UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to Commission file number 1-9810 OWENS & MINOR, INC. (Exact name of Registrant as specified in its charter) Virginia 54-1701843 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4800 Cox Road, Glen Allen, Virginia 23060 (Address of principal executive offices) (Zip Code) Post Office Box 27626, Richmond, Virginia 23261-7626 (Mailing address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (804)747-9794 (Former name, former address and former fiscal year, if changed since last report) 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 _____ The number of shares of Owens & Minor, Inc.'s common stock outstanding as of April 29, 1997 was 31,992,349 shares. Owens & Minor, Inc. and Subsidiaries Index Page Part I. Financial Information Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income - Three Months Ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Part II. Other Information 11-12 2 Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> (In thousands, except per share data) March 31, December 31, 1997 1996 <S> <C> Assets Current assets Cash and cash equivalents $ 596 $ 743 Accounts and notes receivable, net 154,658 147,243 Merchandise inventories 268,292 281,839 Other current assets 25,949 25,675 Total current assets 449,495 455,500 Property and equipment, net 27,637 29,231 Excess of purchase price over net assets acquired, net 166,230 167,366 Other assets, net 26,354 27,404 Total assets $ 669,716 $ 679,501 Liabilities and shareholders' equity Current liabilities Accounts payable $ 208,548 $ 224,037 Accrued payroll and related liabilities 5,982 5,001 Other accrued liabilities 37,506 33,472 Total current liabilities 252,036 262,510 Long-term debt 165,320 167,549 Accrued pension and retirement plans 7,186 7,042 Total liabilities 424,542 437,101 Shareholders' equity Preferred stock, par value $100 per share; authorized - 10,000 shares Series A; Participating Cumulative Preferred Stock; none issued - - Series B; Cumulative Preferred Stock; 4.5%, convertible; issued and outstanding - 1,150 shares 115,000 115,000 Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 31,933 shares at March 31, 1997 and 31,907 shares at December 31, 1996 63,866 63,814 Paid-in capital 5,549 5,086 Retained earnings 60,759 58,500 Total shareholders' equity 245,174 242,400 Total liabilities and shareholders' equity $ 669,716 $ 679,501 </TABLE> See accompanying notes to consolidated financial statements. 3 Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Income <TABLE> <CAPTION> (In thousands, except per share data) Three Months Three Months Ended Ended March 31, March 31, 1997 1996 <S> <C> Net sales $749,623 $771,312 Cost of goods sold 674,521 697,133 Gross margin 75,102 74,179 Selling, general and administrative expenses 56,437 61,040 Depreciation and amortization 4,205 3,930 Interest expense, net 3,947 5,800 Discount on accounts receivable securitization 1,866 744 Total expenses 66,455 71,514 Income before income taxes 8,647 2,665 Income tax provision 3,653 1,146 Net income 4,994 1,519 Dividends on preferred stock 1,294 1,294 Net income attributable to common stock $ 3,700 $ 225 Net income per common share $ 0.12 $ 0.01 Cash dividends per common share $ 0.045 $ 0.045 Weighted average common shares and common share equivalents 32,000 31,140 </TABLE> See accompanying notes to consolidated financial statements. 4 Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> (In thousands) Three Months Three Months Ended Ended March 31, March 31, 1997 1996 <S> <C> Operating Activities Net income $ 4,994 $ 1,519 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 4,205 3,930 Provision for LIFO reserve 1,300 2,748 Changes in operating assets and liabilities Accounts and notes receivable (7,306) (4,669) Merchandise inventories 12,247 7,302 Accounts payable (4,514) (2,464) Net change in other current assets and current liabilities 5,157 2,423 Other, net 942 1,830 Cash provided by operating activities 17,025 12,619 Investing Activities Additions to property and equipment (1,845) (1,249) Additions to computer software (894) (2,483) Proceeds from sale of property and equipment 1,588 27 Cash used for investing activities (1,151) (3,705) Financing Activities Reductions of long-term debt (2,500) (10,362) Other short-term financing, net (10,975) 4,094 Cash dividends paid (2,735) (2,683) Exercise of stock options 189 117 Cash used for financing activities (16,021) (8,834) Net increase (decrease) in cash and cash equivalents (147) 80 Cash and cash equivalents at beginning of year 743 215 Cash and cash equivalents at end of period $ 596 $ 295 </TABLE> See accompanying notes to consolidated financial statements. 5 Owens & Minor, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Accounting Policies In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and its wholly owned subsidiaries (the Company) as of March 31, 1997 and the consolidated results of operations and cash flows for the three month periods ended March 31, 1997 and 1996. 2. Interim Results of Operations The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. Interim Gross Margin Reporting In general, the Company uses estimated gross margin rates to determine the cost of goods sold during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the Company takes physical inventories at selected distribution centers. Reported results of operations for the three month periods ended March 31, 1997 and 1996 reflect the results of such inventories, if materially different. Management will continue a program of interim physical inventories at selected distribution centers to the extent it deems appropriate to ensure the accuracy of interim reporting and to minimize year-end adjustments. 4. Condensed Consolidating Financial Information The following table presents condensed consolidating financial information for: Owens & Minor, Inc.; on a combined basis, the guarantors of Owens & Minor, Inc.'s Senior Subordinated 10-year Notes (all of the wholly owned subsidiaries of Owens & Minor, Inc. except for O&M Funding Corp. (OMF)); and OMF, Owens & Minor, Inc.'s only non- guarantor subsidiary 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 statements are more meaningful in understanding the financial position of the guarantor subsidiaries. 6 <TABLE> <CAPTION> (In thousands) As of and for the three Owens months ended & Minor, Guarantor March 31, 1997 Inc. Subsidiaries OMF Eliminations Consolidated <S> <C> Current assets $157,917 $ 430,884 $ 79,897 $(219,203) $ 449,495 Noncurrent assets 306,530 228,550 - (314,859) 220,221 Total assets $464,447 $ 659,434 $ 79,897 $(534,062) $ 669,716 Current liabilities $ 6,087 $ 403,114 $ 63,238 $(220,403) $ 252,036 Noncurrent liabilities 154,000 18,506 - - 172,506 Shareholders' equity 304,360 237,814 16,659 (313,659) 245,174 Total liabilities and shareholders' equity $464,447 $ 659,434 $ 79,897 $(534,062) $ 669,716 Net sales $ 4,138 $ 749,623 $ 3,722 $(7,860) $ 749,623 Expenses 4,452 745,570 3,117 (8,510) 744,629 Net income (loss) $ (314) $ 4,053 $ 605 $ 650 $ 4,994 </TABLE> 7 Item 2. Owens & Minor, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations First quarter of 1997 compared with first quarter of 1996 Net sales. Net sales decreased 2.8% to $749.6 million in the first quarter of 1997 from $771.3 million in the first quarter of 1996. The sales decline was a result of the Company's late 1995 and early 1996 price increase initiative and its continuing efforts to reduce unprofitable sales and therefore increase the overall profitability of the Company. The Company is committed to profitable sales growth and has recently signed several new agreements that will provide an opportunity for such future growth, although, such growth cannot be assured. Gross margin. Gross margin as a percentage of net sales increased to 10.0% in the first quarter of 1997 from 9.6% in the first quarter of 1996. The improvement has been a result of the price increases discussed above, the standardization of suppliers and products and the increased utilization of an activity-based management system designed to identify costs associated with certain delivery and management services. During the first quarter of 1997, the Company's LIFO (last- in, first-out) provision declined to $1.3 million as compared to $2.7 million in the first quarter of 1996. The decrease was due primarily to lower price increases from manufacturers and lower inventory levels. The Company will continue to focus on maintaining this margin level through the continued utilization of the activity-based management system and continued standardization of suppliers and products. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales decreased to 7.5% in the first quarter of 1997 from 7.9% in the first quarter of 1996. The SG&A expense decline was a result of many cost-saving initiatives including the reduction of over 450 full-time equivalent (FTE) employees since March 31, 1996; the reduction in the cost of employee retirement plans; the more cost effective utilization of computer resources; the implementation of improved inventory management systems; the continuing automation of administrative functions through the utilization of electronic data interchange (EDI); and the refocus on best practices within the Company. The results of these initiatives have been and will be partially offset by costs associated with computer system changes required to accommodate the year 2000. Although the results of its efforts cannot be assured, the Company believes it will be able to maintain or reduce SG&A expense as a percentage of net sales by continuing its efforts on operational improvement. Depreciation and amortization. Depreciation and amortization increased by 7.0% in the first quarter of 1997 compared to the first quarter of 1996. This increase was due primarily to the Company's continued investment in information technology (I/T). The Company anticipates similar increases in depreciation and amortization for the remainder of 1997 associated with additional capital investment in I/T. 8 Interest expense, net and discount on accounts receivable securitization (financing costs). Financing costs, net of finance charge income of $1.0 million and $1.2 million in the first quarter of 1997 and 1996, respectively, decreased to $5.8 million in the first quarter of 1997 from $6.5 million in the first quarter of 1996. The decline in financing costs has been a result of the Company s ability to reduce working capital requirements by substantially completing the implementation of its client/server-based inventory forecasting system and strengthening its accounts receivable collection procedures. Due to the reduction in working capital requirements, the Company has reduced outstanding financing by approximately $107.4 million since March 31, 1996. Additionally, during 1996, the Company completed a refinancing plan that, in addition to the Company s improved financial performance, reduced the effective rate of its outstanding financing. The Company will continue to take action to reduce financing costs by continuing its working capital reduction initiatives, although, the results of these initiatives cannot be assured. Income taxes. The Company had an income tax provision of $3.7 million in the first quarter of 1997 (representing an effective tax rate of 42.2%) compared with an income tax provision of $1.1 million (representing an effective tax rate of 43.0%) in the first quarter of 1996. The decline in the effective tax rate is due primarily to increased income before taxes reducing the impact of nondeductible goodwill amortization. Net income. Net income increased $3.5 million in the first quarter of 1997 compared to the first quarter of 1996. The increase was primarily due to the initiatives previously discussed related to gross margin, SG&A expenses and financing costs. Although the trend has been favorable and the Company continues to pursue these and other initiatives, the future impact on net income cannot be assured. Financial Condition, Liquidity and Capital Resources Liquidity. The Company's liquidity position improved significantly during the first quarter of 1997 compared to the first quarter of 1996. Outstanding financing was reduced $107.4 million from March 31, 1996 and $18.6 million from December 31, 1996. The capitalization ratio (excluding the impact of the off balance sheet accounts receivable securitization) decreased to 52.9% at March 31, 1997 from 61.7% at March 31, 1996 and from 54.8% at December 31, 1996. The improvement was the result of reduced working capital requirements, increased earnings and the completion of the Company's refinancing plan in the second quarter of 1996. The Company expects that its available financing will be sufficient to fund its working capital needs and long-term strategic growth plans, although this cannot be assured. At March 31, 1997, the Company had approximately $221.0 million of unused credit under its revolving credit facility. Working Capital Management. During the first quarter of 1997, the Company's working capital management improved significantly compared to the first quarter of 1996. Inventory turnover for the quarter improved to 9.9 times in the first quarter of 1997 from 8.7 times in the first quarter of 1996 and from 9.4 times in the fourth quarter of 1996. This improvement was due to the implementation of the Company's client/server-based inventory forecasting system and the initiative to reduce the number of items from multiple manufacturers distributed by the Company. 9 The Company has also reduced accounts receivable days sales outstanding (DSO) (excluding the impact of the off balance sheet accounts receivable securitization) to 32.3 days in the first quarter of 1997 from 39.0 days in the first quarter of 1996 and from 33.9 days in the fourth quarter of 1996. This reduction has been achieved through strengthening the Company's methods of monitoring and enforcing contract payment terms and basing a portion of its sales force incentives on reducing days sales outstanding. The Company will focus on maintaining these working capital management measurements, although the results of its efforts cannot be assured. Capital Expenditures. Capital expenditures were approximately $2.7 million in the first quarter of 1997, of which approximately $1.2 million was for computer systems. The Company expects to continue to invest in technology for the foreseeable future as the most cost effective method of reducing operating expenses. These capital expenditures are expected to be funded through cash flow from operations. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards No. 128 ( SFAS 128 ), Earnings per Share. SFAS 128 prescribes the computation, presentation and disclosure requirements for earnings per share. This standard is effective for reporting periods ending after December 15, 1997. Management believes the adoption of this new standard will not have a material impact on the financial condition or results of operations of the Company. 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 and changes in government regulations. Although the Company believes that 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. 10 Part II. Other Information Item 1. Legal Proceedings As of April 22, 1997, Stuart had been named as a defendant along with product manufacturers, distributors, healthcare providers, trade associations and others in approximately 290 lawsuits, filed in various federal and state courts (the "Cases"). The Cases represent the claims of approximately 365 plaintiffs claiming personal injuries and approximately 245 spouses asserting claims for loss of consortium. The Cases seek damages for personal injuries allegedly attributable to spinal fixation devices. The great majority of the Cases seek compensatory and punitive damages in unspecified amounts. Prior to December 1992 and the Company's acquisition of Stuart in 1994, Stuart distributed spinal fixation devices manufactured by Sofamor SNC, a predecessor of Sofamor Danek Group, Inc. ("Sofamor Danek"). Approximately 30% of the Cases involve plaintiffs implanted with spinal fixation devices manufactured by Sofamor Danek. Such plaintiffs allege that Stuart is liable to them under applicable products liability law for injuries caused by such devices distributed and sold by Stuart. In addition, such plaintiffs allege that Stuart distributed and sold the spinal fixation devices through deceptive and misleading means and in violation of applicable law. In the remaining Cases, plaintiffs seek to hold Stuart liable for injuries caused by other manufacturers' devices that were neither distributed nor sold by Stuart. Such plaintiffs allege that Stuart engaged in a civil conspiracy and concerted action with manufacturers, distributors and others to promote the sale of spinal fixation devices through deceptive and misleading means and in violation of applicable law. Stuart never manufactured any spinal fixation devices. The Company believes that affirmative defenses are available to Stuart. All Cases filed against Stuart have been, and will continue to be, vigorously defended. A majority of the Cases have been transferred to, and consolidated for pretrial proceedings, in the Eastern District of Pennsylvania in Philadelphia under the style MDL Docket No. 1014: In re Orthopedic Bone Screw Products Liability Litigation. Discovery proceedings, including the taking of depositions, have been ongoing in certain of the Cases that were first to be filed. Discovery in certain Cases filed later may begin in 1997. Because of the preliminary status of the Cases, the Company is unable at this time to determine with certainty whether or not Stuart may be held liable. In January 1997, the presiding judge entered an order preliminarily approving a settlement agreement between one manufacturer of spinal fixation devices, AcroMed Corporation ("AcroMed"), and the plaintiff's legal committee in the multi-district litigation. Under the proposed terms of the settlement, AcroMed would establish a settlement fund consisting of $100 million in cash and the proceeds of its product liability insurance coverage. Stuart did not distribute devices manufactured by AcroMed and is not a party to the AcroMed settlement. A final hearing will be held later in 1997 to approve the fairness, adequacy and reasonableness of the settlement. It is anticipated that nonsettling defendants, including other manufacturers and distributors, will object to the terms of the settlement and the proposed terms of the notice of the settlement. 11 The Company believes that Stuart may be named as a defendant in additional similar cases in the future as a result of the pending AcroMed settlement or as statutes of limitations approach expiration. Based upon management's analysis of indemnification agreements between Stuart and Sofamor Danek, the manufacturer of the devices distributed by Stuart, the Company believes that Stuart is entitled to indemnification by Sofamor Danek at least with respect to claims brought by plaintiffs implanted with devices manufactured by Sofamor Danek. Such Cases are being defended by Stuart's insurance carriers. Regarding those Cases filed by plaintiffs implanted with other manufacturers' devices, one of Stuart's primary insurance carriers has notified a representative of the former shareholders of Stuart that it will withdraw its provision of defense of such Cases and another one of Stuart's primary insurance carriers has notified a representative of the former shareholders of Stuart that it has declined to provide a defense for such Cases, in both instances asserting that such Cases involve only conspiracy and concerted action claims. The former shareholders of Stuart are contesting the insurance companies' withdrawal and declination of the defense of such Cases. The Company and Stuart are also contractually entitled to indemnification by the former shareholders of Stuart for any liabilities and related expenses incurred by the Company or Stuart in connection with the foregoing litigation. The Company believes that Stuart's available insurance coverage together with the indemnification rights discussed above are adequate to cover any losses should they occur, and accordingly has accrued no liability therefor. Except as set forth above, the Company is not aware of any uncertainty as to the availability and adequacy of such insurance or indemnification, although there can be no assurance that Sofamor Danek and the former shareholders will have sufficient financial resources in the future to meet such obligations. 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(a) Amended and Restated Bylaws of the Company. 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K for the three months ended March 31, 1997. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Owens & Minor, Inc. (Registrant) Date May 12, 1997 /s/ Ann Greer Rector Ann Greer Rector Senior Vice President & Chief Financial Officer