FORM 10-K ANNUAL REPORT
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OWENS & MINOR, INC. AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-9810
OWENS & MINOR, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-01701843
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 Cox Road, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 747-9794
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Stock, New York Stock
$2 par value Exchange
Preferred Stock New York Stock
Purchase Rights Exchange
10 7/8% Senior Subordinated New York Stock
Notes due 2006 Exchange
$2.6875 Term Convertible Not Listed
Securities, Series A
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sales price) was $336,451,740 as of February 18, 2000.
The number of shares of the company's Common Stock outstanding as of
February 18, 2000 was 32,824,560 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the annual meeting of security holders on April 25, 2000
is incorporated by reference into Part III of this Form 10-K.
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ITEM CAPTIONS AND INDEX -
FORM 10-K ANNUAL REPORT
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Part I
1. Business.................................. 18-21
2. Properties................................ 21
3. Legal Proceedings......................... 41-42
4. Submission of Matters to a Vote of
Security Holders.......................... N/A
Part II
5. Market for Registrant's
Common Equity and Related
Stockholder Matters....................... 51-52
6. Selected Financial Data................... 17
7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................... 22-26
7A. Quantitative and Qualitative Disclosures
about Market Risk.........................26, 34-35
8. Financial Statements and
Supplementary Data......................See Item 14
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure...................... N/A
Part III
10. Directors and Executive Officers of
the Registrant............................ (a), 54
11. Executive Compensation.................... (a)
12. Security Ownership of Certain
Beneficial Owners and Management.......... (a)
13. Certain Relationships and Related
Transactions.............................. (a)
Part IV
14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
a. Consolidated Statements of Income
for the Years Ended Dec. 31, 1999,
Dec. 31, 1998 and Dec. 31, 1997........... 27
Consolidated Balance Sheets at
Dec. 31, 1999 and Dec. 31, 1998........... 28
Consolidated Statements of Cash Flows
for the Years Ended Dec. 31, 1999,
Dec. 31, 1998 and Dec. 31, 1997........... 29
Consolidated Statements of Changes
in Shareholders' Equity for the Years
Ended Dec. 31, 1999, Dec. 31, 1998
and Dec. 31, 1997......................... 30
Notes to Consolidated Financial
Statements for the Years Ended
Dec. 31, 1999, Dec. 31, 1998 and
Dec. 31, 1997............................. 31-49
Report of Independent Auditors............ 50
b. Reports on Form 8-K:...................... None.
c. The index to exhibits has been filed as separate
pages of the 1999 Form 10-K and is available to
shareholders on request from the Secretary of
the company at the principal executive offices.
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(a) Part III will be incorporated by reference from the registrant's 2000 Proxy
Statement pursuant to instructions G(1) and G(3) of the General Instructions to
Form 10-K.
FORM 10-K The Annual Report includes the materials required in Form 10-K filed
with the Securities and Exchange Commission. The integration of the two
documents gives stockholders and other interested parties timely, efficient and
comprehensive information on 1999 results. Portions of the Annual Report are not
required by the Form 10-K report and are not filed as part of the Corporation's
Form 10-K. Portions of the Annual Report referenced in the Form 10-K
Index are incorporated in the Form 10-K. The report has not been approved or
disapproved by the Securities and Exchange Commission, nor has the Commission
passed upon its accuracy or adequacy.
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ABOUT THE COMPANY 1999 FINANCIAL OVERVIEW LETTER TO SHAREHOLDERS COMPANY AT A GLANCE
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COMPANY OVERVIEW
Owens & Minor, Inc., a Fortune 500 company headquartered in Richmond, Virginia,
is the nation's largest distributor of national name brand medical/surgical
supplies. With distribution centers located throughout the United States, the
company serves hospitals, integrated healthcare systems and group purchasing
organizations. In addition to a diverse product offering, Owens & Minor offers
innovative services in supply chain management, logistics and technology,
helping customers control healthcare costs and improve inventory management.
Founded in 1882, Owens & Minor began as a wholesale drug company, but since
1992, the company has focused solely on the distribution of medical/surgical
supplies. With the advent of the digital marketplace. Owens & Minor is now
leading the way among distributors in exploring e-commerce and other methods of
sharing information using the Internet.
Owens & Minor's common shares are traded on the New York Stock Exchange under
the symbol OMI. As of December 31, 1999, there were approximately 15,000 common
shareholders.
MISSION
To create consistent value for our customers and supply chain partners that will
maximize shareholder value and long-term earnings growth; we will do this by
managing our business with integrity and the highest ethical standards, while
acting in a socially responsible manner with particular emphasis on the
well-being of our teammates and the communities we serve.
VISION
To be a world class provider of supply chain management solutions to the
selected segments of the healthcare industry we serve.
VALUES
We believe in our teammates and their well-being.
We believe in providing superior customer service.
We believe in supporting the communities we serve.
We believe in delivering long-term value to our shareholders.
We believe in high integrity as the guiding principle of doing business.
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ABOUT THE COMPANY 1999 FINANCIAL OVERVIEW LETTER TO SHAREHOLDERS COMPANY AT A GLANCE
1999 Financial Overview
(in thousands, except ratios, per share data and employee statistics)
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Percent Change
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Year ended December 31, 1999 1998 1997 99/98 98/97
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Net sales $3,186,373 $3,082,119 $3,116,798 3.4% (1.1%)
Net income $27,979 $20,145 $24,320 38.9% (17.2%)
Net income per common share - basic $0.86 $0.56 $0.60 53.6% (6.7%)
Net income per common share - diluted $0.82 $0.56 $0.60 46.4% (6.7%)
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Net income excluding restructuring(1) $27,420 $26,753 $24,320 2.5% 10.0%
Net income per common share
excluding restructuring(1):
Basic $0.84 $0.77 $0.60 9.1% 28.3%
Diluted $0.80 $0.75 $0.60 6.7% 25.0%
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Cash dividends per common share $0.23 $0.20 $0.18 15.0% 11.1%
Book value per common share $5.58 $4.94 $4.48 13.0% 10.3%
Stock price per common share at year-end $8.94 $15.75 $14.50 (43.2%) 8.6%
Number of common shareholders 15.0 15.5 16.1 (3.2%) (3.7%)
Shares of common stock outstanding 32,711 32,618 32,213 0.3% 1.3%
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Return on average common equity
excluding restructuring(1) 16.0% 15.9% 14.1% 0.6% 12.8%
Return on total assets
excluding restructuring(1) (2) 3.1% 3.3% 3.0% (6.1%) 10.0%
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Gross margin as a percent of net sales 10.5% 10.6% 10.2% (0.9%) 3.9%
Selling, general and administrative expenses
as a percent of net sales 7.6% 7.8% 7.5% (2.6%) 4.0%
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Debt(2) $280,790 $225,000 $292,550 24.8% (23.1%)
Capitalization ratio(2) (3) 47.2% 43.4% 53.0% 8.8% (18.1%)
Average receivable days sales outstanding(2) 35.6 34.7 33.4 2.6% 3.9%
Average inventory turnover 9.2 9.8 9.9 (6.1%) (1.0%)
Employees at year-end 2,774 2,661 3,010 4.2% (11.6%)
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(1) See Note 3 to Consolidated Financial Statements regarding the 1998
nonrecurring restructuring expenses ($11.2 million before tax) and the 1999
reserve adjustment ($1.0 million before tax).
(2) Excludes impact of off balance sheet receivables securitization agreement.
See Note 7 to Consolidated Financial Statements.
(3) Includes mandatorily redeemable preferred securities as equity.
Net Income Per Common Share -- Diluted (Excluding restructuring)
[BAR CHART APPEARS HERE]
1999 $0.80
1998 $0.75
1997 $0.60
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ABOUT THE COMPANY 1999 FINANCIAL OVERVIEW LETTER TO SHAREHOLDERS COMPANY AT A GLANCE
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DEAR SHAREHOLDERS,
TEAMMATES, CUSTOMERS,
SUPPLIERS AND FRIENDS,
We had a remarkable and successful year in 1999. We fully restored our business,
fueling our momentum into 2000. The results we achieved in 1999, especially in
the third and fourth quarters, bode well for a more robust future.
We said we were going to restore our sales volume, and we did. We said we were
going to maintain our profitability on the new business, and we did. We said we
were going to maintain our industry-leading service reputation, and we did. We
said we were going to invest heavily in solution-based technology tools to help
our customers, and we did. We said we were going to improve productivity, and we
did. We accomplished all this as a team of committed souls, all focused on
serving our customers and working to improve shareholder value.
Shareholder value is of paramount concern to all of us at Owens & Minor. At this
writing, our share price is well below our expectations, and, we believe well
below the inherent value of Owens & Minor. Through hard work and determination
in 1999, we more than restored our reputation and market presence, and grew our
profitability. We increased shareholder value on our balance sheet, and we feel
we are in position to earn a higher valuation in the equities' market in 2000.
THE NUMBERS
Our financial results for the year were impressive. The following results
include Medix, which we acquired on July 30. As we expected, Medix had no
material impact on earnings in 1999.
Sales increased 3.4% for the year and 20.1% in the fourth quarter. Without
Medix, sales were up 0.8% for the year and 13.4% in the fourth quarter.
Virtually all major group contract purchases were up. The Tenet business
conversion exceeded our expectations. Gross margin dollars were up. In other
words, we didn't "buy" the new business to replace the lost business. SG&A
(Selling, General and Administrative Expenses) as a percent to sales dipped to
7.6% in 1999, down from 7.8% for the previous year. In the fourth quarter of
1999, SG&A was $62.5 million, up only 6% from a year ago, despite the 20% sales
increase. Getting SG&A down even further as a percent to sales is one of our
highest priorities in 2000.
Earnings per diluted common share for the year were $0.80, up 7% from last year,
and $0.25, up 25%, for the fourth quarter, compared to the fourth quarter of
1998. These comparisons, and all other full-year comparisons included in this
letter, exclude the effects of a $6.6 million after-tax restructuring charge
taken in the second quarter of 1998, and a related $0.6 million after-tax credit
taken in the second quarter of 1999. Cash flow was healthy and allowed us to pay
down debt by $26.9 million, net of the Medix acquisition. We were able to reduce
our overall financing costs for the year through strong asset management. At
year-end, however, we employed more working capital to fund our sales growth and
experienced a modest increase in days sales outstanding from 34.7 days to 35.6
days, and inventory turns decreased slightly from 9.8 times to 9.2 times.
Capital expenditures were $22 million for the year, reflecting the emphasis on
our strategic decision to invest in technology. Productivity improved, as sales
per full time equivalent employee (FTE) increased 7%, and gross margin per FTE
increased 7%.
A REVIEW OF OUR SUCCESSFUL STRATEGY FOR 1999
At the beginning of 1999, we knew we had to rebuild our business and restore our
profitability. Strategically, we decided to focus on what we do best.
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CORPORATE OFFICERS BOARD OF DIRECTORS DISTRIBUTION NETWORK FINANCIALS
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G. Gilmer Minor, III Craig R. Smith
Chairman and Chief Executive Officer President and Chief Operating Officer
Our core competency is that we are the most efficient distributor in our
industry, while adding value by providing great service and technology-based
solutions to help our customers.
We turned up the pressure on ourselves. We knew we had the best technology tools
in the business and the best service, so we packaged our offering that way.
Price is always a factor, but we were determined not to give our value away. We
earned the Tenet business, and then put into play the smoothest and most
comprehensive conversion this industry has ever seen. Our annualized sales rate
for Tenet at the end of December 1999, was over $250 million. The sales rate
exceeded our expectations.
By mid-year in 1999, we began to see new sales earned in 1998 come on line as
expected. In July, we acquired Medix, a medical/surgical distributor based in
Wisconsin. This acquisition increased our market share, particularly in the
Midwest, and added significant new customers, especially Consorta Catholic
Resource Partners.
To manage our costs more efficiently we downsized some warehouses that had extra
capacity and installed our CSW (Client Server Warehousing) system in all of our
divisions. CSW has improved accuracy, information flow and speed in our
warehouses.
We also reorganized our field management to take advantage of the 'close to the
customer' strength we have across the nation. We divided the country into eleven
management areas, increasing firepower in the field for sales, operations,
technology and human resources.
We knew we had to manage our assets efficiently, pay down debt and lower our
interest costs. We accomplished all three with hard work, planning and
execution.
We also continued our work with suppliers, figuring out ways to take real cost
out of the supply chain. This cross-functional team effort is very important to
Owens & Minor, as our commitment to national brands increases our value to our
customers.
Nothing we achieved in 1999 would have been possible without the efforts and
determination of our teammates, who rose to the occasion time and again until we
accomplished our objectives.
EXPECTATIONS FOR 2000
Our strategy for 2000 is aimed at growing revenues at 8 to 10 percent, while
maintaining our gross margin, lowering SG&A, and improving earnings by 13 to 15
percent or more. If we can do all this, we expect our stock price to increase,
consistent with our performance and the health of our market sector.
Our hard work in three strategic areas over the past year had a significant
impact on our 1999 results, and we will continue to exploit these areas in 2000.
The first is maintaining operational excellence, which means running our
business so that we provide the absolute best service in the industry. Second,
we want to convert information into knowledge into profits. We have done an
outstanding job here with CostTrack, PANDAC(R), FOCUS and WISDOM in helping our
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ABOUT THE COMPANY 1999 FINANCIAL OVERVIEW LETTER TO SHAREHOLDERS COMPANY AT A GLANCE
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WE BELIEVE THAT OUR
MOST IMPORTANT PRODUCT
IS OUR WORD.
customers manage their businesses more profitably. (These Owens & Minor tools
are described more fully later in this report.) Third, we want to follow and
support patient care. As patients migrate to non-traditional settings for
healthcare, we will be there to supply their needs.
E-COMMERCE OPPORTUNITIES
Owens & Minor is on the leading edge when it comes to business-to-business,
Internet-based communications with our customers. In fact, we won recognition
for our innovative use of technology in 1999 when we were named to the
"E-Business 100" by InformationWeek Magazine, and when we won the 1999
Leadership in Data Warehousing Award from the Data Warehousing Institute.
We are working closely with our largest customers, health alliances and group
purchasing organizations, to implement e-commerce solutions involving the
collection and organization of useful data, as well as more efficient order
processing. We have developed our own e-commerce capability for order processing
called OM Direct. Over 200 customers have signed up with OM Direct, and we are
processing orders at a rate of over $3 million per month.
Also, we are partnering with several healthcare Web sites, such as Neoforma.com
(NASDAQ: NEOF) and medicalbuyer.com(TM), to explore the value of small package
distribution to new markets for Owens & Minor, such as physicians' offices. We
call our small package initiative "eMedExpress" (soon to be a "dot-com" site).
We are developing an open business-to-business, e-commerce digital platform with
Perot Systems (NYSE: PER) to process customer orders for multiple vendors
through one portal. This initiative will provide our customers with the ability
to do business with multiple best-of-class strategic partners, while achieving
back-office savings and efficiencies through a more disciplined process.
We look at e-commerce as an opportunity to grow our business. Even in the
exciting world of e-commerce, the function of distribution must be performed.
The question is who can do it best. The answer is Owens & Minor.
PROMOTIONS AND ELECTIONS
Owens & Minor proved again in 1999 that it has both strength and depth on its
management team. We made a number of important promotions during the year that
made us even more effective.
Craig R. Smith was named President of the company in April 1999, while retaining
his position as Chief Operating Officer. Craig has generated tremendous energy
and a sense of urgency to restoring our market presence, and he has clearly been
successful in this important leadership post.
Timothy J. Callahan was recently promoted to the position of Corporate Senior
Vice President, Distribution, with responsibility for our entire field
organization and distribution network.
Charles C. Colpo was named Corporate Senior Vice President, Operations, after
working his way through our field organization and making his mark in many areas
of the company.
Erika T. Davis was promoted to Corporate Vice President of Human Resources.
Erika has done a magnificent job helping our Human Resources team be a most
responsive and helpful advocate for our teammates.
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CORPORATE OFFICERS BOARD OF DIRECTORS DISTRIBUTION NETWORK FINANCIALS
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In 1999, two new Directors were elected to the Board. Peter S. Redding,
President and CEO of Standard Register, joined the Board in April, and John T.
Crotty, Managing Partner of CroBern Management Partnership, a healthcare
investment, consulting and advisory firm, joined us in July. Both Pete and John
bring supply chain management experience and leadership to Owens & Minor.
AND LOSSES
In March 1999, Ann Greer Rector, Senior Vice President and Chief Financial
Officer, passed away after a short illness. She was our friend, a gallant lady
and truly represented the best of Owens & Minor. We miss her terribly, but her
can-do spirit is a legacy for us all.
In August 1999, we lost our beloved Director Emeritus, Royal E. Cabell, Jr. Roy
had just retired from the Board in April after 37 years of service. He was a
mentor, proactive in helping steer the company to growth, sometimes through
perilous waters, and a dear, loyal friend. His hearty laugh and broad smile will
always be missed.
A NEW YEAR, A NEW CENTURY,
A NEW MILLENNIUM
Owens & Minor has provided service to the healthcare industry in three
centuries. Our sterling roster of customers proves we are leading the way in our
industry. Each year U.S. News & World Report compiles an "honor roll" of the
nation's best hospitals. Of these top 13 institutions, Owens & Minor is the
primary supplier to eight of them. We see this as evidence that we are doing
things right.
The industry we serve is in the throes of change as the government, third party
payors, providers and patients battle over the quality and cost of care.
Yet, healthcare is a growth industry any way you look at it, with our population
aging and medical requirements accelerating. We believe our strategy of
providing innovative supply chain answers, working with strategic partners like
Perot Systems, and providing the absolute best-of-class service, not only works
for us, but provides dynamic solutions for our customers. If our strategy
weren't correct, how else could we have come back so strong, so fast? Owens &
Minor keeps changing and keeps growing by doing things right.
To our suppliers and customers, we are grateful for your loyalty and support as
we all work together in a very tough industry; to our teammates, we are grateful
for your courage, your determination and loyalty as we delivered on our promises
in 1999. To our shareholders, we are grateful for your continued support. It's
hard to be patient in this market, but we do feel patience will be rewarded.
Thank you all for being part of the Owens & Minor team.
Warmest regards,
/s/ G. Gilmer Minor, III
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G. Gilmer Minor, III
Chairman and Chief Executive Officer
/s/ Craig R. Smith
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Craig R. Smith
President and Chief Operating Officer
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ABOUT THE COMPANY 1999 FINANCIAL OVERVIEW LETTER TO SHAREHOLDERS COMPANY AT A GLANCE
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WE PURCHASE GOODS FOR OUR CUSTOMERS
We help our customers lower their purchasing costs by doing the work for them.
By purchasing goods in large volume, we are able to buy
at lower cost, streamline delivery, and collect important sales and usage
information for our customers.
WE HOLD THE INVENTORY
We buy and hold inventory for our customers. With sophisticated delivery
processes, we deliver and invoice goods only when our customers are ready.
Rather than tying up capital in stock sitting in a warehouse, our customers save
money by using our "just-in-time" and stockless services, receiving supplies at
the time they are needed.
WE WAREHOUSE
With warehouse facilities around the nation, Owens & Minor stores medical and
surgical supplies close to our customers. Because it costs money every time an
item is handled, we've researched and developed ways to simplify handling. Using
tools such as CSW (Client Server Warehousing), we are able to streamline receipt
and storage of materials. In some instances, we bypass the warehouse altogether,
taking supplies directly to where they are needed.
WE REDUCE INVENTORY COSTS
Because we have refined the art of warehousing, we are able to reduce costs for
our customers. In many cases, we do the warehousing for them. Or, we employ a
just-in-time delivery system that eliminates the cost of storage.
SO
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WE CUSTOMIZE OUR INFORMATION SERVICES
One of the most important by-products of what we do at Owens & Minor is
information. Because we collect and store data, we are able to help customers
with purchasing and supply-chain analysis. We support them in product
standardization and contract compliance, and help customers pinpoint ways to
streamline and save money. WISDOM, a new product launched in 1999, gives our
subscribers Internet access to their own purchasing and invoice information.
WE ADD VALUE
Once our customers are ready to receive shipments, we customize how we load our
pallets and trucks, reducing labor on the receiving end. Receiving documents are
customized to conform with our customers' information systems. Also, we deliver
only when our customers are ready, allowing them to streamline their receiving
activity.
WE DELIVER
Our warehouse facilities are located throughout the United States close to our
customers. To deliver supplies on time, Owens & Minor uses its own drivers, who
are important ambassadors for our company. They are committed to customer
service.
WE INVOICE AND COLLECT
Once products are delivered, we invoice and collect. By using electronic billing
and funds transfer, we reduce costs for ourselves and for our customers. A
variety of terms are offered to suit the needs of our individual customers. Many
of our customers are members of group purchasing organizations or large hospital
systems and they are able to take advantage of favorable pricing.
LUTIONS
[GRAPHIC]
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OWENS & MINOR, INC.
SOLUTIONS IN SUPPLY CHAIN
MANAGEMENT THROUGH CSW
SOLUT
[GRAPHIC]
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At Owens & Minor, we focus on providing the ultimate in service for our
customers--solutions. By blending 118 years of experience serving the healthcare
industry with the latest in technological innovations, we are providing supply
chain management solutions for our customers--hospitals, integrated healthcare
systems and group purchasing organizations. As an industry leader, we strive to
anticipate challenges emerging for our healthcare partners.
OWENS & MINOR PROVIDES SOLUTIONS IN SUPPLY CHAIN MANAGEMENT
In 1999, Owens & Minor fully implemented CSW, or Client Server Warehousing, in
its warehouses throughout the country. This computer-based warehouse management
system has standardized warehouse processes throughout the company. Prior to the
implementation of CSW, Owens & Minor used three different systems to run its
warehouses.
With CSW, each item is tracked from the moment it enters the warehouse until it
reaches its destination, improving inventory control. Efficiency in the picking
and putaway of products has increased, improving our service to customers.
The hand-held RF (radio frequency) units used by teammates to track every item
in the warehouse also provide Owens & Minor information on the efficiency of
each teammate. Because Owens & Minor has used this information to improve
efficiency, the company is benefiting from a reduction in overtime.
In a business as complex as Owens & Minor's, efficiency has a great impact on
the bottom line. By using this computer-based technology to track the movement
of every item, Owens & Minor has found a way to cut costs, and improve teammate
efficiency, invoice accuracy and customer satisfaction.
WE CONSTANTLY
FIND WAYS TO STAY CLOSE
TO OUR CUSTOMERS.
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SOLU
SOLUTIONS IN COST MANAGEMENT
THROUGH COSTTRACK
ACTIVITY-BASED-MANAGEMENT
OWENS & MINOR, INC.
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MERGING OUR SKILLS WITH
OUR CUSTOMERS' NEEDS
MAKES US DIFFERENT.
OWENS & MINOR PROVIDES
SOLUTIONS IN COST MANAGEMENT
With more than a century's experience in supply chain management, Owens & Minor
is constantly finding better ways to manage and reduce costs for itself and its
customers. With the goal of delivering efficient, high quality service to
customers, Owens & Minor offers CostTrack activity-based-management.
This industry-leading program separates the cost of the product from the process
of delivering it, thus identifying the true cost of distribution. CostTrack
recognizes and rewards efficiencies such as electronic commerce and
standardization of commodity products.
An independent study determined that while hospitals spend about 15 percent of
their budgets on supplies, they spend another 10 to 20 percent on managing those
supplies. These costly internal processes provide Owens & Minor opportunities to
help customers save by implementing CostTrack.
With CostTrack, Owens & Minor customers pay for exactly the services they
choose. For example, a customer might ask that we deliver supplies to the
loading dock--a relatively low cost activity. However, another customer might
ask that Owens & Minor take supplies all the way into the emergency room or
operating room. This is a higher cost activity, but one that Owens & Minor
provides as an outsourcing solution for many customers.
Rather than using a cost-plus model, Owens & Minor charges according to the
complexity of the activity. Customers can choose from a range of services, from
basic distribution to a full outsourcing arrangement.
[GRAPHIC]
TIONS
These hand-held RF(radio frequency) units improve efficiency in Owens & Minor's
warehouses.
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EVERY ASSIGNMENT FROM
OUR CUSTOMERS GIVES US
THE OPPORTUNITY TO EXCEL.
OWENS & MINOR PROVIDES
SOLUTIONS IN DATA MANAGEMENT
In 1999, Owens & Minor launched a major Internet-based initiative, opening its
vast data warehouse to customers and suppliers. This award-winning product,
called WISDOM, rapidly gained subscribers.
Using a simple Internet connection, subscribers to WISDOM can mine their own
sales and other data. Information once difficult for customers and suppliers to
compile is now readily available through this Owens & Minor service. Subscribers
can easily retrieve detailed reports on purchasing, inventory and usage, and
contract compliance. Suppliers can access reports on product inventory, drop
shipments, credits, customer contract utilization and service levels with Owens
& Minor.
The first e-business intelligence application of its kind within the
medical/surgical distribution industry, WISDOM has won acclaim for Owens &
Minor. The Data Warehousing Institute, the premier educational association in
the data warehousing industry, named Owens & Minor the winner of its 1999
Leadership Award for WISDOM.
Also, InformationWeek Magazine included Owens & Minor among its "E-Business
100," a survey of more than 400 nominated businesses that have achieved overall
excellence in e-business initiatives. Owens & Minor was cited for the
development and use of WISDOM.
Using customized information from WISDOM, customers can save money through
product consolidation, and improve inventory management. Now a recognized brand
name in the healthcare industry, WISDOM is helping Owens & Minor attract new
customers and expand existing relationships. WISDOM gives Owens & Minor a
competitive advantage by helping it forge tighter links with customers.
By using the best technology available in partnership with our customers, we
believe we have developed the right formula for our industry. We believe that
Owens & Minor leads the industry by providing in-depth knowledge and experience
in supply chain management to customers and by using technology to create
solutions for our partners. We believe that when we deliver solutions, we
deliver satisfaction.
[GRAPHIC]
SOLU
12
<PAGE>
[GRAPHIC]
TIONS
SOLUTIONS IN DATA MANAGEMENT THROUGH WISDOM
OWENS & MINOR, INC.
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CORPORATE OFFICERS BOARD OF DIRECTORS DISTRIBUTION NETWORK FINANCIALS
<CAPTION>
Corporate Officers
[GRAPHIC]
<S> <C> <C> <C> <C> <C> <C> <C>
Minor Smith Gouldthorpe Callahan Davis Bozard Cape Berling
[GRAPHIC]
Grigg Colpo Thomas Luck MacAllister Marston Carneal Clark
<CAPTION>
<S> <C> <C>
G. GILMER MINOR, III (59) JACK M. CLARK, JR. (49) OLWEN B. CAPE (49)
Chairman & Chief Executive Officer Senior Vice President, Sales & Marketing Vice President, Controller
CRAIG R. SMITH (48) CHARLES C. COLPO (42) ERIKA T. DAVIS (35)
President & Chief Operating Officer Senior Vice President, Operations Vice President, Human Resources
HENRY A. BERLING (57) JAMES L. GRIGG (52) HUGH F. GOULDTHORPE, JR. (60)
Executive Vice President, Senior Vice President, Vice President, Quality & Communications
Partnership Development Supply Chain Management
WAYNE B. LUCK (43)
TIMOTHY J. CALLAHAN (48) F. LEE MARSTON (46) Vice President, Business Technology Group
Senior Vice President, Distribution Senior Vice President,
Chief Information Officer HUE THOMAS, III (60)
DREW ST. J. CARNEAL (61) Vice President, Corporate Relations
Senior Vice President, RICHARD F. BOZARD (52)
General Counsel & Secretary Vice President, Treasurer BRUCE J. MACALLISTER (48)
Acting Chief Financial Officer Regional Vice President, East
</TABLE>
- --------------------------------------------------------------------------------
Numbers inside parentheses indicate age.
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CORPORATE OFFICERS BOARD OF DIRECTORS DISTRIBUTION NETWORK FINANCIALS
BOARD OF DIRECTORS
Crotty Minor Bunting Farinholt Whittemore
Redding Massey Henley Berling Ukrop Rogers
graphic
<CAPTION>
<S> <C> <C>
Henry A. Berling (57) (1), (4) Vernard W. Henley (70) (2), (3), (5) James E. Rogers (54) (1), (3)*, (4)
Executive Vice President, Partnership Chairman & CEO, Consolidated Bank President, SCI Investors Inc.
Development, Owens & Minor, Inc. and Trust Company
James E. Ukrop (62) (2), (3), (5)
Josiah Bunting, III (59) (2), (4) E. Morgan Massey (73) (1), (2), (4)*, (5) Chairman, Ukrop's Super Market, Inc.
Superintendent, Virginia Military Institute Chairman, Asian-American Coal, Inc. Chairman, First Market Bank
Chairman Emeritus,
John T. Crotty (62) (2), (4) A.T. Massey Coal Company, Inc. Anne Marie Whittemore (54) (1), (3), (5)*
Managing Partner, Chairman, Evan Energy Company Partner,
CroBern Management Partnership McGuire, Woods, Battle & Boothe LLP
President, CroBern, Inc. G. Gilmer Minor, III (59) (1)*, (4)
Chairman & CEO, Owens & Minor, Inc.
James B. Farinholt, Jr. (65) (1), (2)*, (4)
Special Assistant to the President Peter S. Redding (61) (3), (4)
for Economic Development, President & CEO, Standard Register
Virginia Commonwealth University
</TABLE>
- --------------------------------------------------------------------------------
Board Committees: (1) Executive Committee, (2) Audit Committee, (3) Compensation
& Benefits Committee, (4) Strategic Planning Committee, (5) Governance &
Nominating Committee, * Denotes Chairperson
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CORPORATE OFFICERS BOARD OF DIRECTORS DISTRIBUTION NETWORK FINANCIALS
</TABLE>
OWENS & MINOR DISTRIBUTION NETWORK
Seattle
Portland
Minneapolis
Green Bay
Boston
Rochester
Waunakee
Chicago
Allentown
Des Moines
Detroit
Greensburg
San Francisco
Bridgeton
Omaha
Salt Lake City
Denver
Indianapolis
Springfield
Savage
Richmond, Home Office
Cincinnati
Wichita
Richmond
Kansas City
Los Angeles
LaFollette
Tulsa
St. Louis
Raleigh
Charlotte
Oklahoma City
Knoxville
Memphis
San Diego
Augusta
Phoenix
Atlanta
Birmingham
Jackson
Dallas
Montgomery
Jacksonville
Houston
Orlando
New Orleans
Ft. Lauderdale
Harlingen
O&M Medical/Surgical Division
O&M Custom Distribution Center
O&M Home Office
O&M Specialty Distribution
16
<PAGE>
SELECTED FINANCIAL DATA(1)
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
============= =============== =============== =============== ===============
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $3,186,373 $3,082,119 $3,116,798 $3,019,003 $2,976,486
Nonrecurring restructuring expense
(credit)(2) $ (1,000) $ 11,200 $ - $ - $ 16,734
Net income (loss)(2) $ 27,979 $ 20,145 $ 24,320 $ 12,965 $ (11,308)
- ----------------------------------------- ---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:
Net income (loss) - basic $ 0.86 $ 0.56 $ 0.60 $ 0.25 $ (0.53)
Net income (loss) - diluted $ 0.82 $ 0.56 $ 0.60 $ 0.25 $ (0.53)
Average number of shares
outstanding - basic 32,574 32,488 32,048 31,707 30,820
Average number of shares
outstanding - diluted 39,098 32,591 32,129 31,809 30,820
Cash dividends $ 0.23 $ 0.20 $ 0.18 $ 0.18 $ 0.18
Stock price at year end $ 8.94 $ 15.75 $ 14.50 $ 10.25 $ 12.75
Book value $ 5.58 $ 4.94 $ 4.48 $ 3.99 $ 3.90
- ----------------------------------------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF FINANCIAL POSITION:
Working capital $ 219,448 $ 235,247 $ 233,789 $ 192,990 $ 331,663
Total assets $ 865,000 $ 717,768 $ 712,563 $ 679,501 $ 857,803
Debt $ 175,178 $ 150,000 $ 182,550 $ 167,549 $ 323,308
Mandatorily redeemable preferred
securities $ 132,000 $ 132,000 $ - $ - $ -
Shareholders' equity $ 182,381 $ 161,126 $ 259,301 $ 242,400 $ 235,271
- ----------------------------------------- ---------- ---------- ---------- ---------- ----------
SELECTED RATIOS:
Gross margin as a percent of net sales 10.5% 10.6% 10.2% 9.9% 9.0%
Selling, general and administrative
expenses as a percent of net sales 7.6% 7.8% 7.5% 7.7% 7.6%
Average receivable days sales
outstanding(3) 35.6 34.7 33.4 36.1 37.7
Average inventory turnover 9.2 9.8 9.9 8.9 8.3
Return on average total equity(4) 10.5% 8.2% 9.7% 5.4% (4.6%)
Return on average total equity(5) 16.3% 9.6% 9.7% 5.4% (4.6%)
Current ratio 1.6 1.9 1.9 1.7 2.1
Capitalization ratio(3)(4) 47.2% 43.4% 53.0% 54.8% 61.9%
Capitalization ratio(3)(5) 69.4% 68.9% 53.0% 54.8% 61.9%
</TABLE>
(1) ON JULY 30, 1999, THE COMPANY ACQUIRED CERTAIN NET ASSETS OF MEDIX, INC.
WHICH WAS ACCOUNTED FOR AS A PURCHASE.
(2) IN 1998, THE COMPANY INCURRED $11.2 MILLION, OR $6.6 MILLION AFTER TAXES, OF
NONRECURRING RESTRUCTURING EXPENSES RELATED TO THE CANCELLATION OF ITS
MEDICAL/SURGICAL DISTRIBUTION CONTRACT WITH COLUMBIA/HCA HEALTHCARE
CORPORATION. IN 1999, THE COMPANY REDUCED THE RESTRUCTURING ACCRUAL BY $1.0
MILLION, OR $0.6 MILLION AFTER TAXES. THE COMPANY INCURRED $16.7 MILLION, OR
$10.3 MILLION AFTER TAXES, IN 1995 OF NONRECURRING RESTRUCTURING EXPENSES
RELATED TO ITS RESTRUCTURING PLANS DEVELOPED IN CONJUNCTION WITH ITS
COMBINATION WITH STUART MEDICAL, INC. IN 1994.
(3) EXCLUDES IMPACT OF OFF BALANCE SHEET RECEIVABLES SECURITIZATION AGREEMENT.
SEE NOTE 7 TO CONSOLIDATED FINANCIAL STATEMENTS.
(4) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS EQUITY.
(5) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS DEBT.
17
<PAGE>
BUSINESS DESCRIPTION
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
COMPANY HISTORY
Owens & Minor, Inc. and subsidiaries (O&M or the company) is the largest
distributor of national name brand medical and surgical supplies in the United
States. The company was incorporated in Virginia on December 7, 1926, as a
successor to a partnership founded in Richmond, Virginia in 1882.
O&M has significantly expanded and strengthened its national presence in
recent years through internal growth and acquisitions. In July 1999, the company
acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and
surgical supplies whose customers are primarily located in the Midwest. This
acquisition strengthens the company's presence and is expected to provide
opportunities for growth in this geographic area. For its 1998 fiscal year,
Medix had net sales of approximately $184 million. In May 1994, the company
acquired Stuart Medical, Inc., then the third largest distributor of medical and
surgical supplies in the United States with 1993 net sales of approximately $891
million.
INDUSTRY OVERVIEW
Distributors of medical and surgical supplies provide a wide variety of products
and services to healthcare providers, including hospitals and hospital-based
systems, integrated healthcare networks (IHNs) and alternate care providers. The
medical/surgical supply distribution industry has experienced growth in recent
years due to the aging population and emerging medical technology resulting in
new healthcare procedures and products. Healthcare providers have consolidated
to form larger and more sophisticated entities that are increasingly seeking
lower procurement costs and sophisticated inventory management from their
preferred suppliers and distributors. Over the years, major acute care hospitals
have aligned with or acquired outpatient and long-term care facilities to form
IHNs, and forged partnerships with national medical and surgical supply
distributors to manage the supply procurement and distribution needs of their
entire network. The traditional role of distributors in warehousing and
delivering medical and surgical supplies to a customer has evolved into the role
of assisting their customers to manage the entire supply chain. O&M expects that
further consolidation in the medical/surgical supply distribution industry will
continue due to the competitive advantages enjoyed by larger distributors.
CUSTOMERS
O&M distributes over 150,000 finished medical and surgical products produced by
approximately 1,200 suppliers to approximately 4,000 customers nationwide. The
company's customers are primarily acute care hospitals and hospital-based
systems, which account for more than 90% of O&M's net sales. Other customers
include alternate care facilities such as nursing homes, clinics, surgery
centers, rehabilitation facilities, physicians' offices and home healthcare
organizations. The company provides distribution services under contractual
agreements with a number of large healthcare networks as well as major buying
groups that represent independently owned member hospitals. Most of O&M's sales
consist of disposable gloves, dressings, endoscopic products, intravenous
products, needles and syringes, sterile procedure trays, surgical products and
gowns, urological products and wound closure products.
NATIONAL HEALTHCARE NETWORKS (NETWORKS) AND GROUP PURCHASING ORGANIZATIONS
(GPOS). Networks and GPOs are entities that act on behalf of a group of
healthcare providers to obtain pricing and other benefits that may be
unavailable to individual members. Hospitals, physicians and other types of
healthcare providers have joined Networks and GPOs to take advantage of improved
economies of scale and to obtain services from medical and surgical supply
distributors ranging from discounted product pricing to logistical and clinical
support. Networks and GPOs negotiate directly with medical and surgical product
suppliers and distributors on behalf of their members, establishing exclusive or
multi-supplier relationships. Networks and GPOs cannot ensure that members will
purchase their supplies from a given distributor. Since 1985, O&M has been a
distributor for VHA, Inc. (VHA), a nationwide network that comprises over 1,900
community-owned healthcare systems and their physicians. On January 1, 1998, VHA
and University HealthSystem Consortium Services Corp. (UHCSC), an alliance of
academic medical centers, created Novation, a supply
18
<PAGE>
- --------------------------------------------------------------------------------
company that serves VHA and UHCSC member organizations. Sales to Novation
members represented approximately 53% of O&M's net sales in 1999.
INTEGRATED HEALTHCARE NETWORKS. An IHN is typically a network of different types
of healthcare providers that seeks to offer a broad spectrum of healthcare
services and comprehensive geographic coverage to a particular local market.
IHNs have become increasingly important because of their expanding role in
healthcare delivery and cost containment and their reliance upon the hospital,
O&M's traditional customer, as a key component of their organizations.
Individual healthcare providers within a multiple-entity IHN may be able to
contract individually for distribution services; however, the providers' shared
economic interests create strong incentives for participation in distribution
contracts established at the system level. Because IHNs frequently rely on cost
containment as a competitive advantage, IHNs have become an important source of
demand for O&M's enhanced inventory management and other value-added services.
In October 1998, O&M entered into an exclusive, eight-year medical/surgical
supply distribution agreement with Tenet Healthcare Corporation (Tenet), the
second largest for-profit hospital chain in the nation. In addition to being a
sole supplier to Tenet's 113 acute care hospitals, O&M provides distribution
services to Tenet's BuyPower purchasing program. One of the nation's leading
GPOs, BuyPower provides national contracting for its approximately 330 acute
care hospitals, 530 associated facilities and 2,500 affiliated members. During
1999, O&M also entered into contracts with a number of other new customers and
has renewed contracts with existing customers.
Until mid-1998, O&M was the primary distributor for Columbia/HCA Healthcare
Corporation (Columbia/HCA). In 1997, approximately 11% of O&M's net sales were
to Columbia/HCA facilities.
INDIVIDUAL PROVIDERS. In addition to contracting with healthcare providers at
the IHN level and through Networks and GPOs, O&M contracts directly with
individual healthcare providers. In 1999, not-for-profit hospitals represented a
majority of these facilities.
SUPPLIERS
O&M believes its size and longstanding relationships enable it to obtain
attractive terms and incentives from suppliers and contribute to its gross
margin. The company has well-established relationships with virtually all of the
major suppliers of medical and surgical supplies.
Approximately 17%, 18%, and 20% of O&M's net sales in 1999, 1998, and 1997,
respectively, were sales of Johnson & Johnson Hospital Services, Inc. products.
Approximately 12% of the company's net sales in 1999, 1998, and 1997 were sales
of products of the subsidiaries of Tyco International.
DISTRIBUTION
O&M employs a decentralized approach to sales and customer service through its
46 distribution centers, strategically located to serve customers in 50 states
and the District of Columbia. These distribution centers generally serve
hospitals and other customers within, on average, a 100- to 150-mile radius. O&M
delivers most medical and surgical supplies with a fleet of leased trucks.
Contract carriers and parcel services are used to transport all other medical
and surgical supplies.
COMPETITION
The medical/surgical supply distribution industry in the United States is highly
competitive and consists of three major nationwide distributors: O&M; Allegiance
Corp., which merged with Cardinal Health, Inc. in early 1999; and McKesson
General Medical Corp., a subsidiary of McKesson HBOC, Inc. The industry also
includes Bergen Brunswig Medical Corp., a wholly owned subsidiary of Bergen
Brunswig Corp.; smaller national distributors of medical and surgical supplies;
and a number of regional and local distributors.
Competitive factors within the medical/surgical supply distribution industry
include total delivered product cost, product availability, the ability to fill
and invoice orders accurately, delivery time, services provided, inventory
management, information technology, and the ability to meet special customer
requirements. O&M believes its decentralized and customer-focused approach to
distribution of medical/surgical supplies enables it to compete effectively with
both larger and smaller distributors by being located
19
<PAGE>
BUSINESS DESCRIPTION (continued)
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
near the customer and offering a high level of customer service. Further
consolidation of medical/surgical supply distributors is expected to continue
through the purchase of smaller distributors by larger companies as a result of
competitive pressures in the marketplace.
ASSET MANAGEMENT
O&M aims to provide the highest quality of service in the medical/surgical
supply distribution industry by focusing on providing suppliers and customers
with local sales and service support and the most responsive, efficient and
cost-effective distribution of medical and surgical products. The company draws
on technology to provide a broad range of value-added services to control
inventory and accounts receivable.
INVENTORY. Due to O&M's significant investment in inventory to meet the rapid
delivery requirements of its customers, efficient asset management is essential
to the company's profitability. The significant and ongoing emphasis on cost
control in the healthcare industry puts pressure on distributors and healthcare
providers to create more efficient inventory management systems. O&M has
responded to these ongoing changes by developing its inventory forecasting
capabilities, its client server warehousing management system, its product
standardization and consolidation initiative, and its continuous inventory
replenishment process (CRP). CRP allows the company's suppliers to monitor daily
sales and inventory levels electronically so they can automatically and
accurately replenish O&M's inventory. These and other initiatives have enabled
the company to control inventory levels while growing sales.
ACCOUNTS RECEIVABLE. The company's credit practices are consistent with those of
other medical/surgical supply distributors. O&M actively manages its accounts
receivable to minimize credit risk and does not believe that credit risk
associated with accounts receivable poses a significant risk to its results of
operations.
INFORMATION TECHNOLOGY
In 1998, O&M signed a 10-year agreement to outsource its information technology
(IT) operations and procure strategic application development services. This
partnership has allowed the company to provide additional resources to major
investments in information technology to support internal operations and to
enhance services to the company's customers and suppliers. In 1999, O&M's
capital expenditures included approximately $19 million for computer hardware
and software. O&M has focused its technology expenditures on electronic commerce
and sales and marketing programs and services.
ELECTRONIC COMMERCE. O&M is an industry leader in the use of electronic commerce
to exchange business transactions with trading partners. In 1999, the company
introduced OM Direct, an Internet-based product catalog and direct ordering
system, to supplement existing electronic data interchange (EDI) technologies.
The company also has entered into a number of contractual arrangements to
provide distribution services for Internet-based medical/surgical supply
companies. O&M is committed to ongoing investments in an open, Internet-based
e-commerce platform to support the company's supply-chain management initiatives
and to enable expansion into new market segments for healthcare products.
SALES AND MARKETING
O&M's sales and marketing force is organized to support its decentralized field
sales teams of approximately 220 people. Based from the company's divisions
nationwide, the company's local sales teams are positioned to respond to
customer needs quickly and efficiently. The company's integrated sales and
marketing strategy offers customers value-added services in logistics,
information management, asset management and product mix management. O&M
provides special training and support tools to its sales team to help promote
these programs and services.
O&M's value-added programs and services for its trading partners include the
following:
O COSTTRACK ACTIVITY-BASED-MANAGEMENT (COSTTRACK):
This industry-leading activity-based-management program helps customers
identify and track the cost-drivers in their distribution activities, giving
them the information they need to drive workflow efficiencies, raise employee
productivity and cut costs. With CostTrack, customers no longer use a
cost-plus model but pay according to the complexity of the Owens & Minor
services that they choose.
20
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- --------------------------------------------------------------------------------
o WISDOM: This new Internet-accessed decision support tool connects customers
and suppliers to O&M's award-winning data warehouse. Password-protected,
WISDOM offers customers online access to more than 90 reports about their
purchase history, contract compliance, product usage and other related data.
This timely information helps customers make well-informed purchasing
decisions and realize hard-dollar savings and operating efficiencies by:
o standardizing their product lines and
consolidating suppliers
o increasing contract compliance and
GPO-related revenues
o consolidating purchasing data among the various
computer systems in a healthcare network
For subscribing supplier partners, WISDOM provides reports on their O&M
product inventory, drop shipments, credits, customer contract utilization and
O&M service levels by product and by customer. This information helps
suppliers target growth opportunities within specific customer accounts.
O PANDAC(R)WOUND CLOSURE MANAGEMENT PROGRAM: This information-based program
provides customers an evaluation of their current and historical wound
closure inventories and usage levels, helping them reduce their investment in
suture and endomechanical equipment and control their costs per operative
case. O&M works closely with customers to target savings in excess of 5% in
the first year.
O FOCUS ON CONSOLIDATION, UTILIZATION & STANDARDIZATION (FOCUS): This
partnership program drives product standardization and consolidation,
increasing the volume of purchases from O&M's leading suppliers, and in turn,
providing operational benefits and cost savings to healthcare customers.
FOCUS centers around both commodity and preference product standardization.
O&M requires its FOCUS partners to be market share leaders and to meet strict
certification standards, such as exceeding minimum fill rates, offering a
flexible returned goods policy and using EDI.
OTHER MATTERS
REGULATION. The medical/surgical supply distribution industry is subject to
regulation by federal, state and local government agencies. Each of O&M's
distribution centers is licensed to distribute medical and surgical supplies as
well as certain pharmaceutical and related products. The company must comply
with regulations, including operating and security standards for each of its
distribution centers, of the Food and Drug Administration, the Drug Enforcement
Agency, the Occupational Safety and Health Administration, state boards of
pharmacy and, in certain areas, state boards of health. O&M believes it is in
material compliance with all statutes and regulations applicable to distributors
of medical and surgical supply products and pharmaceutical and related products,
as well as other general employee health and safety laws and regulations.
PROPERTIES. O&M's corporate headquarters are located in western Henrico County,
in a suburb of Richmond, Virginia, in leased facilities. The company owns two
undeveloped parcels of land adjacent to its corporate headquarters. The company
leases offices and warehouses for its 46 distribution centers across the United
States. In the normal course of business, the company regularly assesses its
business needs and makes changes to the capacity and location of its
distribution centers. The company believes that its facilities are adequate to
carry on its business as currently conducted. All of O&M's distribution centers
are leased from unaffiliated third parties. A number of leases are scheduled to
terminate within the next several years. The company believes that, if
necessary, it could find facilities to replace these leased premises without
suffering a material adverse effect on its business.
21
<PAGE>
ANALYSIS OF OPERATIONS
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
1999 FINANCIAL RESULTS
In 1999, O&M earned net income of $28.0 million, or $0.82 per diluted common
share, compared with $20.1 million, or $0.56 per diluted common share, in 1998.
Net income in 1999 was increased by a $0.6 million after-tax reduction of a
restructuring accrual originally established in 1998. The 1998 restructuring
charge of $11.2 million reflected the company's plan to downsize warehouse
operations as a result of the cancellation of its contract with Columbia/HCA
Healthcare Corporation (Columbia/HCA). Excluding the restructuring charge and
the subsequent adjustment, net income attributable to common stock for 1999
increased 10.3% to $27.4 million or $0.80 per diluted common share from $24.9
million or $0.75 per diluted common share for 1998.
RESULTS OF OPERATIONS
The following table presents the company's consolidated statements of income on
a percentage of net sales basis:
- ------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.5 89.4 89.8
- ------------------------------------------------------------------
Gross margin 10.5 10.6 10.2
- ------------------------------------------------------------------
Selling, general and
administrative expenses 7.6 7.8 7.5
Depreciation and amortization 0.6 0.6 0.6
Interest expense, net 0.4 0.5 0.5
Discount on accounts
receivable securitization 0.1 0.1 0.2
Distributions on mandatorily
redeemable preferred
securities 0.2 0.1 -
Nonrecurring restructuring
expenses - 0.4 -
- -------------------------------------------------------------------
Total expenses 8.9 9.5 8.8
- ------------------------------------------------------------------
Income before income taxes 1.6 1.1 1.4
Income tax provision 0.7 0.4 0.6
- -------------------------------------------------------------------
Net income 0.9% 0.7% 0.8%
- -------------------------------------------------------------------
GENERAL. On July 30, 1999, the company acquired certain net assets of Medix,
Inc. (Medix), a distributor of medical/surgical supplies, for approximately $83
million. The company paid cash of approximately $68 million and assumed debt of
approximately $15 million, which was paid off as part of the closing
transaction. The excess of the purchase price over the fair value of the
identifiable net assets acquired of approximately $58 million has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years. This
acquisition strengthens the company's presence in the Midwest and is expected to
provide opportunities for increased sales in this geographic area. Medix' net
sales were approximately $184 million for its fiscal year ended October 2, 1998.
The success of the acquisition will depend in part on the company's ability to
integrate and capture synergies in the combined businesses.
NET SALES. Net sales increased by 3.4% to $3.19 billion for the year ended
December 31, 1999, from $3.08 billion in 1998 and increased 20.1% to $861
million for the fourth quarter of 1999 from $717 million for the fourth quarter
of 1998. Excluding the sales generated by the Medix acquisition, net sales
increased 0.8% for the year and 13.4% for the fourth quarter. The increase in
sales was due to new customer contracts and increased penetration of existing
accounts. The Columbia/HCA contract, representing approximately 11% of net sales
in 1997, was cancelled in mid-1998. Sales to this customer declined
significantly during the second half of 1998. In February 1999, the company
began shipments to Tenet Healthcare Corporation (Tenet) hospitals and members of
the affiliated BuyPower purchasing group. Partly as a result of these changes,
sales for the first half of 1999 were 5.2% lower than in 1998, and sales for the
second half of 1999, excluding Medix, were 7.2% higher than in 1998.
Net sales declined slightly by 1.1% to $3.08 billion for the year ended
December 31, 1998, from $3.12 billion in 1997, and decreased 10.9% to $717
million for the fourth quarter of 1998 from $805 million for the fourth quarter
of 1997. The reduction in net sales was due to the cancellation of
Columbia/HCA's distribution contract, which mostly affected fourth-quarter
results.
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[BAR CHART APPEARS HERE]
NET SALES
(BILLIONS)
1999 $3.19
1998 $3.08
1997 $3.12
1996 $3.02
1995 $2.98
GROSS MARGIN. Gross margin as a percentage of net sales decreased slightly to
10.5% in 1999 compared with 10.6% in 1998 and decreased to 10.5% for the fourth
quarter of 1999 from 11.3% in the fourth quarter of 1998. The decrease for the
year and the fourth quarter was a result of the benefits of certain supply chain
initiatives being recognized over a lower sales base in 1998.
Gross margin as a percentage of net sales increased to 10.6% in 1998 from
10.2% in 1997 as a result of the company's emphasis on supply chain initiatives
with key suppliers. Gross margin as a percentage of net sales increased to 11.3%
for the fourth quarter of 1998 from 10.5% in the fourth quarter of 1997. As
discussed above, this increase was the result of a lower sales base in 1998.
[BAR CHART APPEARS HERE]
GROSS MARGIN % VS. SG&A% OF NET SALES
GROSS MARGIN %
10.5%
1.4% 2.2% 2.7% 2.8% 2.9%
7.6%
SG$A%
1995 1996 1997 1998 1999
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses as a percentage of net sales were 7.6% in 1999
compared with 7.8% in 1998 and 7.5% in 1997 and decreased to 7.3% in the fourth
quarter of 1999 from 8.2% in the fourth quarter of 1998 and 7.7% in the fourth
quarter of 1997. The decreases for the year and the fourth quarter of 1999 were
primarily a result of the higher sales base as well as management of operating
expenses. Spending on Year 2000 initiatives decreased from $3.6 million to $2.6
million for the year and from $1.2 million to $0.2 million for the fourth
quarter.
The increase in SG&A expenses as a percentage of net sales to 8.2% in the
fourth quarter of 1998 from 7.7% in the fourth quarter of 1997 was driven by the
reduction of sales to Columbia/HCA.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 6.0%
in 1999 to $19.4 million, compared with $18.3 million in 1998 and $17.7 million
in 1997. The increase in 1999 compared to 1998 was due to goodwill amortization
of approximately $0.6 million resulting from the Medix acquisition. In addition,
depreciation expense increased as a result of higher capital spending associated
with development of electronic commerce applications. O&M anticipates similar
increases in depreciation in 2000 associated with additional capital spending on
information technology initiatives.
NET INTEREST EXPENSE AND DISCOUNT ON ACCOUNTS RECEIVABLE SECURITIZATION
(FINANCING COSTS). Net financing costs totaled $17.1 million in 1999, compared
with $18.7 million in 1998 and $22.3 million in 1997. Net financing costs
included collections of customer finance charges of $4.6 million in 1999, up
from $3.0 million in 1998 and $3.1 million in 1997. Excluding the customer
finance charges, financing costs remained consistent at $21.7 million in 1999
and 1998, a decrease from $25.4 million in 1997. The increase in cash flow from
operations enabled the company to reduce debt in both 1999 and 1998, excluding
cash outflows associated with the Medix acquisition. In this analysis of
operations, the term "debt" includes both the debt reported in the consolidated
financial statements, and amounts financed under the company's off balance sheet
accounts receivable securitization facility. The Medix acquisition was funded by
cash flow from operations and an increase in outstanding debt.
In 1998, the decrease in financing costs was due to lower effective interest
rates and lower average outstanding debt. Cash flow from operations in 1998
included a $15.9 million refund of federal income taxes resulting from
23
<PAGE>
ANALYSIS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
a tax method change. Beginning with the tax year ended December 31, 1997, the
company received permission from the Internal Revenue Service to change its
method of accounting for last-in, first-out inventory. This refund resulted in
an increase in the current deferred tax liability and had no effect on the total
income tax provision for 1998.
O&M expects to continue to manage its financing costs by continuing its
working capital reduction initiatives and management of interest rates, although
the future results of these initiatives cannot be assured.
DISTRIBUTIONS ON MANDATORILY REDEEMABLE PREFERRED SECURITIES AND DIVIDENDS ON
PREFERRED STOCK. In May 1998, Owens & Minor Trust I (Trust), a wholly owned
business trust, issued $132 million of Mandatorily Redeemable Preferred
Securities (Securities). The company applied substantially all of the net
proceeds from this transaction to repurchase all of its outstanding Series B
Cumulative Preferred Stock. The effect of this transaction was to reduce the
overall cost of capital of the company. The after-tax combined cost was $4.0
million for the Securities in 1999 and $4.5 million for the Securities and the
dividend on preferred stock in 1998, compared to $5.2 million for the total
dividends on preferred stock in 1997. As of December 31, 1999 and 1998, the
company had accrued $1.2 million of distributions related to the Securities.
NONRECURRING RESTRUCTURING EXPENSES (CREDIT). As a result of the Columbia/HCA
contract cancellation in the second quarter of 1998, the company recorded a
nonrecurring restructuring charge of $11.2 million, or $6.6 million after taxes,
to downsize operations. In the second quarter of 1999, the company re-evaluated
its restructuring accrual. Since the actions under this plan had resulted in
lower projected total costs than originally anticipated, the company recorded a
reduction in the accrual of $1.0 million, or approximately $0.6 million after
taxes. As of December 31, 1999, $4.1 million had been charged against this
liability.
[BAR CHART APPEAR HERE}
Outstanding Financing Financing Costs
95 382 26.2
96 293 25.5
97 293 22.3
98 225 18.7
99 281 17.1
INCOME TAXES. The income tax provision was $22.1 million in 1999, $14.6 million
in 1998 and $17.6 million in 1997. O&M's effective tax rate was 44.1% in 1999,
compared with 42.0% in 1998 and 1997. The increase in the effective tax rate for
1999 results primarily from a decrease in nontaxable income, which was partially
offset by the increase in income before income taxes, which decreased the impact
of nondeductible goodwill amortization. The 1998 effective tax rate remained
consistent with the 1997 effective tax rate as the decrease in income before
taxes, which increased the impact of nondeductible goodwill, was offset by the
increase in the impact of nontaxable income.
NET INCOME. Excluding the effects of the restructuring expense (credit), 1999
net income increased to $27.4 million from $26.8 million in 1998 and $24.3
million in 1997 and net income per diluted common share increased to $0.80
compared to $0.75 in 1998 and $0.60 in 1997. This increase resulted from
increased sales and productivity, partly offset by higher depreciation and
amortization and distributions on mandatorily redeemable preferred securities.
Excluding the effect of the restructuring expense (credit), 1999 net income
attributable to common stock increased to $27.4 million compared to $24.9
million in 1998 and $19.1 million in 1997, due to the positive effect of the
retirement of the company's outstanding Series B Cumulative Preferred Stock in
May 1998 which was funded through the issuance of $132 million of Securities
issued by the Trust. The after-tax distribution rate of the
24
<PAGE>
- --------------------------------------------------------------------------------
Securities is lower than the preferred dividend rate. Net income for the fourth
quarter increased $2.2 million or 33.9% in 1999 compared to 1998 and decreased
$0.5 million or 6.4% in 1998 compared to 1997. The increase in net income in the
fourth quarter of 1999 compared to the fourth quarter of 1998 was a result of
the higher sales in 1999. The decrease in net income in the fourth quarter of
1998 compared to the fourth quarter of 1997 was a result of the reduction in
sales from the cancelled Columbia/HCA contract discussed above. Although the net
income trend has been favorable and the company continues to pursue initiatives
to improve profitability, the future impact on net income cannot be assured.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The company acquired certain net assets of Medix on July 30, 1999,
for approximately $83 million. This acquisition was funded by cash flow from
operations and an increase in outstanding debt. As a result of the acquisition,
debt increased by approximately $55.8 million, from $225.0 million at December
31, 1998, to $280.8 million at December 31, 1999. Excluding the impact of the
acquisition, outstanding debt was reduced by $26.9 million. This reduction was
due to the positive impact of cash flow from operations.
In May 1998, O&M repurchased all of its outstanding Series B Cumulative
Preferred Stock, financing the repurchase with substantially all the net
proceeds from the issuance of $132 million of the Securities by the Trust. These
transactions reduced the company's overall cost of capital from 1998.
The company expects that its available financing will be sufficient to fund
its working capital needs and long-term strategic growth, although this cannot
be assured. At December 31, 1999, O&M had approximately $202.4 million of unused
credit under its revolving credit facility and $43.5 million under its
receivables financing facility.
WORKING CAPITAL MANAGEMENT. The company's working capital decreased by $15.8
million from December 31, 1998 to $219.4 million at December 31, 1999. This
decrease is due, in part, to the Medix acquisition, as well as timing of
payments on higher levels of inventory needed to support sales growth. The
company continues to focus on the management of inventory levels. Inventory
turnover increased to 9.2 times for the fourth quarter of 1999 from 8.4 times in
the fourth quarter of 1998 due to the higher level of sales in the fourth
quarter of 1999. Inventory turnover decreased to 9.2 times for the year ended
December 31, 1999, from 9.8 times in 1998, due to higher levels of inventory to
support continuing sales growth, and anticipated increased demand arising from
concerns about Year 2000.
CAPITAL EXPENDITURES. Capital expenditures were approximately $22.1 million in
1999, of which approximately $19.0 million was for computer hardware and
software, including $3.0 million for system upgrades to complete the preparation
for Year 2000. The company expects to continue to invest in technology,
including system upgrades, to support strategic initiatives, and improve
operational efficiency. These capital expenditures are expected to be funded
through cash flow from operations.
YEAR 2000
The company has experienced virtually no disruptions in its business activities
as a result of the calendar rollover to the Year 2000. There can be no
assurance, however, that all potential Year 2000 issues have been discovered.
The total cost of the company's Year 2000 remediation efforts included $8.3
million of operating expenses and $6.8 million of capital expenditures of which
$2.6 million and $3.0 million were incurred during 1999.
EMPLOYEES
As of December 31, 1999, O&M employed 2,774 people.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, Deferral of the Effective Date of
SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
137 delayed the effective date of SFAS
25
<PAGE>
ANALYSIS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
No. 133 by one year. The company will be required to adopt the provisions of
this standard beginning on January 1, 2001. Management believes the effect of
the adoption of this standard will be limited to financial statement
presentation and disclosure and will not have a material effect on the company's
financial condition or results of operations.
RISKS
The company is subject to risks associated with changes in the medical industry,
including continued efforts to control costs, which place pressure on operating
margin, and changes in the way medical and surgical services are delivered to
patients. The loss of one of the company's larger customers could have a
significant effect on its business. However, management believes that the
company's competitive position in the marketplace and its ability to control
costs would enable it to continue profitable operations and attract new
customers in the event of such a loss.
MARKET RISK
O&M provides credit, in the normal course of business, to its customers. The
company performs ongoing credit evaluations of its customers and maintains
allowances for credit losses.
The company is exposed to market risk relating to changes in interest rates.
O&M's net exposure to interest rate risk consists of floating rate instruments
that are benchmarked to London Interbank Offered Rate (LIBOR). To manage this
risk, O&M uses interest rate swaps to modify the company's exposure to interest
rate movements and reduce borrowing costs. The company enters into these
derivative transactions pursuant to its policies in areas such as counterparty
exposure and hedging practices. The company is exposed to certain losses in the
event of nonperformance by the counterparties to these swap agreements. However,
O&M's exposure is not significant and, since the counterparties are investment
grade financial institutions, nonperformance is not anticipated.
The company is exposed to market risk from changes in interest rates related
to its interest rate swaps. Interest expense is subject to change as a result of
movements in interest rates. As of December 31, 1999, O&M had $100 million of
interest rate swaps on which the company pays a variable rate based on LIBOR and
receives a fixed rate, and has $65 million of interest rate swaps on which the
company pays a fixed rate and receives a variable rate based on LIBOR. A
hypothetical increase in interest rates of 10%, or 60 basis points, would result
in a potential reduction in future pre-tax earnings of approximately $0.6
million per year in connection with the $100 million swaps and an increase in
future pre-tax earnings of approximately $0.4 million per year in connection
with the $65 million swaps.
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, including, but not
limited to, general economic and business conditions, competition, changing
trends in customer profiles, outcome of outstanding litigation, and changes in
government regulations. Although O&M believes its expectations with respect to
the forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
============================================================== ============= =============== ================
<S> <C> <C> <C>
Net sales $3,186,373 $ 3,082,119 $ 3,116,798
Cost of goods sold 2,851,556 2,755,158 2,800,044
- -------------------------------------------------------------- ---------- ----------- ------------
Gross margin 334,817 326,961 316,754
- -------------------------------------------------------------- ---------- ----------- ------------
Selling, general and administrative expenses 242,199 239,543 234,872
Depreciation and amortization 19,365 18,270 17,664
Interest expense, net 11,860 14,066 15,703
Discount on accounts receivable securitization 5,240 4,655 6,584
Distributions on mandatorily redeemable preferred securities 7,095 4,494 -
Nonrecurring restructuring expense (credit) (1,000) 11,200 -
- -------------------------------------------------------------- ---------- ----------- ------------
Total expenses 284,759 292,228 274,823
- -------------------------------------------------------------- ---------- ----------- ------------
Income before income taxes 50,058 34,733 41,931
Income tax provision 22,079 14,588 17,611
- -------------------------------------------------------------- ---------- ----------- ------------
Net income 27,979 20,145 24,320
Dividends on preferred stock - 1,898 5,175
- -------------------------------------------------------------- ---------- ----------- ------------
Net income attributable to common stock $ 27,979 $ 18,247 $ 19,145
- -------------------------------------------------------------- ---------- ----------- ------------
Net income per common share - basic $ 0.86 $ 0.56 $ 0.60
- -------------------------------------------------------------- ---------- ----------- ------------
Net income per common share - diluted $ 0.82 $ 0.56 $ 0.60
- -------------------------------------------------------------- ---------- ----------- ------------
Cash dividends per common share $ 0.23 $ 0.20 $ 0.18
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, 1999 1998
====================================================================== ============= ==========
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 669 $ 546
Accounts and notes receivable, net 226,927 213,765
Merchandise inventories 342,478 275,094
Other current assets 19,172 14,816
- ---------------------------------------------------------------------- -------- --------
TOTAL CURRENT ASSETS 589,246 504,221
Property and equipment, net 25,877 25,608
Goodwill, net 210,837 158,276
Other assets, net 39,040 29,663
- ---------------------------------------------------------------------- -------- --------
TOTAL ASSETS $865,000 $717,768
- ---------------------------------------------------------------------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $303,490 $206,251
Accrued payroll and related liabilities 6,883 8,974
Other accrued liabilities 59,425 53,749
- ---------------------------------------------------------------------- -------- --------
TOTAL CURRENT LIABILITIES 369,798 268,974
Long-term debt 174,553 150,000
Accrued pension and retirement plans 6,268 5,668
- ---------------------------------------------------------------------- -------- --------
TOTAL LIABILITIES 550,619 424,642
- ---------------------------------------------------------------------- -------- --------
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust, holding solely convertible debentures of
Owens & Minor, Inc. 132,000 132,000
- ---------------------------------------------------------------------- -------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value $100 per share; authorized-10,000 shares
Series A; Participating Cumulative Preferred Stock; none issued - -
Common stock, par value $2 per share; authorized-200,000 shares;
issued and outstanding - 32,711 shares and 32,618 shares 65,422 65,236
Paid-in capital 12,890 12,280
Retained earnings 104,069 83,610
- ---------------------------------------------------------------------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 182,381 161,126
- ---------------------------------------------------------------------- -------- --------
Commitments and contingencies
- ----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $865,000 $717,768
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
================================================================== ============= ============ ==============
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,979 $ 20,145 $ 24,320
Adjustments to reconcile net income to cash provided by operating
activities
Depreciation and amortization 19,365 18,270 17,664
Nonrecurring restructuring provision (credit) (1,000) 11,200 -
Deferred income taxes 8,236 22,737 (3)
Provision for LIFO reserve 1,741 1,536 2,414
Provision for losses on accounts and notes receivable 559 496 268
Changes in operating assets and liabilities:
Accounts and notes receivable 481 (26,383) (40,903)
Merchandise inventories (42,397) 8,899 (6,104)
Accounts payable 86,871 (23,375) 4,714
Net change in other current assets and current liabilities (11,232) (651) 4,614
Other, net 1,686 (389) 1,038
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 92,289 32,485 8,022
- ------------------------------------------------------------------ ---------- ---------- ----------
INVESTING ACTIVITIES
Net cash paid for acquisition of business (82,699) - -
Additions to property and equipment (8,933) (8,053) (7,495)
Additions to computer software (13,172) (4,556) (4,472)
Other, net (2,359) 160 1,851
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH USED FOR INVESTING ACTIVITIES (107,163) (12,449) (10,116)
- ------------------------------------------------------------------ ---------- ---------- ----------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily redeemable
preferred securities - 127,268 -
Repurchase of preferred stock - (115,000) -
Additions to debt 25,178 - 26,026
Reductions of debt - (32,550) (11,049)
Other financing, net (2,741) 5,554 (4,679)
Cash dividends paid (7,520) (9,268) (10,950)
Proceeds from exercise of stock options 80 3,923 2,586
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 14,997 (20,073) 1,934
- ------------------------------------------------------------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 123 (37) (160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 546 583 743
- ------------------------------------------------------------------ ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 669 $ 546 $ 583
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Preferred Common
Shares Preferred Shares Common Paid-in Retained
Outstanding Stock Outstanding Stock Capital Earnings
============= ============= ============= ========== ========== ===========
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 1,150 $ 115,000 31,907 $63,814 $ 5,086 $ 58,500
Net income - - - - - 24,320
Common stock cash dividends(1) - - - - - (5,775)
Preferred stock cash dividends(1) - - - - - (5,175)
Exercise of stock options - - 303 606 2,902 -
Other - - 3 6 17 -
- ----------------------------------- ----- ---------- ------ ------- ------- --------
Balance December 31, 1997 1,150 115,000 32,213 64,426 8,005 71,870
Net income - - - - - 20,145
Issuance of restricted stock - - 64 128 832 -
Unearned compensation - - - - (657) -
Common stock cash dividends(1) - - - - - (6,507)
Preferred stock cash dividends(1) - - - - - (1,898)
Exercise of stock options - - 333 666 3,978 -
Repurchase of preferred stock (1,150) (115,000) - - - -
Other - - 8 16 122 -
- ----------------------------------- ------ ---------- ------ ------- ------- --------
Balance December 31, 1998 - - 32,618 65,236 12,280 83,610
Net income - - - - - 27,979
Issuance of restricted stock - - 74 148 893 -
Unearned compensation - - - - (454) -
Common stock cash dividends(1) - - - - - (7,520)
Exercise of stock options - - 6 12 71 -
Other - - 13 26 100 -
- ----------------------------------- ------ ---------- ------ ------- ------- --------
BALANCE DECEMBER 31, 1999 - $ - 32,711 $65,422 $12,890 $104,069
</TABLE>
(1) Cash dividends were $0.23, $0.20 and $0.18 per common share in 1999, 1998
and 1997. Cash dividends were $1.65 and $4.50 per preferred share in 1998
and 1997.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Owens & Minor, Inc. is the largest distributor of national
name brand medical and surgical supplies in the United States. The consolidated
financial statements include the accounts of Owens & Minor, Inc. and its wholly
owned subsidiaries (the company). All significant intercompany accounts and
transactions have been eliminated. The preparation of the consolidated financial
statements in accordance with generally accepted accounting principles requires
management assumptions and estimates that affect amounts reported. Actual
results may differ from these estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and marketable
securities with an original maturity or maturity at acquisition of three months
or less. Cash and cash equivalents are stated at cost, which approximates market
value.
ACCOUNTS RECEIVABLE The company maintains an allowance for doubtful accounts
based upon the expected collectibility of accounts receivable. Allowances for
doubtful accounts of $6.5 million and $6.3 million, have been applied as
reductions of accounts receivable at December 31, 1999 and 1998.
MERCHANDISE INVENTORIES The company's merchandise inventories are valued on a
last-in, first-out (LIFO) basis.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost or, if acquired
under capital leases, at the lower of the present value of minimum lease
payments or fair market value at the inception of the lease. Normal maintenance
and repairs are expensed as incurred, and renovations and betterments are
capitalized. Depreciation and amortization are provided for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets or, for capital leases and leasehold improvements, over the terms of the
lease, if shorter. In general, the estimated useful lives for computing
depreciation and amortization are four to eight years for warehouse equipment
and three to eight years for computer, office and other equipment. Straight-line
and accelerated methods of depreciation are used for income tax purposes.
GOODWILL Goodwill is amortized on a straight-line basis over 40 years from the
dates of acquisition. As of December 31, 1999 and 1998, goodwill was $238.8
million and $181.1 million and the related accumulated amortization was $28.0
million and $22.8 million. Based upon management's assessment of undiscounted
future cash flows, the carrying value of goodwill at December 31, 1999 has not
been impaired. The carrying value of goodwill could be impacted if estimated
future cash flows are not achieved.
COMPUTER SOFTWARE The company develops and purchases software for internal use.
Effective January 1, 1998, the company adopted the provisions of Statement of
Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. Software development costs incurred during the
application development stage are capitalized. Once the software has been
installed and tested and is ready for use, additional costs incurred in
connection with the software are expensed as incurred. Adoption of the
provisions of this statement did not have a material effect on the consolidated
financial statements of the company. Capitalized computer software costs are
amortized over the estimated useful life of the software, usually between 3 and
5 years. Computer software costs are included in other assets, net in the
Consolidated Balance Sheets. Unamortized software at December 31, 1999 and 1998
was $18.2 million and $10.2 million. Depreciation and amortization expense
includes $4.9 million, $5.1 million and $4.6 million of software amortization
for the years ended December 31, 1999, 1998 and 1997.
REVENUE RECOGNITION Revenue from product sales is generally recognized at the
time the product is shipped. Service revenue is recognized over the contractual
period as the services are performed.
STOCK-BASED COMPENSATION The company uses the intrinsic value method of
Accounting Principles Board Opinion No. 25 to account for stock-based
compensation. This method requires compensation expense to be recognized for the
excess of the quoted market price of the stock at the grant date or the
measurement date over the amount an employee must pay to acquire the stock. The
disclosure requirements of Statement of Financial Accounting Standards
31
<PAGE>
- --------------------------------------------------------------------------------
(SFAS) No. 123 are included in Note 9 to Consolidated Financial Statements.
DERIVATIVE FINANCIAL INSTRUMENTS The company enters into interest rate swaps and
caps as part of its interest rate risk management strategy. These instruments
are designated as hedges of interest-bearing liabilities and anticipated cash
flows associated with off balance sheet financing. Net payments or receipts are
accrued as interest payable or receivable and as interest expense or income.
Fees related to these instruments are amortized over the life of the instrument.
If the outstanding balance of the underlying liability were to drop below the
notional amount of the swap or cap, the excess portion of the swap or cap would
be marked to market, and the resulting gain or loss included in net income.
OPERATING SEGMENTS The company adopted the provisions of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, effective
January 1, 1998. As defined in SFAS No. 131, the company operates in 34
operating segments. As each of these segments is substantially identical to the
others in each of the five aggregation characteristics identified in the
statement, these segments have been aggregated for purposes of financial
statement disclosure.
NOTE 2 - ACQUISITION
On July 30, 1999, the company acquired certain net assets of Medix, Inc.
(Medix), a distributor of medical and surgical supplies, for approximately $83
million. Headquartered in Waunakee, Wisconsin, Medix' customers are primarily in
the Midwest and include acute care hospitals, long-term care facilities and
clinics. Medix' net sales were approximately $184 million for its fiscal year
ended October 2, 1998. The acquisition has been accounted for by the purchase
method and, accordingly, the operating results of Medix have been included in
the company's consolidated financial statements since the date of acquisition.
Assuming the acquisition had been made at the beginning of the periods,
consolidated net sales, on a pro forma basis would have been approximately $3.30
billion and $3.27 billion for the years ended December 31, 1999 and 1998,
respectively. Consolidated net income and net income per share on a pro forma
basis would not have been materially different from the results reported.
The company paid cash of approximately $68 million and assumed debt of
approximately $15 million, which was paid off as part of the closing
transaction. The excess of the purchase price over the fair value of the
identifiable net assets acquired of approximately $58 million has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years.
In connection with the acquisition, management adopted a plan for
integration of the businesses which includes closure of some Medix facilities
and consolidation of certain administrative functions. An accrual was
established to provide for certain costs of this plan. The following table sets
forth the major components of the accrual and activity through December 31,
1999:
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
EXIT PLAN DECEMBER 31,
PROVISION CHARGES 1999
----------- --------- ------------
<S> <C> <C> <C>
Losses under lease
commitments $1,643 $34 $1,609
Employee separations 395 56 339
Other 685 - 685
- ---------------------- ------ --- ------
Total $2,723 $90 $2,633
</TABLE>
The employee separations relate to severance costs for employees in
operations and activities being exited. As of December 31, 1999, 12 employees
had been terminated. The integration of the Medix business is expected to be
substantially complete by mid-2000.
NOTE 3 - RESTRUCTURING
In the second quarter of 1998, the company recorded a nonrecurring restructuring
charge of $11.2 million related to the impact of the cancellation of its
medical/ surgical distribution contract with Columbia/HCA Healthcare Corporation
(Columbia/HCA). The restructuring plan includes reductions in warehouse space
and in the number of employees in those divisions which had the highest volume
of business with Columbia/HCA facilities. In the second quarter of 1999, the
company re-evaluated its estimate of the remaining costs to be incurred and
reduced the accrual by $1.0 million. The following table sets forth the activity
in the restructuring accrual through December 31, 1999:
32
<PAGE>
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
RESTRUCTURING BALANCE AT
PROVISION CHARGES ADJUSTMENTS DECEMBER 31, 1999
================ ========= ============= =================
<S> <C> <C> <C> <C>
Losses under lease
commitments $ 4,194 $2,093 $ 203 $2,304
Asset write-offs 3,968 652 - 3,316
Employee separations 2,497 1,281 (1,203) 13
Other 541 64 - 477
- ----------------------- ------- ------ ------- ------
Total $11,200 $4,090 $(1,000) $6,110
</TABLE>
Approximately 130 employees were terminated in connection with the
restructuring plan.
NOTE 4 - MERCHANDISE INVENTORIES
The company's merchandise inventories are valued on a LIFO basis. If LIFO
inventories had been valued on a current cost or first-in, first-out (FIFO)
basis, they would have been greater by $28.6 million and $26.8 million as of
December 31, 1999 and 1998.
NOTE 5 - PROPERTY AND EQUIPMENT
The company's investment in property and equipment consists of the following:
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999 1998
============================= =========== ============
<S> <C> <C>
Warehouse equipment $23,337 $23,138
Computer equipment 30,606 25,888
Office and other equipment 12,804 11,368
Leasehold improvements 9,903 9,288
Land and improvements 1,743 1,738
- ----------------------------- ------- -------
78,393 71,420
Accumulated depreciation
and amortization (52,516) (45,812)
- ----------------------------- ------- -------
Property and equipment, net $25,877 $25,608
</TABLE>
Depreciation and amortization expense for property and equipment in 1999,
1998 and 1997 was $9.3 million, $8.6 million and $8.5 million.
NOTE 6 - ACCOUNTS PAYABLE
Accounts payable balances were $303.5 million and $206.3 million as of December
31, 1999 and 1998, of which $264.4 million and $164.5 million were trade
accounts payable and $39.1 million and $41.8 million, were drafts payable.
Drafts payable are checks written in excess of bank balances to be funded upon
clearing the bank.
33
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7 - FINANCIAL INSTRUMENTS
The company's long-term debt consists of the following:
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999 1998
==================================================== ============================ =========================
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
============= ============ =========== ===========
<S> <C> <C> <C> <C>
10.875% Senior Subordinated Notes, mature
June 2006 $150,000 $155,250 $150,000 $162,000
Revolving Credit Facility with interest based on
London Interbank Offered Rate (LIBOR) or Prime
Rate, expires May 2001, credit limit of $225,000 22,600 22,600 - -
Obligation under financing agreement 2,578 2,578 - -
- ---------------------------------------------------- -------- -------- -------- --------
Total debt 175,178 180,428 150,000 162,000
Less current maturities (625) (625) - -
- ---------------------------------------------------- -------- -------- -------- --------
Long-term debt $174,553 $179,803 $150,000 $162,000
</TABLE>
In May 1996, the company issued $150.0 million of 10.875% Senior
Subordinated 10-year notes (Notes), which mature on June 1, 2006. Interest on
the Notes is payable semi-annually on June 1 and December 1. The Notes are
redeemable, after June 1, 2001, at the company's option, subject to certain
restrictions. The Notes are unconditionally guaranteed on a joint and several
basis by all significant subsidiaries of the company, other than O&M Funding
Corp. (OMF) and Owens & Minor Trust I.
The Revolving Credit Facility expires in May 2001 with interest based on,
at the company's discretion, LIBOR or the Prime Rate. The company is charged a
commitment fee of between 0.15% and 0.25% on the unused portion of the Revolving
Credit Facility. The terms of the Revolving Credit Facility limit the amount of
indebtedness that the company may incur, require the company to maintain certain
levels of tangible net worth, current ratio, leverage ratio and fixed charge
coverage, and restrict the ability of the company to materially alter the
character of the business through consolidation, merger or purchase or sale of
assets. At December 31, 1999, the company was in compliance with these
covenants.
The company entered into a financing agreement for computer software
licenses. This agreement requires periodic payments through January 2002, and
interest is imputed at a rate of 7.0%.
Net interest expense includes finance charge income of $4.6 million, $3.0
million and $3.1 million in 1999, 1998 and 1997. Finance charge income
represents payments from customers for past due balances on their accounts. Cash
payments for interest during 1999, 1998 and 1997 were $16.0 million, $16.4
million and $18.3 million.
The estimated fair value of long-term debt is based on the borrowing rates
currently available to the company for loans with similar terms and average
maturities. The annual maturities of long-term debt for the five years
subsequent to December 31, 1999 are: $0.6 in 2000, $23.9 million in 2001, $0.7
million in 2002 and $0 in 2003 and 2004.
OFF BALANCE SHEET FINANCING Under the terms of the Receivable Financing
Facility, OMF is entitled to transfer, without recourse, certain of the
company's trade receivables and to receive up to $150.0 million from an
unrelated third party purchaser at a cost of funds at commercial paper rates
plus a charge for administrative and credit support services. In October 1999,
the Receivables Financing Facility was modified primarily to extend the facility
termination date to October 2, 2000. At December 31, 1999 and 1998, the company
had received $105.6 million and $75.0 million, respectively, under the
agreement. To continue use of the Receivables Financing Facility, the company is
required
34
<PAGE>
- --------------------------------------------------------------------------------
to be in compliance with the covenants of the Revolving Credit Facility.
The company manages its interest rate risk primarily through the use of
interest rate swap agreements. The company's interest rate swap agreements as of
December 31, 1999 and 1998 included $100.0 million notional amounts that
effectively converted a portion of the company's fixed rate financing
instruments to variable rates. Under these swap agreements, expiring in May
2006, the company pays the counterparties a variable rate based on LIBOR and the
counterparties pay the company a fixed interest rate ranging from 7.29% to
7.32%. At the option of the counterparties, these swaps can be terminated in
2001. As of December 31, 1999 and 1998, the company also had $65.0 million and
$75.0 million notional amounts, respectively, of interest rate swap agreements
that effectively converted the company's variable rate financing instruments to
fixed rate instruments. Under these swap agreements, which expire in May 2001,
the company pays the counterparties a fixed rate ranging from 5.75% to 5.93% and
the counterparties pay the company a variable rate based on LIBOR.
The payments received or disbursed related to the interest rate swaps are
included in interest expense, net. Based on estimates of the prices obtained
from a dealer, the company had an unrealized loss of approximately $1.0 million
and an unrealized gain of approximately $5.0 million at December 31, 1999 and
1998 for the fixed to variable rate swaps, and an unrealized gain of
approximately $0.7 million and an unrealized loss of approximately $1.2 million
at December 31, 1999 and 1998 for the variable to fixed rate swaps.
The company is exposed to certain losses in the event of nonperformance by
the counterparties to these swap agreements. However, the company's exposure is
not material and, since the counterparties are investment grade financial
institutions, nonperformance is not anticipated.
NOTE 8 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
In May 1998, Owens & Minor Trust I (Trust), a statutory business trust sponsored
and wholly owned by Owens & Minor, Inc. (O&M), issued 2,640,000 shares of
$2.6875 Term Convertible Securities, Series A (Securities), for aggregate
proceeds of $132.0 million. Each Security has a liquidation value of $50. The
net proceeds were invested by the Trust in 5.375% Junior Subordinated
Convertible Debentures of O&M (Debentures). The Debentures are the sole assets
of the Trust. O&M applied substantially all of the net proceeds of the
Debentures to repurchase 1,150,000 shares of its Series B Cumulative Preferred
Stock at its par value.
The Securities accrue and pay quarterly cash distributions at an annual
rate of 5.375% of the liquidation value. Each Security is convertible into
2.4242 shares of the common stock of O&M at the holder's option prior to May 1,
2013. The Securities are mandatorily redeemable upon the maturity of the
Debentures on April 30, 2013, and may be redeemed by the company in whole or in
part after May 1, 2001. The obligations of the Trust, as provided under the term
of the Securities, are fully and unconditionally guaranteed by O&M.
The estimated fair value of the Securities was $79.5 million and $127.4
million at December 31, 1999 and 1998 based on quoted market prices. As of
December 31, 1999 and 1998, the company had accrued $1.2 million of
distributions related to the Securities.
NOTE 9 - STOCK-BASED COMPENSATION
The company maintains stock based compensation plans (Plans) that provide for
the granting of stock options, stock appreciation rights (SARs), restricted
common stock and common stock. The Plans are administered by the Compensation
and Benefits Committee of the Board of Directors and allow the company to award
or grant to officers, directors and employees incentive, non-qualified and
deferred compensation stock options, SARs and restricted and unrestricted stock.
At December 31, 1999, approximately 1.2 million common shares were available for
issuance under the Plans.
Stock options awarded under the Plans generally vest over three years and
expire ten years from the date of grant. The options are granted at a price
equal to fair market value at the date of grant. Restricted stock awarded under
the Plans generally vests over three or five years. At December 31, 1999, there
were no SARs outstanding.
The company has a Management Equity Ownership Program (MEOP). This
program requires each of the company's officers to own the company's common
stock
35
<PAGE>
- --------------------------------------------------------------------------------
at specified levels, which gradually increase over five years. Officers who meet
specified ownership goals in a given year are awarded restricted stock under the
provisions of the program. Upon issuance of restricted shares, unearned
compensation is charged to shareholders' equity for the market value of
restricted stock and recognized as compensation expense ratably over the vesting
period. Amortization of unearned compensation for restricted stock awards was
approximately $534.1 thousand, $301.6 thousand and $54.3 thousand for 1999, 1998
and 1997.
The following table summarizes the activity and terms of outstanding
options at December 31, 1999, and for the years in the three-year period then
ended:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
========================= ========================= =======================
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS PRICE Options Price Options Price
=========== =========== =========== =========== ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of year 2,001 $13.78 1,940 $ 13.50 1,922 $13.06
Granted 600 13.70 550 13.79 523 12.73
Exercised (6) 12.68 (333) 12.12 (303) 13.41
Expired/cancelled (147) 13.66 (156) 13.89 (202) 14.58
- --------------------------------------- ------- ------- ----- ------- ----- -------
Outstanding at end of year 2,448 $13.75 2,001 $ 13.78 1,940 $13.50
Exercisable options at end of year 1,560 $13.83 1,137 $ 14.16 1,123 $13.87
</TABLE>
At December 31, 1999, the following option groups were outstanding:
<TABLE>
<CAPTION>
Outstanding Exercisable
============= =============
Weighted Weighted Average Weighted Weighted Average
Range of Number of Average Remaining Number of Average Remaining
Exercise Options Exercise Contractual Life Options Exercise Contractual Life
Prices (000's) Price (Years) (000's) Price (Years)
================= ========== ============= ================= ========== ============= =================
<S> <C> <C> <C> <C> <C> <C>
$ 9.40-13.25 595 $ 12.00 7.35 421 $ 12.16 7.01
$13.35-17.10 1,853 $ 14.31 6.87 1,139 $ 14.45 5.70
- ------------ ----- ------- ---- ----- ------- ----
2,448 $ 13.75 6.99 1,560 $ 13.83 6.06
</TABLE>
Using the intrinsic value method, the company's 1999, 1998 and 1997 net
income includes stock-based compensation expense (net of tax benefit) of
approximately $306 thousand, $201 thousand and $67 thousand. Had the company
included in stock-based compensation expense the fair value at grant date of
stock option awards granted in 1999, 1998 and 1997, net income would have been
$26.6 million (or $0.82 per basic common share and $0.78 per diluted common
share), $19.0 million (or $0.52 per basic and diluted common share) and $23.2
million (or $0.56 per basic and diluted common share) for the years ended
December 31, 1999, 1998 and 1997. The weighted average fair value of options
granted in 1999, 1998 and 1997 was $4.35, $4.06 and $3.77, per option. The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants: dividend
yield of 1.6%-2.4% in 1999, 1.2%-1.5% in 1998, and 1.2%-1.7% in 1997; expected
volatility of 32.4%-38.6% in 1999, 32.4%-37.9% in 1998, and 24.6%-41.0% in 1997;
risk-free interest rate of 6.4% in 1999, 4.7% in 1998, and 5.6% in 1997; and
expected lives of 2.1-5.1 years in 1999, 1998 and 1997.
36
<PAGE>
- --------------------------------------------------------------------------------
NOTE 10 - RETIREMENT PLANS
SAVINGS AND PROTECTION PLAN 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 plan provides for a
minimum contribution by the company to the plan for all eligible employees of 1%
of their salary. This contribution can be increased at the company's discretion.
The company incurred approximately $2.5 million, $2.1 million and $2.6 million
in 1999, 1998 and 1997, respectively, of expenses related to this plan.
PENSION PLAN The company has a noncontributory pension plan covering
substantially all employees who had earned benefits as of December 31, 1996. On
that date, substantially all of the benefits of employees under this plan were
frozen, with all participants becoming fully vested. The company expects to
continue to fund the plan based on federal requirements, amounts deductible for
income tax purposes and as needed to ensure that plan assets are sufficient to
satisfy plan liabilities. As of December 31, 1999, plan assets consist primarily
of equity securities, including 34 thousand shares of the company's common
stock, and U.S. Government securities.
RETIREMENT PLAN The company also has a noncontributory, unfunded retirement plan
for certain officers and other key employees. Benefits are based on a percentage
of the employees' compensation. The company maintains life insurance policies on
plan participants to act as a financing source for the plan.
The following table sets forth the plans' financial status and the amounts
recognized in the company's Consolidated Balance Sheets:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pension Plan Retirement Plan
========================= ===========================
1999 1998 1999 1998
=========== =========== ============ ============
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 22,288 $20,671 $ 6,094 $ 5,078
Service cost 225 243 542 354
Interest cost 1,470 1,415 406 350
Actuarial loss (gain) (571) 831 (978) 452
Benefits paid (894) (872) (176) (140)
- ---------------------------------------------- -------- ------- -------- --------
Benefit obligation, end of year $ 22,518 $22,288 $ 5,888 $ 6,094
- ---------------------------------------------- -------- ------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year $ 24,143 $22,121 $ - $ -
Actual return on plan assets 4,536 2,827 - -
Employer contribution - 67 176 140
Benefits paid (894) (872) (176) (140)
- ---------------------------------------------- -------- ------- -------- --------
Fair value of plan assets, end of year $ 27,785 $24,143 $ - $ -
- ---------------------------------------------- -------- ------- -------- --------
FUNDED STATUS
Funded status at December 31 $ 5,267 $ 1,855 $ (5,888) $ (6,094)
Unrecognized net actuarial (gain) loss (4,112) (816) 635 1,696
Unrecognized prior service benefit - - (188) (204)
Unrecognized net obligation being recognized
through 2002 - - 123 164
- ---------------------------------------------- -------- ------- -------- --------
Prepaid (accrued) benefit cost $ 1,155 $ 1,039 $ (5,318) $ (4,438)
- ---------------------------------------------- -------- ------- -------- --------
</TABLE>
37
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<PAGE>
- --------------------------------------------------------------------------------
The components of net periodic pension cost for the pension and retirement
plans are as follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended
December 31, 1999 1998 1997
========================== =========== =========== ===========
<S> <C> <C> <C>
Service cost $ 767 $ 597 $ 568
Interest cost 1,876 1,765 1,715
Expected return on
plan assets (1,811) (1,682) (1,430)
Amortization of prior
service benefit (16) (17) (17)
Amortization of
transition obligation 41 41 41
Recognized net
actuarial loss 84 57 90
- -------------------------- ------ ------ ------
Net periodic pension
cost $ 941 $ 761 $ 967
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was assumed to be 7.0% for
the Pension Plan and 8.0% for the Retirement Plan in 1999 and 6.75% for both
plans in 1998. The rate of increase in future compensation levels used in
determining the projected benefit obligation was 5.5% in 1999 and 1998. The
expected long-term rate of return on plan assets was assumed to be 8.5% in 1999
and 1998.
NOTE 11 - INCOME TAXES
The income tax provision consists of the following:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended
December 31, 1999 1998 1997
================= ========= ============ ==============
<S> <C> <C> <C>
Current tax
provision
(benefit):
Federal $11,724 $(7,690) $ 14,484
State 2,119 (459) 3,130
- ----------------- ------- ------- --------
Total current
provision
(benefit) 13,843 (8,149) 17,614
- ------------------ ------- ------- --------
Deferred tax
provision
(benefit):
Federal 7,206 19,895 (2)
State 1,030 2,842 (1)
- ------------------ ------- ------- ----------
Total deferred
provision
(benefit) 8,236 22,737 (3)
- ------------------ ------- ------- ----------
Total income tax
provision $22,079 $14,588 $ 17,611
</TABLE>
A reconciliation of the federal statutory rate to the company's effective
income tax rate is shown below:
<TABLE>
<CAPTION>
Year ended
December 31, 1999 1998 1997
============================ ========= ========== ==========
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in
the rate resulting from:
State income taxes, net
of federal income
tax impact 5.5 4.9 4.9
Nondeductible
goodwill
amortization 3.0 4.7 3.7
Nontaxable income - (4.0) (2.6)
Other, net 0.6 1.4 1.0
- ---------------------------- ----- ---- ----
Effective rate 44.1% 42.0% 42.0%
</TABLE>
38
<PAGE>
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The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
================================ ============= ============
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful
accounts $ 2,592 $ 2,509
Accrued liabilities not
currently deductible 3,900 5,276
Employee benefit plans 3,767 3,616
Nonrecurring
restructuring expenses 2,444 3,692
Tax loss carryforward, net 633 947
Other 1,156 815
- -------------------------------- -------- -------
Total deferred tax assets 14,492 16,855
- -------------------------------- -------- -------
Deferred tax liabilities:
Merchandise inventories 24,531 19,113
Accounts receivable 1,400 2,101
Property and equipment 1,869 1,076
Computer software 472 708
Other 1,478 1,359
- -------------------------------- -------- -------
Total deferred tax liabilities 29,750 24,357
- -------------------------------- -------- -------
Net deferred tax liability $(15,258) $(7,502)
</TABLE>
At December 31, 1999 and 1998, the company had a $0.04 million and $0.27
million valuation allowance, respectively, for state net operating losses. Based
on the level of historical taxable income and projections of future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the company will realize the
benefits of these deductible differences, net of existing valuation allowances.
Cash payments for income taxes for 1999, 1998 and 1997 were $17.9 million,
$14.1 million and $18.6 million, respectively.
39
<PAGE>
- --------------------------------------------------------------------------------
NOTE 12 - NET INCOME PER COMMON SHARE
The following sets forth the computation of basic and diluted net income per
common share:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
============ ============ =============
<S> <C> <C> <C>
Numerator:
Net income $27,979 $20,145 $ 24,320
Preferred stock dividends - 1,898 5,175
- ---------------------------------------------------------------- ------- ------- --------
Numerator for basic net income per common share - net income
available to common shareholders $27,979 $18,247 $ 19,145
Distributions on convertible mandatorily redeemable preferred
securities, net of taxes 3,966 - -
- ---------------------------------------------------------------- ------- ------- --------
Numerator for diluted net income per common share - net income
available to common shareholders after assumed conversions $31,945 $18,247 $ 19,145
- ---------------------------------------------------------------- ------- ------- --------
Denominator:
Denominator for basic net income per common share - weighted
average shares 32,574 32,488 32,048
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred securities 6,400 - -
Stock options and restricted stock 124 99 74
Other - 4 7
- ---------------------------------------------------------------- ------- ------- --------
Denominator for diluted net income per common share - adjusted
weighted average shares and assumed conversions 39,098 32,591 32,129
- ---------------------------------------------------------------- ------- ------- --------
Net income per common share - basic $ 0.86 $ 0.56 $ 0.60
Net income per common share - diluted $ 0.82 $ 0.56 $ 0.60
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, outstanding
options to purchase approximately 2,263 thousand, 461 thousand and 1,192
thousand common shares were excluded from the calculation of diluted net income
per share because their exercise price exceeded the average market price for the
year.
NOTE 13 - SHAREHOLDERS' EQUITY
In May 1998, the company repurchased all of the shares of its Series B preferred
stock at par value. Each share of preferred stock had an annual dividend of
$4.50, payable quarterly, had voting rights on items submitted to a vote of the
holders of common stock and was convertible into approximately 6.1 shares of
common stock at the shareholder's option.
The company has a shareholder rights agreement under which 8/27ths of a
Right is attendant to each outstanding share of common stock of the company.
Each full Right entitles the registered holder to purchase from the company one
one-hundredth of a share of Series A Participating Cumulative Preferred Stock
(the Series A Preferred Stock), at an exercise price of $75 (the Purchase
Price). The Rights will become exercisable, if not earlier redeemed, only if a
person or group acquires 20% or more of the outstanding shares of the company's
common stock or announces a tender offer, the consummation of which would result
in ownership by a person or group of 20% or more of such outstanding shares.
Each holder of a Right, upon the occurrence of certain events, will become
entitled to receive, upon exercise and payment of the Purchase Price, Series A
Preferred Stock (or in certain circumstances, cash, property or other securities
of the company or a potential acquirer) having a value equal to twice the amount
of the Purchase Price. The Rights will expire on April 30, 2004, if not earlier
redeemed.
40
<PAGE>
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NOTE 14 - COMMITMENTS AND CONTINGENCIES
The company has a commitment through November 2, 2008 to outsource its
information technology operations, including strategic application development
services. The commitment is cancellable after November 2, 2003 with 180 days
prior notice and payment of a minimum termination fee of between $3.0 million to
$12.0 million depending upon the date of termination.
The company has a commitment through December 2005 to outsource the
management and operation of its mainframe computer. This commitment is
cancellable at any time on 180 days prior notice and a minimum termination fee
of between $1.7 and $4.2 million, depending upon the date of termination.
The company also has entered into noncancellable agreements to lease
certain office and warehouse facilities with remaining terms ranging from one to
eight years. Certain leases include renewal options, generally for five-year
increments. At December 31, 1999, future minimum annual payments under
noncancellable operating lease agreements with original terms in excess of one
year are as follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total
==========
<S> <C>
2000 $20,753
2001 17,852
2002 14,808
2003 12,017
2004 8,366
Later years 9,458
- ------------------------ -------
Total minimum payments $83,254
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1999,
1998 and 1997 was $26.1 million, $26.1 million and $26.3 million, respectively.
The company has limited concentrations of credit risk with respect to
financial instruments. Temporary cash investments are placed with high credit
quality institutions and concentrations within accounts and notes receivable are
limited due to their geographic dispersion.
Net sales to member hospitals under contract with Novation totaled $1.7
billion in 1999 and $1.5 billion in 1998, approximately 53% and 49%, of the
company's net sales. As members of a group purchasing organization, Novation
hospitals have an incentive to purchase from their primary selected distributor;
however, they operate independently and are free to negotiate directly with
distributors and manufacturers. Net sales to member hospitals under contract
with VHA, Inc. were 40% of the company's net sales in 1997.
In 1998 and 1997, net sales to Columbia/HCA totaled $276 million and $356
million, or approximately 9% in 1998 and 11% in 1997 of the company's net sales.
NOTE 15 - LEGAL PROCEEDINGS
Prior to December 1992, the company's subsidiary Stuart Medical, Inc. (Stuart)
distributed spinal fixation devices manufactured by Sofamor S.N.C. As of January
21, 2000, Stuart was named as a defendant in 38 lawsuits, down from 54 in
January 1999, arising from personal injury claims allegedly attributable to
spinal fixation devices distributed by Stuart (the Cases).
A majority of the lawsuits 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.
On August 9, 1999, Medtronic Sofamor Danek, Inc., Danek Medical, Inc. and
Sofamor, S.N.C. (formerly known as Sofamor, S.A.), successors to the
manufacturer of the spinal fixation devices distributed by Stuart, assumed the
defense of Stuart and indemnified Stuart and others against all costs of
defense, any settlements and/or any adverse judgment(s) that may be entered
against Stuart in these Cases. Stuart also retains insurance coverage for the
defense of the Cases. In addition, 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. Management believes that Stuart's available
insurance coverage, together with the indemnification rights discussed above, is
adequate to cover any losses should they occur and, accordingly, has accrued no
liability therefor. The company is not aware of any uncertainty as to the
availability and adequacy of such insurance or indemnification, although there
can be no assurance that the Sofamor successor companies and the former
shareholders will have sufficient financial resources in the future to meet such
obligations.
41
<PAGE>
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As of December 31, 1999, approximately 134 Lawsuits (the Lawsuits), seeking
compensatory and punitive damages, in most cases of an unspecified amount, have
been filed in various federal and state courts against the company, product
manufacturers, and other distributors and sellers of natural rubber latex
products. The company has obtained dismissal or summary judgment in 18 cases.
The Lawsuits allege injuries arising from the use of latex products, principally
medical gloves. The Lawsuits also include claims by approximately 52 spouses
asserting loss of consortium. The company may be named as a defendant in
additional, similar lawsuits in the future. In the course of its medical supply
business, the company has distributed latex products, including medical gloves,
but it does not, nor has it ever manufactured any latex products. The company
has tendered the defense of the Lawsuits to manufacturer defendants whose gloves
were distributed by the company. One manufacturer's insurer has agreed to
indemnify and assume the defense of the company in five Lawsuits. The company
will continue to vigorously pursue indemnification from latex product
manufacturers. The company's insurers are paying all costs of defense in the
Lawsuits, and the company believes, at this time, that future defense costs and
any potential liability should be adequately covered by the insurance, subject
to policy limits and insurer solvency. Most of the Lawsuits are at the early
stages of trial preparation. Several Lawsuits that were scheduled for trial have
been dismissed on summary judgment. After analyzing the above factors at this
point in time, it would appear that the likelihood of a material loss to the
company with respect to the Lawsuits is remote.
The company is party to various other legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, management believes the outcome of these proceedings
will not have a material adverse effect on the company's financial condition or
results of operations.
NOTE 16 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for:
Owens & Minor, Inc.; on a combined basis, the guarantors of Owens & Minor,
Inc.'s Notes; and the non-guarantor subsidiaries of the Notes. Separate
financial statements of the guarantor subsidiaries are not presented because the
guarantors are jointly, severally and unconditionally liable under the
guarantees and the company believes the condensed consolidating financial
information is more meaningful in understanding the financial position, results
of operations and cash flows of the guarantor subsidiaries.
42
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Net sales $ - $3,186,373 $ - $ - $3,186,373
Cost of goods sold - 2,851,556 - - 2,851,556
- ------------------------------------------------ -------- ---------- --------- ----- ----------
Gross margin - 334,817 - - 334,817
- ------------------------------------------------ -------- ---------- --------- ----- ----------
Selling, general and administrative expenses 9 241,629 561 - 242,199
Depreciation and amortization - 19,365 - - 19,365
Interest expense, net 16,798 (4,938) - - 11,860
Intercompany interest expense, net (6,976) 25,326 (18,350) - -
Discount on accounts receivable securitization - 32 5,208 - 5,240
Distributions on mandatorily redeemable
preferred securities - - 7,095 - 7,095
Nonrecurring restructuring credit - (1,000) - - (1,000)
- ------------------------------------------------ -------- ---------- --------- ----- ----------
Total expenses 9,831 280,414 (5,486) - 284,759
- ------------------------------------------------ -------- ---------- --------- ----- ----------
Income (loss) before income taxes (9,831) 54,403 5,486 - 50,058
Income tax provision (benefit) (4,326) 23,865 2,540 - 22,079
- ------------------------------------------------ -------- ---------- --------- ----- ----------
Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ - $ 27,979
</TABLE>
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Net sales $ - $3,082,119 $ - $ - $3,082,119
Cost of goods sold - 2,755,158 - - 2,755,158
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Gross margin - 326,961 - - 326,961
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Selling, general and administrative expenses 5 239,295 243 - 239,543
Depreciation and amortization - 18,270 - - 18,270
Interest expense, net 17,205 (3,139) - - 14,066
Intercompany interest expense, net (10,854) 24,469 (13,615) - -
Discount on accounts receivable securitization - 67 4,588 - 4,655
Distributions on mandatorily redeemable
preferred securities - - 4,494 - 4,494
Nonrecurring restructuring expenses - 11,200 - - 11,200
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Total expenses 6,356 290,162 (4,290) - 292,228
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Income (loss) before income taxes (6,356) 36,799 4,290 - 34,733
Income tax provision (benefit) (2,574) 15,424 1,738 - 14,588
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Net income (loss) (3,782) 21,375 2,552 - 20,145
Dividends on preferred stock 1,898 - - - 1,898
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Net income (loss) attributable to common stock $ (5,680) $ 21,375 $ 2,552 $ - $ 18,247
</TABLE>
43
-
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
================================================ ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Net sales $ - $3,116,798 $ - $ - $3,116,798
Cost of goods sold - 2,800,044 - - 2,800,044
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Gross margin - 316,754 - - 316,754
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Selling, general and administrative expenses - 234,721 151 - 234,872
Depreciation and amortization - 17,664 - - 17,664
Interest expense, net 18,422 (2,707) (12) - 15,703
Intercompany interest expense, net (15,669) 26,456 (10,787) - -
Discount on accounts receivable securitization - 10 6,574 - 6,584
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Total expenses 2,753 276,144 (4,074) - 274,823
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Income (loss) before income taxes (2,753) 40,610 4,074 - 41,931
Income tax provision (benefit) (1,129) 16,685 2,055 - 17,611
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Net income (loss) (1,624) 23,925 2,019 - 24,320
Dividends on preferred stock 5,175 - - - 5,175
- ------------------------------------------------ --------- ---------- --------- ----- ----------
Net income (loss) attributable to common stock $ (6,799) $ 23,925 $ 2,019 $ - $ 19,145
</TABLE>
44
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Owens & Guarantor Non-guarantor
December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
============================================== ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 507 $ 158 $ 4 $ - $ 669
Accounts and notes receivable, net - 112,088 114,839 - 226,927
Merchandise inventories - 342,478 - - 342,478
Intercompany advances, net 157,711 88,347 1,183 (247,241) -
Other current assets - 19,172 - - 19,172
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL CURRENT ASSETS 158,218 562,243 116,026 (247,241) 589,246
Property and equipment, net - 25,877 - - 25,877
Goodwill, net - 210,837 - - 210,837
Intercompany investments 305,441 15,001 136,083 (456,525) -
Other assets, net 9,894 27,933 1,213 - 39,040
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL ASSETS $473,553 $841,891 $253,322 $ (703,766) $865,000
- ---------------------------------------------- -------- -------- -------- ---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $303,490 $ - $ - $303,490
Accrued payroll and related liabilities - 6,883 - - 6,883
Intercompany advances, net - 157,567 89,674 (247,241) -
Other accrued liabilities 1,354 56,368 1,703 - 59,425
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL CURRENT LIABILITIES 1,354 524,308 91,377 (247,241) 369,798
Long-term debt 172,600 1,953 - - 174,553
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 6,268 - - 6,268
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL LIABILITIES 310,037 532,529 91,377 (383,324) 550,619
- ---------------------------------------------- -------- -------- -------- ---------- --------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust,
holding solely convertible debentures of
Owens & Minor, Inc. - - 132,000 - 132,000
- ---------------------------------------------- -------- -------- -------- ---------- --------
SHAREHOLDERS' EQUITY
Common stock 65,422 40,879 5,583 (46,462) 65,422
Paid-in capital 12,890 258,979 15,001 (273,980) 12,890
Retained earnings 85,204 9,504 9,361 - 104,069
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL SHAREHOLDERS' EQUITY 163,516 309,362 29,945 (320,442) 182,381
- ---------------------------------------------- -------- -------- -------- ---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $473,553 $841,891 $253,322 $ (703,766) $865,000
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
============================================== ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 505 $ 40 $ 1 $ - $ 546
Accounts and notes receivable, net - 100,148 113,617 - 213,765
Merchandise inventories - 275,094 - - 275,094
Intercompany advances, net 148,992 90,698 1,183 (240,873) -
Other current assets - 14,816 - - 14,816
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL CURRENT ASSETS 149,497 480,796 114,801 (240,873) 504,221
Property and equipment, net - 25,608 - - 25,608
Goodwill, net - 158,276 - - 158,276
Intercompany investments 303,941 15,001 136,083 (455,025) -
Other assets, net 9,784 19,879 - - 29,663
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL ASSETS $463,222 $ 699,560 $250,884 $ (695,898) $717,768
- ---------------------------------------------- -------- --------- -------- ---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 206,251 $ - $ - $206,251
Accrued payroll and related liabilities - 8,974 - - 8,974
Intercompany advances, net - 148,992 91,881 (240,873) -
Other accrued liabilities 1,394 50,994 1,361 - 53,749
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL CURRENT LIABILITIES 1,394 415,211 93,242 (240,873) 268,974
Long-term debt 150,000 - - - 150,000
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 5,668 - - 5,668
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL LIABILITIES 287,477 420,879 93,242 (376,956) 424,642
- ---------------------------------------------- -------- --------- -------- ---------- --------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust,
holding solely convertible debentures of
Owens & Minor, Inc. - - 132,000 - 132,000
- ---------------------------------------------- -------- --------- -------- ---------- --------
SHAREHOLDERS' EQUITY
Common stock 65,236 40,879 4,083 (44,962) 65,236
Paid-in capital 12,280 258,979 15,001 (273,980) 12,280
Retained earnings (accumulated deficit) 98,229 (21,177) 6,558 - 83,610
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL SHAREHOLDERS' EQUITY 175,745 278,681 25,642 (318,942) 161,126
- ---------------------------------------------- -------- --------- -------- ---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $463,222 $ 699,560 $250,884 $ (695,898) $717,768
</TABLE>
46
- -
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ - $ 27,979
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 19,365 - - 19,365
Nonrecurring restructuring credit - (1,000) - - (1,000)
Deferred income taxes - 8,236 - - 8,236
Provision for LIFO reserve - 1,741 - - 1,741
Provision for losses on accounts and
notes receivable - 292 267 - 559
Changes in operating assets and liabilities:
Accounts and notes receivable - 1,970 (1,489) - 481
Merchandise inventories - (42,397) - - (42,397)
Accounts payable - 86,871 - - 86,871
Net change in other current assets and
current liabilities (39) (11,536) 343 - (11,232)
Other, net 3,049 (1,404) 41 - 1,686
- --------------------------------------------------- --------- ---------- -------- ----- ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (2,495) 92,676 2,108 - 92,289
- --------------------------------------------------- --------- ---------- -------- ----- ----------
INVESTING ACTIVITIES
Net cash paid for acquisition of business - (82,699) - - (82,699)
Additions to property and equipment - (8,933) - - (8,933)
Additions to computer software - (13,172) - - (13,172)
Other, net (1,222) 63 (1,200) - (2,359)
- --------------------------------------------------- --------- ---------- -------- ----- ----------
CASH USED FOR INVESTING ACTIVITIES (1,222) (104,741) (1,200) - (107,163)
- --------------------------------------------------- --------- ---------- -------- ----- ----------
FINANCING ACTIVITIES
Additions to debt 22,600 2,578 - - 25,178
Change in intercompany advances (11,441) 12,346 (905) - -
Other financing, net - (2,741) - - (2,741)
Cash dividends paid (7,520) - - - (7,520)
Proceeds from exercise of stock options 80 - - - 80
- --------------------------------------------------- --------- ---------- -------- ----- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,719 12,183 (905) - 14,997
- --------------------------------------------------- --------- ---------- -------- ----- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2 118 3 - 123
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 40 1 - 546
- --------------------------------------------------- --------- ---------- -------- ----- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 507 $ 158 $ 4 $ - $ 669
- --------------------------------------------------- --------- ---------- -------- ----- ----------
</TABLE>
47
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (3,782) $ 21,375 $ 2,552 $ - $ 20,145
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 18,270 - - 18,270
Nonrecurring restructuring provision - 11,200 - - 11,200
Deferred income taxes - 22,737 - - 22,737
Provision for LIFO reserve - 1,536 - - 1,536
Provision for losses on accounts and
notes receivable - 262 234 - 496
Changes in operating assets and liabilities:
Accounts and notes receivable - (74) (26,309) - (26,383)
Merchandise inventories - 8,899 - - 8,899
Accounts payable - (23,375) - - (23,375)
Net change in other current assets and
current liabilities 460 (1,952) 841 - (651)
Other, net 1,506 (1,895) - - (389)
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,816) 56,983 (22,682) - 32,485
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
INVESTING ACTIVITIES
Additions to property and equipment - (8,053) - - (8,053)
Additions to computer software - (4,556) - - (4,556)
Other, net - 160 - - 160
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
CASH USED FOR INVESTING ACTIVITIES - (12,449) - - (12,449)
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily
redeemable preferred securities (4,732) - 132,000 - 127,268
Repurchase of preferred stock (115,000) - - - (115,000)
Reductions of debt (32,550) - - - (32,550)
Change in intercompany advances 159,443 (50,126) (109,317) - -
Other financing, net - 5,554 - - 5,554
Cash dividends paid (9,268) - - - (9,268)
Proceeds from exercise of stock options 3,923 - - - 3,923
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,816 (44,572) 22,683 - (20,073)
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - (38) 1 - (37)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 78 - - 583
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 40 $ 1 $ - $ 546
- --------------------------------------------------- ---------- --------- ---------- ----- ----------
</TABLE>
48
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
=================================================== ============= ============== ============== ============== =============
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss) $ (1,624) $ 23,925 $ 2,019 $ - $ 24,320
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 17,664 - - 17,664
Deferred income taxes - (3) - - (3)
Provision for LIFO reserve - 2,414 - - 2,414
Provision for losses on accounts and
notes receivable - 124 144 - 268
Changes in operating assets and liabilities:
Accounts and notes receivable - (12,591) (28,312) - (40,903)
Merchandise inventories - (6,104) - - (6,104)
Accounts payable - 4,714 - - 4,714
Net change in other current assets and
current liabilities 147 4,670 (203) - 4,614
Other, net 1,411 (757) 384 - 1,038
- --------------------------------------------------- --------- ---------- --------- ----- ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (66) 34,056 (25,968) - 8,022
- --------------------------------------------------- --------- ---------- --------- ----- ----------
INVESTING ACTIVITIES
Additions to property and equipment - (7,495) - - (7,495)
Additions to computer software - (4,472) - - (4,472)
Other, net - 1,851 - - 1,851
- --------------------------------------------------- --------- ---------- --------- ----- ----------
CASH USED FOR INVESTING ACTIVITIES - (10,116) - - (10,116)
- --------------------------------------------------- --------- ---------- --------- ----- ----------
FINANCING ACTIVITIES
Addition to (reduction of) long-term debt 26,026 (11,049) - - 14,977
Change in intercompany advances (17,596) (8,372) 25,968 - -
Other financing, net - (4,679) - - (4,679)
Cash dividends paid (10,950) - - - (10,950)
Proceeds from exercise of stock options 2,586 - - - 2,586
- --------------------------------------------------- --------- ---------- --------- ----- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 66 (24,100) 25,968 - 1,934
- --------------------------------------------------- --------- ---------- --------- ----- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS - (160) - - (160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 238 - - 743
- --------------------------------------------------- --------- ---------- --------- ----- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 78 $ - $ - $ 583
- --------------------------------------------------- --------- ---------- --------- ----- ----------
</TABLE>
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
The Board of Directors and Shareholders
Owens & Minor, Inc.:
We have audited the accompanying consolidated balance sheets of Owens &
Minor, Inc. and subsidiaries (the company) as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Richmond, Virginia
February 2, 2000
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The management of Owens & Minor, Inc. is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and related
information presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles applied on a consistent basis and include, when necessary, the best
estimates and judgments of management.
The company maintains a system of internal controls that provides
reasonable assurance that its assets are safeguarded against loss or
unauthorized use, that transactions are properly recorded and that financial
records provide a reliable basis for the preparation of the consolidated
financial statements.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not current employees of Owens & Minor, Inc., meets
periodically and privately with the company's independent auditors and internal
auditors, as well as with company management, to review accounting, auditing,
internal control and financial reporting matters. The independent auditors and
internal auditors have direct access to the Audit Committee with and without
management present to discuss the results of their activities.
/S/G. Gilmer Minor, III
G. Gilmer Minor, III
CHAIRMAN & CHIEF EXECUTIVE OFFICER /S/Richard F. Bozard
Richard F. Bozard
VICE PRESIDENT & TREASURER
ACTING CHIEF FINANCIAL OFFICER
50
- -
<PAGE>
QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999
=============================================================
Quarters 1ST 2ND 3RD 4TH
================== ============= ============= ============= =============
<S> <C> <C> <C> <C>
Net sales $ 741,084 $ 772,360 $ 811,917 $ 861,012
- ------------------ --------- --------- --------- ---------
Gross margin 78,729 80,347 85,297 90,444
- ------------------ --------- --------- --------- ---------
Net income 5,491 6,480 7,142 8,866
- ------------------ --------- --------- --------- ---------
Per common share:
Net income
Basic $ 0.17 $ 0.20 $ 0.22 $ 0.27
Diluted $ 0.17 $ 0.19 $ 0.21 $ 0.25
Dividends $ 0.05 $ 0.06 $ 0.06 $ 0.06
- ------------------ --------- --------- --------- ---------
Market price
High $ 17.00 $ 12.44 $ 13.00 $ 10.63
Low $ 9.56 $ 9.50 $ 9.63 $ 7.56
</TABLE>
<TABLE>
<CAPTION>
1998
===========================================================
Quarters 1st 2nd 3rd 4th
================== ============= =========== ============= =============
<S> <C> <C> <C> <C>
Net sales $ 797,950 $798,978 $ 768,416 $ 716,775
- ------------------ --------- -------- --------- ---------
Gross margin 82,087 82,533 81,004 81,337
- ------------------ --------- -------- --------- ---------
Net income 6,759 145 6,618 6,623
- ------------------ --------- -------- --------- ---------
Per common share:
Net income
Basic $ 0.17 $ (0.01) $ 0.20 $ 0.20
Diluted $ 0.17 $ (0.01) $ 0.20 $ 0.20
Dividends $ 0.05 $ 0.05 $ 0.05 $ 0.05
- ------------------ --------- -------- --------- ---------
Market price
High $ 19.88 $ 18.88 $ 13.13 $ 17.25
Low $ 13.13 $ 10.00 $ 10.00 $ 10.63
- ------------------ --------- -------- --------- ---------
</TABLE>
51
<PAGE>
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Owens & Minor, Inc.'s common stock trades on the New York Stock Exchange under
the symbol OMI. As of December 31, 1999, there were approximately 15,000 common
shareholders.
52
<PAGE>
(This Page Intentionally Left Blank)
53
<PAGE>
CORPORATE OFFICERS
- --------------------------------------------------------------------------------
OWENS & MINOR, INC. AND SUBSIDIARIES
G. GILMER MINOR, III, 59, Chairman of the Board since 1994 and Chief Executive
Officer since 1984. Mr. Minor was President from 1981 to April 1999.
CRAIG R. SMITH, 48, President since April 1999 and Chief Operating Officer since
1995. Prior to 1995, Mr. Smith was Executive Vice President, Distribution and
Information Systems from 1994 to 1995 and Senior Vice President, Distribution
and Information Systems from 1993 to 1994.
HENRY A. BERLING, 57, Executive Vice President, Partnership Development since
1995. Mr. Berling was Executive Vice President, Partnership Development and
Chief Sales Officer from 1996 to 1998. Prior to 1995, Mr. Berling was Executive
Vice President, Sales and Customer Development from 1994 to 1995 and Senior
Vice President, Sales and Marketing from 1992 to 1994.
TIMOTHY J. CALLAHAN, 48, Senior Vice President, Distribution, since November
1999. From 1997 to November 1999, Mr. Callahan served as Regional Vice
President, West. Mr. Callahan was Executive Vice President for NCI, a
healthcare consulting company from 1996 to 1997. Prior to that, he was Vice
President, Sales, for Sterile Concepts, Inc. from 1990 to 1996.
DREW ST. J. CARNEAL, 61, Senior Vice President, General Counsel and Secretary
since 1990.
JACK M. CLARK, 49, Senior Vice President, Sales and Marketing since 1997. Mr.
Clark was employed by Campbell Soup Company from 1996 to 1997, serving as Vice
President, U.S. Sales and Marketing. From 1987 to 1996, he was employed by
Coca-Cola USA where his last position was Area Vice President.
CHARLES C. COLPO, 42, Senior Vice President, Operations since November 1999.
Prior to November 1999, Mr. Colpo was Vice President, Operations from 1998 to
November 1999. Prior to 1998, Mr. Colpo was Vice President, Supply Chain Process
from 1996 to 1998; Vice President, Inventory Management from 1995 to 1996; and
Director, Business Process Redesign from 1994 to 1995.
JAMES L. GRIGG, 52, Senior Vice President, Supply Chain Management since 1996.
Mr. Grigg joined the company in 1996 as Senior Vice President, Product. Mr.
Grigg was Vice President, Trade Relations and Product Management for FoxMeyer
Health Corp. from 1992 to 1996.
F. LEE MARSTON, 46, Senior Vice President and Chief Information Officer since
1997. Prior to joining the company, Mr. Marston was President of The Logistics
Technology Group. From 1993 to 1996 he also directed the logistics information
systems practice of the Progress Group, a logistics consulting firm.
RICHARD F. BOZARD, 52, Acting Chief Financial Officer since March 1999 and Vice
President and Treasurer since 1991.
OLWEN B. CAPE, 49, Vice President and Controller since 1997. Ms. Cape was
employed by Bausch & Lomb Incorporated from 1990 to 1997 serving in various
financial positions, including Director, Business Analysis & Planning.
ERIKA T. DAVIS, 35, Vice President, Human Resources since December 1999. Prior
to December 1999, Ms. Davis served as Director, Human Resources & Training from
March 1999 to July 1999; Director, Compensation & HRIS from 1995 to 1999; and
Manager, Compensation from 1993 to 1995.
HUGH F. GOULDTHORPE, JR., 60, Vice President, Quality and Communications since
1993.
WAYNE B. LUCK, 43, Vice President, Business Technology Group, since 1998. Prior
to 1998, Mr. Luck was Vice President, Information Technology from 1995 to 1998.
Mr. Luck served as Director, Application Services from 1993 to 1995.
BRUCE J. MACALLISTER, 48, Regional Vice President, East since 1997. Prior to
1997, Mr. MacAllister was Group Vice President, Southern and Western Regions
from 1995 to 1997. From 1993 to 1995 Mr. MacAllister was Division Vice
President.
HUE THOMAS, III, 60, Vice President, Corporate Relations since 1991.
54
<PAGE>
BOARD OF DIRECTORS
Owens & Minor, Inc. and Subsidiaries
Henry A. Berling (57)1,4
Executive Vice President,
Partnership Development,
Owens & Minor, Inc.
Josiah Bunting, III (59) 2,4
Superintendent,
Virginia Military Institute
John T. Crotty (62) 2,4
Managing Partner,
CroBern Management Partnership
President, CroBern, Inc.
James B. Farinholt, Jr. (65) 1,2*,4
Special Assistant to the President
for Economic Development,
Virginia Commonwealth University
Vernard W. Henley (70) 2,3,5
Chairman & CEO,
Consolidated Bank & Trust Company
E. Morgan Massey (73) 1,2,4*,5
Chairman,
Asian-American Coal, Inc.
Chairman Emeritus,
A.T. Massey Coal Company, Inc.
Chairman, Evan Energy Company
G. Gilmer Minor, III (59) 1*,4
Chairman & CEO,
Owens & Minor, Inc.
Peter S. Redding (61) 3,4
President & CEO,
Standard Register
James E. Rogers (54) 1,3*,4
President,
SCI Investors Inc.
James E. Ukrop (62) 2,3,5
Chairman,
Ukrop's Super Markets, Inc.
Chairman, First Market Bank
Anne Marie Whittemore (54) 1,3,5*
Partner,
McGuire, Woods, Battle & Boothe LLP
- --------------------------------------------------------------------------------
Board Committees:1 Executive Committee,2 Audit Committee,3 Compensation &
Benefits Committee,4 Strategic Planning Committee,5 Governance & Nominating
Committee,* Denotes Chairperson
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Owens & Minor, Inc. and Subsidiaries
Annual Meeting
The annual meeting of Owens & Minor, Inc. shareholders will be held on Tuesday,
April 25, 2000, at the Crestar Bank Building, 919 East Main Street, Richmond,
Virginia.
Transfer Agent, Registrar and Dividend Disbursing Agent
The Bank of New York
Shareholder Relations Department-11E
P.O. Box 11258
Church Street Station
New York, NY 10286
800.524.4458
[email protected]
Dividend Reinvestment and Stock Purchase Plan
The Dividend Reinvestment and Stock Purchase Plan offers holders of Owens &
Minor, Inc. common stock an opportunity to buy additional shares automatically
with cash dividends and to buy additional shares with voluntary cash payouts.
Under the plan, the company pays all brokerage commissions and service charges
for the acquisition of shares. Information regarding the plan may be obtained
by writing the transfer agent at the following address:
The Bank of New York
Dividend Reinvestment Department
P.O. Box 1958
Newark, NJ 07101-9774
Shareholder Records
Direct correspondence concerning Owens & Minor, Inc. stock holdings or change of
address to The Bank of New York's Shareholder Services Department (listed
above). Direct correspondence concerning lost or missing dividend checks to:
Receive and Deliver Department-11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Duplicate Mailings
When a shareholder owns shares in more than one account or when several
shareholders live at the same address, they may receive multiple copies of
annual reports. To eliminate multiple mailings, please write to the transfer
agent.
Counsel
Hunton & Williams
Richmond, Virginia
Independent Auditors
KPMG LLP
Richmond, Virginia
Stock Exchange Listing
The Company's common shares are listed on the New York Stock Exchange. The
trading symbol is OMI.
Press Releases
Owens & Minor, Inc.'s press releases are available through Company News On-Call
by fax-on-demand at 800.758.5804, ext. 66125, or at www.prnewswire.com or at
www.owens-minor.com.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 7th day of
March, 2000.
OWENS & MINOR, INC.
/s/G. Gilmer Minor, III
- ---------------------------
G. Gilmer Minor, III
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant on the 7th day of March 2000 and in the capacities indicated.
/s/G. Gilmer Minor, III Chairman and Chief Executive
- --------------------------- Officer and Director
G. Gilmer Minor, III (Principal Executive Officer)
/s/Richard F. Bozard Vice President and Treasurer
- --------------------------- Acting Chief Financial Officer
Richard F. Bozard (Principal Financial Officer)
/s/Olwen B. Cape Vice President and Controller
- --------------------------- (Principal Accounting Officer)
Olwen B. Cape
/s/Henry A. Berling Director
- ---------------------------
Henry A. Berling
/s/Josiah Bunting, III Director
- ---------------------------
Josiah Bunting, III
/s/John T. Crotty Director
- ---------------------------
John T. Crotty
/s/James B. Farinholt, Jr. Director
- ---------------------------
James B. Farinholt, Jr.
/s/Vernard W. Henley Director
- ---------------------------
Vernard W. Henley
/s/E. Morgan Massey Director
- ---------------------------
E. Morgan Massey
/s/Peter S. Redding Dirctor
- ---------------------------
Peter S. Redding
/s/James E. Rogers Director
- ---------------------------
James E. Rogers
/s/James E. Ukrop Director
- ---------------------------
James E. Ukrop
/s/Anne Marie Whittemore Director
- ---------------------------
Anne Marie Whittemore
<PAGE>
Owens & Minor, Inc.
Statement of Differences
1. The printed Annual Report and Form 10-K contains numerous graphs, a map and
photographs not incorporated into the electronic Form 10-K.
2. The 10-K cover sheet and index, presented on pages 52 and 53 of the printed
document, have been repositioned to the front of the electronic document.
<PAGE>
INDEX TO EXHIBITS
DESCRIPTION
2.1 Agreement of Exchange dated December 22, 1993, as amended and restated
on March 31, 1994, by and among Stuart Medical, Inc., Owens & Minor,
Inc. and certain shareholders of Stuart Medical, Inc. (incorporated
herein by reference to the Company's Proxy Statement/Prospectus dated
April 6, 1994, Annex III)**
3.1 Amended and Restated Articles of Incorporation of Owens & Minor, Inc.
(incorporated herein by reference to the Company's Annual Report on
Form 10-K, Exhibit 3(a), for the year ended December 31, 1994)
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit 3,
for the quarter ended June 30, 1999)
4.1 Indenture dated as of May 29, 1996 among Owens & Minor, Inc., as
Issuer, Owens & Minor Medical, Inc., National Medical Supply
Corporation, Owens & Minor West, Inc., Koley's Medical Supply, Inc.,
Lyons Physician Supply Company, A. Kuhlman & Co., Stuart Medical, Inc.,
as Guarantors, and Crestar Bank, as Trustee ("Notes Indenture")
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4(a), for the quarter ended June 30, 1996)
4.2 Supplemental Indenture No. 1 dated as of May 12, 1998 to Notes
Indenture (incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q, Exhibit 4.1, for the quarter ended June 30, 1998)
4.3 Amended and Restated Rights Agreement dated as of May 10, 1994 between
Owens & Minor, Inc. and Bank of New York, as successor Rights Agent
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4, for the quarter ended June 30, 1995)
4.4 Credit Agreement dated as of September 15, 1997 by and among Owens &
Minor, Inc., certain of its subsidiaries, the various banks and lending
institutions identified on the signature pages thereto, NationsBank,
N.A., as agent, Bank of America NT and SA and Crestar Bank, as
co-agents, and NationsBank, N.A., as administrative agent ("Credit
Agreement") (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q, Exhibit 4, for the quarter ended
September 30, 1997)
4.5 Amendment No. 1 dated as of April 27, 1998 to Credit Agreement
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4.2, for the quarter ended June 30, 1998)
4.6 Amendment and Consent dated June 30, 1999 to Credit Agreement
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 4, for the quarter ended June 30, 1999)
4.7 Junior Subordinated Debentures Indenture dated as of May 13, 1998
between Owens & Minor, Inc. and The First National Bank of Chicago
(incorporated herein by reference to the Company's Registration
Statement on Form S-3, Registration No. 333-58665, Exhibit 4.1)
4.8 First Supplemental Indenture dated as of May 13, 1998 between Owens &
Minor, Inc. and The First National Bank of Chicago (incorporated herein
by reference to the Company's Registration Statement on Form S-3,
Registration No. 333-58665, Exhibit 4.2)
4.9 Registration Rights Agreement dated as of May 13, 1998 between Owens &
Minor, Inc. and J.P. Morgan Securities Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch & Co. (incorporated
herein by reference to the Company's Registration Statement on Form
S-3, Registration No. 333-58665, Exhibit 4.3)
4.10 Amended and Restated Declaration of Trust of Owens & Minor Trust I
(incorporated herein by reference to the Company's Registration
Statement on Form S-3, Registration No. 333-58665, Exhibit 4.4)
4.11 Restated Certificate of Trust of Owens & Minor Trust I (included in
Exhibit 4.9)
4.12 Form of $2.6875 Term Convertible Security (included in Exhibit 4.9)
4.13 Form of 5.375% Junior Subordinated Convertible Debenture (included in
Exhibit 4.7)
4.14 Owens & Minor, Inc. Guarantee Agreement dated as of May 13, 1998
(incorporated herein by reference to the Company's Registration
Statement on Form S-3, Registration No. 333-58665, Exhibit 4.8)
10.1 Owens & Minor, Inc. Annual Incentive Plan (incorporated herein by
reference to the Company's definitive Proxy Statement dated March 25,
1991)*
10.2 Owens & Minor, Inc. Management Equity Ownership Program ("MEOP")
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 10(a), for the quarter ended September 30, 1997)*
<PAGE>
10.3 Amendment to MEOP*--filed herewith
10.4 Owens & Minor, Inc. Pension Plan, as amended and restated effective
January 1, 1994 ("Pension Plan") (incorporated herein by reference to
the Company's Annual Report on Form 10-K, Exhibit 10(c), for the year
ended December 31, 1996)*
10.5 Amendment No. 1 to Pension Plan (incorporated herein by reference to
the Company's Annual Report on Form 10-K, Exhibit 10(d), for the year
ended December 31, 1996)*
10.6 Amendment No. 2 to Pension Plan (incorporated herein by reference to
the Company's Annual Report on Form 10-K, Exhibit 10.5, for the year
ended December 31, 1998)*
10.7 Owens & Minor, Inc. Supplemental Executive Retirement Plan dated July
1, 1991 ("SERP") (incorporated herein by reference to the Company's
Annual Report on Form 10-K, Exhibit 10(i), for the year ended December
31, 1991)*
10.8 First Amendment to SERP, effective July 30, 1996 (incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q, Exhibit
10(e), for the quarter ended September 30, 1996)*
10.9 Forms of Owens & Minor, Inc. Executive Severance Agreements
(incorporated herein by reference to the Company's Annual Report on
Form 10-K, Exhibit 10.8, for the year ended December 31, 1998)*
10.10 Owens & Minor, Inc. 1993 Stock Option Plan (incorporated herein by
reference to the Company's Annual Report on Form 10-K, Exhibit 10(k),
for the year ended December 31, 1993)*
10.11 Amended and Restated Owens & Minor, Inc. 1993 Directors' Compensation
Plan ("Directors' Plan") (incorporated herein by reference to the
Company's Annual Report on Form 10-K, Exhibit 10(k), for the year ended
December 31, 1996)*
10.12 The forms of agreement with directors entered into pursuant to (i) the
Stock Option Program, (ii) the Deferred Fee Program and (iii) the Stock
Purchase Program of the Directors' Plan (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q, Exhibit (10),
for the quarter ended March 31, 1996)*
10.13 Owens & Minor, Inc. 1998 Stock Option and Incentive Plan (incorporated
herein by reference to Annex A of the Company's definitive Proxy
Statement filed pursuant to Section 14(a) of the Securities Exchange
Act on March 13, 1998 (File No. 001-09810))*
10.14 Amendment to 1998 Stock Option and Incentive Plan*--filed herewith
10.15 Owens & Minor, Inc. 1998 Directors' Compensation Plan (incorporated
herein by reference from Annex B of the Company's definitive Proxy
Statement filed pursuant to Section 14(a) of the Securities Exchange
Act on March 13, 1998 (File No. 001-09810))*
10.16 Amendment No. 1 to Owens & Minor, Inc. 1998 Directors' Compensation
Plan (incorporated herein by reference to the Company's Annual Report
on Form 10-K, Exhibit 10.15, for the year ended December 31, 1998)*
10.17 Form of Enhanced Authorized Distribution Agency Agreement dated as of
August 20, 1997 between VHA, Inc. and Owens & Minor (incorporated
herein by reference to the Company's Quarterly Report on Form 10-Q,
Exhibit 10(d), for the quarter ended September 30, 1997)***
10.18 Amended and Restated Purchase and Sale Agreement dated as of May 28,
1996 among Owens & Minor Medical, Inc., Owens & Minor, Inc. and O&M
Funding Corp. (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q, Exhibit 10(a), for the quarter ended
June 30, 1996)
10.19 Amended and Restated Receivables Purchase Agreement dated as of May 28,
1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., Receivables Capital Corporation and Bank of America
National Trust and Savings Association, as Administrator (incorporated
herein by reference to the Company's Quarterly Report on Form 10-Q,
Exhibit 10(b), for the quarter ended June 30, 1996)
10.20 First Amendment dated as of October 17, 1997 to the Amended and
Restated Receivables Purchase Agreement -- among O&M Funding Corp.,
Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital
Corporation and Bank of America National Trust and Savings Association
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 10(b), for the quarter ended September 30, 1997)
<PAGE>
10.21 Second Amendment dated as of October 6, 1998 to the Amended and
Restated Receivables Purchase Agreement among O&M Funding Corp., Owens
& Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital
Corporation and Bank of America National Trust and Savings Association
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 10(a), for the quarter ended September 30, 1999)
10.22 Third Amendment and Consent dated as of October 4, 1999 to the Amended
and Restated Receivables Purchase Agreement among O&M Funding Corp.,
Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital
Corporation and Bank of America N.A. (f/k/a Bank of America National
Trust and Savings Association) (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q, Exhibit 10(c), for the quarter
ended September 30, 1999)
10.23 Amended and Restated Parallel Asset Purchase Agreement dated as of May
28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., the Parallel Purchasers from time to time party thereto
and Bank of America National Trust and Savings Association, as
Administrative Agent (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q, Exhibit 10(c), for the quarter ended
June 30, 1996)
10.24 First Amendment dated as of October 17, 1997 to the Amended and
Restated Parallel Asset Purchase Agreement among O&M Funding Corp.,
Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers
and Bank of America National Trust and Savings Association
(incorporated herein by reference to the - Company's Quarterly Report
on Form 10-Q, Exhibit 10(c), for the quarter ended September 30, 1997)
10.25 Second Amendment dated as of October 6, 1998 to the Amended and
Restated Parallel Asset Purchase Agreement among O&M Funding Corp.,
Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers
and Bank of America National Trust and Savings Association
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, Exhibit 10(b), for the quarter ended September 30, 1999)
10.26 Third Amendment and Consent dated as of October 4, 1999 to the Amended
and Restated Parallel Asset Purchase Agreement among O&M Funding Corp.,
Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers
and Bank of America N.A. (f/k/a Bank of America National Trust and
Savings Association) (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q, Exhibit 10(d), for the quarter ended
September 30, 1999)
11.1 Calculation of Net Income Per Common Share
Information related to this item is in Part II, Item 8, Notes to
Consolidated Financial Statements, Note 12 - Net Income per Common
Share
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
27.1 Financial Data Schedule--filed herewith electronically
* Management contract or compensatory plan or arrangement.
** The schedules to this Agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K. The Company hereby undertakes to file
supplementally with the Commission upon request a copy of the omitted
schedules.
*** The Company has requested confidential treatment by the Commission of
certain portions of this Agreement, which portions have been omitted
and filed separately with the Commission.
EXHIBIT 10.3
AMENDMENT TO MANAGEMENT EQUITY OWNERSHIP PROGRAM
------------------------------------------------
WHEREAS, the Company's Management Equity Ownership Program ("MEOP") was
approved by the Board of Directors on April 29, 1997; and
WHEREAS, Section 1.7 of the MEOP defines the term Change in Control;
and
WHEREAS, Section 1.14 of the MEOP defines the term Fair Market Value;
and
WHEREAS, the Compensation and Benefits Committee has recommended that
the definition of Change in Control be amended to disregard securities
acquired directly from the Company and thereby conform such definition
to the definition of Change in Control contained in other Company
plans; and
WHEREAS, the Compensation and Benefits Committee has recommended that
the definition of Fair Market Value be amended to conform such
definition to the definition of Fair Market Value contained in other
Company plans; and
NOW, THEREFORE BE IT RESOLVED, that the Board of Directors hereby
amends Section 1.7 (i) of the MEOP to add the following to the last
sentence:
provided, however, that Company securities acquired directly
from the Company shall be disregarded for this purpose;
FURTHER RESOLVED, that the Board of Directors hereby amends Section
1.14 of the MEOP to read as follows:
1.14 FAIR MARKET VALUE means, on any given date, the
closing price of a share of Common Stock as reported on the
New York Stock Exchange composite tape on such date, or if the
Common Stock was not traded on the New York Stock Exchange on
such day, then on the next preceding day that the Common Stock
was traded on such exchange, all as reported by such source as
the Administrator may select.
EXHIBIT 10.14
AMENDMENT TO 1998 STOCK OPTION AND INCENTIVE PLAN
-------------------------------------------------
WHEREAS, the Company's 1998 Stock Option Plan ( the "Plan") was
approved by the Board of Directors and shareholders on April 29, 1998;
and
WHEREAS, Section 1.04 of the Plan defines the term Change in Control;
and
WHEREAS, the Compensation and Benefits Committee has recommended that
the definition of Change in Control be amended to disregard securities
acquired directly from the Company and thereby conform such definition
to the definition of Change in Control contained in other Company
plans; and
NOW, THEREFORE BE IT RESOLVED, that the Board of Directors hereby
amends Section 1.04(a) of the Plan to add the following to the last
sentence:
provided, however, that Company securities acquired directly
from the Company shall be disregarded for this purpose;
Subsidiaries of Registrant Exhibit 21.1
<TABLE>
<CAPTION>
State/Jurisdiction of
Incorporation /
Subsidiary Organization
- --------------------------------------------------------------------------------
<S> <C>
Owens & Minor Medical, Inc.* Virginia
National Medical Supply Corporation Delaware
Owens & Minor West, Inc.* California
Koley's Medical Supply, Inc.* Nebraska
Lyons Physician Supply Company Ohio
A. Kuhlman & Co. Michigan
Stuart Medical, Inc.* Pennsylvania
O&M Funding Corp. Virginia
OMI Speciality, Inc. Virginia
Owens & Minor Trust I Delaware
OMI International, Ltd. British Virgin Islands
Asia Medical Supplies Company, Ltd.(1) British Virgin Islands
Owens & Minor Schmidt Co., Ltd.(2) Taiwan
</TABLE>
*Conducts business under the name "Owens & Minor"
(1) 50% owned by OMI International
(2) 100% owned by Asia Medical Supplies Company, Ltd.
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Owens & Minor, Inc.
We consent to incorporation by reference in the following Registration
Statements of our report dated February 2, 2000, relating to the consolidated
financial statements of Owens & Minor, Inc. and subsidiaries included in its
Annual Report on Form 10-K for the year ended December 31, 1999:
Registration Registration
Statement Statement
Number Description Number Description
- ----------------------------------------------------------
33-04536 Form S-8 33-65606 Form S-8
33-32497 Form S-8 333-58337 Form S-8
33-41402 Form S-8 333-58341 Form S-8
33-41403 Form S-8 33-44428 Form S-3
33-63248 Form S-8 333-58665 Form S-3
/s/ KPMG LLP
- -------------------------
KPMG LLP
Richmond, Virginia
March 7, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 669
<SECURITIES> 0
<RECEIVABLES> 233,406
<ALLOWANCES> 6,479
<INVENTORY> 342,478
<CURRENT-ASSETS> 589,246
<PP&E> 78,393
<DEPRECIATION> 52,516
<TOTAL-ASSETS> 865,000
<CURRENT-LIABILITIES> 369,798
<BONDS> 174,553
132,000
0
<COMMON> 65,422
<OTHER-SE> 116,959
<TOTAL-LIABILITY-AND-EQUITY> 865,000
<SALES> 3,186,373
<TOTAL-REVENUES> 3,186,373
<CGS> 2,851,556
<TOTAL-COSTS> 3,112,561
<OTHER-EXPENSES> 11,335
<LOSS-PROVISION> 559
<INTEREST-EXPENSE> 11,860
<INCOME-PRETAX> 50,058
<INCOME-TAX> 22,079
<INCOME-CONTINUING> 27,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,979
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.82
</TABLE>
