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 March 31,June 30, 2001
---------------------------
OR
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-9810
-------------
Owens & Minor, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Virginia 54-1701843
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 April 26,July 31, 2001, was 33,376,66333,787,253 shares.
1
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three Months and
Six Months Ended March 31,June 30, 2001 and 2000 3
Consolidated Balance Sheets -
March 31,June 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows -
ThreeSix Months Ended March 31,June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1416
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1619
Part II. Other Information
Item 1. Legal Proceedings 1720
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Shareholders 20
Item 6. Exhibits and Reports on Form 8-K 1721
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)
Three Months Ended March 31,
--------------------------------------Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2001 2000 --------------- --------------2001 2000
----------- ----------- -----------------------------
Net sales $ 924,508953,531 $ 856,742875,230 $ 1,878,039 $ 1,731,972
Cost of goods sold 825,625 764,781
--------------- --------------852,810 782,427 1,678,435 1,547,208
----------- ----------- ----------- -----------
Gross margin 98,883 91,961
--------------- --------------100,721 92,803 199,604 184,764
----------- ----------- ----------- -----------
Selling, general and administrative expenses 72,701 67,42673,294 66,924 145,995 134,350
Depreciation and amortization 5,607 5,1615,621 5,270 11,228 10,431
Interest expense, net 3,423 3,3053,385 3,053 6,808 6,358
Discount on accounts receivable securitization 1,609 1,8591,296 1,959 2,905 3,818
Distributions on mandatorily redeemable
preferred securities 1,774 1,774 --------------- --------------3,548 3,548
Restructuring credit (1,476) (750) (1,476) (750)
----------- ----------- ----------- -----------
Total expenses 85,114 79,525
--------------- --------------83,894 78,230 169,008 157,755
----------- ----------- ----------- -----------
Income before income taxes 13,769 12,43616,827 14,573 30,596 27,009
Income tax provision 6,058 5,596
--------------- --------------7,404 6,558 13,462 12,154
----------- ----------- ----------- -----------
Net income $ 7,7119,423 $ 6,840
=============== ==============8,015 $ 17,134 $ 14,855
=========== =========== =========== ===========
Net income per common share - basicshare-basic $ 0.230.28 $ 0.21
=============== ==============0.25 $ 0.52 $ 0.46
=========== =========== =========== ===========
Net income per common share - dilutedshare-diluted $ 0.220.26 $ 0.20
=============== ==============0.23 $ 0.48 $ 0.43
=========== =========== =========== ===========
Cash dividends per common share $ 0.07 $ 0.0625 $ 0.0600
=============== ==============0.1325 $ 0.1225
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data) March 31,June 30, December 31,
2001 2000
----------- ---------------------- ---------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 9491,423 $ 626
Accounts and notes receivable, net
of allowance of $6,459$6,389 and $6,419 250,955245,277 261,905
Merchandise inventories 335,785376,277 315,570
Other current assets 14,14816,850 16,190
------------ ---------------------- ---------
Total current assets 601,837639,827 594,291
Property and equipment, net of accumulated
depreciation of $60,027$62,129 and $58,876 26,84826,789 24,239
Goodwill, net of accumulated amortization
of $35,474$36,971 and $33,977 203,352201,855 204,849
Other assets, net 42,64342,706 44,169
------------ ---------------------- ---------
Total assets $ 874,680911,177 $ 867,548
============ ====================== =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 297,094319,244 $ 291,507
Accrued payroll and related liabilities 4,2448,216 9,940
Other accrued liabilities 61,84352,011 59,207
------------ ---------------------- ---------
Total current liabilities 363,181379,471 360,654
Long-term debt 150,689156,100 152,872
Other liabilities 9,6049,989 9,250
------------ ---------------------- ---------
Total liabilities 523,474545,560 522,776
------------ ---------------------- ---------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust, holding solely convertible
debentures of Owens & Minor, Inc. 132,000 132,000
------------ ---------------------- ---------
Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued - --- --
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 33,29333,758 shares and 33,180 shares 66,58667,516 66,360
Paid-in capital 18,56825,030 18,039
Retained earnings 134,632141,694 129,001
Accumulated other comprehensive loss (580)(623) (628)
------------ ---------------------- ---------
Total shareholders' equity 219,206233,617 212,772
------------ ---------------------- ---------
Total liabilities and shareholders' equity $ 874,680911,177 $ 867,548
============ ====================== =========
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) ThreeSix Months Ended
(unaudited) March 31,
---------------------------------June 30,
-----------------------
2001 2000
--------- ----------------- --------
Operating activities
Net income $ 7,71117,134 $ 6,84014,855
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 5,607 5,16111,228 10,431
Restructuring credit (1,476) (750)
Provision for LIFO reserve 1,300 1,2002,025 1,750
Provision for losses on accounts and notes receivable 248 94374 404
Sales of accounts receivable, net 15,00025,000 2,064
Changes in operating assets and liabilities:
Accounts and notes receivable (4,298) 16,956(8,746) 12,001
Merchandise inventories (21,515) 2,567(62,732) (21,757)
Accounts payable 11,187 (1,793)30,537 27,046
Net change in other current assets
and current liabilities (1,690) 6,566(8,115) (665)
Other, net 923 1,740
--------- ---------2,953 2,865
-------- --------
Cash provided by operating activities 14,473 41,395
--------- ---------8,182 48,244
-------- --------
Investing activities
Additions to property and equipment (5,013) (1,268)(7,210) (3,726)
Additions to computer software (590) (2,872)(1,995) (5,825)
Other, net 109 20
--------- ---------(872) (83)
-------- --------
Cash used for investing activities (5,494) (4,120)
--------- ---------(10,077) (9,634)
-------- --------
Financing activities
Addition to debt 3,900 --
Reduction of debt (1,600) (22,600)(661) (21,925)
Other financing, net (5,600) (12,822)(2,800) (13,746)
Cash dividends paid (2,080) (1,970)(4,441) (4,022)
Proceeds from exercise of stock options 624 -
--------- ---------6,694 1,044
-------- --------
Cash used forprovided by (used for) financing activities (8,656) (37,392)
--------- ---------2,692 (38,649)
-------- --------
Net increase (decrease) in cash and cash equivalents 323 (117)797 (39)
Cash and cash equivalents at beginning of period 626 669
--------- ----------------- --------
Cash and cash equivalents at end of period $ 9491,423 $ 552
========= =========630
======== ========
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 March 31,June 30, 2001 and the
consolidated results of operations for the three and six month periods and
cash flows for the threesix month periods ended March 31,June 30, 2001 and 2000.
2. Interim Results of Operations
The results of operations for interim periods are not necessarily indicative
of the results to be expected for the full year.
3. Interim Gross Margin Reporting
The company uses estimated gross margin rates to determine the cost of goods
sold during interim periods. To improve the accuracy of its estimated gross
margins for interim reporting purposes, the company takes physical inventory
counts at selected distribution centers. Reported results of operations for
the three and six month periods ended March 31,June 30, 2001 and 2000 reflect the
results of such counts, to the extent that they are materially different
from estimated amounts. Management will continue a program of interim
physical inventories at selected distribution centers to the extent it deems
appropriate to ensure the accuracy of interim reporting and to minimize
year-endyear- end adjustments.
4. Reclassification of Shipping Fees
In the fourth quarter of 2000, the company adopted the provisions of
Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and
Handling Fees and Costs. As a result, the company reclassified certain
amounts billed to customers for shipping from selling, general and
administrative (SG&A) expenses to net sales for all prior periods. As a
result, net sales, gross margin, and SG&A expenses for the first quarter ofthree months and
six months ended June 30, 2000 have been increased by $2.2$2.1 million and $4.3
million.
6
5. Acquisition
In 1999, the company acquired certain net assets of Medix, Inc. (Medix), a
distributor of medical and surgical supplies. The acquisition has been
accounted for by the purchase method. In connection with the acquisition,
management adopted a plan for integration of the businesses which includes
closure of some Medix facilities and consolidation of certain administrative
functions. An accrual was established to provide for certain costs of this
plan. The following table sets forth the activity in the accrual since
December 31, 2000:
(in thousands) Balance at Balance at
December 31, March 31,
2000 Charges June 30, 2001
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
Losses under lease commitments $1,285 $ 7 $1,27825 $1,260
Employee separations 83 19 6428 55
Other 281 --- 281
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $1,649 $26 $1,623
=============================================================================$ 53 $1,596
=======================================================================================
6
As of March 31,June 30, 2001, approximately 40 employees had been terminated. No
employees were terminated,
under the planincluding two in the firstsecond quarter of 2001. The integration of the Medix
business is expected to be completed by late 2001.
6. Restructuring Reserve
As a result of the cancellation of a significant customer contract in 1998,
the company recorded a nonrecurring restructuring charge to downsize
operations. In the second quarter of 2001, the company re-evaluated its
estimate of the remaining costs to be incurred in connection with the
restructuring plan and reduced the reserve by approximately $1.5 million.
The following table sets forth the activity in the restructuring reserve
since December 31, 2000:
(in thousands) Balance at Balance at
December 31, March 31,
2000 Charges Adjustments June 30, 2001
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Losses under lease commitments $2,718 $117 $2,601$ 2,718 $ 204 $(1,504) $ 1,010
Asset write-offs 821 - 821
--------------------------------------------------------------------------------------- 28 849
------------------------------------------------------------------------------------------------------
Total $3,539 $117 $3,422
=====================================================================================$ 3,539 $ 204 $(1,476) $ 1,859
======================================================================================================
7. Off Balance Sheet Receivables Financing Facility
In the second quarter of 2001, the company adopted the provisions of
Statement of Financial Accounting Standards No. (SFAS) 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of SFAS 125 of the same title. SFAS 140 revises
the standards for securitizations and other transfers of financial assets
and expands the disclosure requirements for such transactions, while
carrying over many of the provisions of SFAS 125 without change. The
provisions of SFAS 140 are effective for transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and are to be
applied prospectively. The adoption of this Standard did not require a
change in the company's accounting treatment of sales of accounts receivable
under its off balance sheet receivables financing facility (Receivables
Financing Facility), or have any material effect on the company's
consolidated financial position, results of operations, or cash flows. The
company adopted the disclosure requirements of SFAS 140 in 2000.
7
Under the terms of its Receivables Financing Facility, O&M Funding is
entitled to transfer, without recourse, certain of the company's trade
receivables and receive up to $225.0 million from a group of unrelated third
party purchasers. At March 31,June 30, 2001 and December 31, 2000, net accounts
receivable of $95.0$105.0 million and $80.0 million had been sold under the
agreement and, as a result, have been excluded from the consolidated balance
sheet.sheets.
8. Derivative Financial Instruments
On January 1, 2001, the company adopted the provisions of Statement of
Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.amended. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities measured at
fair value. The accounting treatment for changes in the fair value of a
derivative depends upon the intended use of the derivative and the resulting
designation.
The company enters into interest rate swaps as part of its interest rate
risk management strategy. The purpose of these swaps is to maintain the
company's desired mix of fixed to floating rate financing, and to minimize
interest expense related to fixed rate financing. The company'scompany had interest
rate swap agreements as of March 31, 2001 included $100.0 million notional amounts that effectively
converted a portion of the company's fixed rate financing instruments to
variable rates.rates, which were cancelled by their respective counterparties on
May 28, 2001. These swaps arewere designated as fair value hedges of a portion
of the company's 10.875% Senior Subordinated 10-year Notes (Notes),due in 2006, and
arewere assumed to have no ineffectiveness under the provisions of SFAS 133.
The adoption of this Standard did not have a material impact on the
company's results of operations or financial position.
7
9. Comprehensive Income
The company's comprehensive income for the three months and six months ended
March 31,June 30, 2001 and 2000 is shown in the table below. Other comprehensive
income is comprised of changes in unrealized gain or loss on investment, net
of income tax.
(in thousands) Three Months Ended March 31,
-------------------------------------------Six Months Ended
June 30, June 30,
-------------------------------------------------------
2001 2000 ----------------- ----------------2001 2000
----------------------- -----------------------
Net income $7,711 $6,840$9,423 $ 8,015 $17,134 $14,855
Other comprehensive income - change in unrealized
gain (loss) on investment, net of tax 48 1,266
----------------- ----------------(43) (1,106) 5 160
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $7,759 $8,106
================= ================$9,380 $ 6,909 $17,139 $15,015
====================================================================================================================
8
10. Net Income per Common Share
The following sets forth the computation of basic and diluted net income per
common share:
(in thousands, except per share data) Three Months Ended March 31,
--------------------------------------------Six Months Ended
June 30, June 30,
-----------------------------------------------------
2001 2000 ------------------- -----------------2001 2000
----------------------- -----------------------
Numerator:
Numerator for basic net income per common share - net income
$ 7,7119,423 $ 6,8408,015 $17,134 $14,855
Distributions on convertible mandatorily redeemable
preferred securities, net of income taxes 993 976 1,986 1,951
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Numerator for diluted net income per common share - net
income attributable to common stock after assumed
conversions $10,416 $ 8,704 $ 7,8168,991 $19,120 $16,806
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic net income per common share - weighted
average shares 32,989 32,58533,284 32,595 33,137 32,590
Effect of dilutive securities:
Conversion of mandatorily redeemable
preferred securities 6,400 6,400 6,400 6,400
Stock options and restricted stock 524 234683 334 613 284
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted net income per common share -
adjusted weighted average shares and assumed conversions
39,913 39,21940,367 39,329 40,150 39,274
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.230.28 $ 0.210.25 $ 0.52 $ 0.46
Net income per common share - diluted $ 0.220.26 $ 0.20
==============================================================================================================================0.23 $ 0.48 $ 0.43
=========================================================================================================================
11. Contingency
In August 2000, the company received notice from the Internal Revenue
Service that it has disallowed certain prior year deductions for interest on
loans associated with the company's corporate-owned life insurance (COLI)
program. Management believes that the company has complied with the tax law
as it relates to its COLI program, and has filed an appeal with the Internal
Revenue Service. The impact of the disallowance of these deductions, if
appeals were unsuccessful, would be approximately $8.8 million after tax,
including interest. The ultimate resolution of this matter may take several
years and a determination adverse to the company could have a material
impact on the company's results of operations.
12. Subsequent Event
In July 2001, the company issued $200.0 million of 8 1/2% Senior
Subordinated 10-year notes (2011 Notes) which mature on July 15, 2011.
Interest on the 2011 Notes is payable semi-annually on January 15 and July
15, beginning January 15, 2002. The 2011 Notes are redeemable on or after
July 15, 2006, at the company's option, subject to certain restrictions. The
2011 Notes are unconditionally guaranteed on a joint and several basis by
certain subsidiaries of the company, including all significant subsidiaries
other than O&M Funding Corporation and Owens & Minor Trust I. The proceeds
from the 2011 Notes were used to retire the 10.875% Senior Subordinated
10-year Notes due in 2006 (2006 Notes) and reduce the amount of accounts
receivable sold under the Receivables Financing Facility. The early
retirement of the 2006 Notes will result in an extraordinary loss of
approximately $7 million, net of tax benefit, which will be recorded in the
company's financial statements for the quarter ended September 30, 2001.
9
13. 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 2006 Notes; and the non-guarantor subsidiaries of the 2006
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)
For the three months ended Owens & Guarantor Non-guarantor
March 31,June 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ --- $ 924,508953,531 $ --- $ 924,508-- $ 953,531
Cost of goods sold -- 852,810 -- -- 852,810
- 825,625 - 825,625
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 100,721 -- -- 100,721
- 98,883 - 98,883
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses - 72,444 257 72,701-- 73,210 84 -- 73,294
Depreciation and amortization - 5,607 - 5,607-- 5,621 -- -- 5,621
Interest expense, net 4,383 (960) - 3,4234,571 (1,186) -- -- 3,385
Intercompany interest expense, net (1,826) 7,432 (5,606) -(2,399) 7,106 (4,707) -- --
Intercompany dividend income (126,386) -- -- 126,386 --
Discount on accounts receivable securitization --- 3 1,606 1,6091,293 -- 1,296
Distributions on mandatorily redeemable preferred -- -- 1,774 -- 1,774
securities
Restructuring credit -- (1,476) -- -- (1,476)
- - 1,774 1,774
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total expenses 2,557 84,526 (1,969) 85,114(124,214) 83,278 (1,556) 126,386 83,894
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,557) 14,357 1,969 13,769124,214 17,443 1,556 (126,386) 16,827
Income tax provision (benefit) (1,125) 6,302 881 6,058(956) 7,676 684 -- 7,404
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,432)125,170 $ 8,0559,767 $ 1,088872 $ 7,711
====================================================================================================================================(126,386) $ 9,423
==============================================================================================================================
For the three months ended Owens & Guarantor Non-guarantor
March 31,June 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ --- $ 856,742875,230 $ --- $ 856,742-- $ 875,230
Cost of goods sold -- 782,427 -- -- 782,427
- 764,781 - 764,781
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 92,803 -- -- 92,803
- 91,961 - 91,961
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses - 67,141 285 67,426-- 66,649 275 -- 66,924
Depreciation and amortization - 5,161 - 5,161-- 5,270 -- -- 5,270
Interest expense, net 4,576 (1,271) - 3,3054,362 (1,309) -- -- 3,053
Intercompany interest expense, net (2,164) 7,199 (5,035) -(1,863) 7,379 (5,516) -- --
Discount on accounts receivable securitization - 7 1,852 1,859-- 2 1,957 -- 1,959
Distributions on mandatorily redeemable preferred -- -- 1,774 -- 1,774
securities
Restructuring credit -- (750) -- -- (750)
- - 1,774 1,774
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total expenses 2,412 78,237 (1,124) 79,525
===================================================================================================================================2,499 77,241 (1,510) -- 78,230
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,412) 13,724 1,124 12,436(2,499) 15,562 1,510 -- 14,573
Income tax provision (benefit) (1,061) 5,995 662 5,596(1,100) 6,845 813 -- 6,558
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,351)(1,399) $ 7,7298,717 $ 462697 $ 6,840
===================================================================================================================================-- $ 8,015
- ------------------------------------------------------------------------------------------------------------------------------
910
Condensed Consolidating Financial Information
(in thousands)
====================================================================================================================================For the six months ended Owens & Guarantor Non-guarantor
March 31,June 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ -- $ 1,878,039 $ -- $ -- $ 1,878,039
Cost of goods sold -- 1,678,435 -- -- 1,678,435
- ----------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 199,604 -- -- 199,604
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses -- 145,654 341 -- 145,995
Depreciation and amortization -- 11,228 -- -- 11,228
Interest expense, net 8,954 (2,146) -- -- 6,808
Intercompany interest expense, net (4,225) 14,538 (10,313) -- --
Intercompany dividend income (126,386) -- -- 126,386 --
Discount on accounts receivable securitization -- 6 2,899 -- 2,905
Distributions on mandatorily redeemable preferred -- -- 3,548 -- 3,548
securities
Restructuring credit -- (1,476) -- -- (1,476)
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses (121,657) 167,804 (3,525) 126,386 169,008
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 121,657 31,800 3,525 (126,386) 30,596
Income tax provision (benefit) (2,081) 13,978 1,565 -- 13,462
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 123,738 $ 17,822 $ 1,960 $ (126,386) $ 17,134
==================================================================================================================================
For the six months ended Owens & Guarantor Non-guarantor
June 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ -- $ 1,731,972 $ -- $ -- $ 1,731,972
Cost of goods sold -- 1,547,208 -- -- 1,547,208
- ----------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 184,764 -- -- 184,764
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses -- 133,790 560 -- 134,350
Depreciation and amortization -- 10,431 -- -- 10,431
Interest expense, net 8,938 (2,580) -- -- 6,358
Intercompany interest expense, net (4,027) 14,578 (10,551) -- --
Discount on accounts receivable securitization -- 9 3,809 -- 3,818
Distributions on mandatorily redeemable preferred -- -- 3,548 -- 3,548
securities
Restructuring credit -- (750) -- -- (750)
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,911 155,478 (2,634) -- 157,755
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,911) 29,286 2,634 -- 27,009
Income tax provision (benefit) (2,161) 12,840 1,475 -- 12,154
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,750) $ 16,446 $ 1,159 $ -- $ 14,855
==================================================================================================================================
11
Condensed Consolidating Financial Information
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
June 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 507 $ 441915 $ 1 $ --- $ 9491,423
Accounts and notes receivable, net - 11,885 239,070 - 250,955-- 7,723 237,554 -- 245,277
Merchandise inventories - 335,785 - - 335,785-- 376,277 -- -- 376,277
Intercompany advances, net 129,167 80,027 (209,194) - -134,695 73,099 (207,794) -- --
Other current assets 4 14,144-- 16,850 -- -- 16,850
- - 14,148
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current assets 129,678 442,282 29,877 - 601,837135,202 474,864 29,761 -- 639,827
Property and equipment, net - 26,845 3 - 26,848-- 26,787 2 -- 26,789
Goodwill, net - 203,352 - - 203,352-- 201,855 -- -- 201,855
Intercompany investments 305,441340,023 15,001 136,083 (456,525) -(491,107) --
Other assets, net 8,543 33,969 1318,250 33,456 1,000 -- 42,706
- 42,643
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 443,662483,475 $ 721,449751,963 $ 166,094166,846 $(491,107) $ (456,525) $ 874,680
====================================================================================================================================911,177
=================================================================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ --- $ 297,094319,244 $ --- $ --- $ 297,094319,244
Accrued payroll and related liabilities - 4,244 - - 4,244-- 8,216 -- -- 8,216
Other accrued liabilities 5,367 57,008 (532)1,415 51,247 (651) -- 52,011
- 61,843
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,367 358,346 (532) - 363,1811,415 378,707 (651) -- 379,471
Long-term debt 150,689 - - - 150,689156,100 -- -- -- 156,100
Intercompany long-term debt 136,083 - - (136,083) -143,890 -- (279,973) --
Other liabilities (930) 10,536 (2)10,922 (3) -- 9,989
- 9,604
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,209 368,882 (534) (136,083) 523,474292,668 533,519 (654) (279,973) 545,560
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, Inc. - --- -- 132,000 -- 132,000
- 132,000
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 66,58667,516 40,879 5,583 (46,462) 66,58667,516
Paid-in capital 18,568 258,97925,030 149,671 15,001 (273,980) 18,568(164,672) 25,030
Retained earnings 67,879 52,709 14,044 - 134,63298,884 27,894 14,916 -- 141,694
Accumulated other comprehensive loss (580)(623) -- -- -- (623)
- - - (580)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 152,453 352,567 34,628 (320,442) 219,206190,807 218,444 35,500 (211,134) 233,617
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 443,662483,475 $ 721,449751,963 $ 166,094166,846 $(491,107) $ (456,525) $ 874,680
====================================================================================================================================911,177
=================================================================================================================================
1012
Condensed Consolidating Financial Information
(in thousands)
====================================================================================================================================
Owens & Guarantor Non-guarantor
December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 507 $ 118 $ 1 $ --- $ 626
Accounts and notes receivable, net --- 24,224 237,681 --- 261,905
Merchandise inventories --- 315,570 - --- -- 315,570
Intercompany advances, net 129,447 79,645 (209,092) - --- --
Other current assets 17 16,173 - --- -- 16,190
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current assets 129,971 435,730 28,590 --- 594,291
Property and equipment, net --- 24,236 3 --- 24,239
Goodwill, net --- 204,849 - --- -- 204,849
Intercompany investments 305,441213,637 15,001 136,083 (456,525) -(364,721) --
Other assets, net 8,735 35,157 277 --- 44,169
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 444,147352,343 $ 714,973 $ 164,953 $ (456,525)$(364,721) $ 867,548
=====================================================================================================================================================================================================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ --- $ 291,507 $ --- $ --- $ 291,507
Accrued payroll and related liabilities --- 9,940 - --- -- 9,940
Other accrued liabilities 1,632 58,159 (584) --- 59,207
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,632 359,606 (584) --- 360,654
Long-term debt 152,200 672 - --- -- 152,872
Intercompany long-term debt 136,083 - --- -- (136,083) ---
Other liabilities (930) 10,183 (3) --- 9,250
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 288,985 370,461 (587) (136,083) 522,776
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, Inc. - --- -- 132,000 -- 132,000
- 132,000
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 66,360 40,879 5,583 (46,462) 66,360
Paid-in capital 18,039 258,979167,175 15,001 (273,980)(182,176) 18,039
Retained earnings 71,391 44,654(accumulated deficit) (20,413) 136,458 12,956 --- 129,001
Accumulated other comprehensive loss (628) - - --- -- -- (628)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 155,16263,358 344,512 33,540 (320,442)(228,638) 212,772
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 444,147352,343 $ 714,973 $ 164,953 $ (456,525)$(364,721) $ 867,548
=====================================================================================================================================================================================================================================================================
1113
Condensed Consolidating Financial Information
(in thousands)
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
For the threesix months ended Owens & Guarantor Non-guarantor
March 31,June 30, 2001 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (1,432)123,738 $ 8,05517,822 $ 1,0881,960 $(126,386) $ 7,71117,134
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization - 5,607 - 5,607-- 11,228 -- -- 11,228
Nonrecurring restructuring credit -- (1,476) -- -- (1,476)
Provision for LIFO reserve - 1,300 - 1,300-- 2,025 -- -- 2,025
Provision for losses on accounts and notes receivable - 465-- 591 (217) 248-- 374
Sales of accounts receivable, net - - 15,000 15,000-- -- 25,000 -- 25,000
Changes in operating assets and liabilities:
Accounts and notes receivable - 11,874 (16,172) (4,298)-- 15,910 (24,656) -- (8,746)
Merchandise inventories - (21,515) - (21,515)-- (62,732) -- -- (62,732)
Accounts payable - 11,187 - 11,187-- 30,537 -- -- 30,537
Net change in other current assets
and current liabilities 3,746 (5,608) 172 (1,690)(200) (8,093) 178 -- (8,115)
Other, net 462 434 27 9231,943 984 26 -- 2,953
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 2,776 11,799 (102) 14,473125,481 6,796 2,291 (126,386) 8,182
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (5,013) - (5,013)-- (7,210) -- -- (7,210)
Additions to computer software - (590) - (590)-- (1,995) -- -- (1,995)
Investments in intercompany debt (143,890) -- -- 143,890 --
Decrease in intercompany investment 17,504 -- -- (17,504) --
Other, net - 109 - 109-- 128 (1,000) -- (872)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (5,494) - (5,494)(126,386) (9,077) (1,000) 126,386 (10,077)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Addition to debt 3,900 -- -- -- 3,900
Reduction of debt (1,600) - - (1,600)-- (661) -- -- (661)
Proceeds from issuance of intercompany debt -- 143,890 -- (143,890) --
Change in intercompany advances 280 (382) 102 -(5,248) 6,539 (1,291) -- --
Decrease in intercompany investment -- (17,504) -- 17,504 --
Other financing, net - (5,600) - (5,600)-- (2,800) -- -- (2,800)
Cash dividends paid (2,080) - - (2,080)(4,441) -- -- -- (4,441)
Intercompany dividends paid -- (126,386) -- 126,386 --
Proceeds from exercise of stock options 624 - - 6246,694 -- -- -- 6,694
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (2,776) (5,982) 102 (8,656)905 3,078 (1,291) -- 2,692
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents - 323 - 323-- 797 -- -- 797
Cash and cash equivalents at beginning of period 507 118 1 -- 626
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 507 $ 441915 $ 1 $ 949
- -------------------------------------------------------------------------------------------------------------------------------------- $ 1,423
===================================================================================================================================
1214
Condensed Consolidating Financial Information
(in thousands)
====================================================================================================================================
For the threesix months ended Owens & Guarantor Non-guarantor
March 31,June 30, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (1,351)(2,750) $ 7,72916,446 $ 4621,159 $ 6,840-- $ 14,855
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization - 5,161 - 5,161-- 10,431 -- -- 10,431
Nonrecurring restructuring credit -- (750) -- -- (750)
Provision for LIFO reserve - 1,200 - 1,200-- 1,750 -- -- 1,750
Provision for losses on accounts and notes receivable - 210 (116) 94-- 590 (186) -- 404
Sales of accounts receivable, net - --- -- 2,064 -- 2,064
Changes in operating assets and liabilities:
Accounts and notes receivable - 30,442 (13,486) 16,956-- 4,912 7,089 -- 12,001
Merchandise inventories - 2,617 (50) 2,567-- (21,708) (49) -- (21,757)
Accounts payable - (1,823) 30 (1,793)-- 27,046 -- -- 27,046
Net change in other current assets
and current liabilities 3,750 2,536 280 6,566(101) (776) 212 -- (665)
Other, net 477 1,263 - 1,7401,028 1,119 718 -- 2,865
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 2,876 49,335 (10,816) 41,395(1,823) 39,060 11,007 -- 48,244
- ---------------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment - (1,264)-- (3,722) (4) (1,268)-- (3,726)
Additions to computer software - (2,872) - (2,872)-- (5,825) -- -- (5,825)
Other, net - 20 - 20(155) 72 -- -- (83)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (4,116)(155) (9,475) (4) (4,120)-- (9,634)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing activities
Reduction of debt (22,600) - - (22,600)(21,300) (625) -- -- (21,925)
Change in intercompany advances 21,694 (32,511) 10,817 -27,502 (16,496) (11,006) -- --
Other financing, net - (12,822) - (12,822)(1,246) (12,500) -- -- (13,746)
Cash dividends paid (1,970) - - (1,970)(4,022) -- -- -- (4,022)
Proceeds from exercise of stock options 1,044 -- -- -- 1,044
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (2,876) (45,333) 10,817 (37,392)
- ---------------------------------------------------------------------------------------------------------------------------------1,978 (29,621) (11,006) -- (38,649)
Net decrease in cash and cash equivalents -- (36) (3) -- (39)
- (114) (3) (117)---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 507 158 4 -- 669
- ---------------------------------------------------------------------------------------------------------------------------------=================================================================================================================================
Cash and cash equivalents at end of period $ 507 $ 44122 $ 1 $ 552-- $ 630
=================================================================================================================================
1315
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(the company) since December 31, 2000. Trends of a material nature are discussed
to the extent known and considered relevant. This discussion should be read in
conjunction with the consolidated financial statements, related notes thereto
and management's discussion and analysis of financial condition and results of
operations included in the company's 2000 Annual Report on Form 10-K for the
year ended December 31, 2000.
Financial Condition, Liquidity and Capital Resources
Liquidity. Combined outstanding debt and off balance sheet accounts receivable
securitization increased by $13.5$28.2 million from December 31, 2000 to $247.0$261.8
million at March 31, 2001,
from $233.5 million at December 31, 2000.June 30, 2001. This increase was primarily a result of an increased
investment in inventory levels to support currentgrowing sales volume.volume and the initial
requirements of new customers. Excluding sales of accounts receivable and their
subsequent collections under the receivables financing facility, $0.5$16.8 million
of cash was used for operating activities in the first threesix months of 2001,
compared with $39.3$46.2 million provided by operating activities in the first quartersix
months of 2000. This decrease in operating cash flow largely resulted primarily from the
increased purchases of inventory necessarymentioned above.
On July 2, 2001, the company issued $200 million of 8 1/2% Senior Subordinated
Notes maturing in July 2011. The proceeds from these notes were used to support current sales volume.retire
the company's $150 million of 10 7/8% Senior Subordinated Notes and reduce the
amount of accounts receivable sold under the receivables financing facility. In
conjunction with the new notes, the company entered into interest rate swap
agreements under which the company pays counterparties a variable rate based on
LIBOR and the counterparties pay the company a fixed interest rate of 8 1/2% on
a notional amount of $100 million, effectively converting one-half of the notes
to variable-rate debt. In addition, effective July 12, 2001, the company
extended the expiration of its receivables financing facility to July 11, 2002.
The company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth, although this cannot be
assured. At March 31,June 30, 2001, the company had $224.4$218.9 million of unused credit
under its revolving credit facility and the ability to sell an additional $130.0$120.0
million of accounts receivable under its receivables financing facility.
Working Capital Management. The company's working capital increased by $5.0$26.7
million from December 31, 2000 to $238.7$260.4 million at March 31,June 30, 2001, primarily
due toas a result
of increased inventory levels. Annualized inventory turnover for the second
quarter of 2001 decreased slightly to 9.6 from 9.7 in the fourth quarter of
2000. Accounts receivable, excluding the effect of the company's receivables
financing facility, increased by $8.4 million to $350.3 million at June 30,
2001. However, sales growth outpaced this increase, resulting in decreased
average days sales outstanding of 32.2 days for the second quarter of 2001,
compared to 33.3 days for the fourth quarter of 2000.
Capital Expenditures. Capital expenditures were $5.6approximately $9.2 million in
the first threesix months of 2001, including $3.3 million for the purchase of land to
be used for the company's future headquarters. The company spent $1.5$3.6 million
to purchase computer hardware and software. The company expects to continue
supporting strategic initiatives and improving operational efficiency through
investments in technology including system upgrades and the development of electronic
commerce.upgrades. These capital expenditures
are expected to be funded through cash flow from operations.
16
Results of Operations
FirstSecond quarter and first six months of 2001 compared with first quarter of 2000
Net sales. Net sales increased 8%9% to $924.5$953.5 million in the firstsecond quarter of
2001 from $856.7$875.2 million in the firstsecond quarter of 2000. This increaseNet sales increased 8%
to $1.9 billion in the first six months of 2001 from $1.7 billion in the first
six months of 2000. These increases resulted
primarily from further penetration of
existing accounts.accounts as well as new business.
Gross margin. Gross margin as a percentage of net sales remained consistent at
10.6% in the second quarter of 2001 compared to the second quarter of 2000.
Gross margin as a percentage of net sales decreased slightly to 10.6% in the
first six months of 2001 compared with 10.7% for the first quarter of 2001 was 10.7% of net
sales, consistent with the first quartersix months of 2000.
CustomerThe decrease resulted from decreased customer contract margins decreased
slightly from last year. These decreases, however,which were
partially offset by favorable vendor initiatives. As the company continues to
face margin pressure, it is focusing on opportunities for margin improvement,
including an emphasis on providing value-added services.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales increased slightly
to 7.7% of net sales for the firstsecond quarter of 2001, were 7.9%compared to 7.6% for the
second quarter of net2000. This increase resulted, in part, from higher personnel
costs incurred to support sales growth and to prepare for additional business
which will be converted in the third quarter. The company also consolidated
four of its distribution centers into two locations in the second quarter of
2001. For the first six months of 2001, SG&A expense remained consistent with
the first quartersix months of 2000.
14
2000 at 7.8% of net sales.
Depreciation and amortization. Depreciation and amortization expense for the
second quarter and first six months of 2001 increased to $5.6 million, or 9%by approximately 7% and 8%
from the first quarter of 2000.
Excluding goodwill amortization of $1.5 millionsame periods in both periods, depreciation
and amortization increased 12%2000, primarily as a result of continued investments in
computer software.
Interest expense, net, and discount on accounts receivable securitization
(financing costs). Net financingFinancing costs totaled $5.0$4.7 million for the second quarter
of 2001 and $9.7 million for the first quartersix months of 2001, compared with $5.2$5.0
million inand $10.2 million for the first quartersame periods of 2000. Excluding collections of customer finance charges, financing costs for the first
quarter decreased $0.2 millionThis decrease resulted
from the first quarter of 2000. While market
interest rates were slightly higher in the first quarter of 2001,lower average outstanding financing decreased from the same period of 2000.in 2001.
The company expects to continue to manage its financing costs by continuing its
working capital reduction initiatives and management of interest rate risks,
although the future results of these initiatives cannot be assured.
Restructuring credits. As a result of the cancellation of a significant
customer contract in 1998, the company recorded a nonrecurring restructuring
charge of $6.6 million, after taxes, to downsize operations. The company
periodically re-evaluates its restructuring reserve, and since the actions under
this plan had resulted in lower projected total costs than originally
anticipated, the company recorded reductions in the reserve in the second
quarters of both 2001 and 2000, which increased net income by approximately
$0.8 million in 2001 and $0.4 million in 2000.
Income taxes. The income tax provision was $6.1$13.5 million infor the first quartersix
months of 2001 compared with $5.6$12.2 million infor the same period infirst six months of 2000.
The effective tax rate was 44.0%, compared to 45.0% for the same period in 2000.
This reduction in rate decrease resultsresulted primarily from decreases in certain
nondeductible expenses.items.
17
Net income. Net income increased to $7.7$9.4 million infor the firstsecond quarter of 2001
from $6.8$8.0 million infor the second quarter of 2000 and increased to $17.1 million
for the first six months of 2001 from $14.9 million for the same period of 2000.
Excluding the adjustments to the restructuring reserve, net income increased to
$8.6 million for the second quarter of 2001 from $7.6 million for the second
quarter of 2000 and increased to $16.3 million for the first six months of 2001
from $14.4 million for the same period of 2000. The increase is primarily due
to the increase in sales whileand success in controlling operating and financing costs.
Recent Accounting Pronouncements
In September 2000,July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a replacement of SFAS 125 of the same title. SFAS 140 revises
the standards for securitizations and other transfers of financial assets and
expands the disclosure requirements for such transactions, while carrying over
many of the provisions of SFAS 125 without change.141,
Business Combinations. The provisions of SFAS 140
are effective141 require that all business
combinations initiated after June 30, 2001, be accounted for transfers of financialby the purchase
method and also specifies criteria that intangible assets and extinguishments of
liabilities occurring after March 31, 2001, and areacquired in a business
combination must meet to be applied prospectively.
Management expectsrecognized and reported apart from goodwill. The
adoption of this standard will affect the company's accounting for potential
future acquisitions.
Also in July, the FASB issued SFAS 142, Goodwill and Other Intangible Assets.
The provisions of SFAS 142 state that goodwill should not be amortized but
should be tested for impairment upon adoption of the pronouncementstandard, and at least
annually, at the reporting unit level. The company will not requirebe required to adopt
the provisions of this standard beginning on January 1, 2002. As a result, the
company will no longer record goodwill amortization expense. The company will
also be required to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. Any such transitional
impairment loss will be recognized as the cumulative effect of a change in
the
company's accounting treatment of sales of accounts receivable under its
Receivables Financing Facility, or have any material effect onprinciple in the company's consolidated financial position, resultsstatement of operations, or cash flows. Theincome.
As of the date of adoption, the company adoptedexpects to have unamortized goodwill in
the disclosure requirementsamount of $198.9 million, which will be subject to the transition provisions
of SFAS 140 in142. Amortization expense related to goodwill was $1.5 million and $1.5
million for the three month periods ended June 30, 2001 and 2000, and $3.0
million and $3.0 million for the six month periods ended June 30, 2001 and 2000.
Based on current values, management does not believe that the company is likely
to incur a transitional impairment loss.
Risks
The company is subject to risks associated with changes in the medical industry,
including continued efforts to control costs, which place pressure on operating
margin, and changes in the way medical and surgical services are delivered to
patients. The loss of one of the company's larger customers could have a
significant effect on its business. However, management believes that the
company's competitive position in the marketplace and its ability to control
costs would enable it to continue profitable operations and attract new
customers in the event of such a loss.
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, dependence on sales to
certain customers, dependence on suppliers, competition, changing trends in
customer profiles, the ability to timely or adequately respond to technological
advances in the medical supply industry, the ability to successfully identify,
manage or integrate possible future acquisitions, outcome of outstanding
litigation and changes in government regulations. Although O&Mthe company 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
18
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, 2000.
1619
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against the company are described in the
company's Annual Report on Form 10-K for the year ended December 31, 2000.
Through March 31,June 30, 2001, there have been no material developments in any legal
proceedings reported in such Annual Report.
Item 2. Changes in Securities and Use of Proceeds
On July 2, 2001, Owens & Minor, Inc. issued $200 million of 8 1/2% Senior
Subordinated Notes. The Senior Subordinated Indenture and First Supplemental
Indenture governing the Notes (attached as Exhibits 4.1 and 4.2 hereto) contain
certain financial covenants and limitations on the payment of dividends.
Item 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 26, 2001, with the voting results designated below
each such matter:
(1) Election of A. Marshall Acuff, Jr., Henry A. Berling, James B. Farinholt,
Jr. and Anne Marie Whittemore as directors of O&M for a three-year term.
Votes Against Broker
Directors Votes For Or Withheld Abstentions Non-Votes
- ---------------------------------- -------------- ------------------ --------------- ----------------
A. Marshall Acuff, Jr. 29,116,257 611,627 0 0
Henry A. Berling 29,060,190 667,694 0 0
James B. Farinholt, Jr. 29,070,872 657,012 0 0
Anne Marie Whittemore 29,070,791 657,093 0 0
(2) Ratification of an amendment to the 1998 Stock Option and Incentive Plan
increasing the number of shares available for issuance and extending the
term of the Plan.
Votes Against
Votes For Or Withheld Abstentions
-------------- ------------- ------------
21,225,827 5,633,409 136,095
(3) Ratification of the appointment of KPMG LLP as O&M's independent auditors.
Votes Against
Votes For Or Withheld Abstentions
-------------- ------------- ------------
29,607,253 69,864 50,766
20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.3 Amended and Restated Bylaws of Owens & Minor, Inc.
4.1 Senior Subordinated Indenture dated as of July 2, 2001 among
Owens & Minor, Inc., as Issuer, Owens & Minor Medical, Inc.,
National Medical Supply Corporation, Owens & Minor West, Inc.,
Koley's Medical Supply, Inc. and Stuart Medical, Inc., as
Guarantors (the "Guarantors"), and SunTrust Bank, as Trustee
4.2 First Supplemental Indenture dated as of July 2, 2001 among Owens
& Minor, Inc., the Guarantors and SunTrust Bank.
4.3 Exchange and Registration Rights Agreement dated as of July 2,
2001 among Owens & Minor, Inc., the Guarantors, Lehman Brothers
Inc., Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, First Union Securities, Inc.,
Goldman Sachs & Co. and J.P. Morgan Securities Inc.
4.4 First amendment dated as of June 12, 2001 to Credit Agreement
dated as of April 24, 2000 among Owens & Minor, Inc., the
Guarantors, First Union National Bank, SunTrust Bank, Bank One,
N.A., The Bank of Nova Scotia, and Bank of America, N.A.
10 Amendment No. 1 dated as of July 12, 2001 to Receivables Purchase
Agreement among O&M Funding Corp., Owens & Minor Medical, Inc.,
Owens & Minor, Inc., Falcon Asset Securitization Corporation,
Receivables Capital Corporation, Liberty Street Funding
Corporation, Bank One, N.A., Bank of America, N.A., and The Bank
of Nova Scotia
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K dated March 20,June 5, 2001, under
Items 5 and 7, with respect to the appointmentcommencement by the company of Jeffrey Kaczka asa
tender offer to purchase for cash any and all of its outstanding $150
million aggregate principal amount of 10 7/8% Senior Vice President, Chief Financial OfficerSubordinated Notes
due 2006.
The company filed a Current Report on Form 8-K dated June 15, 2001,
under Items 5 and 7, with respect to the extension by the company of the
company.
17Early Tender Date for any and all of its outstanding $150 million
aggregate principal amount of 10 7/8% Senior Subordinated Notes due 2006
to June 22, 2001, as well as the commencement by the company of a
proposed private offering of $200 million aggregate principal amount of
Senior Subordinated Notes due 2011.
The company filed a Current Report on Form 8-K dated July 2, 2001, under
Items 5 and 7, with respect to the completion of the company's private
offering of its $200 million aggregate principal amount of 8 1/2% Senior
Subordinated notes due 2011, as well as the expiration of the company's
tender offer for any and all of its outstanding $150 million aggregate
principal amount of 10 7/8% Senior Subordinated Notes due 2006.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Owens & Minor, Inc.
---------------------------------------------------------
(Registrant)
Date May 7,August 13, 2001
/s/ Jeffrey Kaczka
----------------- ____________________________-----------------------------
Jeffrey Kaczka
Senior Vice President
Chief Financial Officer
Date May 7,August 13, 2001
/s/ Olwen B. Cape
----------------- ____________________________---------------- -----------------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
18
Exhibits Filed with SEC
-----------------------
Exhibit #
---------
3 Amended and Restated Bylaws of Owens & Minor, Inc.
4.1 Senior Subordinated Indenture dated as of July 2, 2001 among
Owens & Minor, Inc., as Issuer, Owens & Minor Medical, Inc.,
National Medical Supply Corporation, Owens & Minor West, Inc.,
Koley's Medical Supply, Inc. and Stuart Medical, Inc., as
Guarantors (the "Guarantors"), and SunTrust Bank, as Trustee
4.2 First Supplemental Indenture dated as of July 2, 2001 among Owens
& Minor, Inc., the Guarantors and SunTrust Bank.
4.3 Exchange and Registration Rights Agreement dated as of July 2,
2001 among Owens & Minor, Inc., the Guarantors, Lehman Brothers
Inc., Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, First Union Securities, Inc.,
Goldman Sachs & Co. and J.P. Morgan Securities Inc.
4.4 First amendment dated as of June 12, 2001 to Credit Agreement
dated as of April 24, 2000 among Owens & Minor, Inc., the
Guarantors, First Union National Bank, SunTrust Bank, Bank One,
N.A., The Bank of Nova Scotia, and Bank of America, N.A.
10 Amendment No. 1 dated as of July 12, 2001 to Receivables Purchase
Agreement among O&M Funding Corp., Owens & Minor Medical, Inc.,
Owens & Minor, Inc., Falcon Asset Securitization Corporation,
Receivables Capital Corporation, Liberty Street Funding
Corporation, Bank One, N.A., Bank of America, N.A., and The Bank
of Nova Scotia