UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number 1-9810
OWENS & MINOR, INC.
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(Exact name of Registrant as specified in its charter)
Virginia 54-1701843
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Cox Road, Glen Allen, Virginia 23060
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(Address of principal executive offices) (Zip Code)
Post Office Box 27626, Richmond, Virginia 23261-7626
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(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 November 6, 1998 was 32,567,642 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Consolidated Statements of Income - Three Months and Nine
Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information 20
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 768,416 $ 785,778 $ 2,365,344 $ 2,312,123
Cost of goods sold 687,412 706,897 2,119,720 2,080,099
---------- ---------- ---------- ----------
Gross margin 81,004 78,881 245,624 232,024
---------- ---------- ---------- ----------
Selling, general and administrative
expenses 58,542 57,582 180,563 172,616
Depreciation and amortization 4,583 4,507 13,556 13,044
Interest expense, net 3,799 3,928 10,602 11,634
Discount on accounts receivable
securitization 884 1,649 3,870 5,002
Distributions on mandatorily
redeemable preferred securities 1,785 -- 2,720 --
Nonrecurring restructuring expenses -- -- 11,200 --
---------- ---------- ---------- ----------
Total expenses 69,593 67,666 222,511 202,296
---------- ---------- ---------- ----------
Income before income taxes 11,411 11,215 23,113 29,728
Income tax provision 4,793 4,737 9,591 12,486
---------- ---------- ---------- ----------
Net income 6,618 6,478 13,522 17,242
Dividends on preferred stock -- 1,293 1,898 3,881
---------- ---------- ---------- ----------
Net income attributable to common stock $ 6,618 $ 5,185 $ 11,624 $ 13,361
========== ========== ========== ==========
Net income per common share - basic $ 0.20 $ 0.16 $ 0.36 $ 0.42
Net income per common share - diluted $ 0.20 $ 0.16 $ 0.36 $ 0.42
Weighted average shares - basic 32,532 32,090 32,472 32,003
Weighted average shares - diluted 38,951 32,120 32,561 32,054
Cash dividends per common share $ 0.050 $ 0.045 $ 0.150 $ 0.135
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data) September 30, December 31,
1998 1997
---------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 3,648 $ 583
Accounts and notes receivable, net
of allowance of $6,363 and $6,312 198,997 187,878
Merchandise inventories 324,517 285,529
Other current assets 22,530 25,274
----------- ----------
Total current assets 549,692 499,264
Property and equipment, net of accumulated
depreciation of $46,061 and $41,500 25,339 26,628
Goodwill, net of accumulated
amortization of $21,707 and $18,298 159,412 162,821
Other assets, net 28,632 23,850
=========== ==========
Total assets $ 763,075 $ 712,563
=========== ==========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 247,213 $ 224,072
Accrued payroll and related liabilities 9,566 7,840
Other accrued liabilities 63,613 33,563
----------- ----------
Total current liabilities 320,392 265,475
Long-term debt 150,000 182,550
Accrued pension and retirement plans 5,881 5,237
----------- ----------
Total liabilities 476,273 453,262
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust, holding solely convertible
debentures of Owens & Minor, Inc. 132,000 -
----------- ----------
Shareholders' equity
Preferred stock, par value $100
per share; authorized - 10,000
shares
Series A; Participating Cumulative
Preferred Stock; none issued - -
Series B; Cumulative Preferred Stock;
4.5%, convertible; issued
and outstanding - none and 1,150
shares - 115,000
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 32,532 shares and 32,213
shares 65,064 64,426
Paid-in capital 11,121 8,005
Retained earnings 78,617 71,870
----------- ----------
Total shareholders' equity 154,802 259,301
=========== ==========
Total liabilities and shareholders'
equity $ 763,075 $ 712,563
=========== ==========
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands) Nine Months Ended
(Unaudited) September 30,
------------------------
1998 1997
---------- -----------
Operating activities
Net income $ 13,522 $ 17,242
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 13,556 13,044
Refund of federal income taxes 15,910 -
Restructuring provision 11,200 -
Provision for losses on accounts and notes
receivable 387 183
Provision for LIFO reserve 2,497 2,150
Changes in operating assets and liabilities:
Accounts and notes receivable (11,506) (32,657)
Merchandise inventories (41,485) (3,093)
Accounts payable 59,428 38,778
Net change in other current assets
and current liabilities 8,844 7,546
Other, net 516 (819)
---------- -----------
Cash provided by operating activities 72,869 42,374
---------- -----------
Investing activities
Additions to property and equipment (5,180) (6,290)
Additions to computer software (3,650) (3,115)
Proceeds from sale of property and equipment 65 1,838
---------- ----------
Cash used for investing activities (8,765) (7,567)
---------- ----------
Financing activities
Net proceeds from issuance of mandatorily redeemable
preferred securities 127,319 -
Repurchase of preferred stock (115,000) -
Reduction of long-term debt (32,550) (13,358)
Other financing (36,287) (15,088)
Cash dividends paid (7,638) (8,205)
Proceeds from exercise of stock options 3,117 1,772
---------- ----------
Cash used for financing activities (61,039) (34,879)
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,065 (72)
Cash and cash equivalents at beginning of year 583 743
========== ==========
Cash and cash equivalents at end of period $ 3,648 $ 671
========== ==========
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 (the "Company") as of September 30, 1998 and the
consolidated results of operations for the three and nine month periods and
cash flows for the nine month periods ended September 30, 1998 and 1997.
2. Interim Results of Operations
The results of operations for interim periods are not necessarily indicative
of the results to be expected for the full year.
3. Interim Gross Margin Reporting
The Company uses estimated gross margin rates to determine the cost of goods
sold during interim periods. To improve the accuracy of its estimated gross
margins for interim reporting purposes, the Company takes physical inventory
counts at selected distribution centers. Reported results of operations for
the three and nine month periods ended September 30, 1998 and 1997 reflect
the results of such counts, to the extent that they are materially different
from estimated amounts. Management will continue a program of interim
physical inventories at selected distribution centers to the extent it deems
appropriate to ensure the accuracy of interim reporting and to minimize
year-end adjustments.
4. Nonrecurring Restructuring Expenses
In the second quarter of 1998, the Company recorded a nonrecurring charge of
$11.2 million, or $6.6 million after tax, related to the impact of the
cancellation of its medical/surgical distribution contract with Columbia/HCA
Healthcare Corporation ("Columbia/HCA/ HCA"). The restructuring plan includes
reductions in warehouse space and in the number of employees in those
divisions which have the highest volume of business with Columbia/HCA
facilities. The following table sets forth the activity in the restructuring
reserve through September 30, 1998:
(In millions)
Balance at
Restructuring September
Provision Charges 30, 1998
--------- ------- --------
Losses under lease commitments $ 4.2 $0.1 $ 4.1
Asset write-offs 4.0 - 4.0
Employee separations 2.5 0.2 2.3
Other 0.5 - 0.5
--------- ------- --------
Total $11.2 $ 0.3 $10.9
========= ======= ========
Approximately nineteen employees were terminated during the third quarter in
connection with the restructuring plan.
6
5. 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 Three Months Ended Nine Months Ended
data) September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
Numerator:
Net income $ 6,618 $ 6,478 $ 13,522 $ 17,242
Preferred stock dividends $ - $ 1,293 $ 1,898 $ 3,881
----------------------------------------------------------------------------
Numerator for basic net income
per common share - net income
available to common
shareholders 6,618 5,185 11,624 13,361
Distributions on mandatorily
redeemable preferred
securities, net of tax 1,035 - - -
----------------------------------------------------------------------------
Numerator for diluted net income
per common share-net income
available to common share-
holders after assumed
conversions $7,653 $ 5,185 $11,624 $13,361
----------------------------------------------------------------------------
Denominator:
Denominator for basic net
income per common share -
weighted average shares 32,532 32,090 32,472 32,003
Effect of dilutive securities:
Mandatorily redeemable
preferred securities 6,400 - - -
Stock options and
restricted stock 19 30 89 51
----------------------------------------------------------------------------
Denominator for diluted net
income per common
share - adjusted weighted
average
shares 38,951 32,120 32,561 32,054
----------------------------------------------------------------------------
Net income per common share -
basic $ 0.20 $ 0.16 $ 0.36 $ 0.42
Net income per common share -
diluted $ 0.20 $ 0.16 $ 0.36 $ 0.42
----------------------------------------------------------------------------
6. Mandatorily Redeemable Preferred Securities
In May 1998, Owens & Minor Trust I (the "Trust"), a statutory business trust
sponsored and wholly-owned by Owens & Minor, Inc. ("O&M"), issued 2,640,000
shares of $2.6875 Term Convertible Securities, Series A (the "Securities")
for aggregate proceeds of $132.0 million. Each Security has a liquidation
value of $50. The net proceeds were invested by the Trust in 5.375% Junior
Subordinated Convertible Debentures of O&M (the "Debentures"). The Debentures
are the sole assets of the Trust. O&M applied substantially all of the net
proceeds of the Debentures to repurchase 1,150,000 shares of its Series B
Cumulative Preferred Stock at its par value.
The Securities accrue and pay quarterly cash distributions at an annual rate
of 5.375% of the liquidation value. Each Security is convertible into 2.4242
shares of the common stock of O&M at the holder's option prior to May 1,
2013. The Securities are mandatorily redeemable upon the maturity of the
Debentures on April 30, 2013, and may be redeemed in whole or in part after
May 1, 2001. The obligations of the Trust, as provided under the terms of the
Securities, are fully and unconditionally guaranteed by O&M.
7
7. Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information
for: O&M; on a combined basis, the guarantors of O&M's 10 7/8% Senior
Subordinated 10-year Notes (the "Notes") (all of the wholly-owned
subsidiaries of O&M except for O&M Funding Corp. ("OMF") and the Trust); and
OMF and the Trust, O&M's non-guarantors of the Notes. Separate financial
statements of the guarantor subsidiaries are not presented because the
guarantors are jointly, severally and unconditionally liable under the
guarantees and O&M believes the condensed consolidating financial statements
are more meaningful in understanding the financial position and results of
operations and cash flows of the guarantor subsidiaries.
8
Condensed Consolidating Financial Statements ( 1 )
(In thousands)
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 2,365,344 $ - $ - $ 2,365,344
Cost of goods sold - 2,119,720 - - 2,119,720
- -------------------------------------------------------------------------------------------------------------------------------
Gross margin - 245,624 - - 245,624
- -------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 5 180,374 184 - 180,563
Depreciation and amortization - 13,556 - - 13,556
Interest expense, net 12,998 (2,396) - - 10,602
Intercompany interest expense, net (8,758) 19,999 (10,153) (1,088) -
Discount on accounts receivable securitization - 62 3,808 - 3,870
Distributions on mandatorily redeemable preferred
securities - - 2,720 - 2,720
Nonrecurring restructuring expenses - 11,200 - - 11,200
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,245 222,795 (3,441) (1,088) 222,511
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,245) 22,829 3,441 1,088 23,113
Income tax provision (benefit) (1,719) 9,456 1,397 457 9,591
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (2,526) 13,373 2,044 631 13,522
Dividends on preferred stock 1,898 - - - 1,898
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ (4,424) $ 13,373 $ 2,044 $ 631 $ 11,624
- -------------------------------------------------------------------------------------------------------------------------------
September 30, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ - $ 2,312,123 $ - $ - $ 2,312,123
Cost of goods sold - 2,080,099 - - 2,080,099
- -------------------------------------------------------------------------------------------------------------------------------
Gross margin - 232,024 - - 232,024
- -------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses - 172,484 132 - 172,616
Depreciation and amortization - 13,044 - - 13,044
Interest expense, net 13,575 (1,941) - - 11,634
Intercompany interest expense, net (11,646) 20,565 (7,835) (1,084) -
Discount on accounts receivable securitization - 7 4,995 - 5,002
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,929 204,159 (2,708) (1,084) 202,296
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,929) 27,865 2,708 1,084 29,728
Income tax provision (benefit) (791) 11,698 1,124 455 12,486
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,138) 16,167 1,584 629 17,242
Dividends on preferred stock 3,881 - - - 3,881
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stock $ (5,019) $ 16,167 $ 1,584 $ 629 $ 13,361
- -------------------------------------------------------------------------------------------------------------------------------
( 1 ) Certain amounts in the 1997 condensed consolidating financial statements
have been reclassified to conform to the 1998 presentation.
9
Condensed Consolidating Financial Statements
(In thousands) Owens & Guarantor Non-guarantor
September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 3,142 $ 1 $ - $ 3,648
Accounts and notes receivable, net - 83,171 115,826 - 198,997
Merchandise inventories - 324,517 - - 324,517
Intercompany advances, net 153,953 93,515 1,183 (248,651) -
Other current assets - 22,530 - - 22,530
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 154,458 526,875 117,010 (248,651) 549,692
Property and equipment, net - 25,339 - - 25,339
Goodwill, net - 159,412 - - 159,412
Intercompany investments 303,941 15,001 136,083 (455,025) -
Other assets, net 10,120 18,512 - - 28,632
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 468,519 $ 745,139 $ 253,093 $ (703,676) $ 763,075
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 247,213 $ - $ - $ 247,213
Accrued payroll and related liabilities - 9,566 - - 9,566
Intercompany advances, net - 153,953 95,329 (249,282) -
Other accrued liabilities 5,135 57,106 1,372 - 63,613
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,135 467,838 96,701 (249,282) 320,392
Long-term debt 150,000 - - - 150,000
Intercompany long-term debt 136,083 - - (136,083) -
Accrued pension and retirement plans - 5,881 - - 5,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,218 473,719 96,701 (385,365) 476,273
- ------------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - - - - -
Common stock 65,064 - 4,083 (4,083) 65,064
Paid-in capital 11,121 299,858 15,001 (314,859) 11,121
Retained earnings (cumulative deficit) 101,116 (28,438) 5,308 631 78,617
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 177,301 271,420 24,392 (318,311) 154,802
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 468,519 $ 745,139 $ 253,093 $ (703,676) $ 763,075
- ------------------------------------------------------------------------------------------------------------------------------------
10
Condensed Consolidating Financial Statements
(In thousands) Owens & Guarantor Non-guarantor
December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 77 $ 1 $ - $ 583
Accounts and notes receivable, net - 100,336 87,542 - 187,878
Merchandise inventories - 285,529 - - 285,529
Intercompany advances, net 176,335 68,016 - (244,351) -
Other current assets - 25,274 - - 25,274
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 176,840 479,232 87,543 (244,351) 499,264
Property and equipment, net - 26,628 - - 26,628
Goodwill, net - 162,821 - - 162,821
Intercompany investments 299,858 15,001 - (314,859) -
Other assets, net 6,180 17,670 - - 23,850
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 482,878 $ 701,352 $ 87,543 $ (559,210) $ 712,563
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ - $ 224,072 $ - $ - $ 224,072
Accrued payroll and related liabilities - 7,840 - - 7,840
Intercompany advances, net - 176,335 68,759 (245,094) -
Other accrued liabilities 2,480 30,563 520 - 33,563
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,480 438,810 69,279 (245,094) 265,475
Long-term debt 182,550 - - - 182,550
Accrued pension and retirement plans - 5,237 - - 5,237
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 185,030 444,047 69,279 (245,094) 453,262
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock 115,000 - - - 115,000
Common stock 64,426 - - - 64,426
Paid-in capital 8,005 299,858 15,001 (314,859) 8,005
Retained earnings (cumulative deficit) 110,417 (42,553) 3,263 743 71,870
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 297,848 257,305 18,264 (314,116) 259,301
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 482,878 $ 701,352 $ 87,543 $ (559,210) $ 712,563
- --------------------------------------------------------------------------------------------------------------------------------
11
Condensed Consolidating Financial Statements
(In thousands)
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating Activities
Net income (loss) $ (2,526) $ 13,373 $ 2,044 $ 631 $ 13,522
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 13,556 - - 13,556
Refund of federal income taxes - 15,910 - - 15,910
Restructuring provision - 11,200 - - 11,200
Provision for losses on accounts and notes receivable - 212 175 - 387
Provision for LIFO reserve - 2,497 - - 2,497
Changes in operating assets and liabilities
Accounts and notes receivable - 16,953 (28,459) - (11,506)
Merchandise inventories - (41,485) - - (41,485)
Accounts payable - 59,428 - - 59,428
Net change in other current assets
and current liabilities 4,030 3,965 849 - 8,884
Other, net 866 393 (112) (631) 516
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 2,370 96,002 (25,503) - 72,869
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment - (5,180) - - (5,180)
Additions to computer software - (3,650) - - (3,650)
Proceeds from sale of property and equipment - 65 - - 65
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (8,765) - - (8,765)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net proceeds from issuance of manditorily redeemable
preferred securities (4,681) - 132,000 - 127,319
Repurchase of preferred stock 115,000) - - - (115,000)
Reduction of long-term debt (32,550) - - - (32,550)
Change in intercompany advances 154,382 (47,885) (106,497) - -
Other financing - (36,287) - - (36,287)
Cash dividends paid (7,638) - - - (7,638)
Proceeds from exercise of stock options 3,117 - - - 3,117
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (2,370) (84,172) 25,503 - (61,039)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents - 3,065 - - 3,065
Cash and cash equivalents at beginning of year 505 77 1 - 583
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 505 $ 3,142 $ 1 $ - $ 3,648
- -----------------------------------------------------------------------------------------------------------------------------------
12
Condensed Consolidating Financial Statements
(In thousands)
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating Activities
Net income (loss) $ (1,138) $ 16,167 $ 1,584 $ 629 $ 17,242
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization - 13,044 - - 13,044
Provision for losses on accounts and notes receivable - 58 125 - 183
Provision for LIFO reserve - 2,150 - - 2,150
Changes in operating assets and liabilities
Accounts and notes receivable - (6,122) (26,535) - (32,657)
Merchandise inventories - (3,093) - - (3,093)
Accounts payable - 38,778 - - 38,778
Net change in other current assets
and current liabilities 3,731 3,900 (85) - 7,546
Other, net 679 (349) (520) (629) (819)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 3,272 64,533 (25,431) - 42,374
- ----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment - (6,290) - - (6,290)
Additions to computer software - (3,115) - - (3,115)
Proceeds from sale of property and equipment - 1,838 - - 1,838
- ----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities - (7,567) - - (7,567)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Reduction of long-term debt (2,309) (11,049) - - (13,358)
Change in intercompany advances 5,470 (30,901) 25,431 - -
Other financing - (15,088) - - (15,088)
Cash dividends paid (8,205) - - - (8,205)
Proceeds from exercise of stock options 1,772 - - - 1,772
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (3,272) (57,038) 25,431 - (34,879)
- ----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents - (72) - - (72)
Cash and cash equivalents at beginning of year 505 237 1 - 743
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 505 $ 165 $ 1 $ - $ 671
- ----------------------------------------------------------------------------------------------------------------------------------
13
Item 2. Owens & Minor, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following management discussion and analysis describes material changes in
the Company's financial condition since December 31, 1997. Trends of a material
nature are discussed to the extent known and considered relevant. This
discussion should be read in conjunction with the consolidated financial
statements, related notes thereto and management's discussion and analysis of
financial condition and results of operations included in the Company's 1997
Annual Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 1997.
General
On May 26, 1998, Columbia/HCA informed the Company of its intention to cancel
its medical/surgical supply contract. The Company and Columbia/HCA have agreed
upon a plan for transition of the Columbia/HCA business. This plan has resulted
in a substantial reduction in purchases by Columbia/HCA from the Company,
beginning in the third quarter of 1998. The remaining Columbia/HCA business is
expected to transfer from the Company by December 31, 1998. For the first nine
months of 1998 and 1997, approximately 11% and 12%, respectively, of the
Company's net sales were to Columbia/HCA facilities and for the third quarter of
1998 and 1997, approximately 9% and 12%, respectively, of the Company's net
sales were to Columbia/HCA facilities. In the second quarter of 1998, the
Company implemented a restructuring plan to downsize warehouse operations in
those divisions with the highest volumes of sales to Columbia/HCA facilities. To
offset the loss of sales due to the contract cancellation, the Company has
continued its commitment to profitable sales growth and has entered into new
agreements in the third quarter of 1998 that will provide opportunities for such
future growth, although such growth cannot be assured.
Results of Operations
Third quarter and first nine months of 1998 compared with 1997
Net sales. Net sales decreased 2.2% to $768.4 million in the third quarter of
1998 from $785.8 million in the third quarter of 1997. This decrease is
primarily due to the impact of the cancellation of the Company's distribution
contract with Columbia/HCA. Net sales increased 2.3% to $2.37 billion in the
first nine months of 1998 from $2.31 billion in the first nine months of 1997.
The increase in sales was a result of both increased penetration of existing
accounts and new customer contracts.
Gross margin. Gross margin as a percentage of net sales increased to 10.5% in
the third quarter of 1998 from 10.0% in the third quarter of 1997. Gross margin
as a percentage of net sales increased 10.4% in the first nine months of 1998
from 10.0% in the first nine months of 1997. This improvement reflects the
Company's continued emphasis on supply chain initiatives with key suppliers as
well as inventory purchasing opportunities. The Company will continue to focus
on improving margin levels through continued emphasis on supply chain
initiatives.
14
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses as a percentage of net sales increased to 7.6%
for the third quarter of 1998, compared to 7.3% for the third quarter of 1997.
The increase was the result of both lower sales for the quarter than in 1997 as
a result of the termination of the Columbia/HCA contract; and increased spending
for information systems, as the Company continued to use information technology
to control costs, through more extensive use of electronic data interchange
(EDI) in transactions with both customers and suppliers.
For the first nine months of 1998, SG&A expenses as a percentage of net sales
increased to 7.6% from 7.5% in the first nine months of 1997, in part as a
result of increased information technology spending, including $2.4 million of
expenses for Year 2000, compared to $1.1 million for the same period in 1997.
Depreciation and amortization. Depreciation and amortization increased by 1.7%
in the third quarter of 1998 compared to the third quarter of 1997 and increased
by 3.9% in the first nine months of 1998 compared to the first nine months of
1997. This increase was due primarily to the Company's continued investment in
information technology, including capital spending in the first nine months of
1998 for systems upgrades of $1.9 million associated with Year 2000 issues. The
Company anticipates similar increases in depreciation and amortization for the
remainder of 1998 associated with additional capital investment in information
technology.
Interest expense, net, and discount on accounts receivable securitization
(financing costs). Financing costs decreased to $4.7 million in the third
quarter of 1998 from $5.6 million in the third quarter of 1997, net of finance
charge income of $0.6 million and $0.5 million, respectively. Financing costs
decreased to $14.5 million in the first nine months of 1998 from $16.6 million
in the first nine months of 1997, net of finance charge income of $2.2 million
and $2.3 million, respectively. This reduction has been a result of improved
cash flow from operations, which has enabled the Company to reduce borrowings
for the 1998 third quarter and year to date, compared to the same periods in
1997, as well as lower effective interest rates for the first nine months of
1998 compared to the first nine months of 1997. The Company reduced outstanding
debt, excluding the impact of the accounts receivable securitization, by
approximately $67.6 million in the first nine months of 1998. Included in cash
flow from operations is a $15.9 million refund of federal income tax resulting
from a tax method change. Beginning with the tax year ending December 31, 1997,
the Company received permission from the Internal Revenue Service to change its
method of accounting for last-in first-out inventory. The cumulative effect of
this adjustment generated a net operating loss in the tax year ended December
31, 1997. This refund resulted in an increase in current deferred taxes payable,
and has no effect on the income tax provision for the current periods. The
Company expects to continue to manage its financing costs by continuing its
working capital reduction initiatives and management of interest rates, although
the future results of these initiatives cannot be assured.
15
Distributions on mandatorily redeemable preferred securities and dividends on
preferred stock. In May 1998, the Trust issued $132 million of the Securities.
O&M applied substantially all of the net proceeds to repurchase and retire
1,150,000 shares of its Series B Cumulative Preferred Stock at its par value.
The Securities accrue and pay cash distributions quarterly at an annual rate of
5.375% of the liquidation value of $50. As of September 30, 1998, the Company
had accrued $1.2 million of distributions related to these Securities.
Nonrecurring restructuring expenses. As a result of the Columbia/HCA contract
termination, the Company recorded a nonrecurring restructuring charge of $11.2
million, or $6.6 million after taxes, in the second quarter of 1998, to reflect
the Company's plan to downsize warehouse operations in those divisions with the
highest volumes of sales to Columbia/HCA facilities. The restructuring plan
includes reductions in warehouse space and in the number of employees in those
divisions which had the highest volume of business with Columbia/HCA facilities.
In the third quarter of 1998, $0.3 million was charged against this liability.
Income taxes. The Company had an income tax provision of $9.6 million in the
first nine months of 1998 compared with $12.5 million in the first nine months
of 1997 and an effective tax rate of 41.5%, compared to 42.0% for the same
period in 1997.
Net income. Net income for the third quarter of 1998 increased slightly from the
same period in 1997 as improvements discussed in gross margin and financing
costs were offset by the distributions on mandatorily redeemable preferred
securities. However, net income attributable to common stock increased 27.6%,
reflecting the positive effect of the issuance of the Securities and the
retirement of the Series B Cumulative Preferred Stock discussed above. Net
income decreased $3.7 million in the first nine months of 1998 compared to the
first nine months of 1997. The decrease was due to the impact of the
restructuring charge discussed above. Excluding the effect of the restructuring
charge, net income increased 16.7% and net income per basic and diluted common
share increased to $0.56 and $0.55, respectively, for the first nine months of
1998 compared to $0.42 per basic and diluted common share for the first nine
months of 1997. This increase was primarily due to the improvements previously
discussed in gross margin and reduced financing costs. Although the trend,
excluding the effect of the restructuring charge, has been favorable and the
Company continues to pursue initiatives to improve profitability, the future
impact on net income cannot be assured.
Financial Condition, Liquidity and Capital Resources
Liquidity. The Company's liquidity improved during the first nine months of
1998. Outstanding financing (excluding the impact of the off balance sheet
accounts receivable securitization) was reduced by $67.6 million to $225.0
million at September 30, 1998 from $292.6 million at December 31, 1997. The
reduction was due to improvements in cash flow from operations as discussed
above. The capitalization ratio at September 30, 1998, including the Securities
as equity and excluding the effect of the accounts receivable securitization,
was 44.0% compared to 53.0% at December 31, 1997. This improvement was primarily
the result of the reduction in outstanding financing.
16
In May 1998, O&M repurchased all of its outstanding Series B Cumulative
Preferred Stock, financing the repurchase with substantially all the proceeds of
the $132.0 million of Securities issued by the Trust. Management believes that
these transactions will result in lower overall costs of capital.
The Company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth, although this cannot be
assured. At September 30, 1998, the Company had approximately $225.0 million of
unused credit under its revolving credit facility and $47.7 million under its
receivables financing facility.
Working Capital Management. During the third quarter of 1998, the Company's
working capital increased compared to the third quarter of 1997. The Company's
accounts receivable days sales outstanding (excluding the impact of the off
balance sheet accounts receivable securitization) increased to 32.4 at September
30, 1998 from 31.6 at September 30, 1997. This increase was primarily caused by
the transition of most of the Columbia/HCA business toward the end of the
quarter. Inventory turnover decreased to 8.3 times in the third quarter of 1998
from 9.6 times in the third quarter of 1997 as a result of inventory purchasing
opportunities.
Capital Expenditures. Capital expenditures were approximately $8.8 million in
the first nine months of 1998, of which approximately $7.2 million was for
computer hardware and software, including $1.9 million for system upgrades for
the Year 2000 initiative. The Company expects to continue to invest in
technology, including system upgrades, as the most cost-effective method of
reducing operating expenses. These capital expenditures are expected to be
funded through cash flow from operations.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective for all
quarters of fiscal years beginning after June 15, 1999. Management believes the
effect on the Company of the adoption of this standard will be limited to
financial statement presentation and disclosure and will not have a material
effect on financial condition or results of operations.
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. The SOP also
requires that costs related to the preliminary stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. This Statement is effective for
fiscal years beginning after December 15, 1998. The Company has adopted this
standard effective January 1, 1998. Adoption of this standard did not have a
material impact on the Company's financial condition or results of operations.
17
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 amends the disclosure
requirements of SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. This Statement
standardizes the disclosure requirements of SFAS No. 87 and SFAS No. 106 and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. This Statement is effective for fiscal years beginning
after December 15, 1997. Management believes the effect on the Company of
adoption of this standard will be limited to changes in financial statement
presentation and disclosure.
Forward-looking Statements
Certain statements in this discussion constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, including, but not
limited to, general economic and business conditions, competition, changing
trends in customer profiles, outcomes of outstanding litigation, and changes in
government regulations. Although the Company believes that its expectations with
respect to the forward-looking statements are based upon reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results, performance or achievements of the Company
will not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Readiness for Year 2000
The Year 2000 (Y2K) issue is the result of computer programs being written using
two-digit, rather than four-digit, year dates. The Company's computer hardware,
software, and devices with imbedded technology that are time-sensitive may
recognize a date code using "00" as the year 1900 rather than the year 2000.
This situation could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other normal business
activities.
The Company has divided its Y2K efforts into three main areas:
o computer hardware and software;
o other systems and equipment, such as telephone equipment, scanning equipment
and alarm systems; and
o suppliers and customers.
Computer Hardware and Software. In 1997, the Company completed its assessment of
its computer hardware and software, and developed a strategy of remediation.
This strategy includes retirement of outdated software, and replacement or
repair of the remaining software and hardware. The Company began repair and
replacement efforts in 1997, and expects that they will be substantially
complete by mid-1999, prior to any currently anticipated impact on its computer
hardware and software. Testing of repairs is expected to be substantially
complete by mid-1999, but will continue through the end of that year. The
Company estimates that, as of September 30, 1998, it had completed approximately
90% of the repair, 20% of replacement, and 30% of the testing that it believes
will be necessary to fully address potential Y2K issues relating to its computer
hardware and software.
18
Other Systems and Equipment. The Company has completed an inventory and
assessment of non-computer related systems and equipment at its operating
divisions, and is expects to complete a similar inventory and assessment at its
corporate offices by the end of 1998. The Company believes that the impact on
operations of potential noncompliance for these systems and equipment is
minimal. During the third quarter of 1998, the Company started a program of
replacement and repair of non-compliant systems and equipment, and expects this
effort to be complete by late 1999.
Suppliers and Customers. The Company has contacted its significant suppliers to
determine the extent to which the Company is vulnerable to the suppliers'
failure to remediate their Y2K compliance issues. Of the suppliers representing
approximately 90% of the Company's sales, 87% have responded, and, of those
responding, 93% have indicated that they have either remedied their Y2K
compliance issues, or plan to do so before the end of 1999.
During third quarter 1998, the Company has also contacted its largest customers
to determine their level of Y2K readiness. Many customers have not yet responded
to these inquiries, or have not responded with sufficient detail for the Company
to determine whether they will be Y2K compliant on a timely basis. The Company
is continuing its efforts to ascertain the readiness of its customers but, since
this readiness cannot be assured, the Company is in the process of developing
contingency plans to address the most likely risks of non-compliance.
The Company estimates that the cost of its Y2K remediation efforts will total
approximately $8.0 million of operating expenses and $6.0 million of capital
expenditures. These expenditures will be funded from operating cash flows.
Through September 30, 1998, the Company had incurred approximately $4.5 million
of expenses and $2.5 million of capital spending related to its Y2K efforts, of
which $0.9 million and $1.0 million were incurred in third quarter of 1998. For
the remainder of 1998 and for 1999, the Company expects to incur approximately
$3.5 million of expenses and $3.5 million of capital spending. Other non-Y2K
information technology efforts have not been significantly delayed by Y2K
initiatives.
The Company has begun, but not yet completed, an analysis of the operational
problems and costs that would be reasonably likely to result from the failure by
the Company and certain third parties to complete efforts necessary to achieve
Y2K compliance on a timely basis. The most reasonably likely worst case scenario
has not yet been identified, nor have contingency plans been developed for this
scenario. The Company currently plans to complete its analysis and contingency
planning by late 1999.
19
The Company presently believes that the Y2K issue will not pose significant
operational problems for the Company. However, if all Y2K issues are not
properly identified or if assessment, remediation, and testing are not completed
on a timely basis, there can be no assurance that the Y2K issue will not
materially adversely impact the Company's results of operations or adversely
affect the Company's relationships with customers, suppliers, or others.
Additionally, there can be no assurance that Y2K non-compliance by other
entities will not have a material adverse impact on the Company's systems or
results of operations.
The costs of the Company's Y2K efforts and the dates on which the Company
believes it will complete these efforts are based upon management's current
estimates. These estimates used numerous assumptions regarding future events,
including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate and actual results could differ materially
from those currently anticipated.
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against the Company are described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Through September 30, 1998, there have been no material developments in any
legal proceedings reported in such Annual Report.
Item 5. Other Information
The Company has amended its Bylaws to make Article 14.1 of the Virginia Stock
Corporation Act (the Control Share Acquisitions Statute) inapplicable to shares
of any class of capital stock of the Company and to add certain advance notice
requirements applicable to proposals by shareholders for nominees for election
as directors of the Company and for other matters sought to be brought before an
annual meeting of shareholders.
The text of the amended Bylaws of the Company is filed as Exhibit 3(b) to this
Report, which is incorporated by reference. The amendments are described below.
Article I, Section 1.9 of the Company's By-laws provides that for a shareholder
to bring a matter properly before an annual meeting of shareholders, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Company. To be timely, a shareholder's notice must be given, either by
personal delivery or by United States registered or certified mail, postage
prepaid, to the Secretary of the Company not later than 90 days before the
anniversary of the date of the first mailing of the Company's proxy statement
for the immediately preceding annual meeting -- such date is December 31, 1998
with respect to the 1999 annual meeting. In no event shall the public
announcement of an adjournment or postponement of an annual meeting or the fact
that an annual meeting is held after the anniversary of the preceding annual
meeting commence a new time period for the giving of a shareholder's notice as
described above.
A shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the meeting (i) a brief description of the
business desired to be brought before the meeting, including the complete text
of any resolutions to be presented at the meeting with respect to such business,
and the reasons for conducting such business at the meeting, (ii) the name and
address of record of the shareholder proposing such business and the beneficial
owner, if any, on whose behalf the proposal is made, (iii) the class and number
of shares of the Company that are owned by the shareholder and such beneficial
owner, (iv) a representation that the shareholder is a holder of record of
shares of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to propose such business, and (v) any material
interest of the shareholder and such beneficial owner in such business. In the
event that a shareholder attempts to bring business before a meeting without
complying with the foregoing procedure, such business shall not be transacted at
such meeting.
20
In the case of nominations for the election of directors, Article I, Section 1.8
of the Company's By-laws provides that any shareholder entitled to vote in the
election of directors may nominate one or more persons for election as directors
only at an annual meeting and if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States registered or certified mail, postage prepaid, to the
Secretary of the Company not later than 90 days before the anniversary of the
date of the first mailing of the Company's proxy statement for the immediately
preceding year's annual meeting -- such date is December 31, 1998 with respect
to the 1999 annual meeting. In no event shall the public announcement of an
adjournment or postponement of an annual meeting or the fact that an annual
meeting is held after the anniversary of the preceding annual meeting commence a
new time period for the giving of a shareholder's notice as described above.
Each notice shall set forth (i) the name and address of record of the
shareholder who intends to make the nomination, the beneficial owner, if any, on
whose behalf the nomination is made and of the person or persons to be
nominated, (ii) the class and number of shares of the Company that are owned by
the shareholder and such beneficial owner, (iii) a representation that the
shareholder is a holder of record of shares of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, (iv) a description of
all arrangements, understandings or relationships between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder, and (v) such other information regarding each nominee proposed by
such shareholder as would be required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required to be disclosed, pursuant to the proxy rules of the Securities and
Exchange Commission, had the nominee been nominated, or intended to be
nominated, by the Board of Directors, and shall include a consent signed by each
such nominee to serve as a director of the Company if so elected. In the event
that a shareholder attempts to nominate any person without complying with the
foregoing procedure, such person shall not be nominated and shall not stand for
election at such meeting.
21
For purposes of including a shareholder proposal in the Company's proxy
statement for the 1999 annual meeting of shareholders, the shareholder must also
comply with the requirements set forth under the section "Other Information
Shareholder Proposals" of the Company's 1998 Proxy Statement, dated March 13,
1998, which section is incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3(b). Amended and Restated Bylaws of the Company, as
amended
27. Financial Data Schedule - September 30, 1998 and 1997
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Owens & Minor, Inc.
(Registrant)
Date November 12, 1998 /s/ Ann Greer Rector
------------------------ ------------------------------
Ann Greer Rector
Senior Vice President &
Chief Financial Officer
Date November 12, 1998 /s/ Olwen B. Cape
------------------------ ------------------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
23
Exhibits Filed with SEC
Exhibit #
---------
3(b). Amended and Restated Bylaws of the Company, as amended
27. Financial Data Schedule - September 30, 1998 and 1997