UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ 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 -------------- 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 October 29, 2001, was 33,865,589 shares. 1
Owens & Minor, Inc. and Subsidiaries Index <TABLE> <CAPTION> Page <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 2001 and 2000 3 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II. Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 6. Exhibits and Reports on Form 8-K 21 </TABLE> 2
Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------------------- ------------------------------------- 2001 2000 2001 2000 ------------------ ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Net sales $ 968,230 $ 874,318 $ 2,846,269 $ 2,606,290 Cost of goods sold 865,162 781,197 2,543,597 2,328,405 -------------- ------------- --------------- --------------- Gross margin 103,068 93,121 302,672 277,885 -------------- ------------- --------------- --------------- Selling, general and administrative expenses 74,193 65,752 220,188 200,102 Depreciation and amortization 5,650 5,399 16,878 15,830 Interest expense, net 3,549 3,060 10,357 9,418 Discount on accounts receivable securitization 841 1,744 3,746 5,562 Impairment loss on investment 1,071 - 1,071 - Distributions on mandatorily redeemable preferred securities 1,773 1,773 5,321 5,321 Restructuring credit - - (1,476) (750) -------------- ------------- --------------- --------------- Total expenses 87,077 77,728 256,085 235,483 -------------- ------------- --------------- --------------- Income before income taxes 15,991 15,393 46,587 42,402 Income tax provision 14,294 6,927 27,756 19,081 -------------- ------------- --------------- --------------- Income before extraordinary item 1,697 8,466 18,831 23,321 Extraordinary loss on early retirement of debt, net of income tax benefit (7,068) - (7,068) - -------------- ------------- --------------- --------------- Net income (loss) $ (5,371) $ 8,466 $ 11,763 $ 23,321 ============== ============= =============== =============== Per common share-basic: Income before extraordinary item $ 0.05 $ 0.26 $ 0.57 $ 0.71 Extraordinary loss on early retirement of debt (0.21) - (0.22) - -------------- ------------- --------------- --------------- Net income (loss) $ (0.16) $ 0.26 $ 0.35 $ 0.71 ============== ============= =============== =============== Per common share-diluted: Income before extraordinary item $ 0.05 $ 0.24 $ 0.54 $ 0.67 Extraordinary loss on early retirement of debt (0.21) - (0.17) - -------------- ------------- --------------- --------------- Net income (loss) $ (0.16) $ 0.24 $ 0.37 $ 0.67 ============== ============= =============== =============== Cash dividends per common share $ 0.07 $ 0.0625 $ 0.2025 $ 0.1850 ============== ============= =============== =============== </TABLE> See accompanying notes to consolidated financial statements. 3
Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> (in thousands, except per share data) September 30, December 31, 2001 2000 ---------- --------- (unaudited) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 878 $ 626 Accounts and notes receivable, net of allowance of $5,667 and $6,419 308,869 261,905 Merchandise inventories 395,112 315,570 Other current assets 13,228 16,190 ------------ ------------ Total current assets 718,087 594,291 Property and equipment, net of accumulated depreciation of $64,080 and $58,876 26,234 24,239 Goodwill, net of accumulated amortization of $38,468 and $33,977 200,358 204,849 Other assets, net 49,948 44,169 ------------ ------------ Total assets $ 994,627 $ 867,548 ============ ============ Liabilities and shareholders' equity Current liabilities Accounts payable $ 331,328 $ 291,507 Accrued payroll and related liabilities 6,878 9,940 Other accrued liabilities 64,407 59,207 ------------ ------------ Total current liabilities 402,613 360,654 Long-term debt 221,125 152,872 Other liabilities 10,617 9,250 ------------ ------------ Total liabilities 634,355 522,776 ------------ ------------ 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 - 33,861 shares and 33,180 shares 67,722 66,360 Paid-in capital 26,596 18,039 Retained earnings 133,954 129,001 Accumulated other comprehensive loss - (628) ------------ ------------ Total shareholders' equity 228,272 212,772 ------------ ------------ Total liabilities and shareholders' equity $ 994,627 $ 867,548 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 4
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> (in thousands) Nine Months Ended (unaudited) September 30, ------------------------------------------- 2001 2000 -------------------- ------------------- <S> <C> <C> Operating activities Income before extraordinary item $ 18,831 $ 23,321 Adjustments to reconcile income before extraordinary item to cash provided by (used for) operating activities: Depreciation and amortization 16,878 15,830 Restructuring credit (1,476) (750) Impairment loss on investment 1,071 - Provision for LIFO reserve 2,750 2,280 Provision for losses on accounts and notes receivable 517 263 Collections of sold accounts receivable, net (26,000) (35,612) Changes in operating assets and liabilities: Accounts and notes receivable (21,481) 3,777 Merchandise inventories (82,292) 2,523 Accounts payable 36,171 13,227 Net change in other current assets and current liabilities 11,277 7,298 Other, net 4,790 4,876 --------------- --------------- Cash provided by (used for) operating activities (38,964) 37,033 --------------- --------------- Investing activities Additions to property and equipment (8,893) (5,981) Additions to computer software (3,641) (9,415) Other, net (870) (181) --------------- --------------- Cash used for investing activities (13,404) (15,577) --------------- --------------- Financing activities Net proceeds from issuance of long-term debt 194,591 - Payments to retire long-term debt (158,594) - Additions (reductions) to other debt, net 11,839 (16,625) Other, net 3,650 (1,896) Cash dividends paid (6,810) (6,088) Proceeds from exercise of stock options 7,944 3,190 --------------- --------------- Cash provided by (used for) financing activities 52,620 (21,419) --------------- --------------- Net increase in cash and cash equivalents 252 37 Cash and cash equivalents at beginning of period 626 669 --------------- --------------- Cash and cash equivalents at end of period $ 878 $ 706 =============== =============== </TABLE> See accompanying notes to consolidated financial statements. 5
Owens & Minor, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 1. Accounting Policies In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are comprised only of normal recurring accruals and the use of estimates) necessary to present fairly the consolidated financial position of Owens & Minor, Inc. and its wholly-owned subsidiaries (O&M or the company) as of September 30, 2001 and the consolidated results of operations for the three and nine month periods and cash flows for the nine month periods ended September 30, 2001 and 2000. 2. Interim Results of Operations The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. Interim Gross Margin Reporting The company uses estimated gross margin rates to determine the cost of goods sold during interim periods. To improve the accuracy of its estimated gross margins for interim reporting purposes, the company takes physical inventory counts at selected distribution centers. Reported results of operations for the three and nine month periods ended September 30, 2001 and 2000 reflect the results of such counts, to the extent that they are materially different from estimated amounts. 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. Reclassification of Shipping Fees In the fourth quarter of 2000, the company adopted the provisions of Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and Handling Fees and Costs. As a result, the company reclassified certain amounts billed to customers for shipping from selling, general and administrative (SG&A) expenses to net sales for all prior periods. As a result, net sales, gross margin, and SG&A expenses for the three months and nine months ended September 30, 2000 have been increased by $2.0 million and $6.3 million. 5. Investment The company owns equity securities of a provider of business-to-business e- commerce services in the healthcare industry. The investment is classified as available-for-sale, in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and is included in other assets, net in the consolidated balance sheets at fair value, with unrealized gains or losses, net of tax, reported as accumulated other comprehensive income or loss. Other than temporary declines in market value from original cost are charged to net income. Net income for the quarter ended September 30, 2001 includes an impairment charge of $1.1 million, as the market value of these securities has fallen significantly below the company's original cost basis and management believes that recovery in the near term is unlikely. At September 30, 2001, the estimated fair value (based on the quoted market price) and adjusted cost basis of this investment was $0.2 million. At December 31, 2000, the estimated fair value, unrealized loss, and cost basis were $0.2 million, $1.0 million, and $1.2 million. 6
6. Acquisition In 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies. The acquisition has been accounted for by the purchase method. In connection with the acquisition, management adopted a plan for integration of the businesses that included closure of some Medix facilities and consolidation of certain administrative functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the activity in the accrual since December 31, 2000: Balance at Balance at December 31, September 30, (in thousands) 2000 Charges 2001 ------------------------------------------------------------------------ Losses under lease commitments $1,285 $143 $1,142 Employee separations 83 30 53 Other 281 - 281 ------------------------------------------------------------------------ Total $1,649 $173 $1,476 ------------------------------------------------------------------------ As of September 30, 2001, approximately 40 employees had been terminated since the inception of the plan. While the integration of the Medix business has been substantially completed, the company continues to make payments under lease commitments and other obligations. 7. Restructuring Reserve As a result of the cancellation of a significant customer contract in 1998, the company recorded a nonrecurring restructuring charge to downsize operations. In the second quarter of 2001, the company re-evaluated its estimate of the remaining costs to be incurred in connection with the restructuring plan and reduced the reserve by approximately $1.5 million. The following table sets forth the activity in the restructuring reserve since December 31, 2000: <TABLE> <CAPTION> Balance at Balance at December 31, September 30, (in thousands) 2000 Charges Adjustments 2001 -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Losses under lease commitments $2,718 $257 $(1,504) $ 957 Asset write-offs 821 - 28 849 -------------------------------------------------------------------------------------------------- Total $3,539 $257 $(1,476) $1,806 -------------------------------------------------------------------------------------------------- </TABLE> 8. Refinancing of Debt In July 2001, the company issued $200.0 million of 8 1/2% Senior Subordinated 10-year notes (2011 Notes) which mature on July 15, 2011. Interest on the 2011 Notes is payable semi-annually on January 15 and July 15, beginning January 15, 2002. The 2011 Notes are redeemable on or after July 15, 2006, at the company's option, subject to certain restrictions. The 2011 Notes are unconditionally guaranteed on a joint and several basis by all significant subsidiaries of the company other than O&M Funding Corporation and Owens & Minor Trust I. The net proceeds from the 2011 Notes were used to retire the 10.875% Senior Subordinated 10-year Notes due in 2006 (2006 Notes) and to reduce the amount of accounts receivable sold under the company's off-balance sheet receivables financing facility. The early retirement of the 2006 Notes resulted in an extraordinary loss of $7.1 million, comprised of $8.4 million of retirement premiums, a $3.2 million write-off of debt issuance costs, $0.2 million of fees, and an income tax benefit of $4.7 million. 7
9. Off Balance Sheet Receivables Financing Facility In the second quarter of 2001, the company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125 of the same title. SFAS 140 revised the standards for securitizations and other transfers of financial assets and expanded the disclosure requirements for such transactions, while carrying over many of the provisions of SFAS 125 without change. The provisions of SFAS 140 are effective for transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001, and are to be applied prospectively. The adoption of this Standard did not require a change in the company's accounting treatment of sales of accounts receivable under its off balance sheet receivables financing facility (Receivables Financing Facility), or have any material effect on the company's consolidated financial position, results of operations, or cash flows. The company adopted the disclosure requirements of SFAS 140 in 2000. Under the terms of its Receivables Financing Facility, O&M Funding is entitled to transfer, without recourse, certain of the company's trade receivables and to receive up to $225.0 million from a group of unrelated third party purchasers. At September 30, 2001 and December 31, 2000, net accounts receivable of $54.0 million and $80.0 million had been sold under the agreement and, as a result, have been excluded from the consolidated balance sheets. 10. Derivative Financial Instruments On January 1, 2001, the company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting treatment for changes in the fair value of a derivative depends upon the intended use of the derivative and the resulting designation. The adoption of this Standard did not have a material impact on the company's results of operations or financial position. The company enters into interest rate swaps as part of its interest rate risk management strategy. The purpose of these swaps is to maintain the company's desired mix of fixed to floating rate financing in order to manage interest rate risk. In July 2001, the company entered into interest rate swap agreements of $100.0 million notional amounts that effectively converted a portion of the company's fixed rate financing instruments to variable rates. These swaps were designated as fair value hedges of a portion of the company's 8 1/2% Senior Subordinated 10-year Notes due in 2011, and qualify for an assumption of no ineffectiveness under the provisions of SFAS 133. Previously, the company had similar interest rate swap agreements of $100.0 million notional amounts that were designated as fair value hedges of a portion of the company's 10.875% Senior Subordinated 10-year Notes due in 2006, which were cancelled by their respective counterparties on May 28, 2001. 8
11. Comprehensive Income The company's comprehensive income for the three months and nine months ended September 30, 2001 and 2000 is shown in the table below. Other comprehensive income is comprised of changes in unrealized gain or loss on investment, net of income tax, and a reclassification adjustment due to an unrealized loss included in net income. <TABLE> <CAPTION> (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- 2001 2000 2001 2000 ---------------------- ---------------------- <S> <C> <C> <C> <C> Net income (loss) $(5,371) $8,466 $11,763 $23,321 Other comprehensive income (loss), net of tax: (Increase) decrease in unrealized loss on investment (19) (392) (14) (232) Reclassification adjustment for unrealized loss included in net income 642 - 642 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 623 (392) 628 (232) ------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $(4,748) $8,074 $12,391 $23,089 =================================================================================================================== </TABLE> 12. Income Before Extraordinary Item per Common Share The following sets forth the computation of basic and diluted income before extraordinary item per common share: <TABLE> <CAPTION> (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------ 2001 2000 2001 2000 -------------------- ----------------------- <S> <C> <C> <C> <C> Numerator: Numerator for basic income before extraordinary item per common share - income before extraordinary item $ 1,697 $ 8,466 $ 18,831 $ 23,321 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes - 976 3,023 2,927 ------------------------------------------------------------------------------------------------------------- Numerator for diluted income before extraordinary item per common share - income before extraordinary item after assumed conversions $ 1,697 $ 9,442 $ 21,854 $ 26,248 ------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic income before extraordinary item per common share - weighted average shares 33,560 32,793 33,280 32,658 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities - 6,400 6,400 6,400 Stock options and restricted stock 636 526 628 366 ------------------------------------------------------------------------------------------------------------- Denominator for diluted income before extraordinary item per common share - adjusted weighted average shares and assumed conversions 34,196 39,719 40,308 39,424 ------------------------------------------------------------------------------------------------------------- Income before extraordinary item per common share - basic $ 0.05 $ 0.26 $ 0.57 $ 0.71 Income before extraordinary item per common share - diluted $ 0.05 $ 0.24 $ 0.54 $ 0.67 ------------------------------------------------------------------------------------------------------------- </TABLE> 9
13. Contingency In August 2000, the company received notice from the Internal Revenue Service that it has disallowed certain prior year deductions for interest on loans associated with the company's corporate-owned life insurance (COLI) program. Management believes that the company has complied with the tax law as it relates to its COLI program, and has filed an appeal with the Internal Revenue Service (IRS). However, several cases involving other corporations' COLI programs have been decided in favor of the IRS, and consequently, the climate has become less favorable to taxpayers with respect to these programs. As a result, a provision for the estimated liability of $7.2 million for taxes and interest, included in "income tax provision," was recorded in the third quarter of 2001 as management believes that it has now become probable that the company will not achieve a favorable resolution of this matter. Notwithstanding this action, management does not agree with the IRS position and will continue to protest this matter either administratively or through litigation. 14. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets. The provisions of SFAS 142 state that goodwill should not be amortized but should be tested for impairment upon adoption of the standard, and at least annually, at the reporting unit level. The company will be required to adopt the provisions of this standard beginning on January 1, 2002. As a result, the company will no longer record goodwill amortization expense. The company will also be required to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any such transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the company's consolidated statement of income. As of the date of adoption, the company expects to have unamortized goodwill in the amount of $198.9 million, which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill was $1.5 million for each of the three month periods ended September 30, 2001 and 2000, and $4.5 million for each of the nine month periods ended September 30, 2001 and 2000. Based on current values, management believes that the company is unlikely to incur a transitional impairment loss. 15. 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 2011 Notes; and the non-guarantor subsidiaries of the 2011 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. 10
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor September 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Operations Net sales $ - 968,230 - - 968,230 Cost of goods sold - 865,162 - - 865,162 - ---------------------------------------------------------------------------------------------------------------------------------- Gross margin - 103,068 - - 103,068 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 73,961 232 - 74,193 Depreciation and amortization - 5,650 - - 5,650 Interest expense, net 4,544 (995) - - 3,549 Intercompany interest expense, net (5,824) 10,478 (4,654) - - Discount on accounts receivable securitization - 4 837 - 841 Impairment loss on investment 1,071 - - - 1,071 Distributions on mandatorily redeemable preferred securities - - 1,773 - 1,773 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses (209) 89,098 (1,812) - 87,077 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 209 13,970 1,812 - 15,991 Income tax provision 564 12,933 797 - 14,294 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item (355) 1,037 1,015 - 1,697 Extraordinary loss on early retirement of debt, net of income tax benefit (7,068) - - - (7,068) - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (7,423) 1,037 1,015 - (5,371) - ---------------------------------------------------------------------------------------------------------------------------------- <CAPTION> For the three months ended Owens & Guarantor Non-guarantor September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Operations Net sales $ - 874,318 - - 874,318 Cost of goods sold - 781,197 - - 781,197 - ---------------------------------------------------------------------------------------------------------------------------------- Gross margin - 93,121 - - 93,121 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 155 64,905 692 - 65,752 Depreciation and amortization - 5,399 - - 5,399 Interest expense, net 4,480 (1,420) - - 3,060 Intercompany interest expense, net (1,886) 8,490 (6,604) - - Discount on accounts receivable securitization - 4 1,740 - 1,744 Distributions on mandatorily redeemable preferred securities - - 1,773 - 1,773 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,749 77,378 (2,399) - 77,728 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,749) 15,743 2,399 - 15,393 Income tax provision (benefit) (1,210) 7,044 1,093 - 6,927 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,539) 8,699 1,306 - 8,466 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> 11
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> For the nine months ended Owens & Guarantor Non-guarantor September 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Operations Net sales $ - $ 2,846,269 $ - $ - $ 2,846,269 Cost of goods sold - 2,543,597 - - 2,543,597 - ---------------------------------------------------------------------------------------------------------------------------------- Gross margin - 302,672 - - 302,672 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses - 219,615 573 - 220,188 Depreciation and amortization - 16,878 - - 16,878 Interest expense, net 13,498 (3,141) - - 10,357 Intercompany interest expense, net (10,049) 25,016 (14,967) - - Intercompany dividend income (126,386) - - 126,386 - Discount on accounts receivable securitization - 10 3,736 - 3,746 Impairment loss on investment 1,071 - - - 1,071 Distributions on mandatorily redeemable preferred securities - - 5,321 - 5,321 Restructuring credit - (1,476) - - (1,476) - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses (121,866) 256,902 (5,337) 126,386 256,085 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 121,866 45,770 5,337 (126,386) 46,587 Income tax provision (benefit) (1,517) 26,911 2,362 - 27,756 - ---------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 123,383 18,859 2,975 (126,386) 18,831 Extraordinary loss on early retirement of debt, net of income tax benefit (7,068) - - - (7,068) - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 116,315 $ 18,859 $ 2,975 $ (126,386) $ 11,763 - ---------------------------------------------------------------------------------------------------------------------------------- <CAPTION> For the nine months ended Owens & Guarantor Non-guarantor September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statements of Operations Net sales $ - $ 2,606,290 $ - $ - $ 2,606,290 Cost of goods sold - 2,328,405 - - 2,328,405 - ---------------------------------------------------------------------------------------------------------------------------------- Gross margin - 277,885 - - 277,885 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 155 198,695 1,252 - 200,102 Depreciation and amortization - 15,830 - - 15,830 Interest expense, net 13,418 (4,000) - - 9,418 Intercompany interest expense, net (5,913) 23,068 (17,155) - - Discount on accounts receivable securitization - 13 5,549 - 5,562 Distributions on mandatorily redeemable preferred securities - - 5,321 - 5,321 Restructuring credit - (750) - - (750) - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 7,660 232,856 (5,033) - 235,483 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (7,660) 45,029 5,033 - 42,402 Income tax provision (benefit) (3,371) 19,884 2,568 - 19,081 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,289) $ 25,145 $ 2,465 $ - $ 23,321 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> 12
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- Owens & Guarantor Non-guarantor Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------------- September 30, 2001 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 7 $ 870 $ 1 $ - $ 878 Accounts and notes receivable, net - - 308,869 - 308,869 Merchandise inventories - 395,112 - - 395,112 Intercompany advances, net 187,069 91,175 (278,244) - - Other current assets 29 13,195 4 - 13,228 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 187,105 500,352 30,630 - 718,087 Property and equipment, net - 26,232 2 - 26,234 Goodwill, net - 200,358 - - 200,358 Intercompany investments 340,023 15,001 136,083 (491,107) - Other assets, net 16,293 32,654 1,001 - 49,948 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 543,421 $ 774,597 $ 167,716 $ (491,107) $ 994,627 ================================================================================================================================= Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 331,328 $ - $ - $ 331,328 Accrued payroll and related liabilities - 6,878 - - 6,878 Other accrued liabilities 3,733 61,470 (796) - 64,407 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,733 399,676 (796) - 402,613 Long-term debt 221,125 - - - 221,125 Intercompany long-term debt 136,083 143,890 - (279,973) - Other liabilities (930) 11,550 (3) - 10,617 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 360,011 555,116 (799) (279,973) 634,355 - --------------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 67,722 40,879 5,583 (46,462) 67,722 Paid-in capital 26,596 149,671 15,001 (164,672) 26,596 Retained earnings 89,092 28,931 15,931 - 133,954 - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 183,410 219,481 36,515 (211,134) 228,272 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 543,421 $ 774,597 $ 167,716 $ (491,107) $ 994,627 ================================================================================================================================= </TABLE> 13
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- Owens & Guarantor Non-guarantor December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 118 $ 1 $ - $ 626 Accounts and notes receivable, net - 24,224 237,681 - 261,905 Merchandise inventories - 315,570 - - 315,570 Intercompany advances, net 129,447 79,645 (209,092) - - Other current assets 17 16,173 - - 16,190 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 129,971 435,730 28,590 - 594,291 Property and equipment, net - 24,236 3 - 24,239 Goodwill, net - 204,849 - - 204,849 Intercompany investments 213,637 15,001 136,083 (364,721) - Other assets, net 8,735 35,157 277 - 44,169 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 352,343 $ 714,973 $ 164,953 $ (364,721) $ 867,548 =================================================================================================================================== Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 291,507 $ - $ - $ 291,507 Accrued payroll and related liabilities - 9,940 - - 9,940 Other accrued liabilities 1,632 58,159 (584) - 59,207 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,632 359,606 (584) - 360,654 Long-term debt 152,200 672 - - 152,872 Intercompany long-term debt 136,083 - - (136,083) - Other liabilities (930) 10,183 (3) - 9,250 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 288,985 370,461 (587) (136,083) 522,776 - ----------------------------------------------------------------------------------------------------------------------------------- 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 66,360 40,879 5,583 (46,462) 66,360 Paid-in capital 18,039 167,175 15,001 (182,176) 18,039 Retained earnings (accumulated deficit) (20,413) 136,458 12,956 - 129,001 Accumulated other comprehensive loss (628) - - - (628) - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 63,358 344,512 33,540 (228,638) 212,772 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 352,343 $ 714,973 $ 164,953 $ (364,721) $ 867,548 =================================================================================================================================== </TABLE> 14
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months ended Owens & Guarantor Non-guarantor September 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Statements of Cash Flows Operating activities Income before extraordinary item $ 123,383 $ 18,859 $ 2,975 $ (126,386) $ 18,831 Adjustments to reconcile income before extraordinary item to cash provided by (used for) operating activities: Depreciation and amortization - 16,878 - - 16,878 Restructuring credit - (1,476) - - (1,476) Impairment loss on investment 1,071 - - - 1,071 Provision for LIFO reserve - 2,750 - - 2,750 Provision for losses on accounts and notes receivable - 874 (357) - 517 Collections of sold accounts receivable, net - - (26,000) - (26,000) Changes in operating assets and liabilities: Accounts and notes receivable - 23,350 (44,831) - (21,481) Merchandise inventories - (82,292) - - (82,292) Accounts payable - 36,171 - - 36,171 Net change in other current assets and current liabilities 6,802 4,439 36 - 11,277 Other, net 2,621 2,169 - - 4,790 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities 133,877 21,722 (68,177) (126,386) (38,964) - ------------------------------------------------------------------------------------------------------------------------------------ Investing activities Additions to property and equipment - (8,893) - - (8,893) Additions to computer software - (3,641) - - (3,641) Investments in intercompany debt (143,890) - - 143,890 - Decrease in intercompany investment 17,504 - - (17,504) - Other, net - 105 (975) - (870) - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities (126,386) (12,429) (975) 126,386 (13,404) - ------------------------------------------------------------------------------------------------------------------------------------ Financing activities Net proceeds from issuance of long-term debt 194,591 - - - 194,591 Payments to retire long-term debt (158,594) (158,594) Additions (reductions) to other debt 12,500 (661) - - 11,839 Proceeds from issuance of intercompany debt - 143,890 - (143,890) - Change in intercompany advances (57,622) (11,530) 69,152 - - Decrease in intercompany investment - (17,504) - 17,504 - Other financing, net - 3,650 - - 3,650 Cash dividends paid (6,810) - - - (6,810) Intercompany dividends paid - (126,386) - 126,386 - Proceeds from exercise of stock options 7,944 - - - 7,944 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (7,991) (8,541) 69,152 - 52,620 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (500) 752 - - 252 Cash and cash equivalents at beginning of period 507 118 1 - 626 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 7 $ 870 $ 1 $ - $ 878 ==================================================================================================================================== </TABLE> 15
Condensed Consolidating Financial Information (in thousands) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months ended Owens & Guarantor Non-guarantor September 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Statements of Cash Flows Operating activities Net income (loss) $ (4,289) $ 25,145 $ 2,465 $ - $ 23,321 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 15,830 - - 15,830 Restructuring credit - (750) - - (750) Provision for LIFO reserve - 2,280 - - 2,280 Provision for losses on accounts and notes receivable - 579 (316) - 263 Collections of sold accounts receivable, net - - (35,612) - (35,612) Changes in operating assets and liabilities: Accounts and notes receivable - 91,674 (87,897) - 3,777 Merchandise inventories - 2,572 (49) - 2,523 Accounts payable - 13,227 - - 13,227 Net change in other current assets and current liabilities 3,785 3,764 (251) - 7,298 Other, net 2,256 1,716 904 - 4,876 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities 1,752 156,037 (120,756) - 37,033 - ------------------------------------------------------------------------------------------------------------------------------------ Investing activities Additions to property and equipment - (5,978) (3) - (5,981) Additions to computer software - (9,415) - - (9,415) Other, net (155) (26) - - (181) - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities (155) (15,419) (3) - (15,577) - ------------------------------------------------------------------------------------------------------------------------------------ Financing activities Reduction of debt (16,000) (625) - - (16,625) Change in intercompany advances 18,547 (139,303) 120,756 - - Other financing, net (1,246) (650) - - (1,896) Cash dividends paid (6,088) - - - (6,088) Proceeds from exercise of stock options 3,190 - - - 3,190 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (1,597) (140,578) 120,756 - (21,419) Net increase (decrease) in cash and cash equivalents - 40 (3) - 37 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of period 507 158 4 - 669 ==================================================================================================================================== Cash and cash equivalents at end of period $ 507 $ 198 $ 1 $ - $ 706 ==================================================================================================================================== </TABLE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management discussion and analysis describes material changes in the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries (the company) since December 31, 2000. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations included in the company's Annual Report on Form 10-K for the year ended December 31, 2000. Results of Operations Third quarter and first nine months of 2001 compared with 2000 Overview. In the third quarter of 2001, the company incurred a net loss of $5.4 million, compared with net income of $8.5 million in the third quarter of 2000. For the first nine months of 2001, net income decreased to $11.8 million from $23.3 million in the first nine months of 2000. Excluding a $1.1 million impairment loss on investment, a $7.2 million additional tax provision, discussed below, and a $7.1 million after-tax extraordinary loss on the early retirement of debt, net income increased to $9.9 million, or $0.27 per diluted common share, for the third quarter of 2001 from $8.5 million, or $0.24 per diluted common share, for the third quarter of 2000. Excluding these unusual items and the adjustments to the restructuring reserve in the second quarters of 2001 and 2000, net income increased to $26.2 million, or $0.73 per diluted common share, for the first nine months of 2001 from $22.9 million, or $0.66 per diluted common share, for the same period of 2000. The increase is primarily due to the increase in sales and success in reducing financing costs. Net sales. Net sales increased 11% to $968.2 million in the third quarter of 2001 from $874.3 million in the third quarter of 2000. Net sales increased 9% to $2.8 billion in the first nine months of 2001 from $2.6 billion in the first nine months of 2000. These increases resulted from further penetration of existing accounts as well as new business. In April 2001, the company signed a new three-year distribution agreement with Novation, the supply company of VHA, Inc. and University Health System Consortium, continuing its long-standing relationship with these organizations. Under the new agreement, the company is one of two national medical and surgical distributors authorized to serve all areas of the country. Sales to Novation members represented approximately 52% and 51% of the company's net sales for the first nine months of 2001 and 2000. Gross margin. Gross margin as a percentage of net sales decreased slightly to 10.6% for the third quarter and for the first nine months of 2001 compared with 10.7% for the same periods of 2000. As the company continues to face margin pressure, it is focusing on opportunities for margin improvement, including an emphasis on providing value-added services. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 7.7% of net sales for the third quarter of 2001, compared to 7.5% for the third quarter of 2000. This increase resulted, in part, from higher personnel costs incurred to support sales growth, distribution center relocations and higher employee healthcare costs. For the first nine months of 2001, SG&A expense remained consistent with the first nine months of 2000 at 7.7% of net sales. Management plans to look for new ways to use technology to improve productivity, and to find better ways to efficiently share best operating practices across the company. 17
Depreciation and amortization. Depreciation and amortization expense for the third quarter and first nine months of 2001 increased by approximately 5% and 7% from the same periods in 2000, primarily as a result of continued investments in information technology. Interest expense, net, and discount on accounts receivable securitization (financing costs). Financing costs totaled $4.4 million for the third quarter of 2001 and $14.1 million for the first nine months of 2001, compared with $4.8 million and $15.0 million for the same periods of 2000. This decrease was primarily driven by lower effective interest rates resulting from the refinancing of the company's 2006 Notes with new lower-rate 2011 Notes and from decreases in short-term interest rates. The company expects to continue to manage its financing costs by continuing its working capital reduction initiatives and management of interest rate risks, although the future results of these initiatives cannot be assured. Impairment loss on investment. The company owns equity securities of a provider of business-to-business e-commerce services in the healthcare industry. The market value of these securities has fallen significantly below the company's original cost basis and, as management believes that recovery in the near term is unlikely, the company recorded an impairment charge of $1.1 million in the third quarter of 2001. Restructuring credits. As a result of the cancellation of a significant customer contract in 1998, the company recorded a nonrecurring restructuring charge of $6.6 million, after taxes, to downsize operations. The company periodically re-evaluates its restructuring reserve, and since the actions under this plan had resulted in lower projected total costs than originally anticipated, the company recorded reductions in the reserve in the second quarters of both 2001 and 2000, which increased net income by approximately $0.8 million in 2001 and $0.4 million in 2000. Income taxes. The income tax provision was $14.3 million for the third quarter of 2001, including an additional $7.2 million provision for estimated tax liabilities related principally to interest deductions for corporate-owned life insurance claimed on the company's tax returns for the years 1995 through 1998. Excluding this charge and the impairment loss on investment, the effective tax rate was 43.2% for the first nine months of 2001, compared to 45.0% for the same period in 2000. This reduction in rate resulted primarily from decreases in the effect of certain nondeductible items. Financial Condition, Liquidity and Capital Resources Liquidity. Combined outstanding debt and off balance sheet accounts receivable securitization increased by $42.3 million from December 31, 2000 to $275.8 million at September 30, 2001. This increase was primarily a result of an increased investment in inventory to support growing sales volume. Excluding sales of accounts receivable and their subsequent collections under the receivables financing facility, $13.0 million of cash was used for operating activities in the first nine months of 2001, compared with $72.6 million provided by operating activities in the first nine months of 2000. This decrease in operating cash flow resulted largely from the increased purchases of inventory mentioned above. On July 2, 2001, the company issued $200 million of 8 1/2% Senior Subordinated Notes maturing in July 2011. The proceeds from these notes were used to retire the company's $150 million of 10 7/8% Senior Subordinated Notes and to reduce the amount of accounts receivable sold under the receivables financing facility. The retirement of the 10 7/8% Notes resulted in an extraordinary loss on the early retirement of debt of $7.1 million, net of income tax benefit. In conjunction with the new notes, the company entered 18
into interest rate swap agreements under which the company pays counterparties a variable rate based on LIBOR and the counterparties pay the company a fixed interest rate of 8 1/2% on a notional amount of $100 million. In addition, effective July 12, 2001, the company extended the expiration of its receivables financing facility to July 11, 2002. 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 September 30, 2001, the company had $210.3 million of unused credit under its revolving credit facility and the ability to sell an additional $171.0 million of accounts receivable under its receivables financing facility. Working Capital Management. The company's working capital increased by $81.8 million from December 31, 2000 to $315.5 million at September 30, 2001, as a result of increased levels of inventory and accounts receivable. Annualized inventory turnover for the third quarter of 2001 decreased to 8.9 from 9.7 in the fourth quarter of 2000, as the company increased inventory levels to begin service to new customers. Accounts receivable, excluding the effect of the company's receivables financing facility, increased by $21.0 million to $362.9 million at September 30, 2001 as a result of sales growth. Capital Expenditures. Capital expenditures were approximately $12.5 million in the first nine months of 2001, including $3.3 million for the purchase of land to be used for the company's future headquarters. The company spent $5.7 million to purchase computer hardware and software. The company expects to continue supporting strategic initiatives and improving operational efficiency through investments in technology including system upgrades. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued the following new accounting pronouncements: SFAS 141, Business Combinations, SFAS 142, Goodwill and Other Intangible Assets, and SFAS 143, Accounting for Asset Retirement Obligations. The provisions of SFAS 141 require that all business combinations initiated after June 30, 2001 be accounted for by the purchase method and also specify criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. The adoption of this standard will affect the company's accounting for future acquisitions. The provisions of SFAS 142 state that goodwill should not be amortized but should be tested for impairment upon adoption of the standard, and at least annually, at the reporting unit level. The company will be required to adopt the provisions of this standard beginning on January 1, 2002. As a result, the company will no longer record goodwill amortization expense. The company will also be required to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any such transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the company's consolidated statement of income. As of the date of adoption, the company expects to have unamortized goodwill in the amount of $198.9 million, which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill was $1.5 million for each of the three month periods ended September 30, 2001 and 2000, and $4.5 million for each of the nine month periods ended September 30, 2001 and 2000. Based on current values, management believes that the company is unlikely to incur a transitional impairment loss. 19
The provisions of SFAS 143 address financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The company will be required to adopt the provisions of this standard beginning on January 1, 2003. Management believes that adoption of this standard will not have a material effect on the company's results of operations. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of SFAS 144 will modify the accounting treatment for impairments of long-lived assets and discontinued operations. The company will be required to adopt the provisions of this standard beginning on January 1, 2002. Management believes that adoption of this standard will not have a material effect on the company's 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. 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, dependence on sales to certain customers, dependence on suppliers, competition, changing trends in customer profiles, the ability to timely or adequately respond to technological advances in the medical supply industry, the ability to successfully identify, manage or integrate possible future acquisitions, outcome of outstanding litigation and changes in government regulations. Although management 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Management believes there has been no material change in its exposure to market risk from that discussed in Item 7A in the company's Annual Report on Form 10-K for the year ended December 31, 2000. 20
Part II. Other Information Item 1. Legal Proceedings Certain legal proceedings pending against the company are described in the company's Annual Report on Form 10-K for the year ended December 31, 2000. Through September 30, 2001, there have been no material developments in any legal proceedings reported in such Annual Report. Item 2. Changes in Securities and Use of Proceeds On July 2, 2001, Owens & Minor, Inc. issued $200 million of 8 1/2% Senior Subordinated Notes. The Senior Subordinated Indenture and First Supplemental Indenture governing the Notes (attached as Exhibits 4.1 and 4.2 hereto) contain certain financial covenants and limitations on the payment of dividends. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10 Form of Authorized Distributor Agreement between Novation, LLC and Owens & Minor, effective as of July 1, 2001.* * 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. (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated October 16, 2001, under Items 5 and 7, with respect to the press release issued by the company reporting earnings for the three month period ended September 30, 2001. 21
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 November 14, 2001 --------------------- ___________________________ Jeffrey Kaczka Senior Vice President Chief Financial Officer Date November 14, 2001 ---------------------- ___________________________ Olwen B. Cape Vice President & Controller Chief Accounting Officer 22
Exhibits Filed with SEC ----------------------- Exhibit # --------- 10 Form of Authorized Distributor Agreement between Novation, LLC and Owens & Minor, effective as of July 1, 2001.* * 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. 23