Company for 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, was approximately $327,977 as of December 31, 1995.
On December 28, 1995, the Company entered into a Receivables Financing Facility
(Receivables Financing) pursuant to which a subsidiary of the Company is
entitled to transfer, without recourse, certain of the Company's trade
receivables and to receive up to $75,000 from an unrelated third party purchaser
at a cost of funds at commercial paper rates plus a charge for administrative
and credit support services. As of December 31, 1995, the Company had received
approximately $59,300 under the Receivables Financing, the proceeds of which
were used to reduce amounts outstanding under the Senior Credit Agreement. Prior
to the Company's obtaining waivers in the first quarter of 1996 related to the
Company's non-compliance with certain Senior Credit Agreement covenants, such
non-compliance could have prevented further use by the Company of the
Receivables Financing and certain interest rate swap and cap agreements entered
into by the Company with respect to borrowings under the Senior Credit
Agreement.
Net interest expense includes finance charge income of $3,800, $2,000 and $1,400
in 1995, 1994 and 1993, respectively. Finance charge income represents payments
from customers for past due balances on their accounts. Cash payments for
interest during 1995, 1994 and 1993 were $28,955, $9,831 and $2,341,
respectively.
Maturities of long-term debt for the five years subsequent to 1995 are:
1996 -- $4,055; 1997 -- $10,008; 1998 -- $0; 1999 -- $313,300; and 2000 -- $0.
(8) Retirement Plans
Pension and Retirement Plan
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 34 shares as of December 31, 1995 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.
F-10
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(8) Retirement Plans -- Continued
The following table sets forth the plans' financial status and the amounts
recognized in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
December 31,
Pension Plan Retirement Plan
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations
Vested $(15,092) $(12,302) $(1,256) $(1,195)
Non-vested (1,580) (939) (1,384) (1,018)
Total accumulated benefit obligations (16,672) (13,241) (2,640) (2,213)
Additional amounts related to projected salary increases (2,298) (1,446) (1,937) (1,366)
Projected benefit obligations for service rendered to date (18,970) (14,687) (4,577) (3,579)
Plan assets at fair market value 14,741 12,696 -- --
Plan assets under projected benefit obligations (4,229) (1,991) (4,577) (3,579)
Unrecognized net loss from past experience 1,793 1,058 1,702 1,108
Unrecognized prior service cost (benefit) 334 407 (20) (22)
Unrecognized net (asset) obligation being recognized over 11 and 17 years,
respectively (107) (214) 287 328
Adjustment required to recognize minimum liability under SFAS 87 -- -- (31) (49)
Accrued pension liability $ (2,209) $ (740) $(2,639) $(2,214)
</TABLE>
The components of net periodic pension cost for both plans are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 1,865 $ 1,314 $ 1,146
Interest cost on projected benefit obligations 1,425 1,232 1,056
Actual (return) loss on plan assets (2,521) 436 (1,450)
Net amortization and deferral 1,470 (1,462) 453
Net periodic pension cost $ 2,239 $ 1,520 $ 1,205
</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 were assumed to be 7.5% and 5.5% for 1995, respectively, and 8.0%
and 5.5% for 1994, respectively. The expected long-term rate of return on plan
assets was 8.5% for both 1995 and 1994.
Other Retirement Benefits
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 unfunded and is
contributory with retiree contributions adjusted annually.
F-11
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(8) Retirement Plans -- Continued
The following table sets forth the plan's financial status and the amount
recognized in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (329) $ (246)
Fully eligible active plan participants (837) (590)
Other active plan participants (919) (1,391)
Accumulated postretirement benefit obligation (2,085) (2,227)
Unrecognized net (gain) loss from past experience (52) 262
Accrued postretirement benefit liability $(2,137) $(1,965)
</TABLE>
The components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
1995 1994 1993
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 275 $206 $142
Interest cost on accumulated postretirement benefit obligation 152 160 122
Net amortization (120) 6 --
Net periodic postretirement benefit cost $ 307 $372 $264
</TABLE>
For measurement purposes, a 12.0% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 1995; the rate was assumed to
decrease gradually to 6.0 % for the year 2001 and remain at that level
thereafter. The healthcare cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed healthcare cost
trend rate by 1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $139 and the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for the year then ended by $42. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5 % for 1995 and 8.0% for 1994.
The Company maintains a voluntary Savings and Protection Plan covering
substantially all full-time employees who have completed six months of service
and have attained age 18. The Company matches a certain percentage of each
employee's contribution. The Company incurred approximately $1,100 and $700 in
1995 and 1994, respectively, of expenses related to this plan.
(9) Shareholders' Equity
On May 10, 1994, the Company issued 1,150 shares of Series B preferred stock as
part of the Stuart acquisition. Each share of preferred stock has an annual
dividend of $4.50, payable quarterly, has voting rights on items submitted to a
vote of the holders of common stock, is convertible into approximately 6.1
shares of common stock at the shareholders' option and is redeemable by the
Company after April 1997 at a price of $100.
F-12
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(9) Shareholders' Equity -- Continued
The changes in common stock, paid-in capital and retained earnings are shown as
follows:
<TABLE>
<CAPTION>
Common
Shares Common Paid-in Retained
Outstanding Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992 19,596 $39,191 $ 8,007 $69,461 $116,659
Common stock issued for incentive plan 31 62 387 -- 449
Proceeds from exercised stock options, including tax benefits
realized of $495 119 239 1,256 -- 1,495
Net income -- -- -- 20,134 20,134
Common stock cash dividends ($.14 per share) -- -- -- (4,222) (4,222)
Acquisition related payout 63 126 797 -- 923
Pooling of interests with Lyons Physician Supply Co. 476 951 (1,189) 1,743 1,505
Balance December 31, 1993 20,285 40,569 9,258 87,116 136,943
Stock split (three-for-two) 10,203 20,407 (12,343) (8,064) --
Common stock issued for incentive plan 24 48 515 -- 563
Proceeds from exercised stock options, including tax benefits
realized of $761 189 379 1,665 -- 2,044
Net income -- -- -- 7,919 7,919
Common stock cash dividends ($.17 per share) -- -- -- (5,221) (5,221)
Preferred stock cash dividends ($4.50 per share) -- -- -- (3,309) (3,309)
Acquisition related payout 63 125 2,112 -- 2,237
Balance December 31, 1994 30,764 61,528 1,207 78,441 141,176
Common stock issued for incentive plan 34 68 416 -- 484
Proceeds from exercised stock options, including tax benefits
realized of $117 64 128 521 -- 649
Net loss -- -- -- (11,308) (11,308)
Common stock cash dividends ($.18 per share) -- -- -- (5,555) (5,555)
Preferred stock cash dividends ($4.50 per share) -- -- -- (5,175) (5,175)
Balance December 31, 1995 30,862 $61,724 $ 2,144 $56,403 $120,271
</TABLE>
A 3-for-2 stock split was distributed on June 8, 1994 to shareholders of record
as of May 24, 1994.
The Company has a shareholder rights agreement under which 8/27ths of a Right is
attendant to each outstanding share of common stock of the Company. Each full
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Cumulative Preferred Stock
(the Series A Preferred Stock), at an exercise price of $75 (the Purchase
Price). The Rights will become exercisable, if not earlier redeemed, only if a
person or group acquires 20% or more of the outstanding shares of the common
stock or announces a tender offer, the consummation of which would result in
ownership by a person or group of 20% or more of such outstanding shares. Each
holder of a Right, upon the occurrence of certain events, will become entitled
to receive, upon exercise and payment of the Purchase Price, Series A Preferred
Stock (or in certain circumstances, cash, property or other securities of the
Company or a potential acquirer) having a value equal to twice the amount of the
Purchase Price. The Rights will expire on April 30, 2004, if not earlier
redeemed.
(10) Stock Option Plans
Under the terms of the Company's stock option plans, 3,168 shares of common
stock have been reserved for future issuance at December 31, 1995. Options may
be designated as either Incentive Stock Options (ISOs) 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, 1995, there were 1,745
non-qualified and no ISOs issued and outstanding under the plans.
F-13
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(10) Stock Option Plans -- Continued
The changes in shares under outstanding options for each of the years in the
three-year period ended December 31, 1995 are as follows. All share and grant
price information is restated as stock splits occur.
<TABLE>
<CAPTION>
Shares Grant Price
<S> <C> <C>
Year ended December 31, 1995
Outstanding at beginning of year 1,742 $ 3.55-16.50
Granted 221 12.50-13.56
Exercised (64) 3.55- 9.33
Expired/cancelled (154) 8.33-16.50
Outstanding at end of year 1,745 $ 5.59-16.50
Exercisable 978
Shares available for additional grants 1,423
Year ended December 31, 1994
Outstanding at beginning of year 1,031 $ 3.55- 9.83
Granted 953 14.92-16.50
Exercised (227) 3.55- 9.83
Expired/cancelled (15) 8.33-15.42
Outstanding at end of year 1,742 $ 3.55-16.50
Exercisable 545
Shares available for additional grants 1,605
Year ended December 31, 1993
Outstanding at beginning of year 855 $ 3.53- 9.33
Granted 425 8.59- 9.83
Exercised (181) 3.53- 9.33
Expired/cancelled (68) 3.55- 9.33
Outstanding at end of year 1,031 $ 3.55- 9.83
Exercisable 443
Shares available for additional grants 2,545
</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, 1995, there were no SARs issued and outstanding.
(11) 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 was a favorable adjustment of $706
and is reported separately in the Consolidated Statement of Operations for the
year ended December 31, 1993.
F-14
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(11) Income Taxes -- Continued
The income tax provision (benefit) for continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current tax provision (benefit)
Federal $(13,009) $ 6,663 $10,405
State (172) 1,635 2,123
Total current provision (benefit) (13,181) 8,298 12,528
Deferred tax provision (benefit)
Federal 7,731 (1,816) (555)
State 350 (404) (73)
Total deferred provision (benefit) 8,081 (2,220) (628)
Income tax provision (benefit) $ (5,100) $ 6,078 $11,900
</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,
1995 1994 1993
<S> <C> <C> <C>
Federal statutory rate (34.0%) 35.0% 35.0%
Increases (reductions) in the rate resulting from:
State income taxes, net of federal income tax impact (3.3) 4.6 4.4
Nondeductible goodwill amortization 9.5 2.8 .5
Nontaxable income (4.5) -- --
Other, net 1.2 1.0 (.8)
Effective rate (31.1%) 43.4% 39.1%
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
Year Ended December
31,
1995 1994
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,794 $ 2,115
Accrued liabilities not currently deductible 6,802 10,912
Employee benefit plans 3,916 4,195
Merchandise inventories 1,836 1,190
Nonrecurring restructuring expenses 1,898 5,011
Property and equipment 318 --
Tax loss carryforward (net of valuation allowance of $650) 1,051 --
Other 612 3,606
Total deferred tax assets 19,227 27,029
Deferred tax liabilities:
Property and equipment -- 48
Leased assets -- 165
Other 1,589 1,097
Total deferred tax liabilities 1,589 1,310
Net deferred tax asset (included in other current assets
and other assets, net) $17,638 $25,719
</TABLE>
As of December 31, 1994, the Company had not recognized a valuation allowance
for its gross deferred tax asset. At December 31, 1995, management determined,
based on the Company's carryback and carryforward availability and other
factors, that it is appropriate to recognize a $650 valuation allowance for
state net operating losses. At December 31, 1995, the Company had net operating
losses for federal income tax purposes of $21,009, some of which are available
to offset federal taxable income as reported for tax
F-15
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(11) Income Taxes -- Continued
years 1994, 1993 and 1992, and the remainder of which will be available to
offset federal taxable income for future tax years until such losses expire in
2010. Based on the level of historical taxable income and projections of future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of existing valuation allowances
at December 31, 1995.
Cash payments for income taxes, including taxes on discontinued operations, for
1995, 1994 and 1993 were $6,058, $8,164 and $12,153, respectively.
(12) Commitments and Contingencies
The Company has a commitment through September 1998 to outsource the management
and operation of its mainframe computer. This committment is cancellable at any
time on 180 days prior notice and a minimum payment of $11,515. The Company also
has entered into noncancelable agreements to lease certain office and warehouse
facilities with remaining terms ranging from one to twelve years. Certain leases
include renewal options, generally for five-year increments. At December 31,
1995, future minimum annual payments under noncancelable agreements with
original terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Total
<S> <C>
1996 $15,909
1997 14,381
1998 13,287
1999 10,520
2000 7,655
Later years 19,388
Total minimum payments $81,140
</TABLE>
Minimum lease payments have not been reduced by minimum sublease rentals
aggregating $1,817 due in the future under noncancelable subleases.
Rent expense for the years ended December 31, 1995, 1994 and 1993 was $26,991,
$21,264 and $12,857, respectively.
The Company sold transportation equipment with a net book value of approximately
$407 in a sale/leaseback transaction in 1994. The gain realized in the sale
transaction totaling $1,328 has been deferred and is being credited to income as
a rent expense adjustment over the lease terms.
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. No single customer accounted for 10% or more
of the Company's net sales during 1995. Sales to member hospitals under contract
with VHA Inc. totaled $1,180,000 or approximately 40% of the Company's net sales
in 1995, $960,000 or approximately 40% of the Company's net sales in 1994 and
$460,000 or approximately 33% of the Company's net sales in 1993. As members of
a national healthcare network, VHA Inc. hospitals have incentive to purchase
from their primary selected distributor; however, they operate independently and
are free to negotiate directly with distributors and manufacturers.
F-16
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(13) Quarterly Financial Data (Unaudited)
The following table presents the summarized quarterly financial data for 1995
and 1994:
<TABLE>
<CAPTION>
1995
Quarter (a) 1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Net sales $747,095 $743,718 $739,021 $746,652
Gross margin 72,908 70,501 59,366 65,043
Net income (loss) 4,613 1,688 (8,601) (9,008)
Net income (loss) per common share $ .11 $ .01 $ (.32) $ (.33)
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter (a) 1st 2nd (b) 3rd 4th
<S> <C> <C> <C> <C>
Net sales $390,794 $581,763 $693,004 $730,242
Gross margin 39,126 56,809 66,234 70,175
Net income (loss) 4,756 (5,125) 1,486 6,802
Net income (loss) per common share $ .15 $ (.19) $ .01 $ .18
</TABLE>
(a) Results for all quarters in 1995 and the second, third and fourth quarters
in 1994 include nonrecurring restructuring charges as follows:
<TABLE>
<CAPTION>
1995
Quarter 1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Nonrecurring restructuring charges $2,661 $4,114 $4,656 $5,303
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter 1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Nonrecurring restructuring charges $ -- $18,617 $9,037 $1,940
</TABLE>
(b) Financial information for the second quarter of 1994 includes the results of
operations of Stuart commencing May 1994.
F-17
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March
31, December 31,
1996 1995
<S> <C> <C>
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents $ 295 $ 215
Accounts and notes receivable, net 269,628 265,238
Merchandise inventories 316,330 326,380
Other current assets 29,058 32,069
Total current assets 615,311 623,902
Property and equipment, net 38,014 39,049
Excess of purchase price over net assets acquired, net 170,775 171,911
Other assets, net 24,301 22,941
Total assets $848,401 $857,803
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 722 $ 4,055
Accounts payable 242,678 241,048
Accrued payroll and related liabilities 6,637 5,534
Other accrued liabilities 39,562 41,602
Total current liabilities 289,599 292,239
Long-term debt 313,206 323,308
Accrued pension and retirement plans 7,901 6,985
Total liabilities 610,706 622,532
Shareholders' equity:
Preferred stock, par value $100 per share; authorized -- 10,000 shares
Series A; Participating Cumulative Preferred Stock; none issued -- --
Series B; Cumulative Preferred Stock; 4.5%, convertible; issued -- 1,150 shares 115,000 115,000
Common stock, par value $2 per share; authorized -- 200,000 shares; issued -- 31,739 shares March
31, 1996 and 30,862 December 31, 1995 63,478 61,724
Paid-in capital 3,978 2,144
Retained earnings 55,239 56,403
Total shareholders' equity 237,695 235,271
Total liabilities and shareholders' equity $848,401 $857,803
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
(In thousands, except per share data)
Net sales $771,312 $747,095
Cost of goods sold 697,133 674,187
Gross margin 74,179 72,908
Selling, general and administrative expenses 61,040 53,561
Depreciation and amortization 3,930 3,516
Interest expense, net 5,800 5,391
Discount on accounts receivable securitization 744 --
Nonrecurring restructuring expenses -- 2,661
Total expenses 71,514 65,129
Income before income taxes 2,665 7,779
Income tax provision 1,146 3,166
Net income 1,519 4,613
Dividends on preferred stock 1,294 1,294
Net income attributable to common stock $ 225 $ 3,319
Net income per common share $ 0.01 $ 0.11
Cash dividends per common share $ 0.045 $ 0.045
Weighted average common shares and common share equivalents 31,140 31,087
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
(In thousands)
Operating Activities
Net income $ 1,519 $ 4,613
Adjustments to reconcile net income to cash provided by (used for) operating activities
Depreciation and amortization 3,930 3,516
Provision for losses on accounts and notes receivable 279 121
Provision for LIFO reserve 2,748 962
Other, net 566 559
Change in operating assets and liabilities
Accounts and notes receivable (4,669) (16,202)
Merchandise inventories 7,302 (30,868)
Accounts payable (2,464) (65,174)
Net change in other current assets and current liabilities 2,423 (4,157)
Other, net 985 (3,935)
Cash provided by (used for) operating activities 12,619 (110,565)
Investing Activities
Additions to property and equipment (1,249) (2,363)
Additions to computer software (2,483) (2,034)
Proceeds from sale of property and equipment 27 4
Cash used for investing activities (3,705) (4,393)
Financing Activities
Additions to long-term debt -- 74,696
Reductions of long-term debt (10,362) (59)
Other short-term financing, net 4,094 42,575
Cash dividends paid (2,683) (2,680)
Exercise of stock options 117 174
Cash provided by (used for) financing activities (8,834) 114,706
Net increase (decrease) in cash and cash equivalents 80 (252)
Cash and cash equivalents at beginning of year 215 513
Cash and cash equivalents at end of period $ 295 $ 261
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Accounting Policies
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which are comprised only of normal recurring
accruals and the use of estimates) necessary to present fairly the consolidated
financial position of Owens & Minor, Inc. and its wholly owned subsidiaries (the
Company) as of March 31, 1996 and the results of operations and cash flows for
the three months ended March 31, 1996 and 1995.
(2) Interim Results of Operations
The results of operations for interim periods are not necessarily indicative of
the results to be expected for the full year.
(3) Interim Gross Margin Reporting
In general, the Company uses estimated gross margin rates to determine the cost
of goods sold during interim periods. To improve the accuracy of its estimated
gross margins for interim reporting purposes, the Company takes physical
inventories at selected distribution centers, and reported results of operations
for the quarter reflect the results of such inventories, if materially
different. Management will continue a program of interim physical inventories at
selected distribution centers to the extent it deems appropriate to ensure the
accuracy of interim reporting and to minimize year-end adjustments.
(4) Refinancing Plan
Concurrently with its offering of $150.0 million of senior subordinated notes
(the Notes), the Company will enter into a $225.0 million Senior Credit Facility
(the New Senior Credit Facility) and will use borrowings under the New Senior
Credit Facility, together with the net proceeds from the offering of the Notes,
to repay in full outstanding indebtedness under the Company's current $425.0
million Senior Credit Facility. Following the completion of the offering of the
Notes, the Company's receivables financing facility will be increased to a
maximum of $150.0 million, the proceeds of which will be used to reduce amounts
outstanding under the New Senior Credit Facility.
To reduce the potential impact of increases in interest rates in the period
before the issuance of the Notes, the Company entered into interest rate cap
agreements, with an aggregate notional value of $150.0 million. Under the
interest rate cap agreements, entered into from March 28, 1996 to May 3, 1996,
the Company will receive from the bank counterparties on the determination dates
amounts by which the interest rate of the United States Government 10-Year
Treasury Note exceeds various rates ranging from 6.8% to 7.0%. The determination
dates of the transactions are May 30, 1996 and May 31, 1996. The Company is
exposed to certain losses in the event of nonperformance by the counterparties
to these agreements. However, the Company's exposure is not material and
nonperformance is not anticipated. During the second quarter of 1996, the
Company anticipates entering into further transactions that will reduce the risk
of interest rate increases for all of its financing facilities.
F-21
<PAGE>
[OWENS & MINOR LOGO]
