-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bw4lwueLnIH31Om09JMl5dFMCOMtlibj9a4ZD/le67oCRKo/HV6e1NzFAM0M4Sx4 K8cc12UrofkbUL1cek+CDQ== 0000916641-99-000165.txt : 19990311 0000916641-99-000165.hdr.sgml : 19990311 ACCESSION NUMBER: 0000916641-99-000165 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS & MINOR INC/VA/ CENTRAL INDEX KEY: 0000075252 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 541701843 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09810 FILM NUMBER: 99561882 BUSINESS ADDRESS: STREET 1: 4800 COX RD CITY: GLEN ALLEN STATE: VA ZIP: 23060 BUSINESS PHONE: 8047479794 MAIL ADDRESS: STREET 1: 4800 COX RD CITY: GLEN ALLEN STATE: VA ZIP: 23060 FORMER COMPANY: FORMER CONFORMED NAME: O&M HOLDING INC DATE OF NAME CHANGE: 19940504 FORMER COMPANY: FORMER CONFORMED NAME: OWENS & MINOR INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: OWENS MINOR & BODEKER INC DATE OF NAME CHANGE: 19811124 10-K 1 OWENS & MINOR, INC. 10-K Form 10-K Annual Report - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-9810 OWENS & MINOR, INC. (Exact name of registrant as specified in its charter) Virginia (State or other jurisdiction of incorporation or organization) 4800 Cox Road, Glen Allen, Virginia (Address of principal executive offices) 54-01701843 (I.R.S. Employer Identification No.) 23060 (Zip Code) Registrant's telephone number, including area code (804) 747-9794 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ============================== ====================== Common Stock, New York Stock $2 par value Exchange Preferred Stock New York Stock Purchase Rights Exchange 10 7/8% Senior Subordinated New York Stock Notes due 2006 Exchange $2.6875 Term Convertible Not Listed Securities, Series A Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by non-affiliates (based upon the closing sales price) was approximately 432,232,835 as of February 19, 1999. In determining this figure, the Company has assumed that all of its officers, directors and persons known to the Company to be the beneficial owners of more than five percent of the Company's Common Stock are affiliates. Such assumption shall not be deemed conclusive for any other purpose. The number of shares of the Company's Common Stock outstanding as of February 19, 1999 was 32,621,346 shares. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the annual meeting of security holders on April 28, 1999 is incorporated by reference into Part III of this Form 10-K. ITEM CAPTIONS AND INDEX - FORM 10-K ANNUAL REPORT
Item No. Page ============ ================================================= Part I 1. Business 15-24 2. Properties 22 3. Legal Proceedings 39-40 4. Submission of Matters to a Vote of Security Holders N/A Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 48 6. Selected Financial Data 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-24 7A. Quantitative and Qualitative Disclosures about Market Risk 24, 31-32 8. Financial Statements and Supplementary Data See Item 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure N/A Part III 10. Directors and Executive Officers of the Registrant (a), 49 11. Executive Compensation (a) 12. Security Ownership of Certain Beneficial Owners and Management (a) 13. Certain Relationships and Related Transactions (a) Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K a. Consolidated Statements of Income for the Years Ended Dec. 31, 1998, Dec. 31, 1997 and Dec. 31, 1996 25 Consolidated Balance Sheets at Dec. 31, 1998 and Dec. 31, 1997 26 Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 1998, Dec. 31, 1997 and Dec. 31, 1996 27 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended Dec. 31, 1998, Dec. 31, 1997 and Dec. 31, 1996 28 Notes to Consolidated Financial Statements for the Years Ended Dec. 31, 1998, Dec. 31, 1997 and Dec. 31, 1996 29-46 Report of Independent Auditors 47 b. Reports on Form 8-K: None. c. The index to exhibits has been filed as separate pages of the 1998 Form 10-K and is available to stockholders on request from the Secretary of the Corporation at the principal executive offices.
(a) Part III will be incorporated by reference from the registrant's 1999 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K. FORM 10-K The Annual Report includes the materials required in Form 10-K filed with the Securities and Exchange Commission. The integration of the two documents gives stockholders and other interested parties timely, efficient and comprehensive information on 1998 results. Portions of the Annual Report are not required by the Form 10-K report and are not filed as part of the Corporation's Form 10-K. Only those portions of the Annual Report referenced in the Form 10-K Index are incorporated in the Form 10-K. The report has not been approved or disapproved by the Securities and Exchange Commission, nor has the Commission passed upon its accuracy or adequacy. M I S S I O N Our mission is to create consistent value for our customers and supply chain partners that will maximize shareholder value and long term earnings growth: we will do this by managing our business with integrity and the highest ethical standards, while acting in a socially responsible manner with particular emphasis on the well-being of our teammates and the communities we serve. V I S I O N To be a world-class provider of supply chain management solutions to the selected segments of the healthcare industry we serve. V A L U E S o We believe in high integrity as the guiding principle of doing business o We believe in our teammates and their well-being o We believe in providing superior customer service o We believe in supporting the communities we serve o We believe in delivering long-term value to our shareholders C O M P A N Y O V E R V I E W Owens & Minor, Inc., a Fortune 500 company headquartered in Richmond, Va., is the nation's largest distributor of national name brand medical/surgical supplies. The company's distribution centers serve hospitals, integrated healthcare systems and group purchasing organizations nationwide. In addition, Owens & Minor helps customers control healthcare costs and improve inventory management through innovative services in supply chain management, logistics and technology. Founded in 1882, Owens & Minor started as a wholesale drug company. Since 1992, the company has distributed only medical/surgical supplies. Owens & Minor's common shares are traded on the New York Stock Exchange under the symbol OMI. As of December 31, 1998, there were approximately 15,500 common shareholders. 1998 Financial Overview (in thousands, except ratios, per share data and employee statistics)
- -------------------------------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 1997 1996 98/97 97/96 - -------------------------------------------------------------------------------------------------------- Net sales $3,082,119 $3,116,798 $3,019,003 (1.1%) 3.2% Net income $ 20,145 $24,320 $12,965 (17.2%) 87.6% Net income per common share(1) $ 0.56 $0.60 $0.25 (6.7%) 140.0% - -------------------------------------------------------------------------------------------------------- Net income excluding restructuring expenses(2) $ 26,753 $24,320 $12,965 10.0% 87.6% Net income per common share excluding restructuring expenses(1) (2) $ 0.75 $0.60 $0.25 25.0% 140.0% - -------------------------------------------------------------------------------------------------------- Cash dividends per common share $ 0.20 $0.18 $0.18 11.1% _ Book value per common share $ 4.94 $4.48 $3.99 10.3% 12.3% Stock price per common share at year-end $ 15.75 $14.50 $10.25 8.6% 41.5% Number of common shareholders 15.5 16.1 17.0 (11.2%) (5.3%) Shares of common stock outstanding 32,618 32,213 31,907 1.3% 1.0% - -------------------------------------------------------------------------------------------------------- Return on average common equity excluding restructuring expenses(2) 15.9% 14.1% 6.3% 12.8% 123.8% Return on total assets excluding restructuring expenses(2) (3) 3.3% 3.0% 1.5% 10.0% 100.0% - -------------------------------------------------------------------------------------------------------- Gross margin as a percent of net sales 10.6% 10.2% 9.9% 3.9% 3.0% Selling, general and administrative expenses as a percent of net sales 7.8% 7.5% 7.7% 4.0% (2.6%) - -------------------------------------------------------------------------------------------------------- Debt(3) $ 225,000 $292,550 $293,549 (23.1%) (0.3%) Capitalization ratio(3) (4) 43.4% 53.0% 54.8% (18.1%) (3.3%) Average receivable days sales outstanding(3) 34.7 33.4 36.1 3.9% (7.5%) Average inventory turnover 9.8 9.9 8.9 (1.0%) 11.2% Employees at year-end 2,661 3,010 3,116 (11.6%) (3.4%) - --------------------------------------------------------------------------------------------------------
(1) Basic and diluted (2) After tax. See Note 2 to Consolidated Financial Statements regarding the 1998 nonrecurring restructuring expenses ($11.2 million). (3) Excludes impact of off balance sheet receivables securitization agreement. See Note 6 to Consolidated Financial Statements. (4) Includes mandatorily redeemable preferred securities as equity. 3 1998 Dear Shareholders, Customers, Suppliers, Teammates and Friends, [PHOTO OF G. GILMER MINOR, III] This annual report is dedicated to the people of Owens & Minor who persevered through a year of change and whose determination and character helped us finish the year on a strong note. We took a shot to the chin in late May when we lost a major contract, but we stood our ground and quietly resolved to get back on top. We immediately went to work, and within five months we replaced the lost business. I am very grateful and proud of my teammates who came together as one big team and did the right things. The defining events in 1998 were Columbia, Tenet HealthSystems, Inc. (Tenet), and Perot Systems. We lost the Columbia contract in late May, effective October 1. Between June and October, we negotiated and signed new agreements to compensate for the lost business. Tenet was the big piece of this with an eight-year contract having estimated annual sales of $250 million, signed in late October. Most of the other new replacement business, as well as Tenet, started coming on board in February 1999. Then, to ensure our leadership in the area of technology for the future, we formed a strategic relationship with Perot Systems in November to manage our information services function and to help us create new and even more effective supply chain solutions for our customers. With Perot Systems, we will expand our electronic commerce and Internet capabilities to create a digital (e-commerce) order fulfillment system and enhance the technology we already have in place faster than we could on our own. Along The Way . . . We retired our Series B cumulative preferred stock in favor of a less costly private placement of mandatorily redeemable preferred securities. We accomplished our targets for expense reduction after the loss of the 4 Columbia contract, and have done what we said we would do by moving quickly to restore the company's health. We finished the year with a 25 percent increase in net income per diluted common share compared to 1997, excluding a restructuring charge we took in the second quarter. We are a stronger company for what happened in 1998. You would expect me to say that, and I believe it with all my heart. We dealt with adversity and fought back. We looked at our mission and strategic plan with a magnifying glass and found them sound and viable for us. With all the noise of consolidation around us, we determined we can deliver better value and results to our customers, shareholders and suppliers as a focused company creating world-class service and supply chain solutions. Now we must do it. Let's Look at the Numbers Sales decreased 1.1 percent for the year, most of that coming in the fourth quarter when the real loss of the Columbia contract was first felt and before we could bring on the newly signed business. Gross margin improved from 10.2 percent to 10.6 percent, thanks to our partnership with key suppliers and our supply chain initiatives. Net income per common share improved 25 percent, excluding the restructuring charge, and increased from $0.60 to $0.75. And, net income attributable to common stock improved $5.7 million, or 30 percent over 1997, excluding restructuring charges. Selling, general and administrative (SG&A) expenses as a percent to sales were up from 7.5 percent last year to 7.8 percent in 1998, a difference of 4.0 percent; but dollars spent on SG&A were up only 2.0 percent. Our capitalization ratio was reduced from 53.0 percent to 43.4 percent at the end of 1998, and debt reduction for the year was $67.6 million, excluding the impact of the accounts receivable securitization. During the year, our common stock price increased 8.6 percent, well below our expectations when we started the year. But we finished the year on a strong note after the announcement of the Tenet contract. We must put some sales growth in our numbers for 1999, and that is our number one priority. But, not growth at any price. We have a great value story to tell and sell and a strategy of using technology to achieve successful supply chain results, and we are doing this with the greatest team in the whole wide world. The Value Story We are delivering the best service and the best technological supply chain management solutions in the medical/surgical business. For the second year in a row, we were voted the best medical/surgical supplier in the industry in Health Strategist, a widely-circulated industry publication. This was an independently conducted survey, and it corroborates our own surveys. Our customers and suppliers tell us they want world class distribution services, and they want them right now. We get the products delivered on time and more accurately than anyone else. We are known for our excellent service. 5 An advantage we have is our decision support tools developed with Business Objects, which allow us to extract data from our data warehouse and organize it on a customized and confidential basis for our customers. Today, our customers are able to access and design data for themselves directly from our system. In Information Week's 10th annual survey and ranking of America's most innovative companies in technology, we were ranked 146 out of 500, the highest in our industry. This ranking validates our leadership in providing innovative technology solutions to our customers and suppliers. To maintain this technology edge we entered into a strategic partnership with Perot Systems. They are now managing our information systems and working with our management team to further adapt their own work in other industries to healthcare. They have already invented the future, and we will help them refine their creative solutions for our use and benefit. We are also recognized as the industry leader in Activity-Based Management (ABM). Arthur Andersen Consulting recognized Owens & Minor as a "best practices" company delivering activity-based management solutions, a tribute to our ABM team. We have developed accurate cost information for ourselves and a growing number of customers. We take this information and price our services based on their cost and the frequency of activity by the customer. Activity-based pricing is a much more accurate and efficient way of pricing than cost plus, because cost plus treats all goods and services as if they have the same distribution cost components. By the end of 1999, our plan is to have 15 percent to 20 percent of our business under ABM. Operationally we are installing a new state of the art warehousing system that improves the accuracy of picking and billing, reduces costs in receiving and accounts payables, and facilitates more dynamic buying practices. We have lowered the number of billing credits written appreciably by improving the accuracy of prices and picking and packing of orders. This improved accuracy lowers our customers' cost, also. We spent more time and money in 1998 training our people. And we will spend more again in 1999. The thirst for knowledge coupled with the complexity of a changing healthcare environment are driving forces behind this investment. The majority of our sales and management team work off of laptops today instead of out of a briefcase. We have put solutions at their fingertips, and the results are most helpful to our customers. Strategically, in an industry that is consolidating, our goal is to independently make ourselves indispensable to our customers. We are not trying to be all things to all people. We are focused and committed to being the standard everyone else must compare to when it comes to distribution service and supply chain solutions. We are willing to partner strategically with other healthcare 6 organizations to bring value to our mutual customers through the medium of electronic commerce and connectivity, which enables us to create reliable and usable information. We believe time will show the correctness of our strategy of staying the course and focusing on delivering world-class distribution value through logistics, service and technology. New and Expanding Partnerships As mentioned earlier, our eight-year distribution agreement with Tenet represents all new business, with an estimated annual sales volume of $250 million per year once the business is fully converted. The contract began on February 1, 1999, and the process of conversion has started. Other notable contracts in 1998 included the doubling of our relationship with Sutter Health to approximately $60 million annually; an estimated additional $20 million annually with the University of Maryland Medical System; and several other new and renewed contracts, including Florida Hospital in Orlando, that have given us momentum for 1999. Royal E. Cabell Retires Roy Cabell has been a director of the company for 37 years. He will retire from service at this year's annual meeting. During all of these years, he has served our company with distinction, integrity, loyalty and most of all, great wisdom. He joined the board in 1962, took us public in 1971 as the company's general counsel, personally negotiated the Will Ross acquisition in 1981, and was instrumental in all of our major decisions during the '70s, '80s and '90s. He has been a mentor to me, an advisor I could turn to when good advice was hard to come by, and a friend and colleague I trust more than anyone else in the world. Thank you, Roy, for your long and faithful service. It has been my great privilege to serve with you. You have indeed made a difference to Owens & Minor, for which I am eternally grateful. Come On, 1999 So long, 1998. No material harm done. Great lessons learned. Determination and a passion for new success fueled. And, momentum generated as we move quickly into the last year of the century. We are 117 years old now, and as nice as that is from a historical standpoint, it doesn't guarantee success going forward. We must grow our top line, manage our costs and assets more effectively, and improve measurable productivity. Our war cry for this year is, "It's Time in '99". The "proof is in the pudding," as they say, so I will keep you posted. I am grateful to our suppliers for their willingness to work so closely with us on supply chain solutions and cost savings. I am grateful to our customers for believing in us and trusting our ability to bounce back and continue to deliver value. I am grateful to our shareholders for your patience and continued support during a volatile year. I am also very grateful to our team of dedicated people, who, day in and day out, deliver real value to our customers. Thanks to all for being a part of the team. My warmest regards, /s/ G. Gilmer Minor, III --------------------------------------- G. Gilmer Minor, III Chairman, President and Chief Executive Officer 7 We succeed in the fiercely competitive medical/surgical supply business by maintaining a relentless focus on customer service and lean operations. Cost management is absolutely essential, not only to drive our own costs down, but those of our customers as well. Operational Excellence: It's our people who make it all possible [PHOTO] We at Owens & Minor have a clear-cut business strategy: to deliver service, solutions and value to our customers - and to do so better than anyone else. As the nation's largest distributor of national name brand medical/surgical supplies, we help hospitals, integrated healthcare networks and group purchasing organizations reduce healthcare costs through improved supply chain management. O&M buys about 140,000 products from some 1,200 suppliers - everything from bandages to needles and syringes to disposable gloves - and sells them to nearly 4,000 hospitals and alternate health care providers throughout the U.S. It's a complex business, one that requires the coordinated efforts of roughly 2,700 well-trained and highly motivated teammates using the best logistics management techniques and information technology. Operational excellence is vital to our success. "It all comes down to delivering the right product, at the right time, to the right place and at the right price," says 8 Craig Smith, O&M's executive vice president and chief operating officer. "That means executing the basics of the business - picking, packing and shipping medical/surgical products - as efficiently and as reliably as possible. When you're dealing with something as critical as healthcare, there's very little tolerance for error." We succeed in the fiercely competitive medical/surgical supply business by maintaining a relentless focus on customer service and lean operations. "Cost management is absolutely essential, not only to drive our own costs down, but those of our customers as well," Smith says. "Our teammates are constantly looking for better, more productive ways to serve our customers at less overall cost." One area in which O&M has made great strides in recent years is inventory management. In partnership with our major suppliers, we provide product information to help customers standardize and reduce their inventories. By year-end 1998, we had [PHOTO] reduced the number of items we carry to 140,000, a dramatic reduction from 250,000 just two years earlier. Reduced inventory means less money invested in products sitting on shelves, which frees up warehouse space for high-demand items. Furthermore, inventory consolidation helps us concentrate on delivering those products our customers need most. The result is improved service levels and reduced costs for O&M and our customers. Tighter inventory management is just one of many areas where our teammates are providing logistics expertise to help customers improve asset management and reduce costs. "We're proud of our record of partnering with customers and suppliers to achieve mutual efficiencies in areas such as distribution, logistics, electronic commerce and supply chain management," Smith says. "It's through these effective partnerships that we're finding innovative ways to create value for our partners and shareholders." [PHOTO OF CRAIG SMITH] "It all comes down to delivering the right product, at the right time, to the right place and at the right price." Craig Smith Chief Operating Officer 9 At Owens & Minor, we use technology to get closer to our customers. "Our information technology team is customer-centered in the way we think about and apply technology," says Lee Marston, O&M's chief information officer. "We are successful because our teammates have been passionate about using information and technology to create value for our business partners and to make it easier for them to do business with us." In 1997, O&M began offering electronic decision support services (DSS) to our teammates and business partners, giving them access to information to evaluate purchasing patterns for identifying cost savings opportunities. Our decision support tools enable our teammates, customers and suppliers to gather and summarize business transaction information and quickly convert it into customized knowledge for making informed supply chain decisions. [PHOTO] INFORMATION MANAGEMENT: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE "Our partners, particularly integrated healthcare networks, are delighted with our willingness to openly share information," Marston says. "Information, of course, is only useful if it is timely and can be interpreted correctly," Marston points out, and we are constantly searching for innovative ways to enhance the free flow and clarity of information between O&M and our business partners. In 1998, O&M began offering some of our partners Internet access to this customized information, as well. "We're one of the early adapters of Internet technology for information management across the supply chain," says Marston, "and it's helping cement our relationship with customers and suppliers." O&M took a major step toward enhancing our technology capabilities in November 1998 by entering into a 10-year partnership with Perot Systems Corp., the Dallas-based technology services company with extensive expertise in healthcare information management. Perot Systems is managing O&M's information technology services and aligning our extensive supply chain service offerings. "The partnership with Perot Systems is exciting," Marston says, "because it will help us extend our competitive advantage in information management and develop innovative technology applications at a more rapid pace." We will also be positioned to keep pace with the rapid changes in technology as we [PHOTO OF LEE MARSTON] "We're one of the early adapters of internet technology for information management across the supply chain." Lee Marston Chief Information Officer 10 continually seek to drive internal operating efficiencies and to enhance our products and services. Under our technology-based CostTrack program in activity-based management are supply chain initiatives that allow both O&M and our customers to capitalize on information and knowledge. CostTrack enables us to separate product and process costs to reflect the true cost of specific distribution activities. In turn, our customers can choose those distribution services most cost effective for them. Several of these technology-based CostTrack programs include the following: FOCUS (Focus on Consolidation, Utilization & Standardization): This program allows O&M to increase inventory turnover by consolidating product lines and [PHOTO] Our teammates have been passionate about using information and technology. developing stronger partnerships with our most efficient suppliers. In turn, FOCUS provides cost savings and improved inventory management for our customers and increased market share opportunities for our supplier partners. CRP (Continuous Replenishment Process): With CRP, we electronically transmit inventory usage data to our suppliers, which in turn forecast supply needs and create electronic purchase orders to continually replenish products for our mutual healthcare customers. EDI (Electronic Data Interchange): We lead the industry in EDI and continue to expand our automated business transactions with both customers and suppliers. Of O&M's top 20 suppliers, 18 are sending invoices via EDI, accounting for approximately 80 percent of the products we buy. PANDAC(R) (automated wound closure asset management program): PANDAC provides customers the information they need to manage their inventories and usage levels of wound closure products in order to reduce costs. Effective use of technology has made O&M the medical/surgical supply industry's most efficient distributor, while allowing us to achieve innovations in supply chain management. Our customer-centered focus will ensure our continued success. 11 Customer satisfaction isn't merely an objective at Owens & Minor - it's a passion. "Everything we do is geared toward helping our customers succeed," says Henry Berling, O&M's executive vice president, partnership development. "We sell service, but our ultimate goal is to deliver value. We do that by earning the confidence of our customers and suppliers, understanding their business and forging partnerships to reach mutual objectives." Everything we do is geared toward helping our customers succeed. Every teammate at O&M - from sales representatives to truck drivers to warehouse workers - is focused on providing our customers the best possible service at the lowest possible cost. We are constantly seeking ways to do our jobs better, and we measure our progress in every way imaginable. We reinforce our commitment to excellence through training, incentives and benchmarking. CUSTOMER SATISFACTION: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE [PHOTO] Our divisions compete against one another each year to determine the best and most-improved divisions in five different quality assurance categories, with all teammates in each winning division receiving cash awards. "We believe we have the most highly skilled and customer-focused employees in our industry, and we prove it every day," Berling says. Of course, we're not the only ones recognizing our teammates for quality service. Our customer satisfaction ratings, as measured by an independent polling firm, are the highest they have been in four years. Also, in an independent survey conducted in 1998 by Health Strategist newsletter, providers and suppliers ranked O&M as the best medical/surgical supplies distributor for the second year in a row. While gratified by the positive recognition we've earned, we realize we have a ways to go to reach our full potential. We are committed to being the best in our business. All our efforts are directed toward helping our customers and suppliers make patient care more affordable by maximizing the efficiency of the supply chain. We do all we can to help our partners succeed. After all, our success is fundamentally tied to their success. [PHOTO OF HENRY BERLING] "We believe we have the most highly skilled and customer-focused employees in our industry, and we prove it every day." Henry Berling Executive Vice President, Partnership Development 12 The business priorities discussed on the preceding pages of this report are the foundation that supports Owens & Minor's strategy for creating shareholder value: putting technology to work for our partners and ourselves, achieving operational excellence and improving customer satisfaction. We use our competitive edge in applying information technology to improve the efficiency of our operations and to help our customers and suppliers enhance their business processes. Consequently, we will continue to invest heavily in technology so we can provide value to our trading partners through knowledge sharing. Operational excellence is probably our most easily quantifiable means of demonstrating value. The investments we have made in such areas as warehouse productivity, inventory management and electronic commerce will drive efficiency for our customers and our suppliers. [PHOTO OF ANN GREER RECTOR] "Despite fierce competition and pricing pressure, we are excited about the future, and Owens & Minor is positioned to achieve strong earnings growth." Ann Greer Rector Chief Financial Officer VALUE CREATION: IT'S OUR PEOPLE WHO MAKE IT ALL POSSIBLE [PHOTO] Medical/surgical supply is a dynamic industry with continually changing customer requirements. We will continue to measure quality from the vantage point of our customers, suppliers and teammates, for we cannot achieve our full potential unless we meet the expectations of each of these key constituencies. We measure our success in creating value through benchmarking and performance management - tools that are flexible enough to respond to the rapidly changing requirements of modern healthcare. One such tool is CostTrack, our activity-based management process, which has been invaluable in improving strategic and operational decision making. We are applying the power of CostTrack to operations and in managing the supply chain more effectively. Activity-based management is helping O&M develop closer partnerships with our customers as we pursue the mutual benefits of cutting costs and improving service. "We are convinced our continued success in flexible business design, consistent operational performance and superior customer service will result in significant improvements in service and profits, producing superior long-term value for all our stakeholders - our teammates, customers, suppliers and investors," says Ann Greer Rector, O&M's chief financial officer. Customer satisfaction remains the ultimate yardstick for evaluating our performance. 13 Selected Financial Data(1) - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
1998 1997 1996 1995 1994 =============== =============== =============== =============== =============== SUMMARY OF OPERATIONS: Net sales $3,082,119 $3,116,798 $3,019,003 $2,976,486 $2,395,803 Nonrecurring restructuring expenses(2) $ 11,200 $ - $ - $ 16,734 $ 29,594 Net income (loss)(2) $ 20,145 $ 24,320 $ 12,965 $ (11,308) $ 7,919 - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- PER COMMON SHARE: Net income (loss) - basic $ 0.56 $ 0.60 $ 0.25 $ (0.53) $ 0.15 Net income (loss) - diluted $ 0.56 $ 0.60 $ 0.25 $ (0.53) $ 0.15 Average number of shares outstanding - basic 32,488 32,048 31,707 30,820 30,633 Average number of shares outstanding - diluted 32,591 32,129 31,809 30,820 31,680 Cash dividends $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.17 Stock price at year end $ 15.75 $ 14.50 $ 10.25 $ 12.75 $ 14.25 Book value $ 4.94 $ 4.48 $ 3.99 $ 3.90 $ 4.59 - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- SUMMARY OF FINANCIAL POSITION: Working capital $ 235,247 $ 233,789 $ 192,990 $ 331,663 $ 281,788 Total assets $ 717,768 $ 712,563 $ 679,501 $ 857,803 $ 868,560 Long-term debt $ 150,000 $ 182,550 $ 167,549 $ 323,308 $ 248,427 Mandatorily redeemable preferred securities $ 132,000 $ - $ - $ - $ - Shareholders' equity $ 161,126 $ 259,301 $ 242,400 $ 235,271 $ 256,176 - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- SELECTED RATIOS: Gross margin as a percent of net sales 10.6% 10.2% 9.9% 9.0% 9.7% Selling, general and administrative expenses as a percent of net sales 7.8% 7.5% 7.7% 7.6% 6.9% Average receivable days sales outstanding(3) 34.7 33.4 36.1 37.7 35.9 Average inventory turnover 9.8 9.9 8.9 8.3 8.8 Return on average total equity(4) 7.3% 9.7% 5.4% (4.6%) 3.7% Return on average total equity(5) 9.6% 9.7% 5.4% (4.6%) 3.7% Current ratio 1.9 1.9 1.7 2.1 1.8 Capitalization ratio(3)(4) 43.4% 53.0% 54.8% 61.9% 49.2% Capitalization ratio(3)(5) 68.9% 53.0% 54.8% 61.9% 49.2%
(1) IN 1994, THE COMPANY ACQUIRED STUART MEDICAL, INC. AND EMERY MEDICAL SUPPLY INC. THESE BUSINESS COMBINATIONS WERE ACCOUNTED FOR AS PURCHASES. (2) IN 1998, THE COMPANY INCURRED $11.2 MILLION, OR $6.6 MILLION AFTER TAXES, OF NONRECURRING RESTRUCTURING EXPENSES RELATED TO THE CANCELLATION OF ITS MEDICAL/SURGICAL DISTRIBUTION CONTRACT WITH COLUMBIA/HCA HEALTHCARE CORPORATION. THE COMPANY INCURRED $16.7 MILLION AND $29.6 MILLION, OR $10.3 MILLION AND $17.9 MILLION AFTER TAXES, IN 1995 AND 1994 OF NONRECURRING RESTRUCTURING EXPENSES RELATED TO ITS RESTRUCTURING PLANS DEVELOPED IN CONJUNCTION WITH ITS COMBINATION WITH STUART MEDICAL, INC. (3) EXCLUDES IMPACT OF OFF BALANCE SHEET RECEIVABLES SECURITIZATION AGREEMENT. SEE NOTE 6 TO CONSOLIDATED FINANCIAL STATEMENTS. (4) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS EQUITY. (5) INCLUDES MANDATORILY REDEEMABLE PREFERRED SECURITIES AS DEBT. 14 Analysis of Operations - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Owens and Minor, Inc. and subsidiaries (O&M or the company) is the largest distributor of branded medical and surgical supplies in the United States.The company was incorporated in Virginia on December 7, 1926, as a successor to a partnership founded in Richmond, Virginia in 1882. In 1998, the company reported net sales of $3.1 billion and net income of $26.8 million, excluding restructuring. [CHART] Net Sales (Billions) 98 $3.08 97 $3.12 96 $3.02 95 $2.98 94 $2.40 O&M distributes approximately 140,000 finished medical and surgical products produced by approximately 1,200 suppliers to approximately 4,000 customers nationwide. The company's customers are primarily acute care hospitals and hospital-based systems, which account for more than 90% of O&M's net sales. Other customers include alternate care facilities such as nursing homes, clinics, surgery centers, rehabilitation facilities, physicians' offices and home healthcare. The company serves a number of large healthcare networks and major buying groups that represent independently owned member hospitals. Most of O&M's sales consist of disposable gloves, dressings, endoscopic products, intravenous products, needles and syringes, sterile procedure trays, surgical products and gowns, urological products and wound closure products. O&M has significantly expanded and strengthened its national presence over the last five years through both internal growth and acquisitions. In May 1994, the company acquired Stuart Medical, Inc., then the third largest distributor of medical and surgical supplies in the United States with 1993 net sales of approximately $890.5 million. 1998 Financial Results In 1998, O&M earned net income of $20.1 million, or $0.56 per diluted common share, compared with $24.3 million, or $0.60 per diluted common share, in 1997. Net income was reduced by the impact of a nonrecurring restructuring charge of $11.2 million, or $6.6 million after taxes, that the company recorded in the second quarter of 1998 to reflect its plan to downsize warehouse operations as a result of the cancelled Columbia Healthcare Corporation (Columbia/HCA) contract. Excluding the restructuring charge, net income for 1998 would have been $26.8 million or $0.75 per diluted common share. Gross margin improved to 10.6% of sales from 10.2% in 1997 as a result of the continued success of the company's supply chain initiatives. This improvement was partially offset by an increase in selling, general and administrative (SG&A) expenses as a result of increased information technology spending, which included expenses to prepare computer systems for the Year 2000 (Y2K). Financial Condition, Liquidity and Capital Resources Liquidity. O&M's liquidity improved in 1998 in comparison to 1997. Outstanding financing (excluding the impact of the off balance sheet accounts receivable securitization) was reduced by approximately $67.6 million to $225.0 million at December 31, 1998, from $292.6 million at December 31, 1997. The reduction was due to improvements in cash flow from operations as discussed below. In May 1998, Owens & Minor Trust I (Trust), a business trust sponsored and wholly owned by the company, issued Mandatorily Redeemable Preferred Securities (Securities) and used the proceeds to repurchase all of its outstanding Series B Cumulative Preferred Stock. These transactions reduced the company's net cost of capital in 1998. The capitalization ratio at December 31, 1998, including the Securities as equity and excluding the effect of the accounts receivable securitization, was 43.4% compared with 53.0% at December 31, 1997. This improvement was primarily the result of the reduction in outstanding financing. 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 December 31, 1998, O&M had approximately $225.0 million of unused credit under its revolving credit facility and $43.4 million under its receivables financing facility. 15 Working Capital Management. In 1998, the company's working capital increased slightly compared with 1997. O&M's accounts receivable days sales outstanding (excluding the impact of the accounts receivable securitization) increased to 34.7 at December 31, 1998 compared with 33.4 at December 31, 1997 and inventory turnover decreased to 9.8 times in 1998 compared with 9.9 times in 1997. These changes were driven in part by the reduction in the sales base during the second half of the year as sales to Columbia/HCA declined. Capital Expenditures. Capital expenditures were approximately $12.6 million in 1998, of which approximately $10.2 million was for computer hardware and software, including $3.2 million for system upgrades to prepare for Year 2000. 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. Industry Overview Distributors of medical and surgical supplies provide a wide variety of medical and surgical products to healthcare providers, including hospitals and hospital-based systems, integrated healthcare networks (IHNs) and alternate care providers. The medical/surgical supply distribution industry has experienced growth in recent years due to the aging population and emerging medical technology resulting in new healthcare procedures and products. Healthcare providers have consolidated to form larger and more sophisticated entities that are increasingly seeking lower procurement costs and sophisticated inventory management from their preferred suppliers and distributors. Over the years, major acute care hospitals have aligned with or acquired outpatient and long-term care facilities to form IHNs, and forged partnerships with national medical and surgical supply distributors to manage the supply procurement and distribution needs of their entire network. The traditional role of a distributor involving warehousing and delivering medical and surgical supplies to a customer has evolved into the role of assisting their partners to manage the entire supply chain. O&M expects that further consolidation in the medical/surgical supply distribution industry will continue due to the competitive advantages enjoyed by larger distributors. Business Strategy O&M is committed to enhancing its long-term growth prospects by providing customers and suppliers with the most responsive, efficient and cost-effective distribution system for the delivery of medical and surgical products and services. To meet this commitment, the company has implemented the following strategy: (i) Follow and support patient care. Using technological tools and leveraging its broad distribution network, O&M helps its customers align business functions, standardize products and reduce costs. The company has benefited from the ongoing consolidation of the hospital market because of its strong association with national healthcare networks and group purchasing organizations. Its strong partnership with IHNs allows O&M to extend its acute care supply distribution expertise to the alternate care market - by following the patient migration beyond the acute care setting. (ii) Convert information into knowledge, then profits. O&M has created a valuable database of information gathered from its relationships with customers and suppliers as well as from its internal activities. The company converts this information into customized knowledge to help its customers reduce costs and make knowledgeable, well-supported business decisions. O&M has developed innovative services which are discussed further below that provide customers the resources to develop the best supply chain solutions for their distribution and inventory management challenges. (iii) Maintain the highest quality of service and operational excellence. The company maintains its high-quality and efficient distribution services by providing customers with local sales and service support and industry-leading supply chain logistics management. The company continually strives to achieve 100% customer satisfaction in picking, billing, sales, delivery and customer service functions, with the ultimate goal of providing the most efficient distribution network for getting medical and surgical supplies to the patient. 16 Analysis of Operations(continued) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Customers The company markets its distribution services to approximately 4,000 healthcare providers, including hospitals, IHNs and alternate care providers. O&M contracts with these providers directly and through national healthcare networks (Networks) and group purchasing organizations (GPOs). National Healthcare Networks and Group Purchasing Organizations. Networks and GPOs are entities that act on behalf of a group of healthcare providers to obtain pricing and other benefits that may be unavailable to individual members. Hospitals, physicians and other types of healthcare providers have joined Networks and GPOs to take advantage of improved economies of scale and to obtain services from medical and surgical supply distributors ranging from discounted product pricing to logistical and clinical support. Networks and GPOs negotiate directly with medical and surgical product suppliers and distributors on behalf of their members, establishing exclusive or multi-supplier relationships. Networks and GPOs cannot ensure that members will purchase their supplies from a given supplier. Since 1985, O&M has been a distributor for VHA, Inc. (VHA), a nationwide network that comprises nearly a quarter of the nation's community hospitals. On January 1, 1998, VHA and University HealthSystem Consortium Services Corp. (UHCSC), an alliance of academic medical centers, created Novation, a new supply company that serves VHA and UHCSC health care organizations. O&M currently serves VHA and UHCSC under separate contracts. Sales to VHA members represented approximately 41% of O&M's net sales in 1998, and sales to UHCSC accounted for 7% of net sales. Integrated Healthcare Networks. An IHN is an organization composed of several healthcare facilities that jointly offer a variety of healthcare services in a given market. An IHN is typically a network of different types of healthcare providers that seeks to offer a broad spectrum of healthcare services and comprehensive geographic coverage to a particular local market. IHNs have become increasingly important because of their expanding role in healthcare delivery and cost containment and their reliance upon the hospital, O&M's traditional customer, as a key component of their organizations. Individual healthcare providers within a multiple-entity IHN may be able to contract individually for distribution services; however, the providers' shared economic interests create strong incentives for participation in distribution contracts established at the system level. Because IHNs frequently rely on cost containment as a competitive advantage, IHNs have become an important source of demand for O&M's enhanced inventory management and other value-added services. Until 1998, O&M was the primary distributor for Columbia/HCA, one of the company's largest customers. In May 1998, Columbia/HCA cancelled its medical/surgical supply contract. Columbia/HCA substantially reduced purchases from the company, beginning the third quarter of 1998. In 1998 and 1997, approximately 9 percent and 11 percent of O&M's net sales were to Columbia/HCA facilities. O&M has made substantial progress in replacing the lost sales from the Columbia/HCA contract cancellation, including entering into an exclusive, eight-year medical/surgical supply distribution agreement with Tenet Healthcare, the second largest for-profit hospital chain in the nation. In addition to being a sole supplier to Tenet's 130 acute care hospitals, O&M will provide distribution services to Tenet's BuyPower Purchasing Program. One of the nation's leading GPOs, BuyPower provides national contracting through its approximately 330 acute care hospitals, 530 associated facilities and 2,500 affiliated members. The Tenet contract represents all new business for the company. In addition, O&M has entered into contracts with a number of other new customers and has renewed contracts with existing customers. Individual Providers. In addition to contracting with healthcare providers at the IHN level and through Networks and GPOs, O&M contracts directly with healthcare providers. In 1998, not-for-profit hospitals represented a majority of these facilities. Suppliers O&M believes its size and longstanding relationships enable it to obtain attractive terms and incentives from suppliers and contribute significantly to its gross margin. The company has well-established relationships 17 with virtually all of the major suppliers of medical and surgical supplies. Approximately 18% and 20% of O&M's net sales in 1998 and 1997 were sales of Johnson & Johnson Hospital Services, Inc. products. Approximately 12% of the company's net sales in 1998 were sales of products of the subsidiaries of Tyco International. Distribution O&M employs a decentralized approach to sales and customer service through its 38 distribution centers, strategically located to serve customers in 50 states and the District of Columbia. These distribution centers generally serve hospitals and other customers within, on average, a 100-to-150-mile radius. O&M delivers most medical and surgical supplies with a fleet of leased trucks. Contract carriers and parcel services are used to transport all other medical and surgical supplies. Competition The medical/surgical supply distribution industry in the United States is highly competitive and consists of three major nationwide distributors: O&M; Allegiance Corp., which merged with Cardinal Health, Inc. in early 1999; and McKesson General Medical Corp., a subsidiary of McKesson HBOC, Inc. The industry also includes Bergen Brunswig Medical Corp., a wholly owned subsidiary of Bergen Brunswig Corp.; smaller national distributors of medical and surgical supplies; and a number of regional and local distributors. Competitive factors within the medical/surgical supply distribution industry include total delivered product cost, product availability, the ability to fill and invoice orders accurately, delivery time, services provided, inventory management, information technology, and the ability to meet special customer requirements. O&M believes its decentralized and customer-focused approach to distribution of medical/surgical supplies enables it to effectively compete with both larger and smaller distributors by being located near the customer and offering a high level of customer service. Further consolidation of medical/surgical supply distributors is expected to continue through the purchase of smaller distributors by larger companies as a result of competitive pressures in the market place. Asset Management O&M aims to provide the highest quality of service in the medical/surgical supply distribution industry by focusing on providing suppliers and customers with local sales and service support and the most responsive, efficient and cost-effective distribution of medical and surgical products. The company draws on technology to provide a broad range of value-added services to control inventory and accounts receivable. Inventory. Due to O&M's significant investment in inventory to meet the rapid delivery requirements of its customers, efficient asset management is essential to the company's profitability. The significant and ongoing emphasis on cost control in the healthcare industry puts pressure on distributors and healthcare providers to create more efficient inventory management systems. O&M has responded to these ongoing changes by developing its inventory forecasting capabilities, client/server warehouse management system, its product standardization and consolidation initiative, and its continuous inventory replenishment process (CRP). CRP allows the company's suppliers to monitor daily sales and inventory levels electronically so they can automatically and accurately replenish O&M's inventory. These and other services have enabled the company to reduce its inventory of finished medical and surgical products to approximately 140,000 stock keeping units (SKUs) in 1998 from approximately 250,000 in 1996. During the same period, O&M was able to reduce the number of suppliers with which it conducts business to approximately 1,200 from 3,000. Accounts Receivable. The company's credit practices are consistent with those of other medical/surgical supply distributors. O&M actively manages its accounts receivable to minimize credit risk and does not believe that credit risk associated with accounts receivable poses a significant risk to its results of operations. Information Technology In November 1998, O&M signed a 10-year agreement to outsource its information technology (IT) operations and procure strategic application development services. The company makes major investments each year in 18 Analysis of Operations(continued) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries IT to improve operational efficiency and support supply chain management initiatives with customers and suppliers. In 1998, O&M's capital expenditures included approximately $10.2 million for computer hardware and software. These ongoing investments have been successful in electronically linking O&M with its customers and suppliers for efficient purchasing, invoicing, funds transfer and contract pricing. Computer-to-computer transfer of data significantly reduces paperwork and manual processes and is a key contributor to O&M's operational efficiency. Recognizing that the Internet is reshaping the way business is transacted electronically, O&M is planning an even greater emphasis on the deployment of Internet-based applications, including electronic data interchange (EDI), online product information, decision support systems and direct ordering. In 1998, the company made major investments in a new client/server warehouse management system for its distribution centers. Approximately half of the distribution centers received the new system in 1998, with the remainder to follow in 1999. The new system provides O&M with modern, paperless systems for its physical distribution operations. This enables the company to standardize warehousing best practices and enhance operational efficiency. Sales and Marketing O&M's sales and marketing force is organized on a decentralized basis in order to provide individualized services to customers by giving the local sales force at each distribution center the discretion to respond to customers' needs quickly and efficiently. The sales and marketing force consists of approximately 200 locally based sales personnel. The company, with the support of its suppliers, provides comprehensive training programs for its sales and marketing force to sharpen customer service skills. The company employs an integrated marketing strategy, offering logistics, asset management, information management and product mix management products and services to customers. Leading technology services offered by the company include: o Decision Support System (DSS). DSS enables the company to compile and customize account-specific information for its customers, so that they can make better, well-supported business decisions. Through its distribution activities, O&M collects and stores a wealth of information about its customers' product usage, ordering and pricing patterns. O&M makes this information available to its customers electronically, allowing them to compare product usage, ordering and pricing for each of the facilities within an IHN. Using this information, a customer can standardize facilities on the right products at the lowest cost. In 1999, O&M intends to make its DSS capabilities more widely accessible to customers and suppliers through the Internet, using WISDOM, the company's new decision support tool. o CostTrack SCM. CostTrack SCM is a supply chain management approach based on activity-based costing that allows management to identify the cost drivers in specific distribution activities, giving customers the information they need to reduce costs. o Focus On Consolidation, Utilization & Standardization (FOCUS). The FOCUS program drives product standardization and consolidation that increases the volume of purchases from O&M's most efficient suppliers and provides operational benefits for its customers. By increasing the volume of purchases from its most efficient suppliers, O&M reduces operational costs for its customers, its suppliers and itself. To qualify as a FOCUS partner, O&M requires participating suppliers to satisfy minimum requirements, such as automated purchasing, exceeding minimum fill rates and offering a flexible returned goods policy. o Continuous Replenishment Program (CRP). Utilizing computer-to-computer interfaces, this initiative allows suppliers to monitor daily sales and inventory levels so that they can automatically and accurately replenish O&M's inventory. o PANDAC(R). The PANDAC(R) wound closure management system provides customers with an evaluation of their current wound closure inventories and usage levels in order to reduce costs for wound closure products. The company guarantees its customers that PANDAC(R) will generate a minimum of 5% savings in total wound closure inventory expenditures during its first year of use. 19 Results of Operations The following table presents the company's consolidated statements of income on a percentage of net sales basis: - -------------------------------------------------------------------------------- Year ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 89.4 89.8 90.1 - -------------------------------------------------------------------------------- Gross margin 10.6 10.2 9.9 - -------------------------------------------------------------------------------- Selling, general and administrative expenses 7.8 7.5 7.7 Depreciation and amortization 0.6 0.6 0.5 Interest expense, net 0.5 0.5 0.7 Discount on accounts receivable securitization 0.1 0.2 0.2 Distributions on mandatorily redeemable preferred securities 0.1 - - Nonrecurring restructuring expenses 0.4 - - - -------------------------------------------------------------------------------- Total expenses 9.5 8.8 9.1 - -------------------------------------------------------------------------------- Income before income taxes 1.1 1.4 0.8 Income tax provision 0.4 0.6 0.4 - -------------------------------------------------------------------------------- Net income 0.7% 0.8% 0.4% - -------------------------------------------------------------------------------- Net sales. Net sales declined slightly by 1.1% to $3.08 billion during the year ended December 31, 1998, from $3.12 billion in 1997, and decreased 10.9% to $717 million for the fourth quarter of 1998 from $805 million for the fourth quarter of 1997. The reduction in net sales was due to the unanticipated mid-year cancellation of Columbia/HCA's distribution contract, which mostly affected fourth-quarter results. Net sales increased 3.2% to $3.12 billion for the year ended December 31, 1997, from $3.02 billion for the year ended December 31, 1996, and increased 6.8% to $805 million for the fourth quarter of 1997 from $754 million for the fourth quarter of 1996. The increase was the result of both increased sales to existing customers and new customer contracts. Gross margin. Gross margin as a percentage of net sales increased to 10.6% in 1998 compared with 10.2% in 1997 and 9.9% in 1996. Gross margin as a percentage of sales increased to 11.3% for the fourth quarter of 1998 from 10.5% in the fourth quarter of 1997 and 10.0% in the fourth quarter of 1996. This improvement reflects the company's continued emphasis on supply chain initiatives with key suppliers. The improvement in the fourth quarter of 1998 was also impacted by the reduction in sales to Columbia/HCA as the benefits of certain supply chain initiatives were recognized over a lower sales base. The 1997 result includes a $1.5 million increase in the annual LIFO (last-in, first-out) provision compared with 1996. The lower charge in 1996 resulted from reductions in inventory levels and modest inflation. [CHART] Gross Margin % vs. SG&A % of Net Sales Gross Margin % 94 2.8% 95 1.4% 96 2.2% 97 2.7% 98 2.8% Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 7.8% in 1998 compared with 7.5% in 1997 and 7.7% in 1996. The increase in 1998 was partially the result of increased information technology spending, including $3.6 million of expenses to address Y2K computer issues, compared with $2.1 million in 1997. The favorable comparison between 1997 and 1996 resulted from a number of cost-saving initiatives, including the reduction of more than 100 full-time equivalent (FTE) employees. The increase in SG&A expenses as a percentage of net sales to 8.2% in the fourth quarter of 1998 from 7.7% in the fourth quarter of 1997 was impacted by the reduction of sales to Columbia/HCA. Depreciation and amortization. Depreciation and amortization increased by 3.4% in 1998 to $18.3 million, compared with $17.7 million in 1997 and $16.1 million in 1996. This increase was due primarily to the company's continued investment in IT, including capital spending in 1998 for systems upgrades of $3.2 million associated with Y2K compliance. O&M anticipates similar increases in depreciation and amortization in 1999 associated with additional capital investment in IT. 20 Analysis of Operations(continued) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Net interest expense and discount on accounts receivable securitization (financing costs). Financing costs, net of finance charge income, totaled $18.7 million in 1998, compared with $22.3 million in 1997 and $25.5 million in 1996. Finance charge income, which represents payments from customers for past due balances on their accounts, decreased to $3.0 million in 1998 from $3.1 million in 1997 and $4.7 million in 1996. The lower financing costs were due to improved cash flow from operations, which enabled the company to reduce borrowings in both 1998 and 1997 compared with the prior-year periods, as well as lower effective interest rates in both 1998 and 1997 compared with the prior-year periods. O&M reduced outstanding debt, excluding the impact of the accounts receivable securitization, to $225.0 million in 1998 from $292.6 million in 1997 and from $293.5 million in 1996. Included in cash flow from operations in 1998 was a $15.9 million refund of federal income tax resulting from a tax method change. Beginning with the tax year ended December 31, 1997, the company received permission from the Internal Revenue Service to change its method of accounting for last-in, first-out inventory. This refund resulted in an increase in the current deferred tax liability and had no effect on the total income tax provision for 1998. O&M 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. Distributions on mandatorily redeemable preferred securities and dividends on preferred stock. In May 1998, the Trust issued $132 million of the Securities. The company applied substantially all of the net proceeds to repurchase and retire all of its Series B Cumulative Preferred Stock at its par value. The effect of this transaction was to reduce the overall cost of capital of the company. The after-tax combined cost of the Securities and the dividend on preferred stock was $4.5 million in 1998, compared to the total dividends on preferred stock of $5.2 million in 1997 and 1996. Nonrecurring restructuring expenses. In the second quarter 1998, 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, to downsize warehouse operations. As of December 31, 1998, $2.0 million had been charged against this liability. Income taxes. The company had an income tax provision of $14.6 million in 1998, compared with $17.6 million in 1997 and $10.1 million in 1996. O&M's effective tax rate was 42.0% in 1998, compared with 42.0% and 43.9% in 1997 and 1996. The 1998 effective tax rate remained consistent with the 1997 effective tax rate as the decrease in income before taxes, which increased the impact of nondeductible goodwill, was offset by the increase in the impact of nontaxable income. The decline in the effective tax rate for 1997 compared with 1996 was due to increased income before taxes reducing the impact of nondeductible goodwill amortization. [CHART] Financing Outstanding Financing (Millions) Financing Costs 94 248.4 10.2 95 382.6 26.2 96 293.5 25.5 97 292.6 22.3 98 225.0 18.7 Net income. Net income decreased $4.2 million or 17.2% in 1998 compared to 1997 and increased $11.4 million or 87.6% in 1997 compared to 1996. The decrease in 1998 was due to the impact of the restructuring charge discussed above. Excluding the effect of the restructuring charge, 1998 net income increased 10.0% to $26.8 million and net income per diluted common share increased to $0.75 compared to $0.60 in 1997 and $0.25 in 1996. Net income for the fourth quarter decreased $0.5 million or 6.4% in 1998 compared to 1997 and increased $2.3 million or 48.5% in 1997 compared to 1996. The decrease in net income in the fourth quarter of 1998 compared to the fourth quarter of 1997 was a result of the reduction in sales from the cancelled Columbia/HCA contract discussed above. The increase in 1997 compared to 1996 was a result of 21 improvements discussed above in gross margin and financing costs, and previously described improvements in SG&A expenses. Excluding the effect of the restructuring charge, 1998 net income attributable to common stock increased to $24.9 million or by 29.8% compared to 1997, due to the positive effect of the issuance of the Securities and the retirement of the Series B Cumulative Preferred Stock. 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. Other Matters Regulation. The medical/surgical supply distribution industry is subject to regulation by federal, state and local government agencies. Each of O&M's distribution centers is licensed to distribute medical and surgical supplies as well as certain pharmaceutical and related products. The company must comply with regulations, including operating and security standards for each of its distribution centers, of the Food and Drug Administration, the Drug Enforcement Agency, the Occupational Safety and Health Administration, state boards of pharmacy and, in certain areas, state boards of health. O&M believes it is in material compliance with all statutes and regulations applicable to distributors of medical and surgical supply products and pharmaceutical and related products, as well as other general employee health and safety laws and regulations. Employees. As of December 31, 1998, O&M employed approximately 2,660 people. [CHART] Full-Time Equivalent Employees 98 2,898 97 3,319 96 3,425 95 4,197 94 3,624 Properties. O&M's corporate headquarters are located in western Henrico County, in a suburb of Richmond, Virginia, in leased facilities. The company owns two undeveloped parcels of land adjacent to its corporate headquarters. The company leases offices and warehouses for its 38 distribution centers across the United States. In 1999, the company plans to make adjustments in the capacity of several facilities to meet current and anticipated business needs. The company believes that its facilities are adequate to carry on its business as currently conducted. All of O&M's distribution centers are leased from unaffiliated third parties. A number of leases are scheduled to terminate within the next several years. The company believes that, if necessary, it could find facilities to replace these leased premises without suffering a material adverse effect on its business. 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 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, 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, and expects they will be substantially complete by mid-1999, prior to any currently anticipated impact on its computer hardware and software. 22 Testing of repairs is expected to be substantially complete in the third quarter of 1999, but will continue through the end of the year. O&M estimates that, as of December 31, 1998, it had completed approximately 95% of the repair, 40% of replacement, and 35% of the testing that it believes will be necessary to fully address potential Y2K issues relating to its computer hardware and software. 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. In 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. 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. Of the suppliers representing approximately 90% of O&M's sales, 89% 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. In 1998, the company 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 is in the process of developing contingency plans to address the most likely risks of non-compliance. The company estimates the cost of its Y2K remediation efforts will total approximately $9.7 million of operating expenses and $6.7 million of capital expenditures. These expenditures will be funded from operating cash flows. Through December 31, 1998, O&M had incurred approximately $5.7 million of expenses and $3.8 million of capital spending related to its Y2K efforts of which $3.6 million and $3.2 million were incurred in 1998. For 1999, the company expects to incur approximately $4.0 million of expenses and $2.9 million of capital spending. Other information technology efforts have not been significantly delayed by Y2K initiatives. O&M is working on, but has 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 company is currently determining its most reasonably likely worst-case scenario and will be developing contingency plans to address this scenario. O&M plans to complete its analysis and contingency planning by late 1999. 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 June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments 23 embedded in other contracts, and for hedging activities. This statement is effective for all fiscal years beginning after June 15, 1999. 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. Market Risk. O&M provides credit, in the normal course of business, to its customers. The company performs ongoing credit evaluations of its customers and maintains reserves for credit losses. The company is exposed to market risk relating to changes in interest rates. To manage this risk, O&M uses interest rate swaps to modify the company's exposure to interest rate movements and reduce borrowing costs. The company enters into these derivative transactions pursuant to its policies in areas such as counterparty exposure and hedging practices. O&M's net exposure to interest rate risk consists of floating rate instruments that are benchmarked to London Interbank Offered Rate (LIBOR). The company is exposed to certain losses in the event of nonperformance by the counterparties to these swap agreements. However, O&M's exposure is not significant and, since the counterparties are investment grade financial institutions, nonperformance is not anticipated. The company is exposed to market risk from changes in interest rates related to its interest rate swaps. Interest expense is subject to change as a result of movements in interest rates. As of December 31, 1998, O&M had $100 million of interest rate swaps on which the company pays a variable rate based on LIBOR and receives a fixed rate and $75 million of interest rate swaps on which the company pays a fixed rate and receives a variable rate based on LIBOR. A hypothetical increase in interest rates of 10%, or 50 basis points, would result in a potential reduction in future pre-tax earnings of approximately $0.5 million per year in connection with the $100 million swaps and an increase in future pre-tax earnings of approximately $0.4 million per year in connection with the $75 million swaps. 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. 24 Consolidated Statements of Income - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1998 1997 1996 ============================================================== =============== ================ ================ Net sales $ 3,082,119 $ 3,116,798 $ 3,019,003 Cost of goods sold 2,755,158 2,800,044 2,720,613 - -------------------------------------------------------------- ----------- ------------ ------------ Gross margin 326,961 316,754 298,390 - -------------------------------------------------------------- ----------- ------------ ------------ Selling, general and administrative expenses 239,543 234,872 233,704 Depreciation and amortization 18,270 17,664 16,098 Interest expense, net 14,066 15,703 18,954 Discount on accounts receivable securitization 4,655 6,584 6,521 Distributions on mandatorily redeemable preferred securities 4,494 - - Nonrecurring restructuring expenses 11,200 - - - -------------------------------------------------------------- ----------- ------------ ------------ Total expenses 292,228 274,823 275,277 - -------------------------------------------------------------- ----------- ------------ ------------ Income before income taxes 34,733 41,931 23,113 Income tax provision 14,588 17,611 10,148 - -------------------------------------------------------------- ----------- ------------ ------------ Net income 20,145 24,320 12,965 Dividends on preferred stock 1,898 5,175 5,175 - -------------------------------------------------------------- ----------- ------------ ------------ Net income attributable to common stock $ 18,247 $ 19,145 $ 7,790 - -------------------------------------------------------------- ----------- ------------ ------------ Net income per common share - basic $ 0.56 $ 0.60 $ 0.25 - -------------------------------------------------------------- ----------- ------------ ------------ Net income per common share - diluted $ 0.56 $ 0.60 $ 0.25 - -------------------------------------------------------------- ----------- ------------ ------------ Cash dividends per common share $ 0.20 $ 0.18 $ 0.18
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 25 Consolidated Balance Sheets - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 1998 1997 ======================================================================= =========== ============ ASSETS CURRENT ASSETS Cash and cash equivalents $ 546 $ 583 Accounts and notes receivable, net 213,765 187,878 Merchandise inventories 275,094 285,529 Other current assets 14,816 25,274 - ----------------------------------------------------------------------- -------- --------- TOTAL CURRENT ASSETS 504,221 499,264 Property and equipment, net 25,608 26,628 Goodwill, net 158,276 162,821 Other assets, net 29,663 23,850 - ----------------------------------------------------------------------- -------- --------- TOTAL ASSETS $717,768 $ 712,563 - ----------------------------------------------------------------------- -------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $206,251 $ 224,072 Accrued payroll and related liabilities 8,974 7,840 Other accrued liabilities 53,749 33,563 - ----------------------------------------------------------------------- -------- --------- TOTAL CURRENT LIABILITIES 268,974 265,475 Long-term debt 150,000 182,550 Accrued pension and retirement plans 5,668 5,237 - ----------------------------------------------------------------------- -------- --------- TOTAL LIABILITIES 424,642 453,262 - ----------------------------------------------------------------------- -------- --------- 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 - 32,618 shares and 32,213 shares 65,236 64,426 Paid-in capital 12,280 8,005 Retained earnings 83,610 71,870 - ----------------------------------------------------------------------- -------- --------- TOTAL SHAREHOLDERS' EQUITY 161,126 259,301 - ----------------------------------------------------------------------- -------- --------- Commitments and contingencies - ----------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $717,768 $ 712,563 ======================================================================= ======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS)
Year ended December 31, 1998 1997 1996 ================================================================== ============= ============== ============= OPERATING ACTIVITIES Net income $ 20,145 $ 24,320 $ 12,965 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 18,270 17,664 16,098 Nonrecurring restructuring provision 11,200 - - Deferred income taxes 22,737 (3) 2,406 Provision for LIFO reserve 1,536 2,414 908 Provision for losses on accounts and notes receivable 496 268 838 Changes in operating assets and liabilities: Accounts and notes receivable (26,383) (40,903) 117,157 Merchandise inventories 8,899 (6,104) 43,633 Accounts payable (23,375) 4,714 (9,670) Net change in other current assets and current liabilities (651) 4,614 2,619 Other, net (389) 1,038 1,178 - ------------------------------------------------------------------ ---------- ---------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 32,485 8,022 188,132 - ------------------------------------------------------------------ ---------- ---------- ---------- INVESTING ACTIVITIES Additions to property and equipment (8,053) (7,495) (6,242) Additions to computer software (4,556) (4,472) (6,985) Proceeds from sale of property and equipment 160 1,851 6,865 - ------------------------------------------------------------------ ---------- ---------- ---------- CASH USED FOR INVESTING ACTIVITIES (12,449) (10,116) (6,362) - ------------------------------------------------------------------ ---------- ---------- ---------- FINANCING ACTIVITIES Net proceeds from issuance of mandatorily redeemable preferred securities 127,268 - - Repurchase of preferred stock (115,000) - - Additions to long-term debt - 26,026 150,000 Reductions of long-term debt (32,550) (11,049) (314,877) Other short-term financing, net 5,554 (4,679) (7,341) Cash dividends paid (9,268) (10,950) (10,868) Proceeds from exercise of stock options 3,923 2,586 1,844 - ------------------------------------------------------------------ ---------- ---------- ---------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (20,073) 1,934 (181,242) - ------------------------------------------------------------------ ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37) (160) 528 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 583 743 215 - ------------------------------------------------------------------ ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 546 $ 583 $ 743 ================================================================== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 Consolidated Statements of Changes in Shareholders' Equity - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS)
Preferred Common Shares Preferred Shares Common Paid-in Retained Outstanding Stock Outstanding Stock Capital Earnings ============= ============= ============= ========== =========== =========== Balance December 31, 1995 1,150 $ 115,000 30,862 $61,724 $ 2,144 $ 56,403 Net income - - - - - 12,965 Common stock cash dividends(1) - - - - - (5,693) Preferred stock cash dividends(1) - - - - - (5,175) Exercise of stock options - - 206 412 1,432 - Convertible debt conversion - - 867 1,734 1,766 - Other - - (28) (56) (256) - - ----------------------------------- ----- ---------- ------ ------- ------- -------- Balance December 31, 1996 1,150 115,000 31,907 63,814 5,086 58,500 Net income - - - - - 24,320 Common stock cash dividends(1) - - - - - (5,775) Preferred stock cash dividends(1) - - - - - (5,175) Exercise of stock options - - 303 606 2,902 - Other - - 3 6 17 - - ----------------------------------- ----- ---------- ------ ------- ------- -------- Balance December 31, 1997 1,150 115,000 32,213 64,426 8,005 71,870 Net income - - - - - 20,145 Issuance of restricted stock - - 64 128 832 - Unearned compensation - - - - (657) - Common stock cash dividends(1) - - - - - (6,507) Preferred stock cash dividends(1) - - - - - (1,898) Exercise of stock options - - 333 666 3,978 - Repurchase of preferred stock (1,150) (115,000) - - - - Other - - 8 16 122 - - ----------------------------------- ------ ---------- ------ ------- ------- -------- BALANCE DECEMBER 31, 1998 - $ - 32,618 $65,236 $12,280 $ 83,610 =================================== ====== ========== ====== ======= ======= ========
(1) Cash dividends were $0.20 per common share and $1.65 per preferred share in 1998. Cash dividends were $0.18 per common share and $4.50 per preferred share in 1997 and 1996. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 28 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Owens & Minor, Inc. is the largest distributor of national name brand medical/ surgical supplies in the United States. The consolidated financial statements include the accounts of Owens & Minor, Inc. and its wholly owned subsidiaries (the company). All significant intercompany accounts and transactions have been eliminated. The preparation of the consolidated financial statements in accordance with generally accepted accounting principles requires management assumptions and estimates that affect amounts reported. Actual results may differ from these estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and marketable securities with an original maturity or maturity at acquisition of three months or less. Cash and cash equivalents are stated at cost, which approximates market value. ACCOUNTS RECEIVABLE The company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. Allowances for doubtful accounts of $6.3 million have been applied as a reduction of accounts receivable at December 31, 1998 and 1997. MERCHANDISE INVENTORIES The company's merchandise inventories are valued on a last-in, first-out (LIFO) basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost or, if acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Normal maintenance and repairs are expensed as incurred, and renovations and betterments are capitalized. Depreciation and amortization are provided for financial reporting purposes on the straight-line method over the estimated useful lives of the assets or, for capital leases and leasehold improvements, over the terms of the lease, if shorter. In general, the estimated useful lives for computing depreciation and amortization are four to eight years for warehouse equipment and three to eight years for computer, office and other equipment. Straight-line and accelerated methods of depreciation are used for income tax purposes. GOODWILL Goodwill is amortized on a straight-line basis over 40 years from the dates of acquisition. As of December 31, 1998 and 1997, goodwill was $181.1 million and the related accumulated amortization was $22.8 million and $18.3 million, respectively. Based upon management's assessment of future cash flows of acquired businesses, the carrying value of goodwill at December 31, 1998 has not been impaired. The carrying value of goodwill could be impacted if estimated future cash flows are not achieved. COMPUTER SOFTWARE The company develops and purchases software for internal use. Effective January 1, 1998, the company adopted the provisions of Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Software development costs incurred during the application development stage are capitalized. Once the software has been installed and tested and is ready for use, additional costs incurred in connection with the software are expensed as incurred. Capitalized computer software costs are amortized over the estimated useful life of the software, usually between 3 and 5 years. Computer software costs are included in other assets, net in the Consolidated Balance Sheets. Unamortized software at December 31, 1998 and 1997 was $10.2 million and $11.0 million. Depreciation and amortization expense includes $5.1 million, $4.6 million and $2.8 million of software amortization for the years ended December 31, 1998, 1997 and 1996. REVENUE RECOGNITION Revenue from product sales is generally recognized at the time the product is shipped. Service revenue is recognized over the contractual period as the services are performed. STOCK-BASED COMPENSATION The company uses the intrinsic value method of Accounting Principles Board Opinion No. 25 to account for stock-based compensation. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. The disclosure requirements of Statement of Financial Accounting Standards No. (SFAS) 123 are included in Note 8 to Consolidated Financial Statements. 29 DERIVATIVE FINANCIAL INSTRUMENTS The company enters into interest rate swaps and caps as part of its interest rate risk management strategy. These instruments are designated as hedges of interest-bearing liabilities and anticipated cash flows associated with off balance sheet financing. Net payments or receipts are accrued as interest payable or receivable and as interest expense or income. Fees related to these instruments are amortized over the life of the instrument. If the outstanding balance of the underlying liability were to drop below the notional amount of the swap or cap, the excess portion of the swap or cap would be marked to market, and the resulting gain or loss included in net income. OPERATING SEGMENTS The company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, effective January 1, 1998. As defined in SFAS 131, the company operates in 34 operating segments. As each of these segments is substantially identical to the others in each of the five aggregation characteristics identified in the statement, these segments have been aggregated for purposes of financial statement disclosure. NOTE 2 - NONRECURRING RESTRUCTURING EXPENSES In the second quarter of 1998, the company recorded a nonrecurring restructuring charge of $11.2 million related to the impact of the cancellation of its medical/ surgical distribution contract with Columbia/HCA Healthcare Corporation (Columbia/HCA). 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. The following table sets forth the activity in the restructuring reserve through December 31, 1998: (IN THOUSANDS)
BALANCE AT RESTRUCTURING DECEMBER 31, PROVISION CHARGES 1998 ================= ========= ============= Losses under lease commitments $ 4,194 $ 573 $3,621 Asset write-offs 3,968 505 3,463 Employee separations 2,497 848 1,649 Other 541 33 508 - ----------------------- ------- ------ ------ Total $11,200 $1,959 $9,241
Approximately 100 employees were terminated in 1998 in connection with the restructuring plan. NOTE 3 - MERCHANDISE INVENTORIES The company's merchandise inventories are valued on a LIFO basis. If LIFO inventories had been valued on a current cost or first-in, first-out (FIFO) basis, they would have been greater by $26.8 million and $25.3 million as of December 31, 1998 and 1997, respectively. During 1996, inventory quantities were reduced which resulted in a liquidation of LIFO inventory carried at lower costs prevailing in prior years as compared with the cost of 1996 purchases, the effect of which increased net income by approximately $1.2 million or $0.04 per diluted common share. NOTE 4 - PROPERTY AND EQUIPMENT The company's investment in property and equipment consists of the following: (IN THOUSANDS)
December 31, 1998 1997 ============================= =========== =========== Warehouse equipment $23,138 $ 23,477 Computer equipment 25,888 22,729 Office and other equipment 11,368 11,198 Leasehold improvements 9,288 9,221 Land and improvements 1,738 1,503 - ----------------------------- ------- -------- 71,420 68,128 Accumulated depreciation and amortization (45,812) (41,500) - ----------------------------- ------- -------- Property and equipment, net $25,608 $ 26,628
Depreciation and amortization expense for property and equipment in 1998, 1997 and 1996 was $8.6 million, $8.5 million and $8.7 million. NOTE 5 - ACCOUNTS PAYABLE Accounts payable balances were $206.3 million and $224.1 million as of December 31, 1998 and 1997, respectively, of which $164.5 million and $187.8 million, respectively, were trade accounts payable and $41.8 million and $36.3 million, respectively, were drafts payable. Drafts payable are checks written in excess of bank balances to be funded upon clearing the bank. 30 NOTE 6 - FINANCIAL INSTRUMENTS The company's long-term debt consists of the following: (IN THOUSANDS)
December 31, 1998 1997 ==================================================== ============================= ======================== CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value ============== ============ ========== =========== 10.875% Senior Subordinated Notes, mature June 2006 $150,000 $162,000 $150,000 $168,750 Revolving Credit Facility with interest based on London Interbank Offered Rate (LIBOR) or Prime Rate, expires May 2001, credit limit of $225,000 - - 32,550 32,550 - ---------------------------------------------------- -------- -------- -------- -------- Long-term debt $150,000 $162,000 $182,550 $201,300
In May 1996, the company issued $150.0 million of 10.875% Senior Subordinated 10-year notes (Notes), which mature on June 1, 2006. Interest on the Notes is payable semi-annually on June 1 and December 1. The Notes are redeemable, after June 1, 2001, at the company's option, subject to certain restrictions. The Notes are unconditionally guaranteed on a joint and several basis by all direct and indirect subsidiaries of the company, other than O&M Funding Corp. (OMF) and Owens & Minor Trust I. The Revolving Credit Facility expires in May 2001 with interest based on, at the company's discretion, LIBOR or the Prime Rate. The company is charged a commitment fee of between 0.15% and 0.25%, depending upon the company's capitalization ratio, on the unused portion of the Revolving Credit Facility. The terms of the Revolving Credit Facility limit the amount of indebtedness that the company may incur, require the company to maintain certain levels of tangible net worth, current ratio, leverage ratio and fixed charge coverage, and restrict the ability of the company to materially alter the character of the business through consolidation, merger or purchase or sale of assets. At December 31, 1998, the company was in compliance with these covenants. Net interest expense includes finance charge income of $3.0 million, $3.1 million and $4.7 million in 1998, 1997 and 1996, respectively. Finance charge income represents payments from customers for past due balances on their accounts. Cash payments for interest during 1998, 1997 and 1996 were $16.4 million, $18.3 million and $22.1 million, respectively. The estimated fair value of long-term debt is based on the borrowing rates currently available to the company for loans with similar terms and average maturities. There are no maturities of long-term debt for any of the five years subsequent to December 31, 1998. OFF BALANCE SHEET FINANCING Under the terms of the Receivable Financing Facility, OMF is entitled to transfer, without recourse, certain of the company's trade receivables and to receive up to $150.0 million from an unrelated third party purchaser at a cost of funds at commercial paper rates plus a charge for administrative and credit support services. In October 1998, the Receivables Financing Facility was modified primarily to extend the facility termination date to October 4, 1999. At December 31, 1998 and 1997, the company had received $75.0 million and $110.0 million, respectively, under the agreement. To continue use of the Receivables Financing Facility, the company is required to be in compliance with the covenants of the Revolving Credit Facility. The company manages its interest rate risk, primarily through the use of interest rate swap agreements. The company's interest rate swap agreements as of December 31, 1998 and 1997 included $100.0 million notional amounts that effectively converted a portion of the company's fixed rate financing instruments to variable rates. Under these swap agreements, expiring in May 2006, the company pays the counterparties a variable rate based on LIBOR and the counterparties pay the company a fixed interest rate ranging from 7.29% to 7.32%. At the option of the counterparties, these swaps 31 can be terminated in 2001. As of December 31, 1998, the company also had $75.0 million notional amounts of interest rate swap agreements that effectively converted the company's variable rate financing instruments to fixed rate instruments. Under these swap agreements, which expire in May 2001, the company pays the counterparties a fixed rate ranging from 5.75% to 5.93% and the counterparties pay the company a variable rate based on LIBOR. As of December 31, 1997, the company had $50.0 million notional amounts of interest rate swap agreements, which effectively converted a portion of the company's variable rate financing instruments to fixed rate instruments. Under these swap agreements, which expired in February 1998, the company paid the counterparties a fixed rate ranging from 7.41% to 7.72% and the counterparties paid the company a variable rate based on LIBOR. The payments received or disbursed related to the interest rate swaps are included in interest expense, net. Based on estimates of the prices obtained from a dealer, the company had an unrealized gain of approximately $5.0 million and $2.7 million at December 31, 1998 and 1997, respectively, for the fixed to variable rate swaps and an unrealized loss of approximately $1.2 million and $0.2 million at December 31, 1998 and 1997, respectively, for the variable to fixed rate swaps. The company is exposed to certain losses in the event of nonperformance by the counterparties to these swap agreements. However, the company's exposure is not material and, since the counterparties are investment grade financial institutions, nonperformance is not anticipated. NOTE 7 - MANDATORILY REDEEMABLE PREFERRED SECURITIES In May 1998, Owens & Minor Trust I (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 (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 (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 by the company in whole or in part after May 1, 2001. The obligations of the Trust, as provided under the term of the Securities, are fully and unconditionally guaranteed by O&M. The estimated fair value of the Securities is $127.4 million at December 31, 1998, based on a quoted market price. As of December 31, 1998, the company had accrued $1.2 million of distributions related to these Securities. NOTE 8 - STOCK-BASED COMPENSATION The company maintains stock based compensation plans (Plans) which provide for the granting of stock options, stock appreciation rights (SARs), restricted common stock and common stock. The Plans are administered by the Compensation and Benefits Committee of the Board of Directors and allow the company to award or grant to officers, directors and employees incentive, non-qualified and deferred compensation stock options, SARs and restricted and unrestricted stock. At December 31, 1998, approximately two million common shares were available for issuance under the Plans. Stock options awarded under the Plans generally vest over three years and expire ten years from the date of grant. The options are granted at a price equal to fair market value at the date of grant. Restricted stock awarded under the Plans generally vests over three or five years. At December 31, 1998, there were no SARs outstanding. In 1997, the company adopted a Management Equity Ownership Program. This program requires each of the company's officers to own the company's common stock at specified levels, which gradually increase over five years. Officers who meet specified ownership goals in a given year are awarded restricted stock under the provisions of the program. Upon issuance of restricted shares, unearned compensation is charged to shareholders' equity for the market value of restricted stock and recognized as compensation 32 expense ratably over the vesting period. Amortization of unearned compensation was approximately $301.6 thousand, $54.3 thousand and $2.3 thousand for 1998, 1997 and 1996. The following table summarizes the activity and terms of outstanding options at December 31, 1998, and for the years in the three-year period then ended: (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 ======================= ===================== ====================== AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ========== ========== ======== ========== ======== =========== Options outstanding beginning of year 1,940 $ 13.50 1,922 $ 13.06 1,745 $ 12.41 Granted 550 13.79 523 12.73 629 13.38 Exercised (333) 12.12 (303) 13.41 (206) 8.95 Expired/cancelled (156) 13.89 (202) 14.58 (246) 12.67 - --------------------------------------- ----- ------- ----- ------- ----- ------- Outstanding at end of year 2,001 $ 13.78 1,940 $ 13.50 1,922 $ 13.06 Exercisable options at end of year 1,137 $ 14.16 1,123 $ 13.87 1,053 $ 12.40
At December 31, 1998, the following option groups were outstanding:
Outstanding Exercisable ============= ============= Weighted Weighted Weighted Average Weighted Average Range of Number of Average Remaining Number of Average Remaining Exercise Options Exercise Contractual Life Options Exercise Contractual Life Prices (000's) Price (Years) (000's) Price (Years) ================= =========== ============= ================== =========== ============= ================= $ 9.50-13.00 538 $ 12.36 7.96 270 $ 12.22 7.64 $13.37-17.07 1,463 $ 14.30 7.01 867 $ 14.76 5.82 - ------------ ----- ------- ---- --- ------- ---- 2,001 $ 13.78 7.26 1,137 $ 14.16 6.25
Using the intrinsic value method, the company's 1998, 1997 and 1996 net income includes stock-based compensation expense (net of tax benefit) of approximately $201 thousand, $67 thousand and $50 thousand. The weighted average fair value of options granted in 1998, 1997 and 1996 was $4.06, $3.77 and $3.90 per option. Had the company included in stock-based compensation expense the fair value at grant date of stock option awards granted in 1998, 1997 and 1996, net income would have been $19.0 million or $0.52 per basic and diluted common share, $23.2 million or $0.56 per basic and diluted common share and $12.3 million or $0.23 per basic and diluted common share for the years ended December 31, 1998, 1997 and 1996. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants: dividend yield of 1.2%-1.5% in 1998, 1.2%-1.7% in 1997 and 1.8% in 1996; expected volatility of 32.44%-37.90% in 1998, 24.6%-41.0% in 1997 and 32.0% in 1996; risk-free interest rate of 4.7% in 1998 and 5.6% in 1997 and 6.3% in 1996; and expected lives of 2.1-5.1 years in 1998 and in 1997 and 4.0 years in 1996. 33 NOTE 9 - RETIREMENT PLANS PENSION PLAN The company has a noncontributory pension plan covering substantially all employees who had earned benefits as of December 31, 1996. On that date, substantially all of the benefits of employees under this plan were frozen, with all participants becoming fully vested. The changes in this plan resulted in a 1996 curtailment gain of approximately $2.0 million, which was recorded in selling, general and administrative expenses in the company's Consolidated Statements of Income. The company expects to continue to fund the plan based on federal requirements, amounts deductible for income tax purposes, and as needed to ensure that plan assets are sufficient to satisfy plan liabilities. As of December 31, 1998, plan assets consist primarily of equity securities, including 34 thousand shares of the company's common stock, and U.S. Government securities. RETIREMENT PLAN The company also has a noncontributory, unfunded retirement plan for certain officers and other key employees. Benefits are based on a percentage of the employees' compensation. The company maintains life insurance policies on plan participants to act as a financing source for the plan. The following table sets forth the plans' financial status and the amounts recognized in the company's Consolidated Balance Sheets: (IN THOUSANDS)
Pension Plan Retirement Plan ========================= =========================== 1998 1997 1998 1997 =========== =========== ============ ============ CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year $20,671 $18,324 $ 5,078 $ 5,017 Service cost 243 283 354 285 Interest cost 1,415 1,344 350 371 Actuarial loss (gain) 831 1,461 452 (454) Benefits paid (872) (741) (140) (141) - ---------------------------------------------- ------- ------- -------- --------- Benefit obligation, end of year $22,288 $20,671 $ 6,094 $ 5,078 - ---------------------------------------------- ------- ------- -------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of year $22,121 $16,950 $ - $ - Actual return on plan assets 2,827 3,393 - - Employer contribution 67 2,519 140 141 Benefits paid (872) (741) (140) (141) - ---------------------------------------------- ------- ------- -------- --------- Fair value of plan assets, end of year $24,143 $22,121 $ - $ - - ---------------------------------------------- ------- ------- -------- --------- FUNDED STATUS Funded status at December 31 $ 1,855 $ 1,450 $ (6,094) $ (5,078) Unrecognized net actuarial (gain) loss (816) (502) 1,696 1,301 Unrecognized prior service benefit - - (204) (221) Unrecognized net obligation being recognized through 2002 - - 164 205 - ---------------------------------------------- ------- ------- -------- --------- Prepaid (accrued) benefit cost $ 1,039 $ 948 $ (4,438) $ (3,793)
34 The components of net periodic pension cost for the pension and retirement plans are as follows: (IN THOUSANDS)
Year ended December 31, 1998 1997 1996 =========================== =========== =========== ========== Service cost $ 597 $ 568 $ 2,598 Interest cost 1,765 1,715 1,714 Expected return on plan assets (1,682) (1,430) (1,225) Amortization of prior service (benefit) cost (17) (17) 65 Curtailment gain - - (1,988) Amortization of transition obligation (asset) 41 41 (66) Recognized net actuarial loss 57 90 82 - --------------------------- ------ ------ ------- Net periodic pension cost $ 761 $ 967 $ 1,180
The weighted average discount rate, rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations and the expected long-term rate of return on plan assets were assumed to be 6.75%, 5.5% and 8.5% in 1998 and 7.0%, 5.5% and 8.5% in 1997. OTHER RETIREMENT BENEFITS The company substantially terminated its postretirement medical plan in 1996. The termination resulted in a reduction in the company's accumulated postretirement benefit obligation of approximately $1.6 million, which is being recognized in income through the year 2008. The following table sets forth the plan's financial status and the amounts recognized in the company's Consolidated Balance Sheets: (IN THOUSANDS)
Postretirement Medical Plan ======================================================== 1998 1997 ============= ============= CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year $ 956 $ 932 Interest cost 66 65 Benefits paid (60) (41) - ------------------------ ------- -------- Benefit obligation, end of year $ 962 $ 956 - ------------------------ ------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of year $ - $ - Employer contribution 60 41 Benefits paid (60) (41) - ------------------------ ------- -------- Fair value of plan assets, end of year $ - $ - - ------------------------ ------- -------- FUNDED STATUS Funded status at December 31 $ (962) $ (956) Unrecognized prior service benefit (1,306) (1,436) - ------------------------ ------- -------- Accrued benefit cost $(2,268) $ (2,392)
The components of net periodic cost for the postretirement medical plan are as follows: (IN THOUSANDS)
Year ended December 31, 1998 1997 1996 ====================== ========= ========= ======== Service cost $ - $ - $ 308 Interest cost 66 65 177 Amortization of prior service benefit (130) (131) (78) - ---------------------- ----- ----- ----- Net periodic postretirement cost (benefit) $ (64) $ (66) $ 407
35 For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 1998; the rate was assumed to decrease gradually to 6.0% for the year 2001 and remain at that level thereafter. The healthcare cost trend rate assumption does not have a significant effect on the amounts reported. The company maintains a voluntary Savings and Protection Plan covering substantially all full-time employees who have completed six months of service and have attained age 18. The company matches a certain percentage of each employee's contribution. Effective January 1, 1997, the company enhanced this plan to provide for a minimum contribution by the company to the plan for all eligible employees of 1% of their salary. This contribution can be increased at the company's discretion. The company incurred approximately $2.1 million, $2.6 million and $1.0 million in 1998, 1997 and 1996, respectively, of expenses related to this plan. NOTE 10 - INCOME TAXES The income tax provision consists of the following: (IN THOUSANDS)
Year ended December 31, 1998 1997 1996 ================= ============ ============== ========== Current tax provision (benefit): Federal $(7,690) $ 14,484 $ 6,186 State (459) 3,130 1,556 - ----------------- ------- -------- -------- Total current provision (benefit) (8,149) 17,614 7,742 - ------------------ ------- -------- -------- Deferred tax provision (benefit): Federal 19,895 (2) 1,923 State 2,842 (1) 483 - ------------------ ------- ---------- -------- Total deferred provision (benefit) 22,737 (3) 2,406 - ------------------ ------- ---------- -------- Total income tax provision $14,588 $ 17,611 $ 10,148
A reconciliation of the federal statutory rate to the company's effective income tax rate is shown below:
Year ended December 31, 1998 1997 1996 ============================ =========== ========== ========== Federal statutory rate 35.0% 35.0% 35.0% Increases (reductions) in the rate resulting from: State income taxes, net of federal income tax impact 4.9 4.9 5.0 Nondeductible goodwill amortization 4.7 3.7 7.5 Nontaxable income (4.0) (2.6) (4.6) Other, net 1.4 1.0 1.0 - ---------------------------- ---- ---- ---- Effective rate 42.0% 42.0% 43.9%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: (IN THOUSANDS)
Year ended December 31, 1998 1997 ================================ ============ ========= Deferred tax assets: Allowance for doubtful accounts $ 2,509 $ 2,525 Accrued liabilities not currently deductible 5,276 7,044 Employee benefit plans 3,616 3,377 Merchandise inventories - 4,169 Nonrecurring restructuring expenses 3,692 - Tax loss carryforward, net 947 1,238 Other 815 839 - -------------------------------- ------- ------- Total deferred tax assets 16,855 19,192 - -------------------------------- ------- ------- Deferred tax liabilities: Merchandise inventories 19,113 - Accounts receivable 2,101 - Property and equipment 1,076 1,557 Computer software 708 1,252 Other 1,359 1,148 - -------------------------------- ------- ------- Total deferred tax liabilities 24,357 3,957 - -------------------------------- ------- ------- Net deferred tax asset (liability) $(7,502) $15,235
36 At December 31, 1998 and 1997, the company had a $0.27 million and $0.10 million valuation allowance, respectively, for state net operating losses. Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the company will realize the benefits of these deductible differences, net of existing valuation allowances. For the tax year ended December 31, 1997, the company received permission from the Internal Revenue Service to change its method of accounting for inventories. For tax purposes only, the company's inventories were restated to reflect this change in the method of accounting. This change resulted in a $24.1 million net increase in the company's deferred tax liability in 1998 as well as a cash refund of income taxes of $15.9 million received in the third quarter of 1998. Cash payments for income taxes for 1998, 1997 and 1996 were $14.1 million, $18.6 million and $8.0 million, respectively. - -------------------------------------------------------------------------------- NOTE 11 - 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)
1998 1997 1996 ============ ============= ============= Numerator: Net income $20,145 $ 24,320 $ 12,965 Preferred stock dividends 1,898 5,175 5,175 - ------------------------------------------------------------------- ------- -------- -------- Numerator for basic net income per common share - net income available to common shareholders $18,247 $ 19,145 $ 7,790 Effect of dilutive securities-interest on convertible debt, net - - 51 - ------------------------------------------------------------------- ------- -------- -------- Numerator for diluted net income per common share - net income available to common shareholders after assumed conversions $18,247 $ 19,145 $ 7,841 - ------------------------------------------------------------------- ------- -------- -------- Denominator: Denominator for basic net income per common share - weighted average shares 32,488 32,048 31,707 Effect of dilutive securities: Stock options and restricted stock 99 74 78 Convertible debt - - 21 Other 4 7 3 - ------------------------------------------------------------------- ------- -------- -------- Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 32,591 32,129 31,809 - ------------------------------------------------------------------- ------- -------- -------- Net income per common share - basic $ 0.56 $ 0.60 $ 0.25 Net income per common share - diluted $ 0.56 $ 0.60 $ 0.25
At December 31, 1998, 2.6 million shares of mandatorily redeemable preferred securities, convertible into approximately 6.4 million shares of common stock, were outstanding. All of these potential common shares were excluded from the calculation of diluted net income per share because their inclusion would have had an antidilutive effect. During the years ended December 31, 1998, 1997 and 1996, options to purchase approximately 461 thousand, 1,192 thousand and 1,737 thousand common shares were outstanding. These options were excluded from the calculation of diluted net income per share because their exercise price exceeded the average market price for the year. 37 NOTE 12 - SHAREHOLDERS' EQUITY In May 1998, the company repurchased all of the shares of its Series B preferred stock at par value. This stock was originally issued in May 1994 in connection with the Stuart Medical, Inc. (Stuart) acquisition. Each share of preferred stock had an annual dividend of $4.50, payable quarterly, had voting rights on items submitted to a vote of the holders of common stock and was convertible into approximately 6.1 shares of common stock at the shareholder's option. The company has a shareholder rights agreement under which 8/27ths of a Right is attendant to each outstanding share of common stock of the company. Each full Right entitles the registered holder to purchase from the company one one-hundredth of a share of Series A Participating Cumulative Preferred Stock (the Series A Preferred Stock), at an exercise price of $75 (the Purchase Price). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 20% or more of the outstanding shares of the company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of such outstanding shares. Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Series A Preferred Stock (or in certain circumstances, cash, property or other securities of the company or a potential acquirer) having a value equal to twice the amount of the Purchase Price. The Rights will expire on April 30, 2004, if not earlier redeemed. NOTE 13 - COMMITMENTS AND CONTINGENCIES The company has a commitment through November 2, 2008 to outsource its information technology operations, including strategic application development services. The commitment is cancellable after November 2, 2003 with 180 days prior notice and payment of a minimum termination fee of between $12.0 million to $3.0 million depending upon the date of termination. The company has a commitment through December 2001 to outsource the management and operation of its mainframe computer. This commitment is cancellable at any time on 180 days prior notice and a minimum payment of $7.5 million. The company also has entered into noncancellable agreements to lease certain office and warehouse facilities with remaining terms ranging from one to nine years. Certain leases include renewal options, generally for five-year increments. At December 31, 1998, future minimum annual payments under noncancellable operating lease agreements with original terms in excess of one year are as follows: (IN THOUSANDS)
Total ========== 1999 $18,887 2000 15,216 2001 12,153 2002 9,469 2003 8,164 Later years 13,469 - ------------------------ ------- Total minimum payments $77,358
Minimum lease payments have not been reduced by minimum sublease rentals aggregating $0.5 million due in the future under noncancellable subleases. Rent expense for all operating leases for the years ended December 31, 1998, 1997 and 1996 was $26.1 million, $26.3 million and $25.6 million, respectively. The company has limited concentrations of credit risk with respect to financial instruments. Temporary cash investments are placed with high credit quality institutions and concentrations within accounts and notes receivable are limited due to their geographic dispersion. In 1998, 1997 and 1996, net sales to Columbia/HCA totaled $276 million, $356 million and $321 million, or approximately 9% in 1998 and 11% in 1997 and 1996 of the company's net sales. In May 1998, Columbia/HCA cancelled its medical/surgical distribution contract with the company. Net sales to member hospitals under contract with VHA Inc. totaled $1.3 billion in 1998 and 1997 and $1.2 billion in 1996, approximately 41%, 40% and 41%, respectively, of the company's net sales. As members of a national healthcare network, VHA Inc. hospitals have an incentive to purchase from their primary selected distributor; however, they operate independently and are free to negotiate directly with distributors and manufacturers. 38 NOTE 14 - LEGAL PROCEEDINGS As of January 30, 1999, Stuart is named as a defendant along with product manufacturers, distributors, healthcare providers, trade associations and others in approximately 54 lawsuits filed in various federal and state courts (the Cases). The Cases represent the claims of approximately 55 plaintiffs claiming personal injuries and approximately 30 spouses asserting claims for loss of consortium. The Cases seek damages for personal injuries allegedly attributable to spinal fixation devices. The great majority of the Cases seek compensatory and punitive damages in unspecified amounts. Prior to December 1992, Stuart distributed spinal fixation devices manufactured by Sofamor SNC, a predecessor of Sofamor Danek Group, Inc. (Sofamor Danek). Approximately three fourths of the claims involve plaintiffs implanted with spinal fixation devices manufactured by Sofamor Danek. Such plaintiffs allege that Stuart is liable to them under applicable products liability law for injuries caused by such devices distributed and sold by Stuart. In addition, such plaintiffs allege that Stuart distributed and sold the spinal fixation devices through deceptive and misleading means and in violation of applicable law. In the remaining Cases, plaintiffs seek to hold Stuart liable for injuries caused by other manufacturers' devices that were neither distributed nor sold by Stuart. Such plaintiffs allege that Stuart engaged in a civil conspiracy and concerted action with manufacturers, distributors and others to promote the sale of spinal fixation devices through deceptive and misleading means in violation of applicable law. Stuart never manufactured any spinal fixation devices. The company believes that affirmative defenses are available to Stuart. All Cases filed against Stuart have been, and will continue to be, vigorously defended. A majority of the Cases have been transferred to, and consolidated for pretrial proceedings, in the Eastern District of Pennsylvania in Philadelphia under the style MDL Docket No. 1014: In re Orthopedic Bone Screw Products Liability Litigation. Discovery proceedings, including the taking of depositions have been ongoing in certain of the Cases, and, in a number of Cases, discovery has been completed and these Cases have been remanded back for trial to those jurisdictions where they were originally filed. The company is unable at this time to determine with certainty whether or not Stuart may be liable. Based upon management's analysis of indemnification agreements between Stuart and Sofamor Danek, the manufacturer of the devices distributed by Stuart, the company believes that Stuart is entitled to indemnification by Sofamor Danek at least with respect to claims brought by plaintiffs implanted with devices manufactured by Sofamor Danek. Such Cases are being defended by Stuart's insurance carriers. Regarding those Cases filed by plaintiffs implanted with other manufacturers' devices, Stuart's primary insurance carriers have provided a defense for such Cases and is expected to continue to provide a defense through June 1999. The company and Stuart are also contractually entitled to indemnification by the former shareholders of Stuart for any liabilities and related expenses incurred by the company or Stuart in connection with the foregoing litigation. The company believes that Stuart's available insurance coverage together with the indemnification rights discussed above are adequate to cover any losses should they occur, and accordingly has accrued no liability therefor. The company is not aware of any uncertainty as to the availability and adequacy of such insurance or indemnification, although there can be no assurance that Sofamor Danek and the former shareholders will have sufficient financial resources in the future to meet such obligations. As of January 29, 1999, approximately 70 lawsuits (the "Lawsuits") seeking compensatory and punitive damages, in most cases of an unspecified amount, have been filed in various federal and state courts against the company, product manufacturers and other distributors and sellers of natural rubber latex products. The Lawsuits allege injuries arising from the use of latex products, principally medical gloves. The Lawsuits also include claims by approximately 42 spouses asserting loss of consortium. The company may be named as a defendant in additional similar lawsuits in the future. In the course of its medical supply business, the company has distributed latex products, including medical gloves, but it does not, nor has it ever, manufactured any latex products. The company has tendered the defense of the Lawsuits to manufacturer defendants whose gloves were distributed by the 39 company and one manufacturer's insurer has agreed to indemnify and assume the defense of the company in five Lawsuits. The company will continue to vigorously pursue indemnification from latex product manufacturers. The company's insurers are paying all costs of defense growing out of the Lawsuits and the company believes at this time that future defense costs and any potential liability should be adequately covered by its insurance, subject to policy limits and insurer solvency. Since all of the Lawsuits are in early stages of trial preparation, the likelihood of an unfavorable outcome for the company or the amount or range of potential loss with respect to any of these matters cannot be reasonably determined at this time. The company is party to various other legal actions that are ordinary and incidental to its business. While the outcome of legal actions cannot be predicted with certainty, management believes the outcome of these proceedings will not have a material adverse effect on the company's financial condition or results of operations. NOTE 15 - 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 Notes (all of the wholly owned subsidiaries of Owens & Minor, Inc. except for OMF and the Trust); and OMF and the Trust, 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. - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING FINANCIAL INFORMATION (IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ================================================ ============= ============== ============== ============== ============= STATEMENTS OF OPERATIONS Net sales $ - $3,082,119 $ - $ - $3,082,119 Cost of goods sold - 2,755,158 - - 2,755,158 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Gross margin - 326,961 - - 326,961 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Selling, general and administrative expenses 5 239,295 243 - 239,543 Depreciation and amortization - 18,270 - - 18,270 Interest expense, net 17,205 (3,139) - - 14,066 Intercompany interest expense, net (10,854) 25,750 (13,813) (1,083) - Discount on accounts receivable securitization - 67 4,588 - 4,655 Distributions on mandatorily redeemable preferred securities - - 4,494 - 4,494 Nonrecurring restructuring expenses - 11,200 - - 11,200 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Total expenses 6,356 291,443 (4,488) (1,083) 292,228 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Income (loss) before income taxes (6,356) 35,518 4,488 1,083 34,733 Income tax provision (benefit) (2,574) 14,886 1,821 455 14,588 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Net income (loss) (3,782) 20,632 2,667 628 20,145 Dividends on preferred stock 1,898 - - - 1,898 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Net income (loss) attributable to common stock $ (5,680) $ 20,632 $ 2,667 $ 628 $ 18,247
40 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ================================================ ============= ============== ============== ============== ============= STATEMENTS OF OPERATIONS Net sales $ - $3,116,798 $ - $ - $3,116,798 Cost of goods sold - 2,800,044 - - 2,800,044 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Gross margin - 316,754 - - 316,754 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Selling, general and administrative expenses - 234,721 151 - 234,872 Depreciation and amortization - 17,664 - - 17,664 Interest expense, net 18,422 (2,707) (12) - 15,703 Intercompany interest expense, net (15,669) 27,371 (10,421) (1,281) - Discount on accounts receivable securitization - 10 6,574 - 6,584 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Total expenses 2,753 277,059 (3,708) (1,281) 274,823 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Income (loss) before income taxes (2,753) 39,695 3,708 1,281 41,931 Income tax provision (benefit) (1,129) 16,685 1,517 538 17,611 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Net income (loss) (1,624) 23,010 2,191 743 24,320 Dividends on preferred stock 5,175 - - - 5,175 - ------------------------------------------------ --------- ---------- --------- -------- ---------- Net income (loss) attributable to common stock $ (6,799) $ 23,010 $ 2,191 $ 743 $ 19,145
Year ended Owens & Guarantor Non-guarantor December 31, 1996 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ================================================ ============= ============== ============== ============== ============= STATEMENTS OF OPERATIONS Net sales $ - $3,019,003 $ - $ - $3,019,003 Cost of goods sold - 2,720,613 - - 2,720,613 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Gross margin - 298,390 - - 298,390 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Selling, general and administrative expenses - 233,036 668 - 233,704 Depreciation and amortization - 16,098 - - 16,098 Interest expense, net 22,542 (3,588) - - 18,954 Intercompany interest expense, net (21,525) 30,046 (7,605) (916) - Discount on accounts receivable securitization - 1,908 4,613 - 6,521 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Total expenses 1,017 277,500 (2,324) (916) 275,277 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Income (loss) before income taxes (1,017) 20,890 2,324 916 23,113 Income tax provision (benefit) (407) 9,312 877 366 10,148 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Net income (loss) (610) 11,578 1,447 550 12,965 Dividends on preferred stock 5,175 - - - 5,175 - ------------------------------------------------ --------- ---------- -------- ------ ---------- Net income (loss) attributable to common stock $ (5,785) $ 11,578 $ 1,447 $ 550 $ 7,790
41 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 - ---------------------------------------------- -------- --------- -------- ---------- -------- 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
42 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (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 $ 78 $ - $ - $ 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 176,840 479,233 87,542 (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 $ 701,353 $87,542 $ (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 30,564 519 - 33,563 - ---------------------------------------------- -------- --------- ------- ---------- -------- TOTAL CURRENT LIABILITIES 2,480 438,811 69,278 (245,094) 265,475 Long-term debt 182,550 - - - 182,550 Accrued pension and retirement plans - 5,237 - - 5,237 - ---------------------------------------------- -------- --------- ------- ---------- -------- TOTAL LIABILITIES 185,030 444,048 69,278 (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 (accumulated 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 $ 701,353 $87,542 $ (559,210) $712,563
43 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor December 31, 1998 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated =================================================== ============= ============== ============== ============== ============= STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income (loss) $ (3,782) $ 20,632 $ 2,667 $ 628 $ 20,145 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization - 18,270 - - 18,270 Nonrecurring restructuring provision - 11,200 - - 11,200 Deferred income tax - 22,737 - - 22,737 Provision for LIFO reserve - 1,536 - - 1,536 Provision for losses on accounts and notes receivable - 262 234 - 496 Changes in operating assets and liabilities: Accounts and notes receivable - (74) (26,309) - (26,383) Merchandise inventories - 8,899 - - 8,899 Accounts payable - (23,375) - - (23,375) Net change in other current assets and current liabilities 460 (1,952) 841 - (651) Other, net 1,506 (1,152) (115) (628) (389) - --------------------------------------------------- ---------- --------- ---------- ------ ---------- CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,816) 56,983 (22,682) - 32,485 - --------------------------------------------------- ---------- --------- ---------- ------ ---------- INVESTING ACTIVITIES Additions to property and equipment - (8,053) - - (8,053) Additions to computer software - (4,556) - - (4,556) Proceeds from sale of property and equipment - 160 - - 160 - --------------------------------------------------- ---------- --------- ---------- ------ ---------- CASH USED FOR INVESTING ACTIVITIES - (12,449) - - (12,449) - --------------------------------------------------- ---------- --------- ---------- ------ ---------- FINANCING ACTIVITIES Net proceeds from issuance of mandatorily redeemable preferred securities (4,732) - 132,000 - 127,268 Repurchase of preferred stock (115,000) - - - (115,000) Reduction of long-term debt (32,550) - - - (32,550) Change in intercompany advances 159,443 (50,126) (109,317) - - Other short-term financing, net - 5,554 - - 5,554 Cash dividends paid (9,268) - - - (9,268) Proceeds from exercise of stock options 3,923 - - - 3,923 - --------------------------------------------------- ---------- --------- ---------- ------ ---------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,816 (44,572) 22,683 - (20,073) - --------------------------------------------------- ---------- --------- ---------- ------ ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (38) 1 - (37) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 78 - - 583 - --------------------------------------------------- ---------- --------- ---------- ------ ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 40 $ 1 $ - $ 546
44 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor December 31, 1997 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated =================================================== ============= ============== ============== ============== ============= STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income (loss) $ (1,624) $ 23,010 $ 2,191 $ 743 $ 24,320 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization - 17,664 - - 17,664 Deferred income taxes - (3) - - (3) Provision for LIFO reserve - 2,414 - - 2,414 Provision for losses on accounts and notes receivable - 124 144 - 268 Changes in operating assets and liabilities: Accounts and notes receivable - (12,591) (28,312) - (40,903) Merchandise inventories - (6,104) - - (6,104) Accounts payable - 4,714 - - 4,714 Net change in other current assets and current liabilities 147 4,670 (203) - 4,614 Other, net 1,411 158 212 (743) 1,038 - --------------------------------------------------- --------- ---------- --------- ------ ---------- CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (66) 34,056 (25,968) - 8,022 - --------------------------------------------------- --------- ---------- --------- ------ ---------- INVESTING ACTIVITIES Additions to property and equipment - (7,495) - - (7,495) Additions to computer software - (4,472) - - (4,472) Proceeds from sale of property and equipment - 1,851 - - 1,851 - --------------------------------------------------- --------- ---------- --------- ------ ---------- CASH USED FOR INVESTING ACTIVITIES - (10,116) - - (10,116) - --------------------------------------------------- --------- ---------- --------- ------ ---------- FINANCING ACTIVITIES Addition to (reduction of) long-term debt 26,026 (11,049) - - 14,977 Change in intercompany advances (17,596) (8,372) 25,968 - - Other short-term financing, net - (4,679) - - (4,679) Cash dividends paid (10,950) - - - (10,950) Proceeds from exercise of stock options 2,586 - - - 2,586 - --------------------------------------------------- --------- ---------- --------- ------ ---------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 66 (24,100) 25,968 - 1,934 - --------------------------------------------------- --------- ---------- --------- ------ ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS - (160) - - (160) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 505 238 - - 743 - --------------------------------------------------- --------- ---------- --------- ------ ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 78 $ - $ - $ 583
45 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (IN THOUSANDS)
Year ended Owens & Guarantor Non-guarantor December 31, 1996 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated =================================================== ============= ============== ============== ============== ============= STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income (loss) $ (610) $ 11,578 $ 1,447 $ 550 $ 12,965 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization - 16,098 - - 16,098 Deferred income taxes - 2,406 - - 2,406 Provision for LIFO reserve - 908 - - 908 Provision for losses on accounts and notes receivable - 190 648 - 838 Changes in operating assets and liabilities: Accounts and notes receivable - 150,013 (32,856) - 117,157 Merchandise inventories - 43,633 - - 43,633 Accounts payable - (9,670) - - (9,670) Net change in other current assets and current liabilities 582 1,824 213 - 2,619 Other, net 306 589 833 (550) 1,178 - --------------------------------------------------- ---------- ---------- --------- ------ ---------- CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 278 217,569 (29,715) - 188,132 - --------------------------------------------------- ---------- ---------- --------- ------ ---------- INVESTING ACTIVITIES Additions to property and equipment - (6,242) - - (6,242) Additions to computer software - (6,985) - - (6,985) Proceeds from sale of property and equipment - 6,865 - - 6,865 - --------------------------------------------------- ---------- ---------- --------- ------ ---------- CASH USED FOR INVESTING ACTIVITIES - (6,362) - - (6,362) - --------------------------------------------------- ---------- ---------- --------- ------ ---------- FINANCING ACTIVITIES Addition to (reduction of) long-term debt (164,155) (722) - - (164,877) Change in intercompany advances 173,201 (202,916) 29,715 - - Other short-term financing, net - (7,341) - - (7,341) Cash dividends paid (10,868) - - - (10,868) Proceeds from exercise of stock options 1,844 - - - 1,844 - --------------------------------------------------- ---------- ---------- --------- ------ ---------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 22 (210,979) 29,715 - (181,242) - --------------------------------------------------- ---------- ---------- --------- ------ ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 300 228 - - 528 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 205 10 - - 215 - --------------------------------------------------- ---------- ---------- --------- ------ ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505 $ 238 $ - $ - $ 743
46 Independent Auditors' Report - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES The Board of Directors and Shareholders Owens & Minor, Inc.: We have audited the accompanying consolidated balance sheets of Owens & Minor, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Owens & Minor, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP --------------------------- KPMG LLP Richmond, Virginia February 3, 1999 Report of Management - -------------------------------------------------------------------------------- The management of Owens & Minor, Inc. is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related information presented in this annual report. The consolidated financial statements were prepared in conformity with generally accepted accounting principles applied on a consistent basis and include, when necessary, the best estimates and judgments of management. The company maintains a system of internal controls that provides reasonable assurance that its assets are safeguarded against loss or unauthorized use, that transactions are properly recorded and that financial records provide a reliable basis for the preparation of the consolidated financial statements. The Audit Committee of the Board of Directors, composed entirely of directors who are not current employees of Owens & Minor, Inc., meets periodically and privately with the company's independent auditors and internal auditors, as well as with company management, to review accounting, auditing, internal control and financial reporting matters. The independent auditors and internal auditors have direct access to the Audit Committee with and without management present to discuss the results of their activities. /s/ G. Gilmer Minor, III /s/ Ann Greer Rector - ---------------------------- --------------------------- G. Gilmer Minor, III Ann Greer Rector CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER 47 Quarterly Financial Information - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 ============================================================== Quarters 1ST 2ND 3RD 4TH ================== ============== ============ ============== ============= Net sales $ 797,950 $ 798,978 $ 768,416 $ 716,775 - ------------------ ---------- --------- ---------- --------- Gross margin 82,087 82,533 81,004 81,337 - ------------------ ---------- --------- ---------- --------- Net income 6,759 145 6,618 6,623 - ------------------ ---------- --------- ---------- --------- Per common share: Net income Basic $ 0.17 $ (0.01) $ 0.20 $ 0.20 Diluted $ 0.17 $ (0.01) $ 0.20 $ 0.20 Dividends $ 0.050 $ 0.050 $ 0.050 $ 0.050 - ------------------ ---------- --------- ---------- --------- Market price High $ 19.88 $ 18.88 $ 13.13 $ 17.25 Low $ 13.13 $ 10.00 $ 10.00 $ 10.63
1997 ================================================================= Quarters 1st 2nd 3rd 4th ================== ============== ============== ============== ============== Net sales $ 749,623 $ 776,722 $ 785,778 $ 804,675 - ------------------ ---------- ---------- ---------- ---------- Gross margin 75,102 78,041 78,881 84,730 - ------------------ ---------- ---------- ---------- ---------- Net income 4,994 5,770 6,478 7,078 - ------------------ ---------- ---------- ---------- ---------- Per common share: Net income Basic $ 0.12 $ 0.14 $ 0.16 $ 0.18 Diluted $ 0.12 $ 0.14 $ 0.16 $ 0.18 Dividends $ 0.045 $ 0.045 $ 0.045 $ 0.045 - ------------------ ---------- ---------- ---------- ---------- Market price High $ 11.38 $ 16.25 $ 15.38 $ 15.38 Low $ 9.75 $ 10.75 $ 12.63 $ 13.00
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Owens & Minor, Inc.'s common stock trades on the New York Stock Exchange under the symbol OMI. As of December 31, 1998, there were approximately 15,500 common shareholders. 48 Corporate Officers - -------------------------------------------------------------------------------- OWENS & MINOR, INC. AND SUBSIDIARIES G. GILMER MINOR, III, 58, President since 1981 and Chief Executive Officer since 1984. Chairman of the Board since May, 1994. CRAIG R. SMITH, 47, Chief Operating Officer since February 1995. Prior to February 1995, Mr. Smith was Executive Vice President, Distribution and Information Systems from 1994 to 1995, Senior Vice President, Distribution and Information Systems from 1993 to 1994 and Senior Vice President, Distribution in 1993. HENRY A. BERLING, 56. Executive Vice President, Partnership Development since 1995. Mr. Berling was Executive Vice President, Partnership Development and Chief Sales Officer from 1996 to 1998. Prior to 1995, Mr. Berling was Executive Vice President, Sales and Customer Development from 1994 to 1995 and Senior Vice President, Sales and Marketing from 1992 to 1994. DREW ST. J. CARNEAL, 60, Senior Vice President, General Counsel and Secretary since March, 1990. JACK M. CLARK, 48, Senior Vice President, Sales and Marketing since November 1997. Mr. Clark was employed by Campbell Soup Company from 1996 to 1997, serving as Vice President, U.S. Sales and Marketing. From 1987 to 1996, he was employed by Coca-Cola USA where his last position was Area Vice President. GLORIA M. FARROW, 51, Senior Vice President and Managing Director, Human Resources since April 1997. Ms. Farrow was employed by Allstate Insurance Company from 1973 to 1996 in various positions including Assistant Vice President, Corporate Human Resources. MARK R. GORDON, 45, Senior Vice President, Marketing, since September 1998. Mr. Gordon was Senior Vice President, Strategic Planning and Business Development from November 1997 to September 1998. Mr. Gordon was employed by The Procter & Gamble Company from 1979 to 1997, serving in various positions including Vice President-Latin America and Corporate Officer. JAMES L. GRIGG, 51, Senior Vice President, Supply Chain Management since August 1996. Mr. Grigg joined the company in June 1996 as Senior Vice President, Product. Mr. Grigg was Vice President, Trade Relations and Product Management for FoxMeyer Health Corp. from 1992 to 1996. F. LEE MARSTON, 45, Senior Vice President and Chief Information Officer since April 1997. Prior to joining the company, Mr. Marston was President of The Logistics Technology Group. From 1993 to 1996 he also directed the logistics information systems practice of the Progress Group, a logistics consulting firm. ANN GREER RECTOR, 41, Senior Vice President and Chief Financial Officer since August 1996. From 1995 to 1996 Ms. Rector served as Vice President and Controller. From 1992 to 1995, Ms. Rector was Vice President and Controller of USAir Group, Inc. RICHARD F. BOZARD, 51, Vice President and Treasurer since 1991. OLWEN B. CAPE, 48, Vice President and Controller since June 1997. Ms. Cape was employed by Bausch & Lomb Incorporated from 1990 to 1997 serving in various financial positions, including Director, Business Analysis & Planning. CHARLES C. COLPO, 41, Vice President, Operations since August, 1998. Prior to August 1998, Mr. Colpo was Vice President, Supply Chain Process from 1996 to 1998, Vice President, Inventory Management from 1995 to 1996 and Director, Business Process Redesign from 1994 to 1995. From 1984 to 1994, Mr. Colpo served as Division Vice President. HUGH F. GOULDTHORPE, JR., 59, Vice President, Quality and Communications since 1993. WAYNE B. LUCK, 42, Vice President, Business Technology Group, since November 1998. Prior to November 1998, Mr. Luck was Vice President, Information Technology from 1995 to 1998. Mr. Luck served as Director, Application Services from 1993 to 1995. BRUCE J. MACALLISTER, 47, Group Vice President, East since 1997. Prior to 1997, Mr. MacAllister was Group Vice President, Southern and Western Regions from 1995 to 1997. From 1993 to 1995 Mr. MacAllister was Division Vice President. THOMAS J. SHERRY, 50, Group Vice President, West since November 1997. Mr. Sherry was Senior Vice President, Customer Care from 1996 to 1997, and Vice President, Sales and Marketing from 1994, when Stuart Medical Inc. was acquired by the company, to 1996. Prior to this acquisition, Mr. Sherry had been employed by Stuart Medical Inc. as Executive Vice President. HUE THOMAS, III, 59, Vice President, Corporate Relations since 1991. 49 Board of Directors - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Henry A. Berling (56) (1) (4) Executive Vice President, Partnership Development, Owens & Minor, Inc. Josiah Bunting, III (58) (2) (4) Superintendent, Virginia Military Institute R. E. Cabell, Jr., Esq. (75) (1) (2)* Retired (Of Counsel) from Williams, Mullen, Christian & Dobbins James B. Farinholt, Jr. (64) (1) (2) (4)* Special Assistant to the President for Economic Development, Virginia Commonwealth University Vernard W. Henley (69) (2) (3) (5) Chairman & CEO, Consolidated Bank & Trust Company E. Morgan Massey (72) (3) (4) (5) Chairman, Inter-American Coal, N.V. Chairman Emeritus, A.T. Massey Coal Company, Inc. G. Gilmer Minor, III (58) (1)* (4) Chairman, President & CEO, Owens & Minor, Inc. James E. Rogers (53) (1) (3)* (4) President, SCI Investors Inc. James E. Ukrop (61) (3) (4) Chairman, Ukrop's Super Markets, Inc. Anne Marie Whittemore (53) (1) (3) (5)* Partner, McGuire, Woods, Battle & Boothe LLP - -------------------------------------------------------------------------------- Board Committees: 1 Executive Committee, 2 Audit Committee, 3 Compensation & Benefits Committee 4 Strategic Planning Committee, 5 Governance & Nominating Committee, * Denotes Chairperson 50 Corporate Information - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Annual Meeting The annual meeting of Owens & Minor, Inc. shareholders will be held on Wednesday, April 28, 1999, at the Virginia Historical Society, 428 North Boulevard, Richmond, Virginia. Transfer Agent, Registrar and Dividend Disbursing Agent The Bank of New York Shareholder Relations Department-11E P.O. Box 11258 Church Street Station New York, NY 10286 800.524.4458 shareowner-svcs@bankofny.com Dividend Reinvestment and Stock Purchase Plan The Dividend Reinvestment and Stock Purchase Plan offers holders of Owens & Minor, Inc. common stock an opportunity to buy additional shares automatically with cash dividends and to buy additional shares with voluntary cash payments. Under the plan, the Company pays all brokerage commissions and service charges for the acquisition of shares. Information regarding the plan may be obtained by writing the transfer agent at the following address: The Bank of New York Dividend Reinvestment Department P.O. Box 1958 Newark, NJ 07101-9774 Shareholder Records Direct correspondence concerning Owens & Minor, Inc. stock holdings or change of address to The Bank of New York's Shareholder Services Department (listed above). Direct correspondence concerning lost or missing dividend checks to: Receive and Deliver Department-11W P.O. Box 11002 Church Street Station New York, NY 10286 Duplicate Mailings When a shareholder owns shares in more than one account or when several shareholders live at the same address, they may receive multiple copies of annual and quarterly reports. To eliminate multiple mailings, please write to the transfer agent. Counsel Hunton & Williams Richmond, Virginia Independent Auditors KPMG LLP Richmond, Virginia Stock Exchange Listing The Company's common shares are listed on the New York Stock Exchange. The trading symbol is OMI. Press Releases Owens & Minor, Inc.'s press releases are available through Company News On-Call by fax-on-demand at 800.758.5804, ext. 667125, or at www.prnewswire.com or at www.owens-minor.com. 51 Pursuant to the requirements of Section 13 or 15(d) 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, on the 9th day of March 1999. OWENS & MINOR, INC. By: /s/ G. Gilmer Minor, III ------------------------------ G. Gilmer Minor, III Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant on the 9th day of March 1999 and in the capacities indicated. /s/ G. Gilmer Minor, III Chairman, President and Chief - --------------------------- Executive Officer and Director G. Gilmer Minor, III (Principal Executive Officer) /s/ Ann Greer Rector Senior Vice President and - --------------------------- Chief Financial Officer Ann Greer Rector (Principal Financial Officer) /s/ Olwen B. Cape Vice President and Controller - --------------------------- (Principal Accounting Officer) Olwen B. Cape /s/ Henry A. Berling Executive Vice President, - --------------------------- Partnership Development and Henry A. Berling Director /s/ Josiah Bunting, III Director - --------------------------- Josiah Bunting, III /s/ R. E. Cabell, Jr. Director - --------------------------- R. E. Cabell, Jr. /s/ James B. Farinholt, Jr. Director - --------------------------- James B. Farinholt, Jr. /s/ Vernard W. Hensley Director - --------------------------- Vernard W. Hensley /s/ E. Morgan Massey Director - --------------------------- E. Morgan Massey /s/ James E. Rogers Director - --------------------------- James E. Rogers /s/ James E. Ukrop Director - --------------------------- James E. Ukrop /s/ Anne Marie Whittemore Director - --------------------------- Anne Marie Whittemore 52 Owens & Minor, Inc. Statement of Differences 1. The printed Annual Report and Form 10-K contains numerous graphs, a map and photographs not incorporated into the electronic Form 10-K. 2. The 10-K cover sheet and index, presented on pages 48 and 49 of the printed document, have been repositioned to the front of the electronic document. 53 INDEX TO EXHIBITS Description 2.1 Agreement of Exchange dated December 22, 1993, as amended and restated on March 31, 1994, by and among Stuart Medical, Inc., Owens & Minor, Inc. and certain shareholders of Stuart Medical, Inc. (incorporated herein by reference to the Company's Proxy Statement/Prospectus dated April 6, 1994, Annex III)** 3.1 Amended and Restated Articles of Incorporation of Owens & Minor, Inc. (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 3(a), for the year ended December 31, 1994) 3.2 Amended and Restated Bylaws of Owens & Minor, Inc. 4.1 Indenture dated as of May 29, 1996 among Owens & Minor, Inc., as Issuer, Owens & Minor Medical, Inc., National Medical Supply Corporation, Owens & Minor West, Inc., Koley's Medical Supply, Inc., Lyons Physician Supply Company, A. Kuhlman & Co., Stuart Medical, Inc., as Guarantors, and Crestar Bank, as Trustee ("Notes Indenture") (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4(a), for the quarter ended June 30, 1996) 4.2 Supplemental Indenture No. 1 dated as of May 12, 1998 to Notes Indenture (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4.1, for the quarter ended June 30, 1998) 4.3 Amended and Restated Rights Agreement dated as of May 10, 1994 between Owens & Minor, Inc. and Bank of New York, as successor Rights Agent (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4, for the quarter ended June 30, 1995) 4.4 Credit Agreement dated as of September 15, 1997 by and among Owens & Minor, Inc., certain of its subsidiaries, the various banks and lending institutions identified on the signature pages thereto, NationsBank, N.A., as agent, Bank of America NT and SA and Crestar Bank, as co-agents, and NationsBank, N.A., as administrative agent ("Credit Agreement") (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4, for the quarter ended September 30, 1997) 4.5 Amendment No. 1 dated as of April 27, 1998 to Credit Agreement (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 4.2, for the quarter ended June 30, 1998) 4.6 Junior Subordinated Debentures Indenture dated as of May 13, 1998 between Owens & Minor, Inc. and The First National Bank of Chicago (incorporated herein by reference to the Company's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.1) 4.7 First Supplemental Indenture dated as of May 13, 1998 between Owens & Minor, Inc. and The First National Bank of Chicago (incorporated herein by reference to the Company's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.2) 4.8 Registration Rights Agreement dated as of May 13, 1998 between Owens & Minor, Inc. and J.P. Morgan Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch & Co. (incorporated herein by reference to the Company's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.3) 4.9 Amended and Restated Declaration of Trust of Owens & Minor Trust I (incorporated herein by reference to the Company's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.4) 4.10 Restated Certificate of Trust of Owens & Minor Trust I (included in Exhibit 4.9) 4.11 Form of $2.6875 Term Convertible Security (included in Exhibit 4.9) 4.12 Form of 5.375% Junior Subordinated Convertible Debenture (included in Exhibit 4.7) 4.13 Owens & Minor, Inc. Guarantee Agreement dated as of May 13, 1998 (incorporated herein by reference to the Company's Registration Statement on Form S-3, Registration No. 333-58665, Exhibit 4.8) 10.1 Owens & Minor, Inc. Annual Incentive Plan (incorporated herein by reference to the Company's definitive Proxy Statement dated March 25, 1991)* 10.2 Owens & Minor, Inc. Management Equity Ownership Program (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(a), for the quarter ended September 30, 1997)* 10.3 Owens & Minor, Inc. Pension Plan, as amended and restated effective January 1, 1994 ("Pension Plan") (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(c), for the year ended December 31, 1996)* 10.4 Amendment No. 1 to Pension Plan (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(d), for the year ended December 31, 1996)* 10.5 Amendment No. 2 to Pension Plan* 10.6 Owens & Minor, Inc. Supplemental Executive Retirement Plan dated July 1, 1991 ("SERP") (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(i), for the year ended December 31, 1991)* 10.7 First Amendment to SERP, effective July 30, 1996 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(e), for the quarter ended September 30, 1996)* 10.8 Forms of Owens & Minor, Inc. Executive Severance Agreements* 10.9 Agreement dated May 1, 1991 by and between Owens & Minor, Inc. and W. Frank Fife (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(m), for the year ended December 31, 1992)* 10.10 Owens & Minor, Inc. 1993 Stock Option Plan (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(k), for the year ended December 31, 1993)* 10.11 Amended and Restated Owens & Minor, Inc. 1993 Directors' Compensation Plan ("Directors' Plan") (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10(k), for the year ended December 31, 1996)* 10.12 The forms of agreement with directors entered into pursuant to (i) the Stock Option Program, (ii) the Deferred Fee Program and (iii) the Stock Purchase Program of the Directors' Plan (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit (10), for the quarter ended March 31, 1996)* 10.13 Owens & Minor, Inc. 1998 Stock Option and Incentive Plan (incorporated herein by reference to Annex A of the Company's definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act on March 13, 1998 (File No. 001-09810))* 10.14 Owens & Minor, Inc. 1998 Directors' Compensation Plan (incorporated herein by reference from Annex B of the Company's definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act on March 13, 1998 (File No. 001-09810))* 10.15 Amendment No. 1 to Owens & Minor, Inc. 1998 Directors' Compensation Plan* 10.16 Form of Enhanced Authorized Distribution Agency Agreement dated as of August 20, 1997 between VHA, Inc. and Owens & Minor (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(d), for the quarter ended September 30, 1997)*** 10.17 Amended and Restated Purchase and Sale Agreement dated as of May 28, 1996 among Owens & Minor Medical, Inc., Owens & Minor, Inc. and O&M Funding Corp. (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(a), for the quarter ended June 30, 1996) 10.18 Amended and Restated Receivables Purchase Agreement dated as of May 28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Receivables Capital Corporation and Bank of America National Trust and Savings Association, as Administrator (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(b), for the quarter ended June 30, 1996) 10.19 First Amendment dated as of October 17, 1997 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 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(b), for the quarter ended September 30, 1997) 10.20 Amended and Restated Parallel Asset Purchase Agreement dated as of May 28, 1996 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., the Parallel Purchasers from time to time party thereto and Bank of America National Trust and Savings Association, as Administrative Agent (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(c), for the quarter ended June 30, 1996) 10.21 First Amendment dated as of October 17, 1997 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 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 10(c), for the quarter ended September 30, 1997) 11.1 Calculation of Net Income (Loss) Per Common Share [Information related to this item is in Part II, Item 8, Notes to Consolidated Financial Statements, Note 11 - Net Income (Loss) per Common Share] 21.1 Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors 27.1 Financial Data Schedule * Management contract or compensatory plan or arrangement. ** The schedules to this Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The company hereby undertakes to file supplementally with the Commission upon request a copy of the omitted schedules. *** The company has requested confidential treatment by the Commission of certain portions of this Agreement, which portions have been omitted and filed separately with the Commission. EX-3.(II) 2 EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF OWENS & MINOR, INC. ARTICLE I Meetings of Shareholders 1.1 Places of Meetings. All meetings of the shareholders shall be held at such place, either within or without the Commonwealth of Virginia, as from time to time may be fixed by the Board of Directors. 1.2 Annual Meetings. The annual meeting of the shareholders, for the election of Directors and transaction of such other business as may come before the meeting, shall be held in each year on the fourth Tuesday in April, at 11:00 a.m., or on such other business day that is not earlier than the first day of March and not later than the last day of April, or at such other time, as shall be fixed by the Board of Directors. 1.3 Special Meetings. A special meeting of the shareholders for any purpose or purposes may be called at any time by the Chairman of the Board, the President, or by a majority of the Board of Directors. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. 1.4 Notice of Meetings. Written or printed notice stating the place, day and hour of every meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed not less than ten nor more than sixty days before the date of the meeting to each shareholder of record entitled to vote at such meeting, at his address which appears in the share transfer books of the Corporation. Such further notice shall be given as may be required by law, but meetings may be held without notice if all the shareholders entitled to vote at the meeting are present in person or by proxy or if notice is waived in writing by those not present, either before or after the meeting. 1.5 Quorum. Any number of shareholders together holding at least a majority of the outstanding shares of capital stock entitled to vote with respect to the business to be transacted, who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of business. If less than a quorum shall be in attendance at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the shareholders present or represented by proxy without notice other than by announcement at the meeting. 1.6 Voting. At any meeting of the shareholders each shareholder of a class entitled to vote on any matter coming before the meeting shall, as to such matter, have one vote, in person or by proxy, for each share of capital stock of such class standing in his name on the books of the Corporation on the date, not more than seventy days prior to such meeting, fixed by the Board of Directors as the record date for the purpose of determining shareholders entitled to vote. Every proxy shall be in writing, dated and signed by the shareholder entitled to vote or his duly authorized attorney-in-fact. 1.7 Inspectors. An appropriate number of inspectors for any meeting of shareholders may be appointed by the Chairman of such meeting. Inspectors so appointed will open and close the polls, will receive and take charge of proxies and ballots, and will decide all questions as to the qualifications of voters, validity of proxies and ballots, and the number of votes properly cast. 1.8 Nomination by Shareholders. Subject to any rights of holders of shares of the Preferred Stock of the Corporation, nominations for the election of directors shall be made by the Board of Directors or by any shareholder entitled to vote in elections of directors. However, 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 shareholders' 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 Corporation not later than 90 days before the anniversary of the date of the first mailing of the Corporation's proxy statement for the immediately preceding year's 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 Corporation that are owned by the shareholder and such beneficial owners, (iii) a representation that the shareholder is a holder of record of shares of the Corporation 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 person (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, and 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 Corporation it so elected. In the event that a shareholder attempts to nominate any person without complying with the procedures set forth in this Section 1.8, such person shall not be nominated and shall not stand for election at such meeting. The Chairman of the Board of Directors shall have the power and duty to determine whether a nomination proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 1.8 and, if any proposed nomination is not in compliance with this Section 1.8, to declare that such defective proposal shall be disregarded. 1.9 Business Proposed by a Shareholder. To be properly brought before a meeting of shareholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before an annual meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. 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 Corporation not later than 90 days before the anniversary of the date of the first mailing of the Corporation's proxy statement for the immediately preceding year's 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 Corporation that are owned by the shareholder and such beneficial owner and (iv) 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 procedures set forth in this Section 1.9, such business shall not be transacted at such meeting. The Chairman of the Board of Directors shall have the power and duty to determine whether any proposal to bring business before the meeting was made in accordance with the procedures set forth in this Section 1.9 and, if any business is not proposed in compliance with this Section 1.9, to declare that such defective proposal shall be disregarded and that such proposed business shall not be transacted at such meeting. ARTICLE II Directors 2.1 General Powers. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors, and, except as otherwise expressly provided by law, the Articles of Incorporation or these Bylaws, all of the powers of the Corporation shall be vested in such Board. 2.2 Number of Directors. The number of Directors constituting the Board of Directors shall be ten (10). The Directors shall be divided into three (3) classes, each class to be as nearly equal in number as possible. 2.3 Election and Removal of Directors; Quorum. (a) At each annual meeting of shareholders, (i) the number of Directors equal to the number in the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting and until their successors are elected, and (ii) any other vacancies then existing shall be filled. (b) Any Director may be removed from office at a meeting called expressly for that purpose by the vote of shareholders holding not less than a majority of the shares entitled to vote at an election of Directors. (c) Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of the majority of the remaining Directors though less than a quorum of the Board, and the term of office of any Director so elected shall expire at the next shareholders' meeting at which directors are elected. (d) A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of a majority of Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Less than a quorum may adjourn any meeting. 2.4 Meetings of Directors. An annual meeting of the Board of Directors shall be held as soon as practicable after the adjournment of the annual meeting of shareholders at such place as the Board may designate. Other meetings of the Board of Directors shall be held at places within or without the Commonwealth of Virginia and at times fixed by resolution of the Board, or upon call of the Chairman of the Board, the President or a majority of the Directors. The Secretary or officer performing the Secretary's duties shall give not less than twenty-four hours' notice by letter, telegraph or telephone (or in person) of all meetings of the Board of Directors, provided that notice need not be given of the annual meeting or of regular meetings held at times and places fixed by resolution of the Board. Meetings may be held at any time without notice if all of the Directors are present, or if those not present waive notice in writing either before or after the meeting. The notice of meetings of the Board need not state the purpose of the meeting. 2.5 Compensation. By resolution of the Board, Directors may be allowed a fee and expenses for attendance at all meetings, but nothing herein shall preclude Directors from serving the Corporation in other capacities and receiving compensation for such other services. 2.6 Eligibility for Service as a Director. No person shall be elected or reelected as a Director if at the time of such proposed election or re-election such person shall have attained the age of 75 years. No person shall serve as a Director after the annual meeting following his or her seventy-fifth (75th) birthday; provided that the provisions of this sentence shall not apply to any person elected as a director for a term beginning prior to January 1, 1993, during such term. 2.7 Director Emeritus. The Board of Directors may from time to time elect one or more Directors Emeritus. A Director Emeritus may be named "Chairman Emeritus" or "Vice Chairman Emeritus" if such person holds the office of Chairman or Vice Chairman of the Corporation or any of its subsidiaries at the time of retirement as a Director thereof. Each Director Emeritus shall be elected for a term expiring on the date of the next annual meeting of the Board. Directors Emeritus may attend meetings of the Board of Directors but shall not be entitled to vote at such meetings and shall not be considered "directors" for purposes of these Bylaws or for any other purpose, except that they shall be entitled to receive notice of all regular and special meetings of the Board of Directors. Each Director Emeritus shall be paid the same fees as members of the Board of Directors for attendance at Board meetings. ARTICLE III Committees. 3.1 Executive Committee. The Board of Directors, by resolution adopted by a majority of the number of Directors fixed by these Bylaws, may elect an Executive Committee which shall consist of not less than three Directors, including the President. When the Board of Directors is not in session, the Executive Committee shall have all power vested in the Board of Directors by law, by the Articles of Incorporation, or by these Bylaws, provided that the Executive Committee shall not have power to (i) approve or recommend to shareholders action that the Virginia Stock Corporation Act requires to be approved by shareholders; (ii) fill vacancies on the Board or on any of its committees; (iii) amend the Articles of Incorporation pursuant to ss.13.1-706 of the Virginia Code; (iv) adopt, amend, or repeal the Bylaws; (v) approve a plan of merger not requiring shareholder approval; (vi) authorize or approve a distribution, except according to a general formula or method prescribed by the Board of Directors; or (vii) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, other than within limits specifically prescribed by the Board of Directors. The Executive Committee shall report at the next regular or special meeting of the Board of Directors all action that the Executive Committee may have taken on behalf of the Board since the last regular or special meeting of the Board of Directors. 3.2 Other Committees. The Board of Directors, by resolution adopted by a majority of the number of Directors fixed by these Bylaws, may establish such other standing or special committees of the Board as it may deem advisable, consisting of not less than two Directors; and the members, terms and authority of such committees shall be as set forth in the resolutions establishing the same. 3.3 Meetings. Regular and special meetings of any Committee established pursuant to this Article may be called and held subject to the same requirements with respect to time, place and notice as are specified in these Bylaws for regular and special meetings of the Board of Directors. 3.4 Quorum and Manner of Acting. A majority of the number of members of any Committee shall constitute a quorum for the transaction of business at such meeting. The action of a majority of those members present at a Committee meeting at which a quorum is present shall constitute the act of the Committee. 3.5 Term of Office. Members of any Committee shall be elected as above provided and shall hold office until their successors are elected by the Board of Directors or until such Committee is dissolved by the Board of Directors. 3.6 Resignation and Removal. Any member of a Committee may resign at any time by giving written notice of his intention to do so to the President or the Secretary of the Corporation, or may be removed, with or without cause, at any time by such vote of the Board of Directors as would suffice for his election. 3.7 Vacancies. Any vacancy occurring in a Committee resulting from any cause whatever may be filled by a majority of the number of Directors fixed by these Bylaws. ARTICLE IV Officers 4.1 Election of Officers: Terms. The officers of the Corporation shall consist of a President, a Secretary and a Treasurer. Other officers, including a Chairman of the Board, one or more Vice Presidents (whose seniority and titles, including Executive Vice Presidents and Senior Vice Presidents, may be specified by the Board of Directors), and assistant and subordinate officers, may from time to time be elected by the Board of Directors. All officers shall hold office until the next annual meeting of the Board of Directors and until their successors are elected. The President shall be chosen from among the Directors. Any two officers may be combined in the same person as the Board of Directors may determine. 4.2 Removal of Officers: Vacancies. Any officer of the Corporation may be removed summarily with or without cause, at any time, by the Board of Directors. Vacancies may be filled by the Board of Directors. 4.3 Duties. The officers of the Corporation shall have such duties as generally pertain to their offices, respectively, as well as such powers and duties as are prescribed by law or are hereinafter provided or as from time to time shall be conferred by the Board of Directors. The Board of Directors may require any officer to give such bond for the faithful performance of his duties as the Board may see fit. 4.4 Duties of the President. The President shall be the chief executive officer of the Corporation and shall be primarily responsible for the implementation of policies of the Board of Directors. He shall have authority over the general management and direction of the business and operations of the Corporation and its divisions, if any, subject only to the ultimate authority of the Board of Directors. He shall be a Director and, except as otherwise provided in these Bylaws or in the resolutions establishing such committees, he shall be ex officer a member of all Committees of the Board. In the absence of the Chairman and the Vice-Chairman of the Board, or if there are no such officers, the President shall preside at all corporate meetings. He may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments except in cases where the signing and the execution thereof shall be expressly delegated by these Bylaws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In addition, he shall perform all duties incident to the office of the President and such other duties as from time to time may be assigned to him by the Board of Directors. 4.5 Duties of the Vice Presidents. Each Vice President (which term includes any Senior Executive Vice President, Executive Vice President and Senior Vice President), if any, shall have such powers and duties as may from time to time be assigned to him by the President or the Board of Directors. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except where the signing and execution of such documents shall be expressly delegated by the Board of Directors or the President to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 4.6 Duties of the Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit all monies and securities of the Corporation in such banks and depositories as shall be designated by the Board of Directors. He shall be responsible (i) for maintaining adequate financial accounts and records in accordance with generally accepted accounting practices; (ii) for the preparation of appropriate operating budgets and financial statements; (iii) for the preparation and filing of all tax returns required by law; and (iv) for the performance of all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Directors or the President. The Treasurer may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments, except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 4.7 Duties of the Secretary. The Secretary shall act as secretary of all meetings of the Board of Directors and shareholders of the Corporation. When requested, he shall also act as secretary of the meetings of the committees of the Board. He shall keep and preserve the minutes of all such meetings in permanent books. He shall see that all notices required to be given by the Corporation are duly given and served; shall have custody of the seal of the Corporation and shall affix the seal or cause it to be affixed by facsimile or otherwise to all share certificates of the Corporation and to all documents the execution of which on behalf of the Corporation under its corporate seal is required in accordance with law or the provisions of these Bylaws; shall have custody of all deeds, leases, contracts and other important corporate documents; shall have charge of the books, records and papers of the Corporation relating to its organization and management as a Corporation; shall see that all reports, statements and other documents required by law (except tax returns) are properly filed; and shall in general perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors or the President. 4.8 Compensation. The Board of Directors shall have authority to fix the compensation of all officers of the Corporation. ARTICLE V Capital Stock 5.1 Certificates. The shares of capital stock of the Corporation shall be evidenced by certificates in forms prescribed by the Board of Directors and executed in any manner permitted by law and stating thereon the information required by law. Transfer agents and/or registrars for one or more classes of shares of the Corporation may be appointed by the Board of Directors and may be required to countersign certificates representing shares of such class or classes. If any officer whose signature or facsimile thereof shall have been used on a share certificate shall for any reason cease to be an officer of the Corporation and such certificate shall not then have been delivered by the Corporation, the Board of Directors may nevertheless adopt such certificate and it may then be issued and delivered as though such person had not ceased to be an officer of the Corporation. 5.2 Lost, Destroyed and Mutilated Certificates. Holders of the shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board of Directors may in its discretion cause one or more new certificates for the same number of shares in the aggregate to be issued to such shareholder upon the surrender of the mutilated certificate or upon satisfactory proof of such loss or destruction, and the deposit of a bond in such form and amount and with such surety as the Board of Directors may require. 5.3 Transfer of Shares. The shares of the Corporation shall be transferable or assignable only on the books of the Corporation by the holder in person or by attorney on surrender of the certificate for such shares duly endorsed and, if sought to be transferred by attorney, accompanied by a written power of attorney to have the same transferred on the books of the Corporation. The Corporation will recognize, however, the exclusive right of the person registered on its books as the owner of shares to receive dividends or other distributions and to vote as such owner. To the extent that any provision of the Amended and Restated Rights Agreement between the Corporation and Bank of New York, as Rights Agent, dated as of February 9, 1998, is deemed to constitute a restriction on the transfer of any securities of the Corporation, including, without limitation, the Rights, as defined therein, such restriction is hereby authorized by these Bylaws. 5.4 Fixing Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend or other distribution, the date on which notices of the meeting are mailed or the date on which the resolution of the Board of Directors declaring such dividend or other distribution is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 5.5 Control Share Acquisition Statute. Article 14.1 of the Virginia Stock Corporation Act shall not apply to acquisitions of shares of capital stock of the Corporation. ARTICLE VI Miscellaneous Provisions 6.1 Seal. The seal of the Corporation shall consist of a circular design with the words "Owens & Minor, Inc." around the top margin thereof, "Richmond, Virginia" around the lower margin thereof and the word "Seal" in the center thereof. 6.2 Fiscal Year. The fiscal year of the Corporation shall end on such date and shall consist of such accounting periods as may be fixed by the Board of Directors. 6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize. When the Board of Directors so authorizes, however, the signature of any such person may be a facsimile. 6.4 Amendment of Bylaws. Unless proscribed by the Articles of Incorporation, these Bylaws may be amended or altered at any meeting of the Board of Directors by affirmative vote of a majority of the number of Directors fixed by these Bylaws. The shareholders entitled to vote in respect of the election of Directors, however, shall have the power to rescind, amend, alter or repeal any Bylaws and to enact Bylaws which, if expressly so provided, may not be amended, altered or repealed by the Board of Directors. 6.5 Voting of Shares Held. Unless otherwise provided by resolution of the Board of Directors or of the Executive Committee, if any, the President may cast the vote which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by any such other corporation, or in lieu thereof, from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast such votes or give such consents. The President shall instruct any person or persons so appointed as to the manner of casting such votes or giving such consent and may execute or cause to be executed on behalf of the Corporation, and under its corporate seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper. ARTICLE VII Emergency Bylaws 7.1 The Emergency Bylaws provided in this Article VII shall be operative during any emergency, notwithstanding any different provision in the preceding Articles of these Bylaws or in the Articles of Incorporation of the Corporation or in the Virginia Stock Corporation Act (other than those provisions relating to emergency bylaws). An emergency exists if a quorum of the Corporation's Board of Directors cannot readily be assembled because of some catastrophic event. To the extent not inconsistent with these Emergency Bylaws, the Bylaws provided in the preceding Articles shall remain in effect during such emergency and upon the termination of such emergency the Emergency Bylaws shall cease to be operative unless and until another such emergency shall occur. 7.2 During any such emergency: (a) Any meeting of the Board of Directors may be called by any officer of the Corporation or by any Director. The notice thereof shall specify the time and place of the meeting. To the extent feasible, notice shall be given in accord with Section 2.4 above, but notice may be given only to such of the Directors as it may be feasible to reach at the time, by such means as may be feasible at the time, including publication or radio, and at a time less than twenty-four hours before the meeting if deemed necessary by the person giving notice. Notice shall be similarly given, to the extent feasible, to the other persons referred to in (b) below. (b) At any meeting of the Board of Directors, a quorum shall consist of a majority of the number of Directors fixed at the time by these Bylaws. If the Directors present at any particular meeting shall be fewer than the number required for such quorum, other persons present as referred to below, to the number necessary to make up such quorum, shall be deemed Directors for such particular meeting as determined by the following provisions and in the following order of priority: (i) Vice-Presidents not already serving as Directors, in the order of their seniority of first election to such offices, or if two or more shall have been first elected to such offices on the same day, in the order of their seniority in age; (ii) All other officers of the Corporation in the order of their seniority of first election to such offices, or if two or more shall have been first elected to such offices on the same day, in the order of their seniority in age; and (iii) Any other persons that are designated on a list that shall have been approved by the Board of Directors before the emergency, such persons to be taken in such order of priority and subject to such conditions as may be provided in the resolution approving the list. (c) The Board of Directors, during as well as before any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. (d) The Board of Directors, during as well as before any such emergency, may, effective in the emergency, change the principal office, or designate several alternative offices, or authorize the officers so to do. 7.3 No officer, Director or employee shall be liable for action taken in good faith in accordance with these Emergency Bylaws. 7.4 These Emergency Bylaws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, except that no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action or inaction prior to the time of such repeal or change. Any such amendment of these Emergency Bylaws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. EX-10 3 EXHIBIT 10.5 Exhibit 10.5 PENSION PLAN AMENDMENT NO. 2 WHEREAS, the Company established the Owens & Minor, Inc. Pension Plan as amended and restated effective January 1, 1994; and WHEREAS, the Employer reserved the right in Article X of the Plan to amend said Plan by action of its Board of Directors and did so amend the Plan with Amendment No. I; and WHEREAS, the Employer now desires to again amend said Plan in order to terminate benefit accruals for certain highly compensated employees in the event of disability. RESOLVED, that with the recommendation of the Compensation and Benefits Committee, the Board of Directors approves and adopts the amendment to the Owens & Minor, Inc. Pension Plan as set forth below and shall be effective December 31, 1998: Section 3.04 is hereby amended by the addition of the following paragraph at the conclusion thereof: Notwithstanding any other provisions in this Plan, no Highly Compensated Employee who becomes Totally and Permanently Disabled after December 31, 1996, other than Highly Compensated Employee who is disabled as of the adoption date of this amendment, shall accrue any additional benefit hereunder after such disability. EX-10 4 EXHIBIT 10.8 Exhibit 10.8 [EXECUTIVE SEVERANCE AGREEMENT - CATEGORY A] Dear : Owens & Minor, Inc. (the "Company") considers it essential and in the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a "change in control of the Company" (as defined in Section 2). 1. Term of Agreement. This Agreement shall commence on __________, and shall continue in effect through December 31, _______; provided, however, that commencing on January 1, 200___, and every other January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement provided that no such notice may be given during the pendency of a potential change in control of the Company, as defined in Section 2; and provided, further, that if a "change in control of the Company", as defined in Section 2, shall have occurred during the original and any extension of the term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such change in control occurred. 2. Change in Control and Potential Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below. For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if: (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any Company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the owner or "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Company securities representing 20% or more of the combined voting power of the then outstanding securities; provided, however, that Company securities acquired directly from the Company shall be disregarded for this purpose; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of a majority of the directors then still in office who either (l) were directors at the beginning of such period or (2) were so elected or nominated with such approval, cease for any reason to constitute at least a majority of the Board; (c) the stockholders of the Company approve a merger or consolidation of the Company with any other Company and such merger or consolidation is consummated, other than (l) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 20% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if: (a) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company; (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (c) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company (or a company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities, increases his beneficial ownership of such securities by 3 percentage points or more over the percentage so owned by such person on the date hereof; or (d) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. (iii) You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company until the earliest of (a) a date which is 180 days from the occurrence of such potential change in control of the Company, (b) the termination by you of your employment by reason of Disability as defined in Section 3(ii), or (c) the date on which you first become entitled under this Agreement to receive the benefits provided in Section 4 (ii) below. 3. Termination Following Change in Control. (i) General. If any of the events described in Section 2 constituting a change in control of the Company occurs, you shall be entitled to the benefits provided in Section 4(ii) upon the subsequent termination of your employment during the term of this Agreement regardless of the cause of termination. In the event your employment with the Company is terminated for any reason and a change in control of the Company occurs after your termination, you shall not be entitled to any benefits hereunder. (ii) Disability. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability." (iii) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (iv) Date of Termination, Etc. "Date of Termination" shall mean (a) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (b) if your employment is terminated for any reason (other than Disability), the date specified in the Notice of Termination. 4. Compensation Upon Termination or During Disability. Following a change in control of the Company, you shall be entitled to the following benefits during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all compensation payable to you under the Company's disability plan or program or other similar plan during such period, until this Agreement is terminated pursuant to Section 3(ii) hereof. Thereafter, or in the event your employment shall be terminated by reason of your death, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (ii) If your employment by the Company should be terminated for any reason, you shall be entitled to the benefits provided below: (a) the Company shall pay to you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due; (b) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you, at the time specified in Section 5(vii), a lump sum severance payment equal to 2.99 times (or such lesser number of years and partial years as may then be remaining until your normal retirement age under the Company Pension Plan) the sum of (1) the greater of (i) your annual rate of base salary in effect on the Date of Termination or (ii) your annual rate of base salary in effect immediately prior to the change in control of the Company and (2) the greater of (i) the average of the last three annual bonuses (annualized in the case of any bonus paid with respect to a partial year) paid to you preceding the Date of Termination or (ii) your target or budgeted annual bonus of the year that includes your Date of Termination; (c) the Company shall pay to you all reasonable legal fees and expenses incurred by you as a result of such termination, including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement (other than any such fees or expenses incurred in connection with any such claim which is determined by a court of competent jurisdiction to be frivolous) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"); and (d) the Company shall allow you and your dependents to continue participation in the Company's medical benefits and life insurance plans for a period of 2.99 years from your Date of Termination. (iii) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer, by retirement benefits, or by offset against any amount claimed to be owed by you to the Company, or otherwise. 5. Limit on Amounts Payable. (i) The severance pay and other payments, distributions and benefits provided by the Company to or for your benefit pursuant to this Executive Severance Agreement and under other plans, programs, and agreements may constitute Parachute Payments that are subject to the "golden parachute" rules of Code section 280G and the excise tax of Code section 4999. The Company and you intend to reduce any Parachute Payments (but not any payment, distribution or other benefit that is not a Parachute Payment) if, and only to the extent that, a reduction will allow you to receive a greater Net After Tax Amount than you would receive absent a reduction. The remaining provisions of this subsection describe how that intent will be effectuated. (ii) The Accounting Firm will first determine the amount of any Parachute Payments that are payable to you. The Accounting Firm will also determine the Net After Tax Amount attributable to your total Parachute Payments. (iii) The Accounting Firm will next determine the amount of your Capped Parachute Payments. Thereafter, the Accounting Firm will determine the Net After Tax Amount attributable to your Capped Parachute Payments. (iv) You will receive the total Parachute Payments unless the Accounting Firm determines that the Capped Parachute Payments will yield you a higher Net After Tax Amount, in which case you will receive the Capped Parachute Payments. If you will receive the Capped Parachute Payments, your total Parachute Payments will be adjusted by first reducing the amount payable under any other plan, program, or agreement that, by its terms, requires a reduction to prevent a "golden parachute" payment under Code section 280G; by next reducing your benefit, if any, under this Executive Severance Agreement, to the extent it is a Parachute Payment; by next reducing the severance pay payable under Section 4(ii) of this Agreement; and thereafter by reducing Parachute Payments payable under other plans and agreements (with the reductions first coming from cash benefits and then from noncash benefits). The Accounting Firm will notify you and the Company if it determines that the Parachute Payments must be reduced to the Capped Parachute Payments and will send you and the Company a copy of its detailed calculations supporting that determination. (v) If, pursuant to paragraph (iv), you will receive the total Parachute Payments, the Company shall indemnify you and hold you harmless against all claims, losses, damages, penalties, expenses, and excise taxes. To effect this indemnification, the Company must pay you an additional amount (the "Gross-Up Payment") that after payment by you of all taxes, including, without limitation, any income, employment and excise taxes (and any interest and penalties imposed with respect thereto), imposed upon the Gross-Up Payment leaves you a net amount from the Gross-Up Payment equal to the excise tax under Code section 4999 imposed on the Parachute Payments. The determination of any additional amount that must be paid under this paragraph must be made by the Company in good faith. (vi) As a result of any uncertainty in the application of Code sections 280G and 4999 at the time that the Accounting Firm makes its determinations under this Section 5, it is possible that amounts will have been paid or distributed to you that should not have been paid or distributed under this Section 5 ("Overpayments"), or that additional amounts should be paid or distributed to you under this Section 5 ("Underpayments"). If the Accounting Firm determines, based on either controlling precedent, substantial authority or the assertion of a deficiency by the Internal Revenue Service against you or the Company, which assertion the Accounting Firm believes has a high probability of success, that an Overpayment has been made, then you shall have an obligation to pay the Company upon demand an amount equal to the sum of the Overpayment plus interest on such Overpayment at the prime rate provided in Code section 7872(f)(2) from the date of your receipt of such Overpayment until the date of such repayment; provided, however, that you shall be obligated to make such repayment if, and only to the extent, that the repayment would either reduce the amount on which you are subject to tax under Code section 4999 or generate a refund of tax imposed under Code section 4999. If the Accounting Firm determines, based upon controlling precedent or substantial authority, that an Underpayment has occurred, the Accounting Firm will notify you and the Company of that determination and the Company will pay the amount of that Underpayment to you promptly in a lump sum, with interest calculated on such Underpayment at the prime rate provided in Code section 7872(f)(2) from the date such Underpayment should have been paid until actual payment. (vii) All determinations made by the Accounting Firm under this Section 5 are binding on you and the Company and must be made as soon as practicable but no later than thirty days after your Date of Termination. Within thirty days after your Date of Termination, the Company will pay to you the severance pay under Section 4 or the reduced Severance Amount as calculated by the Accounting Firm pursuant to Section 5. (viii) For purposes of this Agreement, the following terms shall have the meanings indicated below: (a) "Accounting Firm" means the public accounting firm retained as the Company's independent auditor as of the date immediately prior to the Change in Control. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, you shall be entitled to appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). If, however, such firm declines or is unable to undertake the determinations assigned to it under this Agreement, then "Accounting Firm" shall mean such other independent accounting firm mutually agreed upon by the Company and you. (b) "Capped Parachute Payments" means the largest amount of Parachute Payments that may be paid to you without liability for any excise tax under Code section 4999. (c) "Net After Tax Amount" means the amount of any Parachute Payments or Capped Parachute Payments, as applicable, net of taxes imposed under Code sections 1, 3101(b) and 4999 and any state or local income taxes applicable to you as in effect on the date of the payment under Section 5 of this Agreement. The determination of the Net After Tax Amount shall be made using the highest combined effective rate imposed by the foregoing taxes on income of the same character as the Parachute Payments or Capped Parachute Payments, as applicable, in effect for the year for which the determination is made. (d) "Parachute Payment" means a payment that is described in Code section 280G(b)(2) (without regard to whether the aggregate present value of such payments exceeds the limit prescribed by Code section 280G(b)(2)(A)(ii)). The amount of any Parachute Payment shall be determined in accordance with Code section 280G and the regulations promulgated thereunder, or, in the absence of final regulations, the proposed regulations promulgated under Code section 280G 6. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms to which you would have been entitled hereunder if you had terminated your employment following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the initial or any extension term of this Agreement if benefits have become payable under such section before such expiration. 9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the Commonwealth of Virginia, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 12. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect to the subject matter contained herein and during the term of the Agreement supersedes the provisions of all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto with respect to the subject matter hereof. 13. Effective Date. This Agreement is effective as of the date set forth below. If this letter sets forth our agreement on the subject matter thereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. Sincerely, G. Gilmer Minor, III President and Chief Executive Officer Agreed as of the ____ day of __________________, 19___. [EXECUTIVE SEVERANCE AGREEMENT - CATEGORY B] Dear : Owens & Minor, Inc. (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a "change in control of the Company" (as defined in Section 2). 1. Term of Agreement. This Agreement shall commence on ______________, and shall continue in effect through December 31, ______; provided, however, that commencing on January 1, 200___, and every other January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement provided that no such notice may be given during the pendency of a potential change in control of the Company, as defined in Section 2; and provided, further, that if a "change in control of the Company", as defined in Section 2, shall have occurred during the original and any extension of the term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such change in control occurred. 2. Change in Control and Potential Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below. For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if: (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any Company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the owner or "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Company securities representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, that Company securities acquired directly from the Company shall be disregarded for this purpose; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of a majority of the directors then still in office who either (l) were directors at the beginning of such period or (2) were so elected or nominated with such approval, cease for any reason to constitute at least a majority of the Board; (c) the stockholders of the Company approve a merger or consolidation of the Company with any other Company and such merger or consolidation is consummated, other than (l) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 20% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets and such liquidation or sale of assets is consummated. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if: (a) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company; (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (c) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company (or a company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities, increases his beneficial ownership of such securities by 3 percentage points or more over the percentage so owned by such person on the date hereof; or (d) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. (iii) You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company until the earliest of (a) a date which is 180 days from the occurrence of such potential change in control of the Company, (b) the termination by you of your employment by reason of Disability as defined in Section 3(ii), or (c) the date on which you first become entitled under this Agreement to receive the benefits provided in Section 4(ii) below. 3. Termination Following Change in Control. (i) General. If any of the events described in Section 2 constituting a change in control of the Company occurs, you shall be entitled to the benefits provided in Section 4(iii) upon the subsequent termination of your employment during the term of this Agreement unless such termination is (a) because of your death or Disability, (b) by the Company for Cause, or (c) by you other than for Good Reason. In the event your employment with the Company is terminated for any reason and subsequently a change in control of the Company should have occurred, you shall not be entitled to any benefits hereunder. (ii) Disability. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability." (iii) Cause. Termination by the Company of your employment for "Cause" shall mean termination (a) upon the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination (as defined in Subsection 3(v)) by you for Good Reason (as defined in Subsection 3(iv)), after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (b) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you without good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in this Subsection and specifying the particulars thereof in detail. (iv) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a change in control of the Company of any of the following circumstances unless, in the case of paragraphs (a), (e), (f), (g) or (h), such circumstances are fully corrected prior to the Date of Termination (as defined in Section 3(vi)) specified in the Notice of Termination (as defined in Section 3(v)) given in respect thereof: (a) the assignment to you of any duties inconsistent (except in the nature of a promotion) with the position in the Company that you held immediately prior to the change in control of the Company, or an adverse alteration in the nature or status of your position or responsibilities or the conditions of your employment from those in effect immediately prior to such change in control; (b) a reduction by the Company in your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Company and all management personnel of any person in control of the Company; (c) the Company's requiring you to be based more than 25 miles from the Company's offices at which you are principally employed immediately prior to the date of the change in control except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations (d) the failure by the Company to pay to you any portion of your current compensation or compensation under any deferred compensation program of the Company within seven (7) days of the date such compensation is due; (e) the failure by the Company to continue in effect any material compensation or benefit plan in which you participate immediately prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided in the level of your participation relative to other participants, than existed at the time of the change in control of the Company; (f) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's life insurance, medical, dental, accident, or disability plans in which you were participating at the time of the change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of your years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control of the Company; (g) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; or (h) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (v) hereof (and, if applicable, the requirements of Subsection (iii) hereof), which purported termination shall not be effective for purposes of this Agreement. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (v) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (vi) Date of Termination, Etc. "Date of Termination" shall mean (a) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (b) if your employment is terminated pursuant to Subsection (iii) or (iv) hereof or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days from the date such Notice of Termination is given, and in the case of termination for Good Reason shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given); provided, however, that if within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding arbitration award; and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement, and shall not be offset against or reduce any other amounts due under this Agreement and shall not be reduced by any compensation earned by you as the result of employment by another employer. 4. Compensation Upon Termination or During Disability. Following a change in control of the Company, you shall be entitled to the following benefits during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all compensation payable to you under the Company's disability plan or program or other similar plan during such period, until this Agreement is terminated pursuant to Section 3(ii) hereof. Thereafter, or in the event your employment shall be terminated by reason of your death, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment by the Company should be terminated by the Company other than for Cause or disability or your death or if you should terminate your employment for Good Reason, you shall be entitled to the benefits provided below: (a) the Company shall pay to you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due; (b) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you, at the time specified in Section 5(vii), a lump sum severance payment equal to 2.00 times (or such lesser number of years and partial years as may then be remaining until your normal retirement age under the Company Pension Plan) the sum of (l) the greater of (i) your annual rate of base salary in effect on the Date of Termination or (ii) your annual rate of base salary in effect immediately prior to the change in control of the Company and (2) the greater of (i) the average of the last three annual bonuses (annualized in the case of any bonus paid with respect to a partial year) paid to you preceding the Date of Termination or (ii) your target or budgeted annual bonus for the year that includes your Date of Termination; (c) the Company shall pay to you all reasonable legal fees and expenses incurred by you as a result of such termination, including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement (other than any such fees or expenses incurred in connection with any such claim which is determined by a court of competent jurisdiction to be frivolous) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"); and (d) the Company shall allow you and your dependents to continue participation in the Company's medical benefits and life insurance plans for a period of 2.00 years from your Date of Termination. (iv) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer, by retirement benefits, or by offset against any amount claimed to be owed by you to the Company, or otherwise. 5. Limit on Amounts Payable. (i) The severance pay and other payments, distributions and benefits provided by the Company to or for your benefit pursuant to this Executive Severance Agreement and under other plans, programs, and agreements may constitute Parachute Payments that are subject to the "golden parachute" rules of Code section 280G and the excise tax of Code section 4999. The Company and you intend to reduce any Parachute Payments (but not any payment, distribution or other benefit that is not a Parachute Payment) if, and only to the extent that, a reduction will allow you to receive a greater Net After Tax Amount than you would receive absent a reduction. The remaining provisions of this subsection describe how that intent will be effectuated. (ii) The Accounting Firm will first determine the amount of any Parachute Payments that are payable to you. The Accounting Firm will also determine the Net After Tax Amount attributable to your total Parachute Payments. (iii) The Accounting Firm will next determine the amount of your Capped Parachute Payments. Thereafter, the Accounting Firm will determine the Net After Tax Amount attributable to your Capped Parachute Payments. (iv) You will receive the total Parachute Payments unless the Accounting Firm determines that the Capped Parachute Payments will yield you a higher Net After Tax Amount, in which case you will receive the Capped Parachute Payments. If you will receive the Capped Parachute Payments, your total Parachute Payments will be adjusted by first reducing the amount payable under any other plan, program, or agreement that, by its terms, requires a reduction to prevent a "golden parachute" payment under Code section 280G; by next reducing your benefit, if any, under this Executive Severance Agreement, to the extent it is a Parachute Payment; by next reducing the severance pay payable under Subsection 4(iii) of this Agreement; and thereafter by reducing Parachute Payments payable under other plans and agreements (with the reductions first coming from cash benefits and then from noncash benefits). The Accounting Firm will notify you and the Company if it determines that the Parachute Payments must be reduced to the Capped Parachute Payments and will send you and the Company a copy of its detailed calculations supporting that determination. (v) If, pursuant to paragraph (iv), you will receive the total Parachute Payments, the Company shall indemnify you and hold you harmless against all claims, losses, damages, penalties, expenses, and excise taxes. To effect this indemnification, the Company must pay you an additional amount (the "Gross-Up Payment") that after payment by you of all taxes, including, without limitation, any income, employment and excise taxes (and any interest and penalties imposed with respect thereto), imposed upon the Gross-Up Payment leaves you a net amount from the Gross-Up Payment equal to the excise tax under Code section 4999 imposed on the Parachute Payments. The determination of any additional amount that must be paid under this paragraph must be made by the Company in good faith. (vi) As a result of any uncertainty in the application of Code sections 280G and 4999 at the time that the Accounting Firm makes its determinations under Section 5, it is possible that amounts will have been paid or distributed to you that should not have been paid or distributed under this Section 5 ("Overpayments"), or that additional amounts should be paid or distributed to you under this Section 5 ("Underpayments"). If the Accounting Firm determines, based on either controlling precedent, substantial authority or the assertion of a deficiency by the Internal Revenue Service against you or the Company, which assertion the Accounting Firm believes has a high probability of success, that an Overpayment has been made, then you shall have an obligation to pay the Company upon demand an amount equal to the sum of the Overpayment plus interest on such Overpayment at the prime rate provided in Code section 7872(f)(2) from the date of your receipt of such Overpayment until the date of such repayment; provided, however, that you shall be obligated to make such repayment if, and only to the extent, that the repayment would either reduce the amount on which you are subject to tax under Code section 4999 or generate a refund of tax imposed under Code section 4999. If the Accounting Firm determines, based upon controlling precedent or substantial authority, that an Underpayment has occurred, the Accounting Firm will notify you and the Company of that determination and the Company will pay the amount of that Underpayment to you promptly in a lump sum, with interest calculated on such Underpayment at the prime rate provided in Code section 7872(f)(2) from the date such Underpayment should have been paid until actual payment. (vii) All determinations made by the Accounting Firm under this Section 5 are binding on you and the Company and must be made as soon as practicable but no later than thirty days after your Date of Termination. Within thirty days after your Date of Termination, the Company will pay to you the severance pay under Section 4 or the reduced Severance Amount as calculated by the Accounting Firm pursuant to Section 5. (viii) For purposes of this Agreement, the following terms shall have the meanings indicated below: (a) "Accounting Firm" means the public accounting firm retained as the Company's independent auditor as of the date immediately prior to the Change in Control. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, you shall be entitled to appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). If, however, such firm declines or is unable to undertake the determinations assigned to it under this Agreement, then "Accounting Firm" shall mean such other independent accounting firm mutually agreed upon by the Company and you. (b) "Capped Parachute Payments" means the largest amount of Parachute Payments that may be paid to you without liability for any excise tax under Code section 4999. (c) "Net After Tax Amount" means the amount of any Parachute Payments or Capped Parachute Payments, as applicable, net of taxes imposed under Code sections 1, 3101(b) and 4999 and any state or local income taxes applicable to you as in effect on the date of the payment under Section 5 of this Agreement. The determination of the Net After Tax Amount shall be made using the highest combined effective rate imposed by the foregoing taxes on income of the same character as the Parachute Payments or Capped Parachute Payments, as applicable, in effect for the year for which the determination is made. (d) "Parachute Payment" means a payment that is described in Code section 280G(b)(2) (without regard to whether the aggregate present value of such payments exceeds the limit prescribed by Code section 280G(b)(2)(A)(ii)). The amount of any Parachute Payment shall be determined in accordance with Code section 280G and the regulations promulgated thereunder, or, in the absence of final regulations, the proposed regulations promulgated under Code section 280G. 6. Successors: Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the initial or any extension term of this Agreement if benefits have become payable under such section before such expiration. 9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the Commonwealth of Virginia, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 12. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and during the term of the Agreement supersedes the provisions of all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto with respect to the subject matter hereof. 13. Effective Date. This Agreement shall become effective as of the date set forth below. If this letter sets forth our agreement on the subject matter thereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. Sincerely, - ------------------------------ G. Gilmer Minor, III Chairman, President and Chief Executive Officer Agreed as of the ___ day of ________,__________ EX-10 5 EXHIBIT 10.15 Exhibit 10.15 1998 DIRECTORS COMPENSATION PLAN AMENDMENT NO. 1 WHEREAS, the 1998 Directors' Compensation Plan provides that each Participant be awarded a number of whole shares of Common Stock having an aggregate Fair Market Value equal to, or most nearly equal to, $10,000; and WHEREAS, this award is to be granted on the date of each meeting of the Board immediately following the annual meeting of the Company's shareholders; and WHEREAS, the Governance and Nominating Committee has recommended to the Board of Directors that Article VI, 6.01 of the 1998 Directors' Compensation Plan, be amended to award each Participant a number of whole shares of Common Stock having an aggregate Fair Market Value equal to, or most nearly equal to, $12,500; and THEREFORE BE IT RESOLVED, that the Board of Directors adopts and approves the amendment to Article VI, 6.01 of the 1998 Directors' Compensation Plan as set forth below and to be effective immediately following the Company's 1999 annual shareholders meeting: Article VI Stock Award Program 6.01 Awards Beginning in 1999 and during the term of the Plan, on the date of each meeting of the Board immediately following the annual meeting of the Company's shareholders, each Participant shall be awarded a number of whole shares of Common Stock having an aggregate Fair Market Value equal to, or most nearly equal to $12,500. EX-21 6 EXHIBIT 21.1 Subsidiaries of Registrant Exhibit 21.1 State of Incorporation/ Subsidiary Organization - ----------------------------------------------------------------- Owens & Minor Medical, Inc. Virginia National Medical Supply Corporation Delaware Owens & Minor West, Inc. California Koley's Medical Supply, Inc. Nebraska Lyons Physician Supply Company Ohio A. Kuhlman & Co. Michigan Stuart Medical, Inc. Pennsylvania O&M Funding Corp. Virginia Owens & Minor Trust I Delaware EX-23 7 EXHIBIT 23.1 Consent of KPMG LLP Exhibit 23.1 The Board of Directors Owens & Minor, Inc. We consent to incorporation by reference in the following Registration Statements of our report dated February 3, 1999, relating to the consolidated financial statements of Owens & Minor, Inc. and subsidiaries included in its Annual Report on Form 10-K for the year ended December 31, 1998: Registration Registration Statement Statement Number Description Number Description - ---------------------------------------------------------- 33-04536 Form S-8 33-65606 Form S-8 33-32497 Form S-8 333-58337 Form S-8 33-41402 Form S-8 333-58341 Form S-8 33-41403 Form S-8 33-44428 Form S-3 33-63248 Form S-8 333-58665 Form S-3 /s/ KPMG LLP - ------------------------- KPMG LLP Richmond, Virginia March 9, 1999 EX-27 8 EXHIBIT 27
5 1,000 12-MOS DEC-31-1997 DEC-31-1998 546 0 220,038 6,273 301,939 504,221 71,420 45,812 717,768 268,974 150,000 132,000 0 65,236 95,890 717,768 3,082,119 3,082,119 2,755,158 3,012,475 20,349 496 14,066 34,733 14,588 20,145 0 0 0 20,145 0.56 0.56
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