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, 1999 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, 1999, was 32,709,265 shares. 1
Owens & Minor, Inc. and Subsidiaries Index Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 2
Part I. Financial Information Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------------- <S> <C> 1999 1998 1999 1998 -------------- -------------- ---------------- ------------- Net sales $ 811,917 $ 768,416 $ 2,325,361 $ 2,365,344 Cost of goods sold 726,620 687,412 2,080,988 2,119,720 ------------ ------------ -------------- ------------- Gross margin 85,297 81,004 244,373 245,624 ------------ ------------ -------------- ------------- Selling, general and administrative expenses 61,623 58,542 179,709 180,563 Depreciation and amortization 4,919 4,583 14,064 13,556 Interest expense, net 2,702 3,799 8,833 10,602 Discount on accounts receivable securitization 1,527 884 3,316 3,870 Distributions on mandatorily redeemable preferred securities 1,773 1,785 5,321 2,720 Nonrecurring restructuring expenses -- -- (1,000) 11,200 ------------ ------------ -------------- ------------- Total expenses 72,544 69,593 210,243 222,511 ------------ ------------ -------------- ------------- Income before income taxes 12,753 11,411 34,130 23,113 Income tax provision 5,611 4,793 15,017 9,591 ------------ ------------ -------------- ------------- Net income 7,142 6,618 19,113 13,522 Dividends on preferred stock -- -- -- 1,898 ------------ ------------ -------------- ------------- Net income attributable to common stock $ 7,142 $ 6,618 $ 19,113 $ 11,624 ============ ============ ============== ============= Net income per common share-basic $ 0.22 $ 0.20 $ 0.59 $ 0.36 ============ ============ ============== ============= Net income per common share-diluted $ 0.21 $ 0.20 $ 0.57 $ 0.36 ============ ============ ============== ============= Cash dividends per common share $ 0.06 $ 0.05 $ 0.17 $ 0.15 ============ ============ ============== ============= </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, 1999 1998 ------------- ------------ <S> <C> Assets (Unaudited) Current assets Cash and cash equivalents $ 580 $ 546 Accounts and notes receivable, net of allowance of $6,637 and $6,273 186,339 213,765 Merchandise inventories 320,558 275,094 Other current assets 10,967 14,816 -------------- ------------- Total current assets 518,444 504,221 Property and equipment, net of accumulated depreciation of $50,612 and $45,812 26,714 25,608 Goodwill, net of accumulated amortization of $26,494 and $22,843 212,698 158,276 Other assets, net 32,717 29,663 -------------- ------------- Total assets $ 790,573 $ 717,768 ============== ============= Liabilities and shareholders' equity Current liabilities Accounts payable $ 265,859 $ 206,251 Accrued payroll and related liabilities 3,562 8,974 Other accrued liabilities 57,773 53,749 -------------- ------------- Total current liabilities 327,194 268,974 Long-term debt 150,000 150,000 Accrued pension and retirement plans 6,060 5,668 -------------- ------------- Total liabilities 483,254 424,642 -------------- ------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 132,000 -------------- ------------- Shareholders' equity Preferred stock, par value $100 per share; authorized - 10,000 shares Series A; Participating Cumulative Preferred Stock; none issued -- -- Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 32,694 shares and 32,618 shares 65,388 65,236 Paid-in capital 12,766 12,280 Retained earnings 97,165 83,610 -------------- ------------- Total shareholders' equity 175,319 161,126 -------------- ------------- Total liabilities and shareholders' equity $ 790,573 $ 717,768 ============== ============= </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, ------------------------------------ 1999 1998 ---------------- ---------------- <S> <C> Operating activities Net income $ 19,113 $ 13,522 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 14,064 13,556 Nonrecurring restructuring provision (1,000) 11,200 Deferred income taxes -- 15,910 Provision for LIFO reserve 1,629 2,497 Provision for losses on accounts and notes receivable 656 387 Changes in operating assets and liabilities: Accounts and notes receivable 41,582 (11,506) Merchandise inventories (18,654) (41,485) Accounts payable 67,927 59,428 Net change in other current assets and current liabilities (680) 8,844 Other, net 2,064 516 ---------------- ---------------- Cash provided by operating activities 126,701 72,869 ---------------- ---------------- Investing activities Cash paid for acquisition of business (85,112) -- Additions to property and equipment (7,263) (5,180) Additions to computer software (6,477) (3,650) Other, net (1,143) 65 ---------------- ---------------- Cash used for investing activities (99,995) (8,765) ---------------- ---------------- Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities -- 127,319 Repurchase of preferred stock -- (115,000) Reduction of long-term debt -- (32,550) Other financing, net (21,194) (36,287) Cash dividends paid (5,558) (7,638) Proceeds from exercise of stock options 80 3,117 ---------------- ---------------- Cash used for financing activities (26,672) (61,039) ---------------- ---------------- Net increase in cash and cash equivalents 34 3,065 Cash and cash equivalents at beginning of period 546 583 ---------------- ---------------- Cash and cash equivalents at end of period $ 580 $ 3,648 ================ ================ </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, 1999 and the consolidated results of operations for the three and nine month periods and cash flows for the nine month periods ended September 30, 1999 and 1998. 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, 1999 and 1998 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. Acquisition On July 30, 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical/surgical supplies, for a purchase price of approximately $85 million. Headquartered in Waunakee, Wisconsin, Medix's customers are primarily in the Midwest and include acute care hospitals, long-term care facilities and clinics. Medix's net sales were approximately $184 million for its fiscal year ended October 2, 1998. The acquisition has been accounted for by the purchase method and, accordingly, the operating results of Medix have been included in the company's consolidated financial statements since the date of acquisition. Assuming the acquisition had been made at the beginning of the periods, consolidated net sales, on a pro forma basis, would have been approximately $2.44 billion and $2.51 billion for the nine months ended September 30, 1999 and 1998, respectively. Consolidated net income and earnings per share on a pro forma basis would not have been materially different from the results reported. The company paid cash of approximately $70 million and assumed debt of approximately $15 million, which was paid off as part of the closing transaction. In connection with the acquisition, management adopted a plan for integration of the businesses which includes closure of some Medix facilities and consolidation of certain administrative functions. An accrual of approximately $3 million was established to provide for the costs of this plan, including anticipated losses under lease commitments of approximately $2 million and other anticipated costs of approximately $1 million, including employee separations, asset write-offs and other costs. There were no significant charges to the reserve during the three month period ended September 30, 1999. The purchase price has been preliminarily allocated based on estimated fair values of the acquired net assets at the date of acquisition pending final adjustments of certain acquired balances. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $58 million has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. 6
5. Restructuring Reserve As a result of the Columbia/HCA Healthcare Corporation contract cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge to downsize operations. In the second quarter of 1999 the company re-evaluated its estimate of the remaining costs to be incurred in connection with the restructuring plan, and reduced the reserve by $1.0 million. The following table sets forth the activity in the restructuring reserve during the third quarter of 1999: <TABLE> <CAPTION> (In thousands) Balance at Balance at September 30, June 30, 1999 Charges 1999 ------------------------------------- --------------------- ------------- ----------------- <S> <C> Losses under lease commitments $ 2,992 $ 409 $ 2,583 Asset write-offs 3,418 32 3,386 Employee separations 80 45 35 Other 482 5 477 ------------------------------------- --------------------- ------------- ----------------- Total $ 6,972 $ 491 $ 6,481 ------------------------------------- --------------------- ------------- ----------------- </TABLE> 6. Net Income 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 Nine Months Ended September 30, September 30, ------------------------ ------------------------ <S> <C> 1999 1998 1999 1998 ------------------------ ------------------------ Numerator: Net income $ 7,142 $ 6,618 $ 19,113 $ 13,522 Preferred stock dividends -- -- -- 1,898 - --------------------------------------------------------------------------------------------------------------------- Numerator for basic net income per common share - net income attributable to common stock 7,142 6,618 19,113 11,624 Distributions on convertible mandatorily redeemable preferred securities, net of income taxes 993 1,035 2,980 -- - --------------------------------------------------------------------------------------------------------------------- Numerator for diluted net income per common share - net income attributable to common stock after assumed conversions $ 8,135 7,653 22,093 11,624 - --------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic net income per common share - weighted average shares 32,582 32,532 32,570 32,472 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 6,400 6,400 -- Stock options and restricted stock 120 19 125 89 Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 39,102 38,951 39,095 32,561 - --------------------------------------------------------------------------------------------------------------------- Net income per common share - basic $ 0.22 $ 0.20 $ 0.59 $ 0.36 Net income per common share - diluted $ 0.21 $ 0.20 $ 0.57 $ 0.36 - --------------------------------------------------------------------------------------------------------------------- </TABLE> 7
7. 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 10 7/8% Senior Subordinated 10-year Notes (Notes); and the non-guarantor subsidiaries of the Notes. Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees and the company believes the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries. 8
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ -- $ 811,917 $ -- $ -- $ 811,917 Cost of goods sold -- 726,620 -- -- 726,620 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin -- 85,297 -- -- 85,297 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 4 61,431 188 -- 61,623 Depreciation and amortization -- 4,919 -- -- 4,919 Interest expense, net 4,217 (1,515) -- -- 2,702 Intercompany interest expense, net (1,731) 7,623 (4,674) (1,218) -- Discount on accounts receivable securitization -- 8 1,519 -- 1,527 Distributions on mandatorily redeemable preferred -- -- 1,773 -- 1,773 securities - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,490 72,466 (1,194) (1,218) 72,544 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,490) 12,831 1,194 1,218 12,753 Income tax provision (benefit) (1,095) 5,548 622 536 5,611 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,395) $ 7,283 $ 572 $ 682 $ 7,142 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the three months ended Owens & Guarantor Non-guarantor September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ -- $ 768,416 $ -- $ -- $ 768,416 Cost of goods sold -- 687,412 -- -- 687,412 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin -- 81,004 -- -- 81,004 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses -- 58,485 57 -- 58,542 Depreciation and amortization -- 4,583 -- -- 4,583 Interest expense, net 4,403 (604) -- -- 3,799 Intercompany interest expense, net (2,053) 6,942 (3,801) (1,088) -- Discount on accounts receivable securitization -- 22 862 -- 884 Distribution on mandatorily redeemable preferred -- -- 1,785 -- 1,785 securities - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,350 69,428 (1,097) (1,088) 69,593 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,350) 11,576 1,097 1,088 11,411 Income tax provision (benefit) (952) 4,843 445 457 4,793 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,398) $ 6,733 $ 652 $ 631 $ 6,618 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 9
Condensed Consolidating Financial Information (In thousands) <TABLE> <CAPTION> Nine months ended Owens & Guarantor Non-guarantor September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ -- $ 2,325,361 $ -- $ -- $ 2,325,361 Cost of goods sold -- 2,080,988 -- -- 2,080,988 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin -- 244,373 -- -- 244,373 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 9 179,205 495 -- 179,709 Depreciation and amortization -- 14,064 -- -- 14,064 Interest expense, net 12,503 (3,670) -- -- 8,833 Intercompany interest expense, net (5,158) 19,085 (12,709) (1,218) -- Discount on accounts receivable securitization -- 24 3,292 -- 3,316 Distributions on mandatorily redeemable preferred -- -- 5,321 -- 5,321 securities Nonrecurring restructuring expenses -- (1,000) -- -- (1,000) - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 7,354 207,708 (3,601) (1,218) 210,243 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (7,354) 36,665 3,601 1,218 34,130 Income tax provision (benefit) (3,236) 16,058 1,659 536 15,017 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,118) $ 20,607 $ 1,942 $ 682 $ 19,113 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Nine months ended Owens & Guarantor Non-guarantor September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Operations Net sales $ -- $ 2,365,344 $ -- $ -- $ 2,365,344 Cost of goods sold -- 2,119,720 -- -- 2,119,720 - ----------------------------------------------------------------------------------------------------------------------------------- Gross margin -- 245,624 -- -- 245,624 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 5 180,374 184 -- 180,563 Depreciation and amortization -- 13,556 -- -- 13,556 Interest expense, net 12,998 (2,396) -- -- 10,602 Intercompany interest expense, net (8,758) 19,999 (10,153) (1,088) -- Discount on accounts receivable securitization -- 62 3,808 -- 3,870 Distribution on mandatorily redeemable preferred -- -- 2,720 -- 2,720 securities Nonrecurring restructuring expenses -- 11,200 -- -- 11,200 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 4,245 222,795 (3,441) (1,088) 222,511 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (4,245) 22,829 3,441 1,088 23,113 Income tax provision (benefit) (1,719) 9,456 1,397 457 9,591 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) (2,526) 13,373 2,044 631 13,522 Dividends on preferred stock 1,898 -- -- -- 1,898 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to common stock $ (4,424) $ 13,373 $ 2,044 $ 631 $ 11,624 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 10
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Owens & Guarantor Minor, Inc. Subsidiaries Non-guarantor Eliminations Consolidated Subsidiaries September 30, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 72 $ 1 $ -- $ 580 Accounts and notes receivable, net -- 97,709 88,630 -- 186,339 Merchandise inventories -- 320,558 -- -- 320,558 Intercompany advances, net 142,866 63,169 1,183 (207,218) -- Other current assets -- 10,967 -- -- 10,967 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 143,373 492,475 89,814 (207,218) 518,444 Property and equipment, net -- 26,714 -- -- 26,714 Goodwill, net -- 212,698 -- -- 212,698 Intercompany investments 305,441 15,001 136,083 (456,525) -- Other assets, net 8,953 22,482 1,282 -- 32,717 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 457,767 $ 769,370 $ 227,179 $ (663,743) $ 790,573 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $ -- $ 265,859 $ -- $ -- $ 265,859 Accrued payroll and related liabilities -- 3,562 -- -- 3,562 Intercompany advances, net -- 141,222 66,678 (207,900) -- Other accrued liabilities 4,976 51,109 1,688 -- 57,773 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 4,976 461,752 68,366 (207,900) 327,194 Long-term debt 150,000 -- -- -- 150,000 Intercompany long-term debt 136,083 -- -- (136,083) -- Accrued pension and retirement plans -- 6,060 -- -- 6,060 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 291,059 467,812 68,366 (343,983) 483,254 - ---------------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, -- -- 132,000 -- 132,000 Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 65,388 -- 4,083 (4,083) 65,388 Paid-in capital 12,766 301,358 15,001 (316,359) 12,766 Retained earnings 88,554 200 7,729 682 97,165 - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 166,708 301,558 26,813 (319,760) 175,319 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 457,767 $ 769,370 $ 227,179 $ (663,743) $ 790,573 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> 11
<TABLE> <CAPTION> Condensed Consolidating Financial Information (In thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Owens & Guarantor Non-guarantor December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> Balance Sheets Assets Current assets Cash and cash equivalents $ 505 $ 40 $ 1 $ -- $ 546 Accounts and notes receivable, net -- 100,148 113,617 -- 213,765 Merchandise inventories -- 275,094 -- -- 275,094 Intercompany advances, net 148,992 90,698 1,183 (240,873) -- Other current assets -- 14,816 -- -- 14,816 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 149,497 480,796 114,801 (240,873) 504,221 Property and equipment, net -- 25,608 -- -- 25,608 Goodwill, net -- 158,276 -- -- 158,276 Intercompany investments 303,941 15,001 136,083 (455,025) -- Other assets, net 9,784 19,879 -- -- 29,663 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $ -- $ 206,251 $ -- $ -- $ 206,251 Accrued payroll and related liabilities -- 8,974 -- -- 8,974 Intercompany advances, net -- 148,992 92,509 (241,501) -- Other accrued liabilities 1,394 50,994 1,361 -- 53,749 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,394 415,211 93,870 (241,501) 268,974 Long-term debt 150,000 -- -- -- 150,000 Intercompany long-term debt 136,083 -- -- (136,083) -- Accrued pension and retirement plans -- 5,668 -- -- 5,668 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 287,477 420,879 93,870 (377,584) 424,642 - ---------------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. -- -- 132,000 -- 132,000 - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 65,236 -- 4,083 (4,083) 65,236 Paid-in capital 12,280 299,858 15,001 (314,859) 12,280 Retained earnings (accumulated deficit) 98,229 (21,177) 5,930 628 83,610 - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 175,745 278,681 25,014 (318,314) 161,126 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> 12
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (In thousands) - ----------------------------------------------------------------------------------------------------------------------------------- For the nine months ended Owens & Guarantor Non-guarantor September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Cash Flows Operating activities Net income (loss) $ (4,118) $ 20,607 $ 1,942 $ 682 $ 19,113 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization -- 14,064 -- -- 14,064 Nonrecurring restructuring provision -- (1,000) -- -- (1,000) Provision for LIFO reserve -- 1,629 -- -- 1,629 Provision for losses on accounts and notes receivable -- 389 267 -- 656 Changes in operating assets and liabilities: Accounts and notes receivable -- 16,862 24,720 -- 41,582 Merchandise inventories -- (18,654) -- -- (18,654) Accounts payable -- 67,927 -- -- 67,927 Net change in other current assets and current liabilities 3,582 (4,589) 327 -- (680) Other, net 1,389 1,024 333 (682) 2,064 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 853 98,259 27,589 -- 126,701 - ----------------------------------------------------------------------------------------------------------------------------------- Investing activities Cash paid for acquisition of business -- (85,112) -- -- (85,112) Additions to property and equipment -- (7,263) -- -- (7,263) Additions to computer software -- (6,477) -- -- (6,477) Other, net -- 57 (1,200) -- (1,143) - ----------------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities -- (98,795) (1,200) -- (99,995) - ----------------------------------------------------------------------------------------------------------------------------------- Financing activities Change in intercompany advances 4,627 21,762 (26,389) -- -- Other financing, net -- (21,194) -- -- (21,194) Cash dividends paid (5,558) -- -- -- (5,558) Proceeds from exercise of stock options 80 -- -- -- 80 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities (851) 568 (26,389) -- (26,672) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2 32 -- -- 34 Cash and cash equivalents at beginning of period 505 40 1 -- 546 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 507 $ 72 $ 1 $ -- $ 580 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 13
<TABLE> <CAPTION> Condensed Consolidating Financial Statements (In thousands) - ----------------------------------------------------------------------------------------------------------------------------------- For the nine months ended Owens & Guarantor Non-guarantor September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Statements of Cash Flows Operating activities Net income (loss) $ (2,526) $ 13,373 $ 2,044 $ 631 $ 13,522 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization -- 13,556 -- -- 13,556 Nonrecurring restructuring provision -- 11,200 -- -- 11,200 Deferred income taxes -- 15,910 -- -- 15,910 Provision for LIFO reserve -- 2,497 -- -- 2,497 Provision for losses on accounts and notes receivable -- 212 175 -- 387 Changes in operating assets and liabilities: Accounts and notes receivable -- 16,953 (28,459) -- (11,506) Merchandise inventories -- (41,485) -- -- (41,485) Accounts payable -- 59,428 -- -- 59,428 Net change in other current assets and current liabilities 4,030 3,965 849 -- 8,844 Other, net 866 393 (112) (631) 516 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities 2,370 96,002 (25,503) -- 72,869 - ----------------------------------------------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment -- (5,180) -- -- (5,180) Additions to computer software -- (3,650) -- -- (3,650) Other, net -- 65 -- -- 65 - ----------------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities -- (8,765) -- -- (8,765) - ----------------------------------------------------------------------------------------------------------------------------------- Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities (4,681) -- 132,000 -- 127,319 Repurchase of preferred stock (115,000) -- -- -- (115,000) Reduction of long-term debt (32,550) -- -- -- (32,550) Change in intercompany advances 154,382 (47,885) (106,497) -- -- Other financing, net (36,287) -- -- (36,287) Cash dividends paid (7,638) -- -- -- (7,638) Proceeds from exercise of stock options 3,117 -- -- -- 3,117 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities (2,370) (84,172) 25,503 -- (61,039) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents -- 3,065 -- -- 3,065 Cash and cash equivalents at beginning of period 505 77 1 -- 583 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 505 $ 3,142 $ 1 $ -- 3,648 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 14
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 (O&M or the company) since December 31, 1998. 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 1998 Annual Report on Form 10-K for the year ended December 31, 1998. General On July 30, 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical/surgical supplies, for approximately $85 million. The company paid cash of approximately $70 million and assumed debt of approximately $15 million, which was paid off as part of the closing transaction. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $58 million has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. This acquisition strengthens the company's presence in the Midwest and is expected to provide opportunities for increased sales in this geographic area. Medix's net sales were approximately $184 million for their fiscal year ended October 2, 1998. The success of the acquisition will depend in part on the company's ability to integrate and capture synergies in the combined businesses. Financial Condition, Liquidity and Capital Resources Liquidity. The company acquired Medix on July 30, 1999. This acquisition was funded through the off balance sheet accounts receivable securitization facility. As a result of the acquisition, combined outstanding debt and off balance sheet accounts receivable securitization levels increased by approximately $52.0 million to $277.0 million at September 30, 1999, from $225.0 million at December 31, 1998. Excluding the impact of the acquisition, the combined outstanding debt and off balance sheet accounts receivable securitization levels were reduced by $33.0 million. This reduction was due to the positive impact of cash flow from operations. In May 1998, O&M repurchased all of its outstanding Series B Cumulative Preferred Stock, financing the repurchase with substantially all the net proceeds of the $132.0 million of Mandatorily Redeemable Preferred Securities (Securities) issued by Owens & Minor Trust I (Trust). These transactions reduced the company's overall cost of capital for the first nine months of 1999 compared to the same period of 1998. The company expects that its available financing will be sufficient to fund its working capital needs and long-term strategic growth, although this cannot be assured. At September 30, 1999, the company had $225.0 million of unused credit under its revolving credit facility and approximately $10.9 million under its receivables financing facility. Working Capital Management. The company's working capital decreased by $44.0 million from December 31, 1998, to $191.3 million at September 30, 1999. This decline is due, in part, to the Medix acquisition, as well as timing of payments on higher levels of inventory needed to support sales growth. The company continues to focus on the management of inventory levels, and inventory turnover increased to 9.5 times for the quarter from 8.4 times in the fourth quarter of 1998. 15
Capital Expenditures. Capital expenditures were approximately $13.7 million in the first nine months of 1999, of which approximately $11.6 million was for computer hardware and software, including $2.5 million for system upgrades to prepare for Year 2000. The company expects to continue to support strategic initiatives, to invest in technology including system upgrades, and improve operational efficiency. These capital expenditures are expected to be funded through cash flow from operations. Results of Operations Third quarter and first nine months of 1999 compared with 1998 Net sales. Net sales increased 5.7% to $811.9 million in the third quarter of 1999 from $768.4 million in the third quarter of 1998. This increase resulted from the inclusion of two months' of Medix sales in the quarter which accounted for a 4% increase, as well as new customer contracts and increased penetration of existing accounts. Net sales decreased 1.7% to $2.33 billion in the first nine months of 1999 from $2.37 billion in the first nine months of 1998 principally because the loss of Columbia/HCA business in mid 1998 was not fully offset by new business until third quarter,1999. Gross margin. Gross margin as a percentage of net sales remained consistent at 10.5% in the third quarter of 1999 compared to the third quarter of 1998. Gross margin as a percentage of net sales increased to 10.5% in the first nine months of 1999 from 10.4% for the first nine months of 1998. This level of gross margin as a percentage of net sales reflects the company's continued emphasis on supply chain initiatives with key suppliers, as well as the lower sales base during the first quarter of 1999. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses were 7.6% of net sales for the third quarter of 1999, unchanged from the third quarter of 1998. SG&A expenses increased to 7.7% of net sales for the first nine months of 1999 from 7.6% for the first nine months of 1998. This increase was the result of a lower sales base for the first nine months of 1999 compared to 1998. Depreciation and amortization. Depreciation and amortization expense for the quarter increased by approximately 7% from 1998, due to increased goodwill amortization resulting from the Medix acquisition. Interest expense, net, and discount on accounts receivable securitization. Interest expense, net, decreased to $2.7 million in the third quarter of 1999 from $3.8 million in the third quarter of 1998 and decreased to $8.8 million in the first nine months of 1999 from $10.6 million in the first nine months of 1998. The decrease for both periods was primarily a result of higher collections of customer finance charges. The discount on accounts receivable securitization increased to $1.5 million in the third quarter of 1999 from $0.9 million in the third quarter of 1998, but decreased to $3.3 million for the first nine months of 1999 from $3.9 million for the same period in 1998. The increase for the quarter was a result of the Medix acquisition which was funded through this facility. The decrease for the nine month period resulted from lower average levels of financing under the facility. The company expects to continue to manage these costs by continuing its working capital reduction initiatives and management of interest rate risks, although the future results of these initiatives cannot be assured. Distributions on mandatorily redeemable preferred securities and dividends on preferred stock. In May 1998, the Trust issued $132.0 million of the Securities. O&M applied substantially all of the net proceeds from this transaction to repurchase all of its outstanding Series B Cumulative Preferred Stock. As of September 30, 1999, the company had accrued $1.2 million of distributions related to these Securities. 16
Nonrecurring restructuring expenses. As a result of the Columbia/HCA contract cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge of approximately $6.6 million, after taxes, to downsize operations. In the second quarter of 1999, the company re-evaluated its restructuring reserve. Since the actions under this plan had resulted in lower projected total costs than originally anticipated, the company recorded a reduction in the reserve which increased net income by approximately $0.6 million, after taxes. Income taxes. The income tax provision was $15.0 million in the first nine months of 1999 compared with $9.6 million in the same period in 1998. The effective tax rate was 44.0%, compared to 41.5% for the same period in 1998. This increase results primarily from reduced deductibility of expenses related to certain nontaxable income. Net income. Net income increased to $7.1 million in the third quarter of 1999 from $6.6 million in the third quarter of 1998. The increase is primarily due to the increase in sales for the quarter. Net income increased to $19.1 million in the first nine months of 1999 from $13.5 million in the same period of 1998. The increase was due to the impact of the restructuring charge in 1998 and the restructuring reserve adjustment in 1999. Excluding the effect of the restructuring charge in 1998 and the related adjustment in 1999, net income attributable to common stock increased to $18.6 million for the nine month period ended September 30, 1999, from $18.2 million in the same period in 1998. This increase resulted from the retirement of the company's outstanding Series B Cumulative Preferred Stock in May 1998 which was funded through the issuance of $132.0 million of Securities issued by Trust. The after tax distribution rate of the Securities is lower than the preferred dividend rate. Readiness for Year 2000 The Year 2000 (Y2K) issue is the result of computer programs being written using two-digit, rather than four-digit, year dates. O&M's computer hardware, software and devices with embedded technology that are date-sensitive may recognize a date code using "00" as the year 1900 rather than the year 2000. This situation could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The company has divided its Y2K efforts into three main areas: o computer hardware and software; o other systems and equipment, such as telephone equipment, scanning equipment and alarm systems; and o suppliers and customers. Computer Hardware and Software. In 1997, O&M completed its assessment of its computer hardware and software, and developed a strategy of remediation. This strategy includes retirement of outdated software and replacement or repair of the remaining software and hardware. The company began repair and replacement efforts in 1997 so that its computer systems would function properly in the year 2000 and beyond. As of September 30, 1999, these repairs and replacements were substantially complete. Also, the company has substantially completed testing of the repairs and replacements that it believes will be necessary to fully address potential Y2K issues relating to its computer hardware and software. In order to maintain an appropriate level of Y2K compliance, the company will continue testing of new or modified computer hardware and software through the end of the year. 17
Other Systems and Equipment. The company has completed an inventory and assessment of non-computer related systems and equipment at its operating divisions and a similar inventory and assessment at its corporate offices. O&M believes that the impact on operations of potential noncompliance for these systems and equipment would be minimal. As of September 30, 1999, the replacement and repair of non-compliant systems and equipment was substantially complete. Suppliers and Customers. O&M has contacted its significant suppliers to determine the extent to which the company is vulnerable to the suppliers' failure to remediate their Y2K compliance issues. Although the company considered several factors in identifying these suppliers, the company has concentrated its communication efforts with suppliers that represent approximately 90% of O&M's sales. Based on the responses received, the company believes that all critical suppliers are compliant or will be compliant by the end of 1999 while the remaining suppliers have indicated they are still addressing Y2K issues. The company has successfully completed testing with three of its largest suppliers and will continue testing with selected suppliers during the remainder of 1999. The company has also contacted its largest customers to determine their level of Y2K readiness. Many customers have not yet responded to these inquiries or have not responded with sufficient detail for O&M to determine whether they will be Y2K compliant on a timely basis. The company is continuing its efforts to ascertain the readiness of its customers but, since this readiness cannot be assured, O&M has developed contingency plans to address the most likely risks of non-compliance and is in the process of implementing those plans. The company has successfully completed testing with over 60 customers and will continue testing during the remainder of 1999. The company estimates the cost of its Y2K remediation efforts will total approximately $8.4 million of operating expenses and $6.8 million of capital expenditures. These expenditures will be funded from operating cash flows. Through September 30, 1999, O&M had incurred approximately $8.1 million of expenses and $6.2 million of capital spending related to its Y2K efforts, of which $0.7 million was incurred in the third quarter of 1999 for each. For the remainder of 1999, the company expects to incur approximately $0.3 million of expenses and $0.6 million of capital spending. Other information technology initiatives have not been significantly delayed by Y2K efforts. O&M has completed its analysis of the operational problems that would be reasonably likely to result from the failure by the company and certain third parties to complete efforts necessary to achieve Y2K compliance on a timely basis. Some of the possible consequences include, but are not limited to, loss of communications, loss of utility services, and an inability to process customer transactions or engage in similar normal business activities. The company has developed contingency plans to address these and other possible scenarios. In the event that the company or third party is adversely affected by the century change, the company will implement its contingency plan for each situation. These plans include alternate means of communication with customers and suppliers, manual operation of certain systems, and other previously established emergency procedures. 18
O&M believes the Y2K issue will not pose significant operational problems for the company. However, if all Y2K issues are not properly identified or if assessment, remediation and testing are not completed on a timely basis, there can be no assurance that the Y2K issue will not have a material adverse impact on the company's results of operations or adversely affect its relationships with customers, suppliers or others. Additionally, there can be no assurance that Y2K non-compliance by other entities will not have a material adverse impact on the company's systems or results of operations. The costs of O&M's Y2K efforts and the dates on which the company believes it will complete these efforts are based upon management's current estimates. These estimates used numerous assumptions regarding future events, including the continued availability of certain resources, third party remediation plans and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Recent Accounting Pronouncements. In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. In May 1999, the FASB delayed the effective date of this standard by one year. The company will be required to adopt the provisions of this standard beginning on January 1, 2001. Management believes the effect of the adoption of this standard will be limited to financial statement presentation and disclosure and will not have a material effect on the company's financial condition or results of operations. Risks The company is subject to risks associated with changes in the medical industry, including continued efforts to control costs, which place pressure on operating margin, and changes in the way medical and surgical services are delivered to patients. Forward-looking Statements Certain statements in this discussion constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions, competition, changing trends in customer profiles, outcome of outstanding litigation, readiness for Year 2000 and changes in government regulations. Although O&M believes its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The company 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, 1998. 19
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, 1998. Through September 30, 1999, there have been no material developments in any legal proceedings reported in such Annual Report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10(a) Second Amendment dated as of October 6, 1998 to the Amended and Restated Receivables Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and Bank of America National Trust and Savings Association 10(b) Second Amendment dated as of October 6, 1998 to the Amended and Restated Parallel Asset Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers and Bank of America National Trust and Savings Association 10(c) Third Amendment and Consent dated as of October 4, 1999 to the Amended and Restated Receivables Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and Bank of America N.A. (f/k/a Bank of America National Trust and Savings Association) 10(d) Third Amendment and Consent dated as of October 4, 1999 to the Amended and Restated Parallel Asset Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers and Bank of America N.A. (f/k/a Bank of America National Trust and Savings Association) 27 Financial Data Schedule (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated July 6, 1999, under Items 5 and 7, with respect to the issuance of two press releases relating to the acquisition of Medix, Inc. and the election of two new board members. 20
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 12, 1999 /s/ Richard F. Bozard -------------------------------- ------------------------------ Richard F. Bozard Vice President & Treasurer Acting Chief Financial Officer Date November 12, 1999 /s/ Olwen B. Cape -------------------------------- ------------------------------ Olwen B. Cape Vice President & Controller Chief Accounting Officer
Exhibits Filed with SEC Exhibit # - --------- 10(a) Second Amendment dated as of October 6, 1998 to the Amended and Restated Receivables Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and Bank of America National Trust and Savings Association 10(b) Second Amendment dated as of October 6, 1998 to the Amended and Restated Parallel Asset Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers and Bank of America National Trust and Savings Association 10(c) Third Amendment and Consent dated as of October 4, 1999 to the Amended and Restated Receivables Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and Bank of America N.A. (f/k/a Bank of America National Trust and Savings Association) 10(d) Third Amendment and Consent dated as of October 4, 1999 to the Amended and Restated Parallel Asset Purchase Agreement among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Parallel Purchasers and Bank of America N.A. (f/k/a Bank of America National Trust and Savings Association) 27 Financial Data Schedule