UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-9810
Owens & Minor, Inc.
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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 October 29, 1999, was 32,709,265 shares.
1
Owens & Minor, Inc. and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three Months and
Nine Months Ended September 30, 1999 and 1998 3
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- ---------------- -------------
Net sales $ 811,917 $ 768,416 $ 2,325,361 $ 2,365,344
Cost of goods sold 726,620 687,412 2,080,988 2,119,720
------------ ------------ -------------- -------------
Gross margin 85,297 81,004 244,373 245,624
------------ ------------ -------------- -------------
Selling, general and administrative expenses 61,623 58,542 179,709 180,563
Depreciation and amortization 4,919 4,583 14,064 13,556
Interest expense, net 2,702 3,799 8,833 10,602
Discount on accounts receivable securitization 1,527 884 3,316 3,870
Distributions on mandatorily redeemable
preferred securities 1,773 1,785 5,321 2,720
Nonrecurring restructuring expenses -- -- (1,000) 11,200
------------ ------------ -------------- -------------
Total expenses 72,544 69,593 210,243 222,511
------------ ------------ -------------- -------------
Income before income taxes 12,753 11,411 34,130 23,113
Income tax provision 5,611 4,793 15,017 9,591
------------ ------------ -------------- -------------
Net income 7,142 6,618 19,113 13,522
Dividends on preferred stock -- -- -- 1,898
------------ ------------ -------------- -------------
Net income attributable to common stock $ 7,142 $ 6,618 $ 19,113 $ 11,624
============ ============ ============== =============
Net income per common share-basic $ 0.22 $ 0.20 $ 0.59 $ 0.36
============ ============ ============== =============
Net income per common share-diluted $ 0.21 $ 0.20 $ 0.57 $ 0.36
============ ============ ============== =============
Cash dividends per common share $ 0.06 $ 0.05 $ 0.17 $ 0.15
============ ============ ============== =============
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,
1999 1998
------------- ------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 580 $ 546
Accounts and notes receivable, net
of allowance of $6,637 and $6,273 186,339 213,765
Merchandise inventories 320,558 275,094
Other current assets 10,967 14,816
-------------- -------------
Total current assets 518,444 504,221
Property and equipment, net of accumulated
depreciation of $50,612 and $45,812 26,714 25,608
Goodwill, net of accumulated
amortization of $26,494 and $22,843 212,698 158,276
Other assets, net 32,717 29,663
-------------- -------------
Total assets $ 790,573 $ 717,768
============== =============
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 265,859 $ 206,251
Accrued payroll and related liabilities 3,562 8,974
Other accrued liabilities 57,773 53,749
-------------- -------------
Total current liabilities 327,194 268,974
Long-term debt 150,000 150,000
Accrued pension and retirement plans 6,060 5,668
-------------- -------------
Total liabilities 483,254 424,642
-------------- -------------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust, holding solely convertible debentures
of Owens & Minor, Inc. 132,000 132,000
-------------- -------------
Shareholders' equity
Preferred stock, par value $100 per share;
authorized - 10,000 shares
Series A; Participating Cumulative
Preferred Stock; none issued -- --
Common stock, par value $2 per share;
authorized - 200,000 shares; issued and
outstanding - 32,694 shares and 32,618 shares 65,388 65,236
Paid-in capital 12,766 12,280
Retained earnings 97,165 83,610
-------------- -------------
Total shareholders' equity 175,319 161,126
-------------- -------------
Total liabilities and shareholders' equity $ 790,573 $ 717,768
============== =============
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,
------------------------------------
1999 1998
---------------- ----------------
Operating activities
Net income $ 19,113 $ 13,522
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,064 13,556
Nonrecurring restructuring provision (1,000) 11,200
Deferred income taxes -- 15,910
Provision for LIFO reserve 1,629 2,497
Provision for losses on accounts and notes receivable 656 387
Changes in operating assets and liabilities:
Accounts and notes receivable 41,582 (11,506)
Merchandise inventories (18,654) (41,485)
Accounts payable 67,927 59,428
Net change in other current assets
and current liabilities (680) 8,844
Other, net 2,064 516
---------------- ----------------
Cash provided by operating activities 126,701 72,869
---------------- ----------------
Investing activities
Cash paid for acquisition of business (85,112) --
Additions to property and equipment (7,263) (5,180)
Additions to computer software (6,477) (3,650)
Other, net (1,143) 65
---------------- ----------------
Cash used for investing activities (99,995) (8,765)
---------------- ----------------
Financing activities
Net proceeds from issuance of mandatorily redeemable
preferred securities -- 127,319
Repurchase of preferred stock -- (115,000)
Reduction of long-term debt -- (32,550)
Other financing, net (21,194) (36,287)
Cash dividends paid (5,558) (7,638)
Proceeds from exercise of stock options 80 3,117
---------------- ----------------
Cash used for financing activities (26,672) (61,039)
---------------- ----------------
Net increase in cash and cash equivalents 34 3,065
Cash and cash equivalents at beginning of period 546 583
---------------- ----------------
Cash and cash equivalents at end of period $ 580 $ 3,648
================ ================
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which are comprised only of
normal recurring accruals and the use of estimates) necessary to present
fairly the consolidated financial position of Owens & Minor, Inc. and its
wholly-owned subsidiaries (O&M or the company) as of September 30, 1999 and
the consolidated results of operations for the three and nine month periods
and cash flows for the nine month periods ended September 30, 1999 and
1998.
2. Interim Results of Operations
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
3. Interim Gross Margin Reporting
The company uses estimated gross margin rates to determine the cost of
goods sold during interim periods. To improve the accuracy of its estimated
gross margins for interim reporting purposes, the company takes physical
inventory counts at selected distribution centers. Reported results of
operations for the three and nine month periods ended September 30, 1999
and 1998 reflect the results of such counts, to the extent that they are
materially different from estimated amounts. Management will continue a
program of interim physical inventories at selected distribution centers to
the extent it deems appropriate to ensure the accuracy of interim reporting
and to minimize year-end adjustments.
4. Acquisition
On July 30, 1999, the company acquired certain net assets of Medix, Inc.
(Medix), a distributor of medical/surgical supplies, for a purchase price
of approximately $85 million. Headquartered in Waunakee, Wisconsin, Medix's
customers are primarily in the Midwest and include acute care hospitals,
long-term care facilities and clinics. Medix's net sales were approximately
$184 million for its fiscal year ended October 2, 1998. The acquisition has
been accounted for by the purchase method and, accordingly, the operating
results of Medix have been included in the company's consolidated financial
statements since the date of acquisition. Assuming the acquisition had been
made at the beginning of the periods, consolidated net sales, on a pro
forma basis, would have been approximately $2.44 billion and $2.51 billion
for the nine months ended September 30, 1999 and 1998, respectively.
Consolidated net income and earnings per share on a pro forma basis would
not have been materially different from the results reported.
The company paid cash of approximately $70 million and assumed debt of
approximately $15 million, which was paid off as part of the closing
transaction. In connection with the acquisition, management adopted a plan
for integration of the businesses which includes closure of some Medix
facilities and consolidation of certain administrative functions. An
accrual of approximately $3 million was established to provide for the
costs of this plan, including anticipated losses under lease commitments of
approximately $2 million and other anticipated costs of approximately $1
million, including employee separations, asset write-offs and other costs.
There were no significant charges to the reserve during the three month
period ended September 30, 1999. The purchase price has been preliminarily
allocated based on estimated fair values of the acquired net assets at the
date of acquisition pending final adjustments of certain acquired balances.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of approximately $58 million has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years.
6
5. Restructuring Reserve
As a result of the Columbia/HCA Healthcare Corporation contract
cancellation in the second quarter of 1998, the company recorded a
nonrecurring restructuring charge to downsize operations. In the second
quarter of 1999 the company re-evaluated its estimate of the remaining
costs to be incurred in connection with the restructuring plan, and reduced
the reserve by $1.0 million. The following table sets forth the activity in
the restructuring reserve during the third quarter of 1999:
(In thousands) Balance at
Balance at September 30,
June 30, 1999 Charges 1999
------------------------------------- --------------------- ------------- -----------------
Losses under lease commitments $ 2,992 $ 409 $ 2,583
Asset write-offs 3,418 32 3,386
Employee separations 80 45 35
Other 482 5 477
------------------------------------- --------------------- ------------- -----------------
Total $ 6,972 $ 491 $ 6,481
------------------------------------- --------------------- ------------- -----------------
6. Net Income per Common Share
The following sets forth the computation of basic and diluted net income
per common share:
(In thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
Numerator:
Net income $ 7,142 $ 6,618 $ 19,113 $ 13,522
Preferred stock dividends -- -- -- 1,898
- ---------------------------------------------------------------------------------------------------------------------
Numerator for basic net income per common
share - net income attributable to common stock 7,142 6,618 19,113 11,624
Distributions on convertible mandatorily redeemable
preferred securities, net of income taxes 993 1,035 2,980 --
- ---------------------------------------------------------------------------------------------------------------------
Numerator for diluted net income per common share -
net income attributable to common stock after
assumed conversions $ 8,135 7,653 22,093 11,624
- ---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic net income per
common share - weighted average shares 32,582 32,532 32,570 32,472
Effect of dilutive securities:
Conversion of mandatorily redeemable preferred
securities 6,400 6,400 6,400 --
Stock options and restricted stock 120 19 125 89
Denominator for diluted net income per common
share - adjusted weighted average shares and
assumed conversions 39,102 38,951 39,095 32,561
- ---------------------------------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.22 $ 0.20 $ 0.59 $ 0.36
Net income per common share - diluted $ 0.21 $ 0.20 $ 0.57 $ 0.36
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7
7. Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information
for: Owens & Minor, Inc.; on a combined basis, the guarantors of Owens &
Minor, Inc.'s 10 7/8% Senior Subordinated 10-year Notes (Notes); and the
non-guarantor subsidiaries of the Notes. Separate financial statements of
the guarantor subsidiaries are not presented because the guarantors are
jointly, severally and unconditionally liable under the guarantees and the
company believes the condensed consolidating financial information is more
meaningful in understanding the financial position, results of operations
and cash flows of the guarantor subsidiaries.
8
Condensed Consolidating Financial Information
(In thousands)
For the three months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
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Statements of Operations
Net sales $ -- $ 811,917 $ -- $ -- $ 811,917
Cost of goods sold -- 726,620 -- -- 726,620
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Gross margin -- 85,297 -- -- 85,297
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Selling, general and administrative expenses 4 61,431 188 -- 61,623
Depreciation and amortization -- 4,919 -- -- 4,919
Interest expense, net 4,217 (1,515) -- -- 2,702
Intercompany interest expense, net (1,731) 7,623 (4,674) (1,218) --
Discount on accounts receivable securitization -- 8 1,519 -- 1,527
Distributions on mandatorily redeemable preferred -- -- 1,773 -- 1,773
securities
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Total expenses 2,490 72,466 (1,194) (1,218) 72,544
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Income (loss) before income taxes (2,490) 12,831 1,194 1,218 12,753
Income tax provision (benefit) (1,095) 5,548 622 536 5,611
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Net income (loss) $ (1,395) $ 7,283 $ 572 $ 682 $ 7,142
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For the three months ended Owens & Guarantor Non-guarantor
September 30, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
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Statements of Operations
Net sales $ -- $ 768,416 $ -- $ -- $ 768,416
Cost of goods sold -- 687,412 -- -- 687,412
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 81,004 -- -- 81,004
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses -- 58,485 57 -- 58,542
Depreciation and amortization -- 4,583 -- -- 4,583
Interest expense, net 4,403 (604) -- -- 3,799
Intercompany interest expense, net (2,053) 6,942 (3,801) (1,088) --
Discount on accounts receivable securitization -- 22 862 -- 884
Distribution on mandatorily redeemable preferred -- -- 1,785 -- 1,785
securities
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 2,350 69,428 (1,097) (1,088) 69,593
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,350) 11,576 1,097 1,088 11,411
Income tax provision (benefit) (952) 4,843 445 457 4,793
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Net income (loss) $ (1,398) $ 6,733 $ 652 $ 631 $ 6,618
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9
Condensed Consolidating Financial Information
(In thousands)
Nine months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Net sales $ -- $ 2,325,361 $ -- $ -- $ 2,325,361
Cost of goods sold -- 2,080,988 -- -- 2,080,988
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margin -- 244,373 -- -- 244,373
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 9 179,205 495 -- 179,709
Depreciation and amortization -- 14,064 -- -- 14,064
Interest expense, net 12,503 (3,670) -- -- 8,833
Intercompany interest expense, net (5,158) 19,085 (12,709) (1,218) --
Discount on accounts receivable securitization -- 24 3,292 -- 3,316
Distributions on mandatorily redeemable preferred -- -- 5,321 -- 5,321
securities
Nonrecurring restructuring expenses -- (1,000) -- -- (1,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,354 207,708 (3,601) (1,218) 210,243
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,354) 36,665 3,601 1,218 34,130
Income tax provision (benefit) (3,236) 16,058 1,659 536 15,017
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,118) $ 20,607 $ 1,942 $ 682 $ 19,113
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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
Distribution on mandatorily redeemable preferred -- -- 2,720 -- 2,720
securities
Nonrecurring restructuring expenses -- 11,200 -- -- 11,200
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,245 222,795 (3,441) (1,088) 222,511
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,245) 22,829 3,441 1,088 23,113
Income tax provision (benefit) (1,719) 9,456 1,397 457 9,591
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (2,526) 13,373 2,044 631 13,522
Dividends on preferred stock 1,898 -- -- -- 1,898
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Net income (loss) attributable to common stock $ (4,424) $ 13,373 $ 2,044 $ 631 $ 11,624
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10
Condensed Consolidating Financial Information
(In thousands)
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Owens & Guarantor
Minor, Inc. Subsidiaries Non-guarantor Eliminations Consolidated
Subsidiaries
September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 507 $ 72 $ 1 $ -- $ 580
Accounts and notes receivable, net -- 97,709 88,630 -- 186,339
Merchandise inventories -- 320,558 -- -- 320,558
Intercompany advances, net 142,866 63,169 1,183 (207,218) --
Other current assets -- 10,967 -- -- 10,967
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 143,373 492,475 89,814 (207,218) 518,444
Property and equipment, net -- 26,714 -- -- 26,714
Goodwill, net -- 212,698 -- -- 212,698
Intercompany investments 305,441 15,001 136,083 (456,525) --
Other assets, net 8,953 22,482 1,282 -- 32,717
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Total assets $ 457,767 $ 769,370 $ 227,179 $ (663,743) $ 790,573
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ -- $ 265,859 $ -- $ -- $ 265,859
Accrued payroll and related liabilities -- 3,562 -- -- 3,562
Intercompany advances, net -- 141,222 66,678 (207,900) --
Other accrued liabilities 4,976 51,109 1,688 -- 57,773
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Total current liabilities 4,976 461,752 68,366 (207,900) 327,194
Long-term debt 150,000 -- -- -- 150,000
Intercompany long-term debt 136,083 -- -- (136,083) --
Accrued pension and retirement plans -- 6,060 -- -- 6,060
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Total liabilities 291,059 467,812 68,366 (343,983) 483,254
- ----------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor, -- -- 132,000 -- 132,000
Inc.
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Shareholders' equity
Common stock 65,388 -- 4,083 (4,083) 65,388
Paid-in capital 12,766 301,358 15,001 (316,359) 12,766
Retained earnings 88,554 200 7,729 682 97,165
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Total shareholders' equity 166,708 301,558 26,813 (319,760) 175,319
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Total liabilities and shareholders' equity $ 457,767 $ 769,370 $ 227,179 $ (663,743) $ 790,573
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11
Condensed Consolidating Financial Information
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor
December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheets
Assets
Current assets
Cash and cash equivalents $ 505 $ 40 $ 1 $ -- $ 546
Accounts and notes receivable, net -- 100,148 113,617 -- 213,765
Merchandise inventories -- 275,094 -- -- 275,094
Intercompany advances, net 148,992 90,698 1,183 (240,873) --
Other current assets -- 14,816 -- -- 14,816
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 149,497 480,796 114,801 (240,873) 504,221
Property and equipment, net -- 25,608 -- -- 25,608
Goodwill, net -- 158,276 -- -- 158,276
Intercompany investments 303,941 15,001 136,083 (455,025) --
Other assets, net 9,784 19,879 -- -- 29,663
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Total assets $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ -- $ 206,251 $ -- $ -- $ 206,251
Accrued payroll and related liabilities -- 8,974 -- -- 8,974
Intercompany advances, net -- 148,992 92,509 (241,501) --
Other accrued liabilities 1,394 50,994 1,361 -- 53,749
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,394 415,211 93,870 (241,501) 268,974
Long-term debt 150,000 -- -- -- 150,000
Intercompany long-term debt 136,083 -- -- (136,083) --
Accrued pension and retirement plans -- 5,668 -- -- 5,668
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 287,477 420,879 93,870 (377,584) 424,642
- ----------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust, holding
solely convertible debentures of Owens & Minor,
Inc. -- -- 132,000 -- 132,000
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 65,236 -- 4,083 (4,083) 65,236
Paid-in capital 12,280 299,858 15,001 (314,859) 12,280
Retained earnings (accumulated deficit) 98,229 (21,177) 5,930 628 83,610
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 175,745 278,681 25,014 (318,314) 161,126
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 463,222 $ 699,560 $ 250,884 $ (695,898) $ 717,768
- ----------------------------------------------------------------------------------------------------------------------------------
12
Condensed Consolidating Financial Statements
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
For the nine months ended Owens & Guarantor Non-guarantor
September 30, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Operating activities
Net income (loss) $ (4,118) $ 20,607 $ 1,942 $ 682 $ 19,113
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization -- 14,064 -- -- 14,064
Nonrecurring restructuring provision -- (1,000) -- -- (1,000)
Provision for LIFO reserve -- 1,629 -- -- 1,629
Provision for losses on accounts and notes receivable -- 389 267 -- 656
Changes in operating assets and liabilities:
Accounts and notes receivable -- 16,862 24,720 -- 41,582
Merchandise inventories -- (18,654) -- -- (18,654)
Accounts payable -- 67,927 -- -- 67,927
Net change in other current assets
and current liabilities 3,582 (4,589) 327 -- (680)
Other, net 1,389 1,024 333 (682) 2,064
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Cash provided by operating activities 853 98,259 27,589 -- 126,701
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities
Cash paid for acquisition of business -- (85,112) -- -- (85,112)
Additions to property and equipment -- (7,263) -- -- (7,263)
Additions to computer software -- (6,477) -- -- (6,477)
Other, net -- 57 (1,200) -- (1,143)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities -- (98,795) (1,200) -- (99,995)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities
Change in intercompany advances 4,627 21,762 (26,389) -- --
Other financing, net -- (21,194) -- -- (21,194)
Cash dividends paid (5,558) -- -- -- (5,558)
Proceeds from exercise of stock options 80 -- -- -- 80
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (851) 568 (26,389) -- (26,672)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2 32 -- -- 34
Cash and cash equivalents at beginning of period 505 40 1 -- 546
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 507 $ 72 $ 1 $ -- $ 580
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13
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
Nonrecurring restructuring provision -- 11,200 -- -- 11,200
Deferred income taxes -- 15,910 -- -- 15,910
Provision for LIFO reserve -- 2,497 -- -- 2,497
Provision for losses on accounts and notes
receivable -- 212 175 -- 387
Changes in operating assets and liabilities:
Accounts and notes receivable -- 16,953 (28,459) -- (11,506)
Merchandise inventories -- (41,485) -- -- (41,485)
Accounts payable -- 59,428 -- -- 59,428
Net change in other current assets
and current liabilities 4,030 3,965 849 -- 8,844
Other, net 866 393 (112) (631) 516
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 2,370 96,002 (25,503) -- 72,869
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to property and equipment -- (5,180) -- -- (5,180)
Additions to computer software -- (3,650) -- -- (3,650)
Other, net -- 65 -- -- 65
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities -- (8,765) -- -- (8,765)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities
Net proceeds from issuance of mandatorily
redeemable preferred securities (4,681) -- 132,000 -- 127,319
Repurchase of preferred stock (115,000) -- -- -- (115,000)
Reduction of long-term debt (32,550) -- -- -- (32,550)
Change in intercompany advances 154,382 (47,885) (106,497) -- --
Other financing, net (36,287) -- -- (36,287)
Cash dividends paid (7,638) -- -- -- (7,638)
Proceeds from exercise of stock options 3,117 -- -- -- 3,117
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Cash provided by (used for) financing activities (2,370) (84,172) 25,503 -- (61,039)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents -- 3,065 -- -- 3,065
Cash and cash equivalents at beginning of period 505 77 1 -- 583
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 505 $ 3,142 $ 1 $ -- 3,648
- -----------------------------------------------------------------------------------------------------------------------------------
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management discussion and analysis describes material changes in
the financial condition of Owens & Minor, Inc. and its wholly-owned subsidiaries
(O&M or the company) since December 31, 1998. Trends of a material nature are
discussed to the extent known and considered relevant. This discussion should be
read in conjunction with the consolidated financial statements, related notes
thereto and management's discussion and analysis of financial condition and
results of operations included in the company's 1998 Annual Report on Form 10-K
for the year ended December 31, 1998.
General
On July 30, 1999, the company acquired certain net assets of Medix, Inc.
(Medix), a distributor of medical/surgical supplies, for approximately $85
million. The company paid cash of approximately $70 million and assumed debt of
approximately $15 million, which was paid off as part of the closing
transaction. The excess of the purchase price over the fair value of the net
identifiable assets acquired of approximately $58 million has been recorded as
goodwill and is being amortized on a straight-line basis over 40 years. This
acquisition strengthens the company's presence in the Midwest and is expected to
provide opportunities for increased sales in this geographic area. Medix's net
sales were approximately $184 million for their fiscal year ended October 2,
1998. The success of the acquisition will depend in part on the company's
ability to integrate and capture synergies in the combined businesses.
Financial Condition, Liquidity and Capital Resources
Liquidity. The company acquired Medix on July 30, 1999. This acquisition was
funded through the off balance sheet accounts receivable securitization
facility. As a result of the acquisition, combined outstanding debt and off
balance sheet accounts receivable securitization levels increased by
approximately $52.0 million to $277.0 million at September 30, 1999, from $225.0
million at December 31, 1998. Excluding the impact of the acquisition, the
combined outstanding debt and off balance sheet accounts receivable
securitization levels were reduced by $33.0 million. This reduction was due to
the positive impact of cash flow from operations.
In May 1998, O&M repurchased all of its outstanding Series B Cumulative
Preferred Stock, financing the repurchase with substantially all the net
proceeds of the $132.0 million of Mandatorily Redeemable Preferred Securities
(Securities) issued by Owens & Minor Trust I (Trust). These transactions reduced
the company's overall cost of capital for the first nine months of 1999 compared
to the same period of 1998.
The company expects that its available financing will be sufficient to fund its
working capital needs and long-term strategic growth, although this cannot be
assured. At September 30, 1999, the company had $225.0 million of unused credit
under its revolving credit facility and approximately $10.9 million under its
receivables financing facility.
Working Capital Management. The company's working capital decreased by $44.0
million from December 31, 1998, to $191.3 million at September 30, 1999. This
decline is due, in part, to the Medix acquisition, as well as timing of payments
on higher levels of inventory needed to support sales growth. The company
continues to focus on the management of inventory levels, and inventory turnover
increased to 9.5 times for the quarter from 8.4 times in the fourth quarter of
1998.
15
Capital Expenditures. Capital expenditures were approximately $13.7 million in
the first nine months of 1999, of which approximately $11.6 million was for
computer hardware and software, including $2.5 million for system upgrades to
prepare for Year 2000. The company expects to continue to support strategic
initiatives, to invest in technology including system upgrades, and improve
operational efficiency. These capital expenditures are expected to be funded
through cash flow from operations.
Results of Operations
Third quarter and first nine months of 1999 compared with 1998
Net sales. Net sales increased 5.7% to $811.9 million in the third quarter of
1999 from $768.4 million in the third quarter of 1998. This increase resulted
from the inclusion of two months' of Medix sales in the quarter which accounted
for a 4% increase, as well as new customer contracts and increased penetration
of existing accounts. Net sales decreased 1.7% to $2.33 billion in the first
nine months of 1999 from $2.37 billion in the first nine months of 1998
principally because the loss of Columbia/HCA business in mid 1998 was not fully
offset by new business until third quarter,1999.
Gross margin. Gross margin as a percentage of net sales remained consistent at
10.5% in the third quarter of 1999 compared to the third quarter of 1998. Gross
margin as a percentage of net sales increased to 10.5% in the first nine months
of 1999 from 10.4% for the first nine months of 1998. This level of gross margin
as a percentage of net sales reflects the company's continued emphasis on supply
chain initiatives with key suppliers, as well as the lower sales base during the
first quarter of 1999.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses were 7.6% of net sales for the third quarter of
1999, unchanged from the third quarter of 1998. SG&A expenses increased to 7.7%
of net sales for the first nine months of 1999 from 7.6% for the first nine
months of 1998. This increase was the result of a lower sales base for the first
nine months of 1999 compared to 1998.
Depreciation and amortization. Depreciation and amortization expense for the
quarter increased by approximately 7% from 1998, due to increased goodwill
amortization resulting from the Medix acquisition.
Interest expense, net, and discount on accounts receivable securitization.
Interest expense, net, decreased to $2.7 million in the third quarter of 1999
from $3.8 million in the third quarter of 1998 and decreased to $8.8 million in
the first nine months of 1999 from $10.6 million in the first nine months of
1998. The decrease for both periods was primarily a result of higher collections
of customer finance charges. The discount on accounts receivable securitization
increased to $1.5 million in the third quarter of 1999 from $0.9 million in the
third quarter of 1998, but decreased to $3.3 million for the first nine months
of 1999 from $3.9 million for the same period in 1998. The increase for the
quarter was a result of the Medix acquisition which was funded through this
facility. The decrease for the nine month period resulted from lower average
levels of financing under the facility. The company expects to continue to
manage these costs by continuing its working capital reduction initiatives and
management of interest rate risks, although the future results of these
initiatives cannot be assured.
Distributions on mandatorily redeemable preferred securities and dividends on
preferred stock. In May 1998, the Trust issued $132.0 million of the Securities.
O&M applied substantially all of the net proceeds from this transaction to
repurchase all of its outstanding Series B Cumulative Preferred Stock. As of
September 30, 1999, the company had accrued $1.2 million of distributions
related to these Securities.
16
Nonrecurring restructuring expenses. As a result of the Columbia/HCA contract
cancellation in the second quarter of 1998, the company recorded a nonrecurring
restructuring charge of approximately $6.6 million, after taxes, to downsize
operations. In the second quarter of 1999, the company re-evaluated its
restructuring reserve. Since the actions under this plan had resulted in lower
projected total costs than originally anticipated, the company recorded a
reduction in the reserve which increased net income by approximately $0.6
million, after taxes.
Income taxes. The income tax provision was $15.0 million in the first nine
months of 1999 compared with $9.6 million in the same period in 1998. The
effective tax rate was 44.0%, compared to 41.5% for the same period in 1998.
This increase results primarily from reduced deductibility of expenses related
to certain nontaxable income.
Net income. Net income increased to $7.1 million in the third quarter of 1999
from $6.6 million in the third quarter of 1998. The increase is primarily due to
the increase in sales for the quarter. Net income increased to $19.1 million in
the first nine months of 1999 from $13.5 million in the same period of 1998. The
increase was due to the impact of the restructuring charge in 1998 and the
restructuring reserve adjustment in 1999. Excluding the effect of the
restructuring charge in 1998 and the related adjustment in 1999, net income
attributable to common stock increased to $18.6 million for the nine month
period ended September 30, 1999, from $18.2 million in the same period in 1998.
This increase resulted from the retirement of the company's outstanding Series B
Cumulative Preferred Stock in May 1998 which was funded through the issuance of
$132.0 million of Securities issued by Trust. The after tax distribution rate of
the Securities is lower than the preferred dividend rate.
Readiness for Year 2000
The Year 2000 (Y2K) issue is the result of computer programs being written using
two-digit, rather than four-digit, year dates. O&M's computer hardware, software
and devices with embedded technology that are date-sensitive may recognize a
date code using "00" as the year 1900 rather than the year 2000. This situation
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in other normal business activities. The
company has divided its Y2K efforts into three main areas:
o computer hardware and software;
o other systems and equipment, such as telephone equipment, scanning
equipment and alarm systems; and
o suppliers and customers.
Computer Hardware and Software. In 1997, O&M completed its assessment of its
computer hardware and software, and developed a strategy of remediation. This
strategy includes retirement of outdated software and replacement or repair of
the remaining software and hardware. The company began repair and replacement
efforts in 1997 so that its computer systems would function properly in the year
2000 and beyond. As of September 30, 1999, these repairs and replacements were
substantially complete. Also, the company has substantially completed testing of
the repairs and replacements that it believes will be necessary to fully address
potential Y2K issues relating to its computer hardware and software. In order to
maintain an appropriate level of Y2K compliance, the company will continue
testing of new or modified computer hardware and software through the end of the
year.
17
Other Systems and Equipment. The company has completed an inventory and
assessment of non-computer related systems and equipment at its operating
divisions and a similar inventory and assessment at its corporate offices. O&M
believes that the impact on operations of potential noncompliance for these
systems and equipment would be minimal. As of September 30, 1999, the
replacement and repair of non-compliant systems and equipment was substantially
complete.
Suppliers and Customers. O&M has contacted its significant suppliers to
determine the extent to which the company is vulnerable to the suppliers'
failure to remediate their Y2K compliance issues. Although the company
considered several factors in identifying these suppliers, the company has
concentrated its communication efforts with suppliers that represent
approximately 90% of O&M's sales. Based on the responses received, the company
believes that all critical suppliers are compliant or will be compliant by the
end of 1999 while the remaining suppliers have indicated they are still
addressing Y2K issues. The company has successfully completed testing with three
of its largest suppliers and will continue testing with selected suppliers
during the remainder of 1999.
The company has also contacted its largest customers to determine their level of
Y2K readiness. Many customers have not yet responded to these inquiries or have
not responded with sufficient detail for O&M to determine whether they will be
Y2K compliant on a timely basis. The company is continuing its efforts to
ascertain the readiness of its customers but, since this readiness cannot be
assured, O&M has developed contingency plans to address the most likely risks of
non-compliance and is in the process of implementing those plans. The company
has successfully completed testing with over 60 customers and will continue
testing during the remainder of 1999.
The company estimates the cost of its Y2K remediation efforts will total
approximately $8.4 million of operating expenses and $6.8 million of capital
expenditures. These expenditures will be funded from operating cash flows.
Through September 30, 1999, O&M had incurred approximately $8.1 million of
expenses and $6.2 million of capital spending related to its Y2K efforts, of
which $0.7 million was incurred in the third quarter of 1999 for each. For the
remainder of 1999, the company expects to incur approximately $0.3 million of
expenses and $0.6 million of capital spending. Other information technology
initiatives have not been significantly delayed by Y2K efforts.
O&M has completed its analysis of the operational problems that would be
reasonably likely to result from the failure by the company and certain third
parties to complete efforts necessary to achieve Y2K compliance on a timely
basis. Some of the possible consequences include, but are not limited to, loss
of communications, loss of utility services, and an inability to process
customer transactions or engage in similar normal business activities. The
company has developed contingency plans to address these and other possible
scenarios. In the event that the company or third party is adversely affected by
the century change, the company will implement its contingency plan for each
situation. These plans include alternate means of communication with customers
and suppliers, manual operation of certain systems, and other previously
established emergency procedures.
18
O&M believes the Y2K issue will not pose significant operational problems for
the company. However, if all Y2K issues are not properly identified or if
assessment, remediation and testing are not completed on a timely basis, there
can be no assurance that the Y2K issue will not have a material adverse impact
on the company's results of operations or adversely affect its relationships
with customers, suppliers or others. Additionally, there can be no assurance
that Y2K non-compliance by other entities will not have a material adverse
impact on the company's systems or results of operations.
The costs of O&M's Y2K efforts and the dates on which the company believes it
will complete these efforts are based upon management's current estimates. These
estimates used numerous assumptions regarding future events, including the
continued availability of certain resources, third party remediation plans and
other factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated.
Recent Accounting Pronouncements. In September 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
(SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. In May
1999, the FASB delayed the effective date of this standard by one year. The
company will be required to adopt the provisions of this standard beginning on
January 1, 2001. Management believes the effect of the adoption of this standard
will be limited to financial statement presentation and disclosure and will not
have a material effect on the company's financial condition or results of
operations.
Risks
The company is subject to risks associated with changes in the medical industry,
including continued efforts to control costs, which place pressure on operating
margin, and changes in the way medical and surgical services are delivered to
patients.
Forward-looking Statements
Certain statements in this discussion constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, including, but not
limited to, general economic and business conditions, competition, changing
trends in customer profiles, outcome of outstanding litigation, readiness for
Year 2000 and changes in government regulations. Although O&M believes its
expectations with respect to the forward-looking statements are based upon
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results, performance or
achievements of the company will not differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company believes there has been no material change in its exposure to market
risk from that discussed in Item 7A in the company's Annual Report on Form 10-K
for the year ended December 31, 1998.
19
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against the company are described in the
company's Annual Report on Form 10-K for the year ended December 31, 1998.
Through September 30, 1999, there have been no material developments in any
legal proceedings reported in such Annual Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10(a) Second Amendment dated as of October 6, 1998 to the
Amended and Restated Receivables Purchase Agreement among O&M
Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Receivables Capital Corporation and Bank of America
National Trust and Savings Association
10(b) Second Amendment dated as of October 6, 1998 to the
Amended and Restated Parallel Asset Purchase Agreement among
O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Parallel Purchasers and Bank of America National Trust
and Savings Association
10(c) Third Amendment and Consent dated as of October 4, 1999 to
the Amended and Restated Receivables Purchase Agreement among
O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Receivables Capital Corporation and Bank of America N.A.
(f/k/a Bank of America National Trust and Savings Association)
10(d) Third Amendment and Consent dated as of October 4, 1999 to
the Amended and Restated Parallel Asset Purchase Agreement
among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., Parallel Purchasers and Bank of America N.A.
(f/k/a Bank of America National Trust and Savings Association)
27 Financial Data Schedule
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K dated July 6, 1999,
under Items 5 and 7, with respect to the issuance of two press releases
relating to the acquisition of Medix, Inc. and the election of two new
board members.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Owens & Minor, Inc.
------------------------------
(Registrant)
Date November 12, 1999 /s/ Richard F. Bozard
-------------------------------- ------------------------------
Richard F. Bozard
Vice President & Treasurer
Acting Chief Financial Officer
Date November 12, 1999 /s/ Olwen B. Cape
-------------------------------- ------------------------------
Olwen B. Cape
Vice President & Controller
Chief Accounting Officer
Exhibits Filed with SEC
Exhibit #
- ---------
10(a) Second Amendment dated as of October 6, 1998 to the
Amended and Restated Receivables Purchase Agreement among O&M
Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Receivables Capital Corporation and Bank of America
National Trust and Savings Association
10(b) Second Amendment dated as of October 6, 1998 to the
Amended and Restated Parallel Asset Purchase Agreement among
O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Parallel Purchasers and Bank of America National Trust
and Savings Association
10(c) Third Amendment and Consent dated as of October 4, 1999 to
the Amended and Restated Receivables Purchase Agreement among
O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor,
Inc., Receivables Capital Corporation and Bank of America N.A.
(f/k/a Bank of America National Trust and Savings Association)
10(d) Third Amendment and Consent dated as of October 4, 1999 to
the Amended and Restated Parallel Asset Purchase Agreement
among O&M Funding Corp., Owens & Minor Medical, Inc., Owens &
Minor, Inc., Parallel Purchasers and Bank of America N.A.
(f/k/a Bank of America National Trust and Savings Association)
27 Financial Data Schedule