UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1996
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)
Registrant's telephone number, including area code (804)747-9794
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X
No _____
The number of shares of Owens & Minor, Inc.'s common
stock outstanding as of July 30,October 31, 1996 was 31,863,31331,905,856
shares.
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Consolidated Balance Sheets - JuneSeptember 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations - Three Months and
SixNine Months Ended JuneSeptember 30, 1996 and 1995 4
Consolidated Statements of Cash Flows - SixNine Months
Ended JuneSeptember 30, 1996 and 1995
5
Notes to Consolidated Financial Statements 6- 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
8-11
Part II. Other Information 12-14
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
June 30, December 31,
1996 1995
----------------------------
Assets
Current assets
Cash and cash equivalents $ 546 $ 215
Accounts and notes receivable, net 170,695 265,238
Merchandise inventories 297,074 326,380
Other current assets 18,809 32,069
------------ -------------
Total current assets 487,124 623,902
Property and equipment, net 32,043 39,049
Excess of purchase price over net
assets acquired, net 169,638 171,911
Other assets, net 29,900 22,941
------------ -------------
Total assets $ 718,705 $ 857,803
============ =============
Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt $ - $ 4,055
Accounts payable 227,943 241,048
Accrued payroll and related liabilities 4,248 5,534
Other accrued liabilities 38,199 41,602
------------ -------------
Total current liabilities 270,390 292,239
Long-term debt 200,529 323,308
Accrued pension and retirement plans 8,823 6,985
------------ -------------
Total liabilities 479,742 622,532
------------ -------------
Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000
shares Series A; Participating Cumulative
Preferred Stock; none issued - -
Series B; Cumulative Preferred
Stock; 4.5%, convertible;
issued - 1,150 shares 115,000 115,000
Common stock, par value $2 per share;
authorized - 200,000 shares; issued - 31,857 at
June 30, 1996 and 30,862 at December 31, 1995 63,714 61,724
Paid-in capital 4,807 2,144
Retained earnings 55,442 56,403
------------ -------------
Total shareholders' equity 238,963 235,271
------------ -------------
Total liabilities and shareholders' equity $ 718,705 $ 857,803
============ =============
September 30, December 31,
1996 1995
Assets
Current assets
Cash and cash equivalents $ 655 $ 215
Accounts and notes
receivable, net 151,452 265,238
Merchandise inventories 294,844 326,380
Other current assets 18,207 32,069
Total current assets 465,158 623,902
Property and equipment, net 30,952 39,049
Excess of purchase price
over net assets
acquired, net 168,502 171,911
Other assets, net 29,964 22,941
Total assets $ 694,576 $ 857,803
Liabilities and
shareholders' equity
Current liabilities
Current maturities
of long-term debt $ - $ 4,055
Accounts payable 205,624 241,048
Accrued payroll and
related liabilities 6,465 5,534
Other accrued liabilities 41,188 41,602
Total current liabilities 253,277 292,239
Long-term debt 192,689 323,308
Accrued pension and
retirement plans 8,398 6,985
Total liabilities 454,364 622,532
Shareholders' equity
Preferred stock, par value
$100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock;
none issued - -
Series B; Cumulative
Preferred
Stock; 4.5%, convertible;
issued - 1,150 shares 115,000 115,000
Common stock, par value
$2 per share;
authorized - 200,000 shares;
issued - 31,887 at
September 30, 1996 and
30,862 at December 31, 1995 63,774 61,724
Paid-in capital 4,971 2,144
Retained earnings 56,467 56,403
Total shareholders' equity 240,212 235,271
Total liabilities and
shareholders equity $ 694,576 $857,803
See accompanying notes to consolidated financial
statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Three Three Nine Nine
Months Months Months Months
Ended Six Months Ended JuneEnded Ended
Sep 30, JuneSep 30, ------------------------------ ------------------------------Sep 30, Sep 30,
1996 1995 1996 1995
-------------- --------------- -------------- --------------
Net sales $ 749,938744,146 $ 743,718739,021 $ 1,521,250 $ 1,490,8132,265,396 $2,229,834
Cost of goods sold 675,427 673,217 1,372,560 1,347,404
------------- ------------- ------------- -------------669,660 679,655 2,042,220 2,027,059
Gross margin 74,511 70,501 148,690 143,409
------------- ------------- ------------- -------------74,486 59,366 223,176 202,775
Selling, general and
administrative
expenses 58,474 54,074 119,514 107,63557,709 57,229 177,223 164,864
Depreciation and
amortization 4,071 3,713 8,001 7,2294,016 3,833 12,017 11,062
Interest expense, net 4,974 5,730 10,774 11,1214,283 7,128 15,057 18,249
Discount on accounts
receivable
securitization 1,8511,889 - 2,5954,484 -
Nonrecurring
restructuring
expenses - 4,1144,656 - 6,775
------------- ------------- ------------- -------------11,431
Total expenses 69,370 67,631 140,884 132,760
------------- ------------- ------------- -------------67,897 72,846 208,781 205,606
Income (loss) before
income taxes 5,141 2,870 7,806 10,6496,589 (13,480) 14,395 (2,831)
Income tax provision
2,210 1,182 3,356 4,348
------------- ------------- ------------- -------------(benefit) 2,839 (4,879) 6,195 (531)
Net income 2,931 1,688 4,450 6,301(loss) 3,750 (8,601) 8,200 (2,300)
Dividends on preferred
stock 1,294 1,294 2,588 2,588
------------- ------------- ------------- -------------1,293 1,293 3,881 3,881
Net income (loss)
attributable to common
stock $ 1,6372,457 $ 394(9,894) $ 1,862 $ 3,713
============= ============= ============= =============4,319 $(6,181)
Net income (loss)
per common share $ 0.05.08 $ 0.01(.32) $ 0.06.14 $ 0.12
============= ============= ============= =============(.20)
Cash dividends per
common share $ 0.045.045 $ 0.045.045 $ 0.090.135 $ 0.090
============= ============= ============= =============.135
Weighted average
common shares and
common share
equivalents 32,000 31,077 31,560 31,082
============= ============= ============= =============31,980 30,839 31,700 30,804
See accompanying notes to consolidated financial
statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Six
Nine Nine
Months Months
Ended (In thousands) JuneEnded
Sep 30, ----------------------------------Sep 30,
1996 1995
------------- -------------
Operating Activities
Net income (loss) $ 4,4508,200 $ 6,301(2,300)
Adjustments to reconcile net income
(loss) to cash provided by (used for)
operating activities
Depreciation and amortization 8,001 7,22912,017 11,062
Provision for losses on accounts
and notes receivable 523 222787 476
Provision for LIFO reserve 2,248 1,6621,551 2,912
Change in operating assets
and liabilities
Accounts and notes receivable 94,020 (10,844)112,999 (35,254)
Merchandise inventories 27,058 (18,841)29,985 (15,201)
Accounts payable (5,091) (92,805)(12,953) (14,464)
Net change in other current assets
and current liabilities 9,659 (19,566)15,854 (18,732)
Other, net (2,493) (1,895)
------------- --------------(2,204) (802)
Cash provided by (used for)
operating activities 138,375 (128,537)
------------- --------------166,236 (72,303)
Investing Activities
Additions to property and equipment (3,152) (5,359)(4,553) (9,890)
Additions to computer software (3,940) (3,595)(5,397) (5,721)
Proceeds from sale of property and equipment 5,312 52
------------- --------------5,372 105
Cash used for investing activities (1,780) (8,902)
------------- --------------(4,578) (15,506)
Financing Activities
Additions to long-term debt 150,000 120,166122,435
Reductions of long-term debt (274,022) (119)(282,122) (180)
Other short-term financing, net (8,014) 22,235(22,471) (27,038)
Cash dividends paid (5,411) (5,362)(8,136) (8,044)
Exercise of stock options 1,183 259
------------- --------------1,511 344
Cash provided by (used for) financing
activities (136,264) 137,179
------------- --------------(161,218) 87,517
Net increase (decrease) in cash
and cash equivalents 331 (260)440 (292)
Cash and cash equivalents at
beginning of year 215 513
------------- -------------
Cash and cash equivalents at end of period $ 546655 $ 253
============= ==============221
5
See accompanying notes to consolidated financial
statements.
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Accounting Policies
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(which are comprised only of normal recurring accruals and
the use of estimates) necessary to present fairly the
consolidated financial position of Owens & Minor, Inc. and
its wholly owned subsidiaries (the Company) as of
JuneSeptember 30, 1996 and the consolidated results of
operations for the three and sixnine month periods and cash
flows for the sixnine month periods ended JuneSeptember 30, 1996
and 1995.
2. Interim Results of Operations
The results of operations for interim periods are not
necessarily indicative of the results to be expected for
the full year.
3. Interim Gross Margin Reporting
In general, the Company uses estimated gross margin rates
to determine the cost of goods sold during interim
periods. To improve the accuracy of its estimated gross
margins for interim reporting purposes, the Company takes
physical inventories at selected distribution centers.
Reported results of operations for the three and sixnine
month periods ended JuneSeptember 30, 1996 and 1995 reflect
the results of such inventories, if materially different.
Management will continue a program of interim physical
inventories at selected distribution centers to the extent
it deems appropriate to ensure the accuracy of interim
reporting and to minimize year-end adjustments.
4. Long-Term Debt and Refinancing
During May 1996 the Company completed the refinancing of
its $425 million revolving credit facility (Senior Credit
Facility) by issuing $150 million of 10.875% Senior
Subordinated Notes (Notes), increasing its available
receivables financing facility (Receivables Financing
Facility) to $150 million from $75 million and entering
into a new $225 million revolving credit facility (New
Senior Credit Facility).
The Notes were issued on May 29, 1996, and mature on June
1, 2006. Interest on the Notes is payable semi-annually
on June 1 and December 1. The Notes are redeemable at the
Company's option subject to certain restrictions. The
Notes are unconditionally guaranteed on a joint and
several basis by all direct and indirect subsidiaries of
the Company, other than O&M Funding Corp. (OMF).
To manage the interest rate exposure of the Notes, the
Company entered into interest rate swap agreements with
terms of 10 years during the second quarter of 1996.
Under the interest rate swap agreements, the Company pays
the counterparties a variable rate based on 6
the six-month
London Interbank Offered Rate (LIBOR) and the
counterparties pay the Company a fixed interest rate,
ranging from 7.29% to 7.32%. The total notional amount of
the interest rate swaps was $100 million at JuneSeptember 30,
1996. The Company is exposed to certain losses in the
event of nonperformance by the counterparties to these
agreements. However, the Company's exposure is not
material and nonperformance is not anticipated.
The terms of the Receivables Financing Facility are
substantially the same as the agreement entered into in
December 1995 other than an increase in the available
funds to $150 million and the extension of the term of the
agreement from December 1996 to May 1999. At JuneSeptember
30, 1996 the Company had received $141approximately $133
million under the Receivables Financing Facility.
The New Senior Credit Facility expires in May 2001 with
interest based on LIBOR or the Prime Rate. The New Senior
Credit Facility limits the amount of indebtedness the
Company may incur, requires the Company to maintain
certain financial covenants including covenants related to
tangible net worth, cash flow coverage, current ratio,
leverage ratio and fixed charge coverage ratio and
restricts the ability of the Company to materially alter
the character of the business through consolidation,
merger or purchase or sale of assets.
5. Condensed Consolidating Financial Information
The following table presents condensed consolidating
financial information for: Owens & Minor, Inc.; on a
combined basis, the guarantors of Owens & Minor, Inc.'s
Notes (all of the wholly owned subsidiaries of Owens &
Minor, Inc. except for OMF); and OMF, Owens & Minor,
Inc.'s only non-guarantor subsidiary of the Notes.
Separate financial statements of the guarantor
subsidiaries are not presented because the guarantors are
jointly, severally and unconditionally liable under the
guarantees and the Company believes the condensed
consolidating financial statements are more meaningful in
understanding the financial position of the guarantor
subsidiaries.
(In thousands)
As of and for the Owens
sixAs of and for the
nine months ended
September 30, 1996
Owens
& Minor, Guarantor
June 30, 1996
Inc. Subsidiaries OMF Eliminations Consolidated
----------------- -------- ------------ ----------- ------------ ------------
Current
assets $201,166 $470,512 $69,866 ($254,420) $487,124$ 191,572 $ 446,930 $ 53,892 $(227,236) $ 465,158
Noncurrent
assets 306,152 240,288306,791 237,486 - (314,859) 231,581229,418
Total
assets 507,318 710,800 69,866 (569,279) 718,705$ 498,363 $ 684,416 $ 53,892 $(542,095) $ 694,576
Current
liabilities 3,578 466,457 54,775 (254,420) 270,390$ 6,261 $ 436,425 $ 38,451 $(227,860) $ 253,277
Noncurrent
liabilities 190,000 19,352181,900 19,187 - - 209,352201,087
Shareholders'
equity 313,740 224,991 15,091 (314,859) 238,963310,202 228,804 15,441 (314,235) 240,212
Total
liabilities
and
shareholders'
equity $ 498,363 $ 684,416 $ 53,892 $(542,095) $694,576
Net sales 14,633 1,521,250 3,912 (18,545) 1,521,250$ 18,014 $2,265,396 $ 7,911 $ (25,925) $2,265,396
Expenses 13,471 1,518,279 3,595 (18,545) 1,516,80017,937 2,258,732 7,076 (26,549) 2,257,196
Net income 1,162 2,971 317 - 4,450$ 77 $ 6,664 $ 835 $ 624 $ 8,200
7
Item 2.
Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
SecondThird quarter and first sixnine months of 1996 compared with
1995
Net Sales.sales. Net sales increased 0.8%0.7% to $749.9$744.1 million in the
secondthird quarter of 1996 from $743.7$739.0 million in the secondthird
quarter of 1995. Net sales increased 2.0%1.6% to $1.52$2.27 billion
in the first sixnine months of 1996 from $1.49$2.23 billion in the
first sixnine months of 1995. The Company's expected moderate sales
growth, which had been anticipated, has been primarily a
result of the price increases instituted in December 1995 and
the first quarter of 1996 and changes in management focus.
Sales growth is expected to be moderate for the remainder of
1996 as the Company focusescontinues to focus on the profitability
of existing business and obtaining new business that meets
established profitability requirements.
Gross margin. Gross margin as a percentage of net sales
increased to 9.9%10.0% in the secondthird quarter of 1996 from 9.5%8.0% in
the secondthird quarter of 1995, and from 8.7% in the fourth
quarter of 1995. Gross margin as a percentage of net sales
increased to 9.8%9.9% in the first sixnine months of 1996 from 9.6%9.1%
in the first sixnine months of 1995. The increase has been a
result of several initiatives. As discussed above, the
Company implemented price increases for the services it
provides in December 1995 and the majorityfirst quarter of these price increases have been realized. The1996.
Additionally, the Company continues to
remain focused on improving gross marginhas and continues to implement
other gross margin enhancement programs in addition to the price increases.programs. These enhancement
programs include: utilizing an activity-based cost system
that charges incremental fees for additional distribution and
enhanced inventory management services, implementing supplier
partnerships that will increase margin opportunities for the
Company, as well as the supplier and the customer and continuing to
improve the Company's utilization of technology which will
continue to reduce the cost of the order fulfillment cycle.
The third quarter of 1995 included inventory and sales credit
reserve adjustments of approximately $3.2 million. There can
be no assurance that the Company's pricing methods and the
other gross margin enhancement programs will produce
increases in net sales or gross margin as a percentage of net
sales in future periods.
Selling, general and administrative expenses. Selling,
general and administrative (SG&A) expenses as a percentage of
net sales increased to 7.8% in the secondthird quarter of 1996 from
7.3%7.7% in the secondthird quarter of 1995 and increased to 7.9%7.8% in
the first sixnine months of 1996 from 7.2%7.4% in the first sixnine
months of 1995, but declined from 8.2% in the fourth quarter
of 1995. The increase in SG&A expenses as a percentage of
net sales as compared to the secondthird quarter and first sixnine
months of 1995 was primarily a result of increased personnel
costs incurred in connection with new contracts providing for
enhanced service levels and services not previously provided
by the Company, a significant increase in
the number of Stock Keeping Units (SKUs) distributed by the Company, system conversions, opening or expanding 11
distribution centers in the second half of 1995 and
reconfiguring warehouse systems.
During the secondthird quarter of 1996, SG&A expenses decreased
$2.6$3.3 million from 8.2% of net sales in the fourth quarter of
1995 to 7.9% in the first quarter of
1996 and to 7.8% in the secondthird quarter of 1996. The SG&A expense
decline iswas a result of many cost saving initiatives,
primarily 8
the reduction of over 200400 full time equivalent
employees in the second quartersince March 31, 1996 due to reduced overtime and
temporary help. Also, the more cost effective utilization of
the Company's mainframe computer system lowered SG&A
expenses. The reduction in these costs has been achieved
through the completion of 22 warehouse reconfigurations in
1995, the implementation of improved inventory management
systems in a majority of its facilities and the refocus on
functional best practices within the Company. Additionally,
the implementation of the Company's restructuring plan to
further reduce distribution center costs through the closure
of two and the downsizing of five distribution centers (which
resulted in $3.5 million of the Company's nonrecurring
restructuring charges in the fourth quarter of 1995) has
contributed to the reduction of SG&A expenses. The Company
will continue to focus on these programs duringthrough 1996 and in
future periods. Although the Company expects these
initiatives to continue to reduce SG&A expenses, their impact
cannot be assured.
Depreciation and amortization. Depreciation and amortization
increased by 9.6%4.8% in the secondthird quarter of 1996 compared to
the secondthird quarter of 1995 and increased by 10.7 %8.6% in the first
sixnine months of 1996 compared to the first sixnine months of
1995. This increase was due primarily to the Company's
continued investment in improved Information Technology (IT).
The Company anticipates similar increases in depreciation and
amortization for the remainder of 1996 associated with
additional capital investment in IT.
Interest expense, net and discount on accounts receivable
securitization (Financing Costs). Financing Costs, net of
finance charge income of $1.2$1.1 million and $1.0 million in the
secondthird quarter of 1996 and 1995, increasedrespectively, decreased from
$5.7$7.1 million in the secondthird quarter of 1995 to $6.8$6.2 million in
the secondthird quarter of 1996. The third quarter decline in
Financing Costs has been a result of the Company's ability to
reduce working capital requirements by substantially
completing the implementation of its client/server-based
forecasting system and strengthening its accounts receivable
collection procedures. Due to this reduction in working
capital requirements, the Company has reduced outstanding
financing by approximately $57.0 million since March 31,
1996. Financing Costs, net of finance charge income of $2.4$3.5
million and $1.6$2.7 million in the first sixnine months of 1996 and
1995, respectively, increased from $11.1$18.2 million in the first
sixnine months of 1995 to $13.4$19.5 million in the first sixnine months
of 1996.
The increases were1996 primarily due to higher borrowing levelslevels. The nine
month increase in Financing Costs was due to fund increasedan increase in
working capital requirements arising from the Company's
system conversions and higher interest rates. Although Financing
Costs, net of finance charge income increased compared to the same periods in
1995, Financing Costs, net of finance charge incomedistribution center changes in the
second quarter of
1996 declined approximately 13.9% or $1.1 million from the fourth quarterhalf of 1995.
This decline is primarily due to the reduction of outstanding financing by
approximately $40.8 million from March 31, 1996.
Management has taken and continues to take action to reduce Financing Costs including (i)further
by improving financing rates (as discussed below in the
liquidity section, the Company completed its refinancing plan
during the second quarter of 1996 which will provide the Company improved financing rates)1996) and (ii) reducingcontinuing to reduce
working capital requirements through the implementationincreased
utilization of the Company's new inventory forecasting
system, product standardization and the strengthening of its
methods of monitoring and enforcing contract payment terms.
Income taxes. The Company had an income tax provision of
$3.4$6.2 million in the first sixnine months of 1996 (representing
an effective tax rate of 43.0%) compared with an income tax
provisionbenefit of $4.3$0.5 million in the first sixnine months of 1995
(representing an effective tax rate of 40.8%). The increase in the effective tax
rate was due to the Company's lower earnings level increasing the impact
of certain nondeductible expenses such as goodwill amortization.
9
1995.
Net income. Net income increased $1.2$12.4 million in the secondthird
quarter of 1996 compared to the secondthird quarter of 1995. Net
income declined $1.9increased $10.5 million in the first sixnine months of
1996 compared to the first sixnine months of 1995. Excluding
nonrecurring restructuring expenses net of taxes, net income
has declined $1.2increased $9.6 million in the secondthird quarter of 1996 compared
to the secondthird quarter of 1995 and has declined $5.9increased $3.6 million in
the first sixnine months of 1996 compared to the first sixnine
months of 1995. The decline wasincrease is due to an increase in SG&A expenses and
Financing Costs. Due tothe impact of the
initiatives previously discussed to improve the Company has
shown improvement from its fourth quarter 1995 net lossearnings of
$9.0 million (which
loss included a $3.4 million nonrecurring restructuring charge, net of taxes),
to net income of $1.5 million in the first quarter of 1996 and to net income of
$2.9 million in the second quarter of 1996.Company. Although the trend has been favorable and the
Company continues to pursue thethese initiatives, previously
discussed in an effort to continue improvement in the earnings of the Company, the impact of these initiatives on
net income cannot be assured.
Financial Condition, Liquidity and Capital Resources
Liquidity. The Company's liquidity position improved
significantly during the first sixnine months of 1996 from the
fourth quarter of 1995. The improvement was the result of
increased earnings, reduced working capital requirements and
the availabilitycompletion of additional financing sources.the Company's refinancing plan in the
second quarter of 1996.
During May 1996 the Company refinanced its $425.0 million
revolving credit facility (Senior Credit Facility) by issuing
$150.0 million of 10.875% Senior Subordinated Notes (Notes),
increasing its available receivables financing facility to
$150.0 million from $75.0 million (Receivables Financing
Facility) and entering into a new $225.0 million revolving
credit facility (New Senior Credit Facility).
The Notes were issued on May 29, 1996, and mature on June 1,
2006. Interest on the Notes is payable semi-annually on June
1 and December 1. The Notes are redeemable at the Company's
option subject to certain restrictions. The Notes are
unconditionally guaranteed on a joint and several basis by
all direct and indirect subsidiaries of the Company, other
than O&M Funding Corp. (OMF).
During the second quarter, the Company entered into interest
rate swap agreements to convert a portion of the fixed
interest rates under the Notes to a variable rate. Under the
swap agreements, the Company pays the counterparties a
variable rate based on the six-month London Interbank Offered
Rate (LIBOR) and the counterparties pay the Company a fixed
interest rate, ranging from 7.29% to 7.32%. The total
notional amount of these interest rate swaps was $100.0
million at JuneSeptember 30, 1996.
The terms of the Receivables Financing Facility are
substantially the same as the agreement entered into in
December 1995 other than an increase in the available funds
to $150.0 million and the extension of the term of the
agreement to May 1999. At JuneSeptember 30, 1996 the Company had
received $141.0$132.9 million under the Receivables Financing
Facility.
The New Senior Credit Facility expires in May 2001 with
interest based on LIBOR or the Prime Rate. The New Senior
Credit Facility limits the amount of indebtedness the Company
may incur,
10
requires the Company to maintain certain financial
covenants including covenants related to tangible net worth,
cash flow coverage, current ratio, leverage ratio and fixed
charge coverage ratio and restricts the ability of the
Company to materially alter the character of the business
through consolidation, merger or purchase or sale of assets.
The Company expects that borrowings under the Notes, the New
Senior Credit Facility and proceeds from the Receivables
Financing Facility will be sufficient to fund its working
capital needs and long-term strategic growth plans, although
this cannot be assured. Available financing at JuneSeptember 30,
1996 was approximately $185.0$193.1 million.
Working Capital Management. During the first sixnine months of
1996 the Company has made significant improvement in working
capital management. Inventory turnover has improved from 8.2
times in the fourth quarter of 1995 to 8.79.0 times in the first quarter of 1996, to 8.9 times in the secondthird
quarter of 1996. This improvement was due to the
continued implementation of the Company's client/server-based
forecasting system scheduled for completion duringwhich was substantially completed by the
third quarter of 1996 and the limitationreduction of the number of SKUs
from multiple manufacturers distributed by the Company. The
Company has also reduced accounts receivable days sales
outstanding from 40.0 in the fourth quarter of 1995 to 39.436.7
in the secondthird quarter of 1996. This reduction has been
achieved through strengthening the Company's methods of
monitoring and enforcing contract payment terms and basing a
portion of its sales force incentives on reducing days sales
outstanding.
Capital Expenditures. Capital expenditures were
approximately $7.1$10.0 million in the first sixnine months of 1996,
of which approximately $5.8$8.0 million were for computer
systems, including the continued conversion of certain
applications from a mainframe computer system to
client/server technology. Approximately 75%
of the Company's $25.0 million of capital expenditures planned for 1996 will be
for IT. The Company expects to continue to
make this level of investment for the foreseeable future.
These capital expenditures are expected to be funded through
cash flow from operations.
Inflation. Inflation has not had a significant effect on the
Company's results of operations or financial condition.
11
Part II. Other Information
Item 1. Legal Proceedings
In May 1994, Owens & Minor, Inc. (the Company) acquired all
the outstanding capital stock of Stuart Medical Inc. (Stuart)
through a statutory share exchange. Accordingly, Stuart, as
a wholly ownedwholly-owned subsidiary of Owens & Minor, Inc., retains all
of its pre-acquisition liabilities subject to Stuart's and
Owens & Minor, Inc.'sMinor's contractual rightrights of indemnification from
the former shareholders of Stuart for certain pre-acquisition
liabilities (including liabilities arising from the spinal
implant litigation discussed below) and the liability
insurance coverage
discussed below.
Beginning in 1994 and continuing to the present, Stuart has
been named as a defendant along with product manufacturers,
healthcare providers and others in approximately 200
lawsuits, filed in various federal and state courts by
multiple plaintiffs based on allegedwith claims for approximately 380
different plaintiffs. These suits allege liability for
injuries allegedly attributable to the implantation of
internal spinal fixation devices distributed by a specialty
products division of Stuart from the early 1980s tothrough
December 1992 and prior to OwenOwens & Minor, Inc.'sMinor's acquisition of
Stuart in 1994. OfNot all of the approximately 200
cases namingplaintiffs suing Stuart there are approximately 100 plaintiffswere
implanted with the type of orthopedic screwdevice distributed by
Stuart.Stuart; approximately 70% or more of the plaintiffs are
implanted with different manufacturers' devices, distributed
by other companies. Most of the cases seek monetary damages
in varying amounts. The great majority of these cases allege
compensatory and punitive damages in an unspecified amount
stated to be in excess of the jurisdictional minimum for the
courts in which such cases are filed. A smaller group of
cases seek specified damages ranging from $50,000 to $15,000,000. Many
of these cases also seek the creation of a fund for medical
research, medical monitoring, prejudgment and post-judgment
interest and costs of suit. Substantially allA significant number of these
cases have been transferred to, and consolidated for pretrial
proceedings, in the Eastern District of Pennsylvania in
Philadelphia under the style MDL Docket No. 1014: In re
Orthopedic Bone Screw Products Liability Litigation.
All such cases are inAlthough the preliminary stages. In addition,
a motionnumber of lawsuits filed has been filed to add Stuart and a number of other parties as
additional defendants in approximately 10 additional lawsuits involving multiple
plaintiffs. Owens & Minor, Inc.generally
stagnant over the last quarter, the Company believes that
Stuart may be named as a defendant in additional similar
lawsuits in the future.future as statutes of limitations approach
expiration.
Stuart did not manufacture the internal spinal fixation
devices. Based upon management's analysis of indemnification
agreements between Stuart and the manufacturer involved, Owens & Minor, Inc.the
Company believes that Stuart is entitled to indemnification
by the manufacturer of the devices with respect to certain of
the claims
alleging defects in the products.litigation. The cases described above are
being defended by the manufacturer's and Stuart's respective
insurance carriers.
Owens & Minor, Inc. and Stuart are also contractually
entitled to indemnification by the former shareholders of
Stuart for any liabilities and related expenses incurred by
Owens & Minor, Inc. or Stuart in connection with the
foregoing litigation. Because of the preliminary status of
the lawsuits, Owens & Minor, Inc.the Company is unable at this time to determine
with certainty whether Stuart may be held liable.
In
the event Stuart were to be held liable, Owens & Minor, Inc.The Company believes that Stuart's available insurance
coverage together with the indemnification rights discussed
above are adequate to cover any losses should they occur, and
accordingly has created no reserve therefor. Owens & Minor, Inc.The Company is
not aware of any uncertainty as to the availability and
adequacy of such insurance or indemnification, although there
can be no assurance that the manufacturers and former
12
shareholders will have sufficient financial resources in the
future to meet such obligations. Owens & Minor, Inc.The Company believes that,
with or without regard to such indemnification or insurance,
the likelihood is remote that any liability resulting from
suchthe orthopedic bone screw litigation would have a material
adverse effect on the Company's financial condition or
results of operations.
The Company is party to various other legal actions that are
ordinary and incidental to its business. While the outcome of
legal actions cannot be predicted with certainty, management
believes the outcome of these proceedings will not have a
material adverse effect on the Company's financial condition
or results of operations.
Item 2. Changes in Securities
On May 29, 1996, Owens & Minor, Inc. issued $150 million of
10.875% Senior Subordinated Notes. Section 4.06 of the
Indenture governing the Notes restricts the Company's ability
to make certain payments, including the payment of dividends
on Owens & Minor, Inc.'s Common Stock. See Section 4.06 of
the Indenture dated as of May 29, 1996 attached as Exhibit
4(a) hereto.
In addition, Section 7.12 of the Company's $225 million
revolving credit facility prohibits Owens & Minor, Inc. from
paying dividends unless it is in compliance with certain
financial covenants and is otherwise not in default either
prior to or after giving effect to any such dividend. See
Section 7.12 of the Credit Agreement dated as of May 24, 1996
attached as Exhibit 4(b) hereto.
Item 4. Submission of Matters to a Vote of Shareholders
The following matters were submitted to a vote of Owens & Minor, Inc.'s
shareholders at its annual meeting held on April 30, 1996 with the voting
results designated below each such matter:
(1) Election of Vernard W. Henley, G. Gilmer Minor, III and R.E Cabell, Jr.,
as directors of Owens & Minor, Inc. for a three-year term and election of
Josiah Bunting, III as a director of Owens & Minor, Inc. for a one-year
term.
Votes Against Broker
Directors Votes For or Withheld Abstentions Non-Votes
- --------- ---------- ------------- ----------- ---------
Vernard W. Henley 33,880,253 139,918 0 0
G. Gilmer Minor, III 33,920,876 99,295 0 0
R. E. Cabell, Jr. 33,879,128 141,043 0 0
Josiah Bunting, III 33,902,542 117,629 0 0
(2) Ratification of the appointment of KPMG Peat Marwick LLP as Owens &
Minor, Inc.'s independent auditors.
Votes Against Broker
Votes For or Withheld Abstentions Non-Votes
---------- ------------- ----------- ---------
33,908,260 53,132 58,779 0
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 (a) Indenture dated as of May 29, 1996 among10 (e) First Amendment to Owens & Minor, Inc., as
Issuer, Owens & Minor Medical, Inc., National Medical Supply
Corporation, Owens & Minor West, Inc., Koley's Medical Supply, Inc.,
Lyons Physician Supply Company, A. Kuhlman & Co., Stuart Medical,
Inc., as Guarantors, and Crestar Bank, as Trustee
4 (b) Credit Agreement dated as of May 24, 1996 by and among Owens & Minor,
Inc., certain of its subsidiaries, various banks and lending
institutions identified on the signature pages hereto, NationsBank,
N.A., as agent, Bank of America National Trust and Savings Association
and Crestar Bank, as co-agents, and NationsBank, N.A., as
administrative agent
10 (a) Amended and Restated Purchase and Sale Agreement dated as of May 28,
1996 among Owens & Minor Medical, Inc., Stuart Medical, Inc., Owens &
Minor, Inc. and O&M Funding Corp.
10 (b) Amended and Restated Receivables Purchase Agreement dated as of May
28, 1996 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 (c) Amended and Restated Parallel Asset Purchase Agreement dated as of May
28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., the Parallel Purchasers from time to time party hereto
and Bank of America National Trust and Savings Association
27 Financial Data Schedule
Supplemental Executive Retirement Plan,
effective July 30, 1996.
(b) Reports on Form 8-K
There were no reportsThe company filed a Current Report on Form 8-K fordated
August 28, 1996, Items 5 and 7, with respect to the
three month period ended June
30, 1996.
14
issuance of a press release relating to certain
management changes, including the resignation and
replacement of Owens and Minor, Inc.'s chief financial
officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Owens & Minor, Inc.
(Registrant)
Date August 9,November 12, 1996 /s/ GLENN J. DOZIER
-------------- -----------------------------------
Glenn J. DozierAnn Greer Rector
Ann Greer Rector
Senior Vice President,
Finance,
Chief Financial Officer
Date August 9, 1996 /s/ ANN GREER RETOR
--------------- ----------------------------------
Ann Greer Rector
Vice President, Controller
Exhibit Index
Exhibit #
4 (a) Indenture dated as of May 29, 1996 among10 (e) First Amendment to Owens & Minor, Inc., as Issuer,
Owens & Minor Medical, Inc., National Medical Supply Corporation, Owens &
Minor West, Inc., Koley's Medical Supply, Inc., Lyons Physician Supply
Company, A. Kuhlman & Co., Stuart Medical, Inc., as Guarantors, and
Crestar Bank, as Trustee
4 (b) Credit Agreement dated as of May 24, 1996 by and among Owens & Minor,
Inc., certain of its subsidiaries, various banks and lending institutions
identified on the signature pages hereto, NationsBank, N.A., as agent,
Bank of America National Trust and Savings Association and Crestar Bank,
as co-agents, and NationsBank, N.A., as administrative agent
10 (a) Amended and Restated Purchase and Sale Agreement dated as of May 28, 1996
among Owens & Minor Medical, Inc., Stuart Medical, Inc., Owens & Minor,
Inc. and O&M Funding Corp.
10 (b) Amended and Restated Receivables Purchase Agreement dated as of May 28,
1996 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 (c) Amended and Restated Parallel Asset Purchase Agreement dated as of May
28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., the Parallel Purchasers from time to time party hereto and
Bank of America National Trust and Savings Association
27 Financial Data Schedule Supplemental
Executive Retirement Plan,
effective July 30, 1996.