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 June 30, 1998 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 August 7, 1998 was 32,543,434 shares.
Owens & Minor, Inc. and Subsidiaries Index Page Part I. Financial Information Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 1998 and 1997 3 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II. Other Information 16
Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Operations <TABLE> <CAPTION> (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> Net sales $ 798,978 $ 776,722 $ 1,596,928 $ 1,526,345 Cost of goods sold 716,445 698,681 1,432,308 1,373,202 -------- -------- -------- ------- Gross margin 82,533 78,041 164,620 153,143 -------- -------- -------- -------- Selling, general and administrative expenses 61,079 58,597 122,021 115,034 Depreciation and amortization 4,505 4,332 8,973 8,537 Interest expense, net 3,190 3,759 6,803 7,706 Discount on accounts receivable securitization 1,377 1,487 2,986 3,353 Distribution on mandatorily redeemable preferred securities 935 - 935 - Nonrecurring restructuring expenses 11,200 - 11,200 - -------- -------- -------- -------- Total expenses 82,286 68,175 152,918 134,630 -------- -------- -------- -------- Income before income taxes 247 9,866 11,702 18,513 Income tax provision 102 4,096 4,798 7,749 -------- -------- -------- -------- Net income 145 5,770 6,904 10,764 Dividends on preferred stock 604 1,294 1,898 2,588 -------- -------- -------- -------- Net income (loss) attributable to common stock $ (459) $ 4,476 $ 5,006 $ 8,176 ======== ======== ======== ======== Net income (loss) per common share - basic $ (0.01) $ 0.14 $ 0.15 $ 0.26 Net income (loss) per common share - diluted $ (0.01) $ 0.14 $ 0.15 $ 0.26 Weighted average shares - basic 32,546 32,000 32,442 31,958 Weighted average shares - diluted 32,625 32,081 32,566 32,021 Cash dividends per common share $ 0.050 $ 0.045 $ 0.100 $ 0.090 </TABLE> See accompanying notes to consolidated financial statements.
Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share data) June 30, December 31, 1998 1997 ------------------------------- Assets (Unaudited) Current assets Cash and cash equivalents $ 629 $ 583 Accounts and notes receivable, net of allowance of $6,277 and $6,312 197,988 187,878 Merchandise inventories 328,739 285,529 Other current assets 22,694 25,274 ----------- ----------- Total current assets 550,050 499,264 Property and equipment, net of accumulated depreciation of $45,310 and $41,500 24,873 26,628 Goodwill, net of accumulated amortization of $20,570 and $18,298 160,548 162,821 Other assets, net 29,532 23,850 =========== =========== Total assets $ 765,003 $ 712,563 =========== =========== Liabilities and shareholders' equity Current liabilities Accounts payable $ 283,606 $ 224,072 Accrued payroll and related liabilities 5,994 7,840 Other accrued liabilities 37,821 33,563 ----------- ----------- Total current liabilities 327,421 265,475 Long-term debt 150,000 182,550 Accrued pension and retirement plans 5,644 5,237 ----------- ----------- Total liabilities 483,065 453,262 Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 - ----------- ----------- 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 - none and 1,150 shares - 115,000 Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 32,532 shares and 32,213 shares 65,064 64,426 Paid-in capital 11,247 8,005 Retained earnings 73,627 71,870 ----------- ----------- Total shareholders' equity 149,938 259,301 =========== =========== Total liabilities and shareholders' equity $ 765,003 $ 712,563 =========== =========== See accompanying notes to consolidated financial statements.
Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Six Months Ended (Unaudited) June 30, ------------------------- 1998 1997 ---------- ----------- Operating activities Net income $ 6,904 $ 10,764 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 8,973 8,537 Provision for losses on accounts and notes receivable 224 43 Provision for LIFO reserve 2,497 1,750 Changes in operating assets and liabilities: Accounts and notes receivable (10,334) (16,122) Merchandise inventories (45,707) (21,674) Accounts payable 73,919 47,911 Net change in other current assets and current liabilities 6,504 392 Other, net (339) 1,609 ---------- ----------- Cash provided by operating activities 42,641 33,210 ---------- ----------- Investing activities Additions to property and equipment (2,453) (4,567) Additions to computer software (2,961) (2,005) Proceeds from sale of property and equipment 38 1,741 ---------- ----------- Cash used for investing activities (5,376) (4,831) ---------- ----------- Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities 127,610 - Repurchase of preferred stock (115,000) - Reduction of long-term debt (32,550) (17,549) Other financing, net (14,386) (6,934) Cash dividends paid (6,010) (5,466) Proceeds from exercise of stock options 3,117 1,065 ---------- ----------- Cash used for financing activities (37,219) (28,884) ---------- ----------- Net increase (decrease) in cash and cash equivalents 46 (505) Cash and cash equivalents at beginning of year 583 743 ========== =========== Cash and cash equivalents at end of period $ 629 $ 238 ========== =========== See accompanying notes to consolidated financial statements.
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 (the "Company") as of June 30, 1998 and the consolidated results of operations for the three and six month periods and cash flows for the six month periods ended June 30, 1998 and 1997. 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 six month periods ended June 30, 1998 and 1997 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. Nonrecurring Restructuring Expenses During the three month period ended June 30, 1998, the Company recorded a nonrecurring charge of $11.2 million, or $6.6 million after tax, 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 have the highest volume of business with Columbia/HCA facilities. This restructuring plan is expected to be substantially complete by late in the fourth quarter of 1998. The major components of this liability are as follows: Losses under lease commitments $ 4.2 Asset writeoffs 4.0 Employee separations 2.5 Other 0.5 ========= Total $11.2 ========= No charges were made against this liability during the quarter ended June 30, 1998.
5. Net Income (Loss) per Common Share The following sets forth the computation of basic and diluted net income per common share: <TABLE> <CAPTION> (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1998 1997 1998 1997 ---------- --------- --------- ---------- <S> <C> Numerator: Net income $ 145 $ 5,770 $ 6,904 $ 10,764 Preferred stock dividends 604 1,294 1,898 2,588 -------------------------------------------------------------------------------- Numerator for basic and diluted net income (loss) per common share - net income (loss) available to common shareholders (459) 4,776 5,006 8,176 -------------------------------------------------------------------------------- Denominator: Denominator for basic net income (loss) per common share - weighted average shares 32,546 32,000 32,442 31,958 Effect of dilutive securities: Stock options 79 81 124 63 -------------------------------------------------------------------------------- Denominator for diluted net income (loss) per common share - adjusted weighted average shares 32,625 32,081 32,566 32,021 -------------------------------------------------------------------------------- Net income (loss) per common share - basic $ (0.01) $ 0.14 $ 0.15 $ 0.26 Net income (loss) per common share - diluted $ (0.01) $ 0.14 $ 0.15 $ 0.26 -------------------------------------------------------------------------------- </TABLE> 6. Mandatorily Redeemable Preferred Securities In May 1998, Owens & Minor Trust I (the "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, (the "Securities") for aggregate proceeds of $132 million. Each Security has a liquidation value of $50. The proceeds were invested by the Trust 5.375% Junior Subordinated Convertible Debentures of the O&M (the "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 in whole or in part after May 1, 2001. The obligations of the Trust, as provided under the terms of the Securities, are fully and unconditionally guaranteed by O&M. 7. Condensed Consolidating Financial Information The following tables present condensed consolidating financial information for: O&M; on a combined basis, the guarantors of O&M's 10 7/8% Senior Subordinated 10-year Notes (the "Notes") (all of the wholly owned subsidiaries of O&M except for O&M Funding Corp. ("OMF") and the Trust); and OMF and the Trust, O&M's non-guarantors 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 O&M believes the condensed consolidating financial statements are more meaningful in understanding the financial position of the guarantor subsidiaries.
Condensed Consolidating Financial Statements ( 1 ) <TABLE> <CAPTION> (In thousands) For the six months ended Owens & Guarantor Non-guarantor June 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S><C> Statements of Operations Net sales $ - $ 1,596,928 $ - $ - $ 1,596,928 Cost of goods sold - 1,432,308 - - 1,432,308 - ------------------------------------------------------------------------------------------------------------------------------------ Gross margin - 164,620 - - 164,620 - ------------------------------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses 5 121,889 127 - 122,021 Depreciation and amortization - 8,973 - - 8,973 Interest expense, net 8,595 (1,792) - - 6,803 Intercompany interest expense, net (6,705) 14,145 (6,352) (1,088) - Discount on accounts receivable securitization - 40 2,946 - 2,986 Distribution on mandatorily redeemable preferred securities - - 935 - 935 Nonrecurring restructuring expenses - 11,200 - - 11,200 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 1,895 154,455 (2,344) (1,088) 152,918 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (1,895) 10,165 2,344 1,088 11,702 Income tax provision (benefit) (767) 4,156 952 457 4,798 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) (1,128) 6,009 1,392 631 6,904 Dividends on preferred stock 1,898 - - - 1,898 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) attributable to common stock $ (3,026) $ 6,009 $ 1,392 $ 631 $ 5,006 - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Statements of Operations Net sales $ - $ 1,526,345 $ - $ - $ 1,526,345 Cost of goods sold - 1,373,202 - - 1,373,202 - ------------------------------------------------------------------------------------------------------------------------------------ Gross margin - 153,143 - - 153,143 - ------------------------------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses - 114,975 59 - 115,034 Depreciation and amortization - 8,537 - - 8,537 Interest expense, net 9,139 (1,433) - - 7,706 Intercompany interest expense, net (7,963) 14,878 (5,878) (1,037) - Discount on accounts receivable securitization - 5 3,348 - 3,353 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 1,176 136,962 (2,471) (1,037) 134,630 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (1,176) 16,181 2,471 1,037 18,513 Income tax provision (benefit) (482) 6,769 1,026 436 7,749 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) (694) 9,412 1,445 601 10,764 Dividends on preferred stock 2,588 - - - 2,588 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) attributable to common stock $ (3,282) $ 9,412 $ 1,445 $ 601 $ 8,176 - ------------------------------------------------------------------------------------------------------------------------------------ ( 1 ) Certain amounts in the 1997 condensed consolidating financial statements have been reclassified to conform to the 1998 presentation. </TABLE> 8
Condensed Consolidating Financial Statements <TABLE> <CAPTION> (In thousands) As of Owens & Guarantor Non-guarantor June 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S><C> Balance Sheets Assets Current assets Cash and cash equivalents $ 505 $ 124 $ - $ - $ 629 Accounts and notes receivable, net - 74,989 122,999 - 197,988 Merchandise inventories - 328,739 - - 328,739 Intercompany advances, net 150,163 102,420 947 (253,530) - Other current assets - 22,694 - - 22,694 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 150,668 528,966 123,946 (253,530) 550,050 Property and equipment, net - 24,873 - - 24,873 Goodwill, net - 160,548 - - 160,548 Intercompany investments 303,941 15,001 136,083 (455,025) - Other assets, net 14,199 15,333 - - 29,532 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 468,808 $ 744,721 $ 260,029 $ (708,555) $ 765,003 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 283,606 $ - $ - $ 283,606 Accrued payroll and related liabilities - 5,994 - - 5,994 Intercompany advances, net 947 150,151 103,063 (254,161) - Other accrued liabilities 1,326 35,268 1,227 - 37,821 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 2,273 475,019 104,290 (254,161) 327,421 Long-term debt 150,000 - - - 150,000 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 5,644 - - 5,644 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 288,356 480,663 104,290 (390,244) 483,065 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - - - - Common stock 65,064 - 4,083 (4,083) 65,064 Paid-in capital 11,247 299,858 15,001 (314,859) 11,247 Retained earnings (cumulative deficit) 104,141 (35,800) 4,655 631 73,627 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 180,452 264,058 23,739 (318,311) 149,938 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 468,808 $ 744,721 $ 260,029 $ (708,555) $ 765,003 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> 9
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (In thousands) As of Owens & Guarantor Non-guarantor December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------------- <S><C> Balance Sheets Assets Current assets Cash and cash equivalents $ 505 $ 78 $ - $ - $ 583 Accounts and notes receivable, net - 100,336 87,542 - 187,878 Merchandise inventories - 285,529 - - 285,529 Intercompany advances, net 176,335 68,016 - (244,351) - Other current assets - 25,274 - - 25,274 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 176,840 479,233 87,542 (244,351) 499,264 Property and equipment, net - 26,628 - - 26,628 Goodwill, net - 162,821 - - 162,821 Intercompany investments 299,858 15,001 - (314,859) - Other assets, net 6,180 17,670 - - 23,850 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 482,878 $ 701,353 $ 87,542 $ (559,210) $ 712,563 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $ - $ 224,072 $ - $ - $ 224,072 Accrued payroll and related liabilities - 7,840 - - 7,840 Intercompany advances, net - 176,335 68,759 (245,094) - Other accrued liabilities 2,480 30,564 519 - 33,563 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 2,480 438,811 69,278 (245,094) 265,475 Long-term debt 182,550 - - - 182,550 Accrued pension and retirement plans - 5,237 - - 5,237 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 185,030 444,048 69,278 (245,094) 453,262 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Preferred stock 115,000 - - - 115,000 Common stock 64,426 - - - 64,426 Paid-in capital 8,005 299,858 15,001 (314,859) 8,005 Retained earnings (cumulative deficit) 110,417 (42,553) 3,263 743 71,870 - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 297,848 257,305 18,264 (314,116) 259,301 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 482,878 $ 701,353 $ 87,542 $ (559,210) $ 712,563 - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> 10
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (In thousands) For the six months ended Owens & Guarantor Non-guarantor June 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S><C> Statements of Cash Flows Operating Activities Net income (loss) $ (1,128) $ 6,009 $ 1,392 $ 631 $ 6,904 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization - 8,973 - - 8,973 Provision for losses on accounts and notes receivable - 105 119 - 224 Provision for LIFO reserve - 2,497 - - 2,497 Changes in operating assets and liabilities Accounts and notes receivable - 25,242 (35,576) - (10,334) Merchandise inventories - (45,707) - - (45,707) Accounts payable - 73,919 - - 73,919 Net change in other current assets and current liabilities 1,319 5,411 (226) - 6,504 Other, net 554 (150) (112) (631) (339) - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities 745 76,299 (34,403) - 42,641 - ------------------------------------------------------------------------------------------------------------------------------------ Investing Activities Additions to property and equipment - (2,453) - - (2,453) Additions to computer software - (2,961) - - (2,961) Proceeds from sale of property and equipment - 38 - - 38 - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities - (5,376) - - (5,376) - ------------------------------------------------------------------------------------------------------------------------------------ Financing Activities Proceeds from mandatorily redeemable preferred securities, net (4,390) - 132,000 - 127,610 Retirement of preferred stock (115,000) - - - (115,000) Reductions of long-term debt (32,550) - - - (32,550) Change in intercompany advances 154,088 (56,491) (97,597) - - Other financing, net - (14,386) - - (14,386) Cash dividends paid (6,010) - - - (6,010) Exercise of stock options 3,117 - - - 3,117 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (745) (70,877) 34,403 - (37,219) - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents - 46 - - 46 Cash and cash equivalents at beginning of year 505 78 - - 583 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 505 $ 124 $ - $ - $ 629 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> 11
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (In thousands) For the six months ended Owens & Guarantor Non-guarantor June 30, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ <S><C> Statements of Cash Flows Operating Activities Net income (loss) $ (694) $ 9,412 $ 1,445 $ 601 $ 10,764 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization - 8,537 - - 8,537 Provision for losses on accounts and notes receivable - (9) 52 - 43 Provision for LIFO reserve - 1,750 - - 1,750 Changes in operating assets and liabilities Accounts and notes receivable - (2,278) (13,844) - (16,122) Merchandise inventories - (21,674) - - (21,674) Accounts payable - 47,911 - - 47,911 Net change in other current assets and current liabilities 272 454 (334) - 392 Other, net 414 1,701 95 (601) 1,609 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities (8) 45,804 (12,586) - 33,210 - ------------------------------------------------------------------------------------------------------------------------------------ Investing Activities Additions to property and equipment - (4,567) - - (4,567) Additions to computer software - (2,005) - - (2,005) Proceeds from sale of property and equipment - 1,741 - - 1,741 - ------------------------------------------------------------------------------------------------------------------------------------ Cash used for investing activities - (4,831) - - (4,831) - ------------------------------------------------------------------------------------------------------------------------------------ Financing Activities Reductions of long-term debt (6,500) (11,049) - - (17,549) Change in intercompany advances 10,409 (22,995) 12,586 - - Other financing, net - (6,934) - - (6,934) Cash dividends paid (5,466) - - - (5,466) Exercise of stock options 1,065 - - - 1,065 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities (492) (40,978) 12,586 - (28,884) - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (500) (5) - - (505) Cash and cash equivalents at beginning of year 505 238 - - 743 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 5 $ 233 $ - $ - $ 238 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> 12
Item 2. Owens & Minor, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The following management discussion and analysis describes material changes in the Company's financial condition since December 31, 1997. 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 1997 Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 1997. General On May 26, 1998, Columbia/HCA informed the Company of its intention to cancel its medical/surgical supply contract. The Company and Columbia/HCA have agreed upon a plan for transition of the Columbia/HCA business. This plan will result in a reduction in purchases by Columbia/HCA from the Company beginning in the third quarter of 1998. By the end of the third quarter, the majority of the Columbia/HCA business should have transferred from the Company. For the first six months of 1998, approximately 12% of the Company's net sales were to Columbia/HCA facilities. Results of Operations Second quarter and first six months of 1998 compared with 1997 Net sales. Net sales increased 2.9% to $799.0 million in the second quarter of 1998 from $776.7 million in the second quarter of 1997. Net sales increased 4.6% to $1.60 billion in the first six months of 1998 from $1.53 billion in the first six months of 1997. The increase in sales was a result of both new customer contracts and increased penetration of existing accounts. Gross margin. Gross margin as a percentage of net sales increased to 10.3% in the second quarter and the first six months of 1998 from 10.0% in the second quarter and the first six months of 1997. This improvement reflects the Company's continuing success with supply chain initiatives with key suppliers. The Company will continue to focus on improving margin levels through continued emphasis on supply chain initiatives. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 7.6% in the second quarter and the first six months of 1998 from 7.5% in the second quarter and the first six months of 1997. The increase was primarily the result of approximately $0.7 million of expense incurred in the second quarter of 1998 and $1.5 million in the first six months of 1998 in connection with the Company's initiatives to enable computer processing in the Year 2000 and beyond. In the second quarter of 1998, the Company continued to use information technology to control costs through more extensive use of EDI in transactions with both customers and suppliers. The positive results of SG&A expense initiatives will continue to be partially offset with additional expenses associated with the preparation of the Company's systems for the Year 2000. Depreciation and amortization. Depreciation and amortization increased by 4.0% in the second quarter of 1998 compared to the second quarter of 1997 and increased by 5.1% in the first six months of 1998 compared to the first six months of 1997. This increase was due primarily to the Company's continued investment in information technology, including capital spending in the first six months of 1998 for systems upgrades of $0.9 million associated with Year 2000 issues. The Company anticipates similar increases in depreciation and amortization for the remainder of 1998 associated with additional capital investment in information technology. 13
Interest expense, net, and discount on accounts receivable securitization (financing costs). Financing costs decreased to $4.6 million in the second quarter of 1998 from $5.2 million in the second quarter of 1997, net of finance charge income of $0.8 million in both periods. Financing costs decreased to $9.8 million in the first six months of 1998 from $11.1 million in the first six months of 1997, net of finance charge income of $1.6 million and $1.8 million, respectively. This reduction has been a result of the Company's ability to reduce borrowings and lower effective interest rates. The Company reduced outstanding debt, excluding the impact of the accounts receivable securitization, by approximately $72.6 million in the first six months of 1998. This reduction is due to improvement in cash flow from operations as a result of the Company's improved profitability. The Company will continue to take action to reduce financing costs by continuing its working capital reduction initiatives and management of interest rates, although the future results of these initiatives cannot be assured. Distribution on mandatorily redeemable preferred securities and dividends on preferred stock. In May 1998, the Trust issued $132 million of $2.6875 Term Convertible Securities. O&M applied substantially all of the proceeds to repurchase and retire 1,150,000 shares of its Series B Cumulative Preferred Stock at its par value. The Securities accrue and pay cash distributions quarterly at an annual rate of 5.375% of the liquidation value of $50. As of June 30, 1998, the Company had accrued $0.9 million of distributions related to these Securities. Nonrecurring restructuring expenses. As a result of the Columbia/HCA contract termination, the Company recorded a nonrecurring restructuring charge of $11.2 million, or $6.6 million after taxes, in the second quarter of 1998, to reflect the Company's plan to downsize warehouse operations in those divisions with the highest volumes of sales to Columbia/HCA facilities. This charge consists primarily of costs associated with employee separations and reductions in warehouse space. No charges were made against this liability during the quarter ended June 30, 1998. Income taxes. The Company had an income tax provision of $4.8 million in the first six months of 1998 compared with $7.7 million in the first six months of 1997 and an effective tax rate of 41.0%, compared to 41.9% for the same period in 1997. Net income. Net income decreased $5.6 million in the second quarter of 1998 compared to the second quarter of 1997 and decreased $3.9 million in the first six months of 1998 compared to the first six months of 1997. The decrease was due to the impact of the restructuring charge discussed above. Excluding the effect of the restructuring charge, net income increased 17% and net income per basic and diluted common share increased to $0.19 from $0.14 for the quarter ended June 30, 1998 compared to the quarter ended June 30, 1997. This increase was primarily due to the improvements previously discussed in gross margin and reduced financing costs. Although the trend, before considering the restructuring charge, has been favorable, and the Company continues to pursue initiatives to improve gross margin and reduce SG&A expenses, the future impact on net income cannot be assured. Financial Condition, Liquidity and Capital Resources Liquidity. The Company's liquidity improved during the second quarter of 1998 compared to the second quarter of 1997. Outstanding financing (excluding the impact of the off balance sheet accounts receivable securitization) was reduced by $72.6 million to $220.0 million at June 30, 1998 from $292.6 million at December 31, 1997. The capitalization ratio at June 30, 1998, including the Securities as equity, and excluding the effect of the accounts receivable securitization, was 43.8% compared to 50.2% at June 30, 1997. The improvement was the result of lower outstanding financing. 14
In May 1998, O&M repurchased all of its outstanding Series B Cumulative Preferred Stock, financing the repurchase with substantially all the proceeds of the $132.0 million of Securities issued by the Trust. Management believes that these transactions will result in lower overall costs of capital. 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 June 30, 1998, the Company had approximately $225.0 million of unused credit under its revolving credit facility. Working Capital Management. During the second quarter of 1998, the Company's working capital increased compared to the second quarter of 1997 as a result of higher sales levels and increased cash flows from operations. The Company's accounts receivable days sales outstanding (excluding the impact of the off balance sheet accounts receivable securitization) decreased to 31.6 at June 30, 1998 from 32.8 at December 31, 1997. Inventory turnover decreased to 9.0 in the second quarter of 1998 from 9.8 in the second quarter of 1997 and from 10.1 in the fourth quarter of 1997 as a result of inventory purchasing opportunities. Capital Expenditures. Capital expenditures were approximately $5.4 million in the first six months of 1998, of which approximately $4.6 million was for computer hardware and software, including $0.9 million for system upgrades for the Year 2000 initiative. The Company expects to continue to invest in technology, including system upgrades, 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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This Statement is effective for all quarters of fiscal years beginning after June 15, 1999. Management believes the effect on the Company of the adoption of this standard will be limited to financial statement presentation and disclosure and will not have a material effect on the financial condition or results of operations. In March 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. This Statement is effective for fiscal years beginning after December 15, 1998. The Company has adopted this standard effective January 1, 1998. Adoption of this standard did not have a material impact on the Company's financial condition or results of operations for the second quarter of 1998. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 amends the disclosure requirements of SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits, and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement standardizes the disclosure requirements of SFAS No. 87 and SFAS No. 106 and recommends a parallel format for presenting information about pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. Management believes the effect on the Company of adoption of this standard will be limited to changes in financial statement presentation and disclosure. 15
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, outcomes of outstanding litigation, 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. Readiness for Year 2000 The Company continues to work closely with both customers and suppliers to ensure that they are continuing with the development of plans to address the Year 2000 issue. As of June 30, 1998, the Company continues to implement its strategy for remediation which is expected to be completed in the first quarter of 1999. Although the Company expects its remediation efforts to be completed on a timely basis, failure to do so could have a material adverse effect on the Company's results of operations. During the first six months of 1998, the Company incurred $1.5 million of expenses and $0.9 million of capital expenditures related to this strategy. 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, 1997. Through June 30, 1998, there have been no material developments in any legal proceedings reported in such Annual Report. Item 2. Changes in Securities On May 12, 1998, O&M and Crestar Bank, as Trustee, executed Supplemental Indenture No. 1 (the "Supplemental Indenture") in accordance with the terms of the Indenture dated as of May 29, 1996 (the "Indenture") relating to the Notes. The Supplemental Indenture made certain technical amendments to the Indenture to permit O&M to effect the repurchase of its then outstanding Series B Cumulative Preferred Stock with the proceeds of the offering the Securities. The Indenture contained an exception to the Restricted Payment covenant permitting O&M to make additional Investments constituting Restricted Payments in Persons or entities in the same line of business as O&M as of May 29, 1996 (the issue date of the Notes) in an aggregate outstanding amount not to exceed at any time $4 million whether or not O&M then has the ability to make a Restricted Payment under the "basket" of the Restricted Payment covenant. The Supplemental Indenture increased such permitted amount to $8 million and provided that only the amount in excess of $4 million would constitute a Restricted Payment for purposes of the "basket' under the Restricted Payment covenant. 16
The information required to be disclosed pursuant to subsection (c) of this Item 2 is incorporated by reference herein from Item 9 of O&M's Current Report on Form 8-K dated May 13, 1998 and filed on May 28, 1998. Item 4. Submission of Matters to a Vote of Shareholders The following matters were submitted to a vote of O&M's shareholders at its annual meeting held on April 28, 1998, with the voting results designated below each such matter: (1) Election of Henry A. Berling, James B. Farinholt, Jr., E. Morgan Massey and Anne Marie Whittemore as directors of O&M for a three-year term. Directors Votes For Votes Against or Broker Withheld Abstentions Non-Votes Henry A. Berling 35,862,288 202,490 0 0 James B. Farinholt, Jr. 35,858,956 205,822 0 0 E. Morgan Massey 35,851,778 213,000 0 0 Anne Marie Whittemore 35,857,415 207,363 0 0 (2) Ratification of the appointment of KPMG Peat Marwick LLP as O&M's independent auditors. Votes Against or Votes For Withheld Abstentions 35,906,896 74,492 83,390 (3) Approval of the Owens & Minor, Inc. 1998 Stock Option and Incentive Plan. Votes Against or Votes For Withheld Abstentions 34,664,555 1,235,500 164,723 17
(4) Approval of the Owens & Minor, Inc. 1998 Directors' Compensation Plan. Votes Against or Votes For Withheld Abstentions 34,424,313 1,441,974 198,491 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Supplemental Indenture No. 1 dated as of May 12, 1998 to 10 7/8% Senior Subordinated Notes Indenture dated as of May 29, 1996 between Owens & Minor, Inc. ("O&M") and Crestar Bank 4.2 Amendment No. 1 dated as of April 27, 1998 to the Credit Agreement dated as of September 15, 1997 among O&M, the Guarantors and Lenders identified therein and NationsBank, N.A., as Administrative Agent 4.3 Junior Subordinated Debentures Indenture dated as of May 13, 1998 between O&M and The First National Bank of Chicago (incorporated herein by reference from O&M's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.1) 4.4 First Supplemental Indenture dated as of May 13, 1998 between O&M and The First National Bank of Chicago (incorporated herein by reference from O&M's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.2) 4.5 Registration Rights Agreement dated as of May 13, 1998 between O&M and J.P. Morgan Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch & Co. (incorporated herein by reference from O&M's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.3) 4.6 Amended and Restated Declaration of Trust of Owens & Minor Trust I (incorporated herein by reference from O&M's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.4) 4.7 Restated Certificate of Trust of Owens & Minor Trust I (included in Exhibit 4.6) 4.8 Form of $2.6875 Term Convertible Security (included in Exhibit 4.6) 4.9 Form of 5.375% Junior Subordinated Convertible Debenture (included in Exhibit 4.4) 4.10 Owens & Minor, Inc. Guarantee Agreement dated as of May 13, 1998 (incorporated herein by reference from O&M's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.8) 18
10.1 Owens & Minor, Inc. 1998 Stock Option and Incentive Plan (incorporated herein by reference from Annex A of O&M's definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act on March 13, 1998 (File No. 001-09810)) 10.2 Owens & Minor, Inc. 1998 Directors' Compensation Plan (incorporated herein by reference from Annex B of O&M's definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act on March 13, 1998 (File No. 001-09810)) (b) Reports on Form 8-K On May 28, 1998, O&M filed a Current Report on Form 8-K dated as of May 13, 1998 reporting the sale of the Securities (Item 9) and the cancellation of the Columbia/HCA distribution contract. (Item 5). 19
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 August 13, 1998 /s/ Ann Greer Rector ---------------------- -------------------- Ann Greer Rector Senior Vice President & Chief Financial Officer Date August 13, 1998 /s/ Olwen B. Cape ---------------------- ----------------- Olwen B. Cape Vice President & Controller Chief Accounting Officer
Exhibits Filed with SEC Exhibit # 4.1 Supplemental Indenture No. 1 dated as of May 12, 1998 to 10 7/8% Senior Subordinated Notes Indenture dated as of May 29, 1996 between Owens & Minor, Inc. ("O&M") and Crestar Bank 4.2 Amendment No. 1 dated as of April 27, 1998 to the Credit Agreement dated as of September 15, 1997 among O&M, the Guarantors and Lenders identified therein and NationsBank, N.A., as Administrative Agent 27 Financial Data Schedule