-----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, McIdSHt/M4H7XSIC13XPwYD6DzU0CdEwPFA+3zbxlNAQqWeSiJi4oEgLYdMjfRW0 F56Up5PBGF8D0WNdsXNqxA== 0000916641-01-000279.txt : 20010307 0000916641-01-000279.hdr.sgml : 20010307 ACCESSION NUMBER: 0000916641-01-000279 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010305 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-K405 SEC ACT: SEC FILE NUMBER: 001-09810 FILM NUMBER: 1561529 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-K405 1 0001.txt ANNUAL REPORT 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, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-9810 OWENS & MINOR, INC. (Exact name of registrant as specified in its charter) Virginia 54-01701843 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4800 Cox Road, Glen Allen, Virginia 23060 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (804) 747-9794 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. [X] The aggregate market value of Common Stock held by non-affiliates (based upon the closing sales price) was approximately $522,151,087 as of February 8, 2001. The number of shares of the Company's Common Stock outstanding as of February 8, 2001 was 33,258,031 shares. DOCUMENTS INCORPORATED BY REFERENCE The Proxy statement for the annual meeting of security holders on April 26, 2001 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.......................................................19-22 2. Properties........................................................22 3. Legal Proceedings..............................................43-44 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...................................53, 56 6. Selected Financial Data...........................................18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................23-26 7A. Quantitative and Qualitative Disclosures about Market Risk..........................................26, 35-36 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), 14-15 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, 2000, Dec. 31, 1999 and Dec. 31, 1998....................27 Consolidated Balance Sheets at Dec. 31, 2000 and Dec. 31, 1999 ..................................28 Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 2000, Dec. 31, 1999 and Dec. 31, 1998.................................................29 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended Dec. 31, 2000, Dec. 31, 1999 and Dec. 31, 1998.................................................30 Notes to Consolidated Financial Statements for the Years Ended Dec. 31, 2000, Dec. 31, 1999 and Dec. 31, 1998..............................................31-51 Report of Independent Auditors....................................52 b. Reports on Form 8-K.............................................None c. The index to exhibits has been filed as separate pages of the 2000 Form 10-K and is available to shareholders on request from the Secretary of the company at the principal executive offices
(a) Part III will be incorporated by reference from the registrant's 2001 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K. [PICTURE APPEARS HERE] Board of Directors From left to right: Peter Redding, Marshall Acuff, James Ukrop, James Farinholt, John Crotty, Morgan Massey, Gilmer Minor, Anne Marie Whittemore, Henry Berling, Vernard Henley, James Rogers, Josiah Bunting A. Marshall Acuff, Jr. (61) /2/ Senior Vice President and Managing Director, Salomon Smith Barney, Inc. Henry A. Berling (58) /1,4/ Executive Vice President, Partnership Development, Owens & Minor, Inc. Josiah Bunting, III (60) /2,4,5/ Superintendent, Virginia Military Institute John T. Crotty (63) /2,3,4/ Managing Partner, CroBern Management Partnership President, CroBern, Inc. James B. Farinholt, Jr. (66) /1,2*,4/ Special Assistant to the President for Economic Development, Virginia Commonwealth University Vernard W. Henley (71) /2,3,5/ Chairman & CEO, Consolidated Bank & Trust Company E. Morgan Massey (74) /1,4*,5/ Chairman, Asian-American Coal, Inc. Chairman Emeritus, A.T. Massey Coal Company, Inc. Chairman, Evan Energy Company G. Gilmer Minor, III (60) /1*,4/ Chairman & CEO, Owens & Minor, Inc. Peter S. Redding (62) /2,3,4/ Retired President & CEO, Standard Register Company James E. Rogers (55) /1,3*,4/ President, SCI Investors Inc. James E. Ukrop (63) /2,3,5/ Chairman, Ukrop's SuperMarkets, Inc. Chairman, First Market Bank Anne Marie Whittemore (55) /1,3,5*/ Partner, McGuireWoods LLP Board Committees: /1/ Executive Committee, /2/Audit Committee, /3/Compensation & Benefits Committee, /4/Strategic Planning Committee, /5/Governance & Nominating Committee, *Denotes Chairperson 14 - -- Corporate Officers G. Gilmer Minor, III (60) Chairman & Chief Executive Officer Chairman of the Board since 1994 and Chief Executive Officer since 1984. Mr. Minor was President from 1981 to April 1999. Mr. Minor joined the company in 1963. Craig R. Smith (49) President & Chief Operating Officer President since 1999 and Chief Operating Officer since 1995. Mr. Smith has been with the company since 1989. Henry A. Berling (58) Executive Vice President, Partnership Development Executive Vice President, Partnership Development since 1995. Mr. Berling was Executive Vice President, Partnership Development and Chief Sales Officer from 1996 to 1998. Mr. Berling has been with the company since 1966. Timothy J. Callahan (49) Senior Vice President, Distribution Senior Vice President, Distribution since 1999. From 1997 to 1999, Mr. Callahan served as Regional Vice President, West. Mr. Callahan was Executive Vice President for NCI, a healthcare consulting company from 1996 to 1997. Prior to that, he was Vice President, Sales for Sterile Concepts, Inc. from 1990 to 1996. Drew St. J. Carneal (62) Senior Vice President, General Counsel & Secretary Senior Vice President, General Counsel and Secretary since 1990. Mr. Carneal has been with the company since 1989. Jack M. Clark, Jr. (50) Senior Vice President, Sales & Marketing Senior Vice President, Sales & Marketing since 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. Charles C. Colpo (43) Senior Vice President, Operations Senior Vice President, President, Operations since 1999. From 1998 to 1999, Mr. Colpo was Vice President, Operations. Prior to 1998, Mr. Colpo was Vice President, Supply Chain Process from 1996 to 1998 and Vice President, Inventory Management from 1995 to 1996. Mr. Colpo has been with the company since 1981. James L. Grigg (53) Senior Vice President, Supply Chain Management Senior Vice President, Supply Chain Management since 1996. Mr. Grigg joined the company in 1996 as Senior Vice President, Product. Mr. Grigg was Vice President, Trade Relations and Product Management for FoxMeyer Health Corp. from 1992 to 1996. David R. Guzman (45) Senior Vice President & Chief Information Officer Senior Vice President and Chief Information Officer since December 2000. Mr. Guzman was employed by Office Depot from 1999 to 2000 serving as Senior Vice President, Systems Development. From 1997 to 1998, he was employed by ALCOA as Chief Architect, Managing Director, Global Information Services. From 1996 to 1997, Mr. Guzman served as Chief Technology Officer, Divisional Vice President for KMart, and from 1994 to 1996, he was employed by Federated Department Stores as Director of Architecture. Richard F. Bozard (53) Vice President, Treasurer & Acting Chief Financial Officer Acting Chief Financial Officer since 1999 and Vice President and Treasurer since 1991. Mr. Bozard has been with the company since 1988. Olwen B. Cape (51) Vice President, Controller Vice President and Controller since 1997. Ms. Cape was employed by Bausch & Lomb Incorporated from 1990 to 1997 serving in various financial positions, including Director, Business Analysis & Planning. Erika T. Davis (37) Vice President, Human Resources Vice President, Human Resources since 1999. Prior to that, Ms. Davis served as Director, Human Resources & Training in 1999 and Director, Compensation & HRIS from 1995 to 1999. Ms. Davis has been with the company since 1993. Hugh F. Gouldthorpe, Jr. (61) Vice President, Quality & Communications Vice President, Quality and Communications since 1993. Mr. Gouldthorpe has been with the company since 1986. Hue Thomas, III (61) Vice President, Corporate Relations Vice President, Corporate Relations since 1991. Mr. Thomas has been with the company since 1970. Numbers inside parentheses indicate age. 15 -- SELECTED FINANCIAL DATA(/1/) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands, except ratios and per share data) - --------------------------------------------------------------------------------
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------- Summary of Operations: Net sales(/2/) $3,503,583 $3,194,134 $3,090,048 $3,124,062 $3,025,341 Nonrecurring restructuring expense (credit)(/3/) $ (750) $ (1,000) $ 11,200 $ - $ - Net income(/3/) $ 33,088 $ 27,979 $ 20,145 $ 24,320 $ 12,965 - ------------------------------------------------------------------------------------- Per Common Share: Net income - basic $ 1.01 $ 0.86 $ 0.56 $ 0.60 $ 0.25 Net income - diluted $ 0.94 $ 0.82 $ 0.56 $ 0.60 $ 0.25 Average number of shares outstanding - basic 32,712 32,574 32,488 32,048 31,707 Average number of shares outstanding - diluted 39,453 39,098 32,591 32,129 31,809 Cash dividends $ 0.2475 $ 0.23 $ 0.20 $ 0.18 $ 0.18 Stock price at year end $ 17.75 $ 8.94 $ 15.75 $ 14.50 $ 10.25 Book value $ 6.41 $ 5.58 $ 4.94 $ 4.48 $ 3.99 - ------------------------------------------------------------------------------------- Summary of Financial Position: Working capital $ 233,637 $ 219,448 $ 235,247 $ 233,789 $ 192,990 Total assets $ 867,548 $ 865,000 $ 717,768 $ 712,563 $ 679,501 Long-term debt $ 152,872 $ 174,553 $ 150,000 $ 182,550 $ 167,549 Mandatorily redeemable preferred securities $ 132,000 $ 132,000 $ 132,000 $ - $ - Shareholders' equity $ 212,772 $ 182,381 $ 161,126 $ 259,301 $ 242,400 - ------------------------------------------------------------------------------------- Selected Ratios: Gross margin as a percent of net sales(/2/) 10.7% 10.7% 10.8% 10.4% 10.1% Selling, general and administrative expenses as a percent of net sales(/2/) 7.7% 7.8% 8.0% 7.8% 7.9% Average receivable days sales outstanding(/2/)(/4/) 33.3 34.9 33.5 32.4 37.3 Average inventory turnover 9.5 9.2 9.8 9.9 8.9 Return on average total equity(/5/) 11.2% 10.5% 8.2% 9.7% 5.4% Return on average total equity(/6/) 16.7% 16.3% 9.6% 9.7% 5.4% Current ratio 1.6 1.6 1.9 1.9 1.7 Capitalization ratio(/4/)(/5/) 40.4% 47.2% 43.4% 53.0% 54.8% Capitalization ratio(/4/)(/6/) 63.2% 69.4% 68.9% 53.0% 54.8% - -------------------------------------------------------------------------------------
(/1/)On July 30, 1999, the company acquired certain net assets of Medix, Inc. This acquisition was accounted for as a purchase. (/2/)Net sales, gross margin, SG&A expenses and all related ratios have been restated for all periods in accordance with Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. See Note 1 to the Consolidated Financial Statements. (/3/)In 1998, the company incurred $11.2 million, or $6.6 million after taxes, of nonrecurring restructuring expenses. In 2000 and 1999, the company reduced the restructuring accrual by $0.8 million and $1.0 million, or $0.4 million and $0.6 million after taxes. See Note 3 to the Consolidated Financial Statements. (/4/)Excludes the impact of the company's off balance sheet receivables financing facility. See Note 8 to the Consolidated Financial Statements. (/5/)Includes mandatorily redeemable preferred securities as equity. (/6/)Includes mandatorily redeemable preferred securities as debt. 18 - -- B U S I N E S S D E S C R I P T I O N - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Company History Owens and Minor, Inc. and subsidiaries (O&M or the company) is the leading distributor of national name brand 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. O&M has significantly expanded and strengthened its national presence in recent years through internal growth and acquisitions. In July 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies whose customers are primarily located in the Midwest, strengthening the company's presence in this part of the country. Industry Overview Distributors of medical and surgical supplies provide a wide variety of products and services 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. Over the years, IHNs have continued to change and model their health systems to meet the needs of the markets they serve. They have forged partnerships with national medical and surgical supply distributors to meet the challenges of managing the supply procurement and distribution needs of their entire network. The traditional role of a distributor in warehousing and delivering medical and surgical supplies to a customer has evolved into the role of assisting customers to manage the entire supply chain. Advances in information technology have enabled Owens & Minor to assist IHNs in the management of product standardization initiatives, paving the way for electronic commerce to play an increasingly important role in supply chain management. O&M expects that further consolidation in the medical/surgical supply distribution industry will continue due to the competitive advantages enjoyed by larger distributors, which include, among other things, the ability to serve nationwide customers, buy inventory in large volume and develop e- commerce platforms and decision support systems. Customers O&M distributes over 170,000 finished medical and surgical products produced by approximately 1,700 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 organizations. The company provides distribution services under contractual agreements with a number of large healthcare networks as well as 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. Recently, the company has begun to provide distribution services for manufacturers, helping them to implement logistics and e-commerce solutions. The form of these arrangements varies, as Owens & Minor seeks to provide customized services to meet the needs of its manufacturing partners. In 2000, the company announced agreements with several manufacturers, including C. R. Bard Inc., Mead Johnson Nutritionals(TM) and American Health Products Corporation. National Healthcare Networks (Networks) and Group Purchasing Organizations (GPOs). 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 distributor. O&M is a distributor for Novation, an organization that manages purchasing for more than 5,000 healthcare organizations. Novation was created in 1998 to serve member organizations of VHA, which O&M has served since 1985, and University HealthSystem Consortium (UHC), an alliance of academic health centers. Sales to Novation members represented approximately 51% of O&M's net sales in 2000. 19 -- B U S I N E S S D E S C R I P T I O N ( c o n t i n u e d ) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries In October 1998, O&M entered into an exclusive, eight-year medical/surgical supply distribution agreement with Tenet Healthcare Corporation (Tenet), the second largest for-profit hospital chain in the nation. In addition to being a sole supplier to Tenet's approximately 110 acute care hospitals, O&M provides distribution services to Broadlane, Tenet's GPO. One of the nation's leading GPOs, Broadlane provides national contracting through its more than 500 acute care hospitals and more than 2,000 other healthcare facilities. Integrated Healthcare Networks (IHNs). 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 value-added services. Individual Providers. In addition to contracting with healthcare providers at the IHN level and through Networks and GPOs, O&M contracts directly with individual healthcare providers. In 2000, 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 to its gross margin. The company has well-established relationships with virtually all major suppliers of medical and surgical supplies, and has developed close working relationships with its largest suppliers to create operating efficiencies in the supply chain. Approximately 16%, 17% and 18% of O&M's net sales in 2000, 1999 and 1998 were sales of Johnson & Johnson Hospital Services, Inc. products. Approximately 15% of the company's 2000 net sales and 12% of the company's 1999 and 1998 net sales were sales of products of the subsidiaries of Tyco International. Distribution O&M employs a decentralized approach to sales and customer service through its 45 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 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., a subsidiary of Cardinal Health, Inc.; and McKesson General Medical Corp., a subsidiary of McKesson HBOC, Inc. In 2000, Allegiance Corp. acquired Bergen Brunswig Medical Corp., the medical and surgical distribution division of Bergen Brunswig Corporation. The industry also includes 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 emphasis on technology combined with its decentralized and customer-focused approach to distribution of medical/surgical supplies enables it to compete effectively 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 marketplace. 20 - -- - -------------------------------------------------------------------------------- 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 health-care providers to create more efficient inventory management systems. O&M has responded to these ongoing challenges by developing its inventory forecasting capabilities, client/server warehouse management system, product standardization and consolidation initiative, and vendor managed inventory process (VMI). VMI allows some of the company's major 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 grow sales without significantly increasing inventory levels. 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 1998, O&M signed a 10-year agreement with Perot Systems Corporation to outsource its information technology (IT) operations and to procure strategic application development services. This partnership has allowed the company to provide additional resources to major IT initiatives to support internal operations and to enhance services to the company's customers and suppliers. In 2000, O&M's capital expenditures included approximately $16.8 million for computer hardware and software. O&M has focused its technology expenditures on electronic commerce, data warehouse/decision support, supply chain management/warehousing systems, sales and marketing programs and services, and infrastructure enhancements. Electronic Commerce. Owens & Minor is an industry leader in the use of electronic commerce to exchange business transactions with trading partners. In 1999, the company introduced OM Direct, an Internet-based product catalog and direct ordering system, to supplement existing electronic data interchange (EDI) technologies. The company also provides distribution services for several Internet-based medical/surgical supply companies. O&M is committed to ongoing investment in an open, Internet-based e-commerce platform to support the company's supply chain management initiatives and to enable expansion into new market segments for healthcare products. The company is committed to supporting e-commerce initiatives throughout the industry, including Marketplace@Novation, Medibuy, Broadlane, the Global Healthcare Exchange and others. The company expects to serve as an integration point for customers, both healthcare providers and suppliers. Sales and Marketing O&M's sales and marketing function is organized to support its decentralized field sales teams of approximately 230 people. Based from the company's distribution centers nationwide, the company's local sales teams are positioned to respond to customer needs quickly and efficiently. In addition, Owens & Minor has introduced a field organization focused on assisting customers in the clinical environment, specializing in a knowledge of surgical products and technology. The company's integrated sales and marketing strategy offers customers value-added services in logistics, information management, asset management and product mix management. O&M provides special training and support tools to its sales team to help promote these programs and services. O&M's value-added programs and services for its trading partners include the following: . CostTrack: This industry-leading activity-based management program helps customers identify and track the cost-drivers in their distribution activities, giving them the information they need to drive workflow efficiencies, raise employee productivity and cut costs. With CostTrack, the pricing of services provided to customers is no longer based on a cost-plus model, but on the variety of the Owens & Minor services that they choose. In 2000, over 20% of the company's net sales were generated through the CostTrack program. 21 -- B U S I N E S S D E S C R I P T I O N ( c o n t i n u e d ) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries . WISDOM: This award-winning Internet-accessed decision support tool connects O&M's customers, suppliers and GPOs to its data warehouse. Password-protected, WISDOM offers customers online access to a wide variety of reports about their purchase history, contract compliance, product usage and other related data. This timely information helps customers make well-informed purchasing decisions and realize hard-dollar savings and operating efficiencies by standardizing their product lines and consolidating suppliers, increasing contract compliance and GPO- related revenues, and consolidating purchasing data among the various computer systems in a healthcare network. Over 90 healthcare systems currently subscribe to WISDOM. . PANDAC(R) Wound Closure Management Program: This information-based program provides customers an evaluation of their current and historical wound closure inventories and usage levels, helping them reduce their investment in suture and endomechanical equipment and control their costs per operative case. O&M guarantees customers a minimum five percent savings in total wound closure inventory expenditures during their first year on the program. . Focus On Consolidation, Utilization & Standardization (FOCUS): This partnership program drives product standardization and consolidation, increasing the volume of purchases from O&M's most efficient suppliers, which provides operational benefits and cost savings to healthcare customers. FOCUS centers around both commodity and preference product standardization. O&M requires its FOCUS partners to be market share leaders and to meet strict certification standards, such as exceeding minimum fill rates, offering a flexible returned goods policy and using EDI. 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. 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 45 distribution centers across the United States. In the normal course of business, the company regularly assesses its business needs and makes changes to the capacity and location of its distribution centers. 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. Employees. At the end of 2000, the company had 2,763 full and part-time employees. Management believes that relations with employees are good. 22 - -- ANALYSIS OF OPERATIONS - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries 2000 Financial Results In 2000, O&M earned net income of $33.1 million, or $0.94 per diluted common share, compared with $28.0 million, or $0.82 per diluted common share, in 1999. Net income in 2000 and 1999 was increased by $0.4 million and $0.6 million after tax reductions of a restructuring reserve originally established in 1998. The 1998 restructuring charge of $11.2 million (pretax) reflected the company's plan to downsize warehouse operations as a result of the cancellation of its contract with HCA - The Healthcare Company (HCA). Excluding the reductions of the restructuring reserve, net income for 2000 increased 19% to $32.7 million, or $0.93 per diluted common share, from $27.4 million, or $0.80 per diluted common share for 1999. 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, 2000 1999 1998 - ------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 89.3 89.3 89.2 - ------------------------------------------------------------------------------- Gross margin 10.7 10.7 10.8 - ------------------------------------------------------------------------------- Selling, general and administrative expenses 7.7 7.8 8.0 Depreciation and amortization 0.6 0.6 0.6 Interest expense, net 0.3 0.4 0.5 Discount on accounts receivable securitization 0.2 0.1 0.1 Distributions on mandatorily redeemable preferred securities 0.2 0.2 0.1 Nonrecurring restructuring expenses - - 0.4 - ------------------------------------------------------------------------------- Total expenses 9.0 9.1 9.7 - ------------------------------------------------------------------------------- Income before income taxes 1.7 1.6 1.1 Income tax provision 0.8 0.7 0.4 - ------------------------------------------------------------------------------- Net income 0.9% 0.9% 0.7% - ------------------------------------------------------------------------------- Acquisition. On July 30, 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical/ surgical supplies, for approximately $83 million. The company paid cash of approximately $68 million and assumed debt of approximately $15 million, which was paid off as part of the closing transaction. The excess of the purchase price over the fair value of the identifiable net assets acquired of approximately $58 million has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. As the acquisition was accounted for as a purchase, the operating results of Medix have been included in the company's consolidated financial statements since July 30, 1999. This acquisition strengthens the company's presence in the Midwest and provides opportunities for increased sales in this geographic area. Medix' net sales were approximately $184 million for its last fiscal year, which ended October 2, 1998. The success of the acquisition will depend in part on the company's ability to integrate and capture synergies in the combined businesses. In connection with the acquisition, management adopted a plan for integration of the businesses that includes closure of some Medix facilities and consolidation of certain administrative functions. An accrual of $2.7 million, included in the allocation of the purchase price, was established to provide for certain costs related to this plan. As of December 31, 2000, $1.1 million had been spent, principally for lease payments on closed facilities and employee separations. The integration of the Medix business is expected to be completed in 2001. Net sales. Net sales increased by 10% to $3.50 billion for 2000, from $3.19 billion in 1999. Excluding the sales generated by customers acquired through the Medix acquisition, net sales increased 6%. Most of this increase resulted from higher sales volumes due to increased penetration of existing accounts, most significantly Broadlane (formerly Tenet-BuyPower), whose distribution contract began in February 1999. Net sales increased by 3% to $3.19 billion for 1999, from $3.09 billion in 1998. Excluding the sales generated by the Medix acquisition, net sales increased 1%. The increase in sales was due to new customer contracts, primarily Broadlane, and increased penetration of existing accounts, offset by the loss of the HCA contract, which was cancelled in mid-1998. 23 -- ANALYSIS OF OPERATIONS (continued) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Gross margin. Gross margin as a percentage of net sales for 2000 remained unchanged from 1999 at 10.7%, and decreased slightly from 10.8% in 1998. From 1999 to 2000, customer margins decreased slightly due to changes in the company's customer mix, including lower contract margins on business acquired from Medix. These decreases, however, were offset by favorable vendor initiatives. The decrease from 1998 to 1999 was a result of the benefits of certain supply chain initiatives being recognized over a lower sales base in 1998. The company will continue to pursue opportunities for margin improvement. Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses as a percentage of net sales was 7.7% in 2000 compared with 7.8% in 1999 and 8.0% in 1998. The decreases from year to year as a percentage of net sales were attributable to three major factors: . economies of scale as a result of a higher sales base without a significant increase in fixed costs . operating efficiencies driven by improved warehouse technology . continued management of administrative costs, including consolidation of certain administrative functions Depreciation and amortization. Depreciation and amortization increased by 11% in 2000 to $21.5 million, compared with $19.4 million in 1999 and $18.3 million in 1998. The increases from year to year were due, in part, to goodwill amortization of $1.4 million and $0.6 million in 2000 and 1999 resulting from the Medix acquisition. Excluding this amortization, depreciation and amortization increased by 7% from 1999 to 2000 and by 3% from 1998 to 1999 as a result of higher capital spending associated with information technology initiatives. O&M anticipates similar increases in depreciation in 2001 as the company continues to invest in information technology. Net interest expense and discount on accounts receivable securitization (financing costs). Net financing costs totaled $19.4 million in 2000, compared with $17.1 million in 1999 and $18.7 million in 1998. Net financing costs included collections of customer finance charges of $5.3 million in 2000, up from $4.6 million in 1999 and $3.0 million in 1998. Excluding the collection of customer finance charges, financing costs increased to $24.8 million in 2000 from $21.7 million in both 1999 and 1998. The increase in financing costs was due to a combination of higher interest rates due to external market forces and an increase in outstanding financing resulting from the Medix acquisition. Average daily outstanding financing, which includes debt and accounts receivable sold under the company's off balance sheet receivables financing facility (Receivables Financing Facility), increased to $262.7 million for 2000 from $245.6 million in 1999. O&M expects to continue to manage its financing costs by continuing its working capital reduction initiatives and management of interest rates. Nonrecurring restructuring expenses (credits). As a result of the HCA contract cancellation in the second quarter of 1998, the company recorded a nonrecurring restructuring charge of $11.2 million, or $6.6 million after taxes, to downsize operations. In the second quarters of 1999 and 2000, the company re-evaluated its restructuring reserve. Since the actions under this plan had resulted in lower projected total costs than originally anticipated, the company recorded reductions in the reserve of $1.0 million in 1999 and $0.8 million in 2000, or approximately $0.6 million and $0.4 million after taxes. In 2000, 1999 and 1998, amounts of $1.8 million, $2.1 million and $2.0 million were charged against this liability. The remaining accrual consists primarily of losses on lease commitments for vacated warehouse and office space on leases through as late 24 - -- - -------------------------------------------------------------------------------- as 2006, as well as anticipated asset write-offs. Management attempts to sublease the vacant space when practicable to reduce the cost of the restructuring plan. Income taxes. The income tax provision was $27.1 million in 2000, $22.1 million in 1999, and $14.6 million in 1998. O&M's effective tax rate was 45.0% in 2000, compared with 44.1% in 1999 and 42.0% in 1998. The increase in the effective tax rate from year to year results primarily from the increase in certain nondeductible expenses. Net income. Net income increased 18% to $33.1 million in 2000 from $28.0 million in 1999. For 1999, net income was 39% higher than 1998. The increase from 1998 to 1999 was primarily due to the impact of the nonrecurring restructuring charge discussed above. Excluding the effect of the restructuring charge and subsequent credits, 2000 net income increased to $32.7 million from $27.4 million in 1999 and $26.8 million in 1998 and net income per diluted common share increased to $0.93 compared to $0.80 in 1999 and $0.75 in 1998. Excluding the effect of the restructuring charge, 1999 net income attributable to common stock increased to $27.4 million compared to $24.9 million in 1998. The increase resulted from the retirement of the company's outstanding Series B Cumulative Preferred Stock in May 1998 which was funded through the issuance of $132.0 million of mandatorily redeemable preferred securities. This favorable trend in net income from year to year is primarily due to the increase in sales and success in controlling operating expenses through productivity improvements. Financial Condition, Liquidity and Capital Resources Liquidity. As a result of favorable cash flows from operations, combined outstanding debt and off balance sheet accounts receivable securitization decreased by $47.3 million to $233.5 million at December 31, 2000. Excluding sales of accounts receivable and their subsequent collections under the company's receivables financing facility, $68.8 million of cash was provided by operating activities in 2000, compared to $61.7 million in 1999 and $67.5 million in 1998. In July 1999, the company acquired certain net assets of Medix for approximately $83 million. This acquisition was funded by cash flow from operations and an increase in outstanding debt. During 2000, the company replaced its revolving credit facility and receivables financing facility with new facilities expiring in April 2003 and July 2001. The new revolving credit facility allows the company to borrow up to $225 million, unchanged from the prior facility. Under the new receivables financing facility, the company can sell up to $225 million of accounts receivable, an increase of $75 million from the prior facility. 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, 2000, O&M had $222.8 million of unused credit under its revolving credit facility and the ability to sell an additional $145.0 million of accounts receivable under the receivables financing facility. Working Capital Management. The company's working capital increased by $14.2 million from December 31, 1999, to $233.6 million at December 31, 2000, primarily due to a reduction in the amount of receivables sold under the financing facility. As of December 31, 2000, $80.0 million of receivables were sold, compared to $105.6 million at December 31, 1999. Excluding the impact of the financing facility, accounts receivable increased by $9.4 million to $341.9 million at December 31, 2000. The company continues to focus on the management of inventory levels, and inventory turnover increased to 9.5 times for the year ended December 31, 2000, from 9.2 times for the year ended December 31, 1999, due to a combination of higher sales and reduced inventory levels. Capital Expenditures. Capital expenditures were approximately $19.6 million in 2000, of which approximately $16.8 million was for computer hardware and software. The company expects to continue supporting strategic initiatives and improving operational efficiency through investments in technology, including system upgrades and the development of electronic commerce. The company expects future expenditures to be funded through cash flow from operations. Recent Accounting Pronouncements. In May 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 137, Deferral of the Effective Date of SFAS 133, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 137 delayed the effective date of SFAS 133 by one year. In September 2000, the FASB amended SFAS 133 with SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133. The company will be 25 -- ANALYSIS OF OPERATIONS (continued) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries required to adopt the provisions of this standard beginning on January 1, 2001. As a result, the company's interest rate swaps will be recognized on the consolidated balance sheet as either assets or liabilities at fair value, and the carrying amounts of certain liabilities hedged by the swaps will be adjusted based on changes in the values of the hedging instruments. At January 3, 2001, the interest rate swaps had a fair value of $0.2 million as an asset. Adoption of this standard will not have a material effect on the company's net income. In September 2000, the FASB issued SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125 of the same title. SFAS 140 revises the standards for securitiza- tions and other transfers of financial assets and expands the disclosure requirements for such transactions, while carrying over many of the provisions of SFAS 125 without change. The provisions of SFAS 140 are effective for transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001, and are to be applied prospectively. Management is in the process of evaluating this standard, but does not believe that it will change the company's treatment of sales of accounts receivable under its Receivables Financing Facility, or have any material effect on the company's consolidated financial position, results of operations, or cash flows. The company has adopted the disclosure requirements of SFAS 140, which were required to be implemented in 2000. These disclosures are included in Note 8 to the Consolidated Financial Statements. Risks. The company is subject to risks associated with changes in the medical industry, including continued efforts to control costs, which place pressure on operating margin, and changes in the way medical and surgical services are delivered to patients. The loss of one of the company's larger customers could have a significant effect on its business. However, management believes that the company's competitive position in the marketplace and its ability to control costs would enable it to continue profitable operations and attract new customers in the event of such a loss. 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, 2000, 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. A hypothetical increase in interest rates of 10%, or 70 basis points, would result in a potential reduction in future pre-tax earnings of approximately $0.7 million per year in connection with these 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, 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. 26 - -- CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Net sales $3,503,583 $3,194,134 $3,090,048 Cost of goods sold 3,127,911 2,851,556 2,755,158 - ------------------------------------------------------------------------------- Gross margin 375,672 342,578 334,890 - ------------------------------------------------------------------------------- Selling, general and administrative expenses 268,205 249,960 247,472 Depreciation and amortization 21,515 19,365 18,270 Interest expense, net 12,566 11,860 14,066 Discount on accounts receivable securitization 6,881 5,240 4,655 Distributions on mandatorily redeemable preferred securities 7,095 7,095 4,494 Nonrecurring restructuring expense (credit) (750) (1,000) 11,200 - ------------------------------------------------------------------------------- Total expenses 315,512 292,520 300,157 - ------------------------------------------------------------------------------- Income before income taxes 60,160 50,058 34,733 Income tax provision 27,072 22,079 14,588 - ------------------------------------------------------------------------------- Net income 33,088 27,979 20,145 Dividends on preferred stock - - 1,898 - ------------------------------------------------------------------------------- Net income attributable to common stock $ 33,088 $ 27,979 $ 18,247 - ------------------------------------------------------------------------------- Net income per common share - basic $ 1.01 $ 0.86 $ 0.56 - ------------------------------------------------------------------------------- Net income per common share - diluted $ 0.94 $ 0.82 $ 0.56 - ------------------------------------------------------------------------------- Cash dividends per common share $ 0.2475 $ 0.23 $ 0.20 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 27 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) - --------------------------------------------------------------------------------
December 31, 2000 1999 - ------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 626 $ 669 Accounts and notes receivable, net 261,905 226,927 Merchandise inventories 315,570 342,478 Other current assets 16,190 19,172 - ------------------------------------------------------------------------------- Total current assets 594,291 589,246 Property and equipment, net 24,239 25,877 Goodwill, net 204,849 210,837 Deferred income taxes - 145 Other assets, net 44,169 38,895 - ------------------------------------------------------------------------------- Total assets $867,548 $865,000 - ------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable $291,507 $303,490 Accrued payroll and related liabilities 9,940 6,883 Deferred income taxes 16,502 15,403 Other accrued liabilities 42,705 44,022 - ------------------------------------------------------------------------------- Total current liabilities 360,654 369,798 Long-term debt 152,872 174,553 Accrued pension and retirement plans 8,879 6,268 Deferred income taxes 371 - - ------------------------------------------------------------------------------- Total liabilities 522,776 550,619 - ------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 132,000 - ------------------------------------------------------------------------------- Shareholders' equity Preferred stock, par value $100 per share; authorized - 10,000 shares Series A; Participating Cumulative Preferred Stock; none issued - - Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 33,180 shares and 32,711 shares 66,360 65,422 Paid-in capital 18,039 12,890 Retained earnings 129,001 104,069 Accumulated other comprehensive loss (628) - - ------------------------------------------------------------------------------- Total shareholders' equity 212,772 182,381 - ------------------------------------------------------------------------------- Commitments and contingencies - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $867,548 $865,000 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ---------------------------------------------------------------------------------- Operating activities Net income $33,088 $ 27,979 $ 20,145 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 21,515 19,365 18,270 Nonrecurring restructuring provision (credit) (750) (1,000) 11,200 Deferred income taxes (1,293) 8,236 22,737 Provision for LIFO reserve 2,973 1,741 1,536 Provision for losses on accounts and notes receivable 227 559 496 Sales of (collections of sold) accounts receivable, net (25,612) 30,612 (35,000) Changes in operating assets and liabilities: Accounts and notes receivable (9,593) (30,131) 8,617 Merchandise inventories 23,935 (42,397) 8,899 Accounts payable (14,783) 86,871 (23,375) Net change in other current assets and current liabilities 8,926 (11,232) (651) Other, net 4,522 1,686 (389) - ---------------------------------------------------------------------------------- Cash provided by operating activities 43,155 92,289 32,485 - ---------------------------------------------------------------------------------- Investing activities Net cash paid for acquisition of business - (82,699) - Additions to property and equipment (8,005) (8,933) (8,053) Additions to computer software (11,622) (13,172) (4,556) Other, net (152) (2,359) 160 - ---------------------------------------------------------------------------------- Cash used for investing activities (19,779) (107,163) (12,449) - ---------------------------------------------------------------------------------- Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities - - 127,268 Repurchase of preferred stock - - (115,000) Additions to debt - 25,178 - Reductions of debt (21,645) - (32,550) Other financing, net 1,545 (2,741) 5,554 Cash dividends paid (8,156) (7,520) (9,268) Proceeds from exercise of stock options 4,837 80 3,923 - ---------------------------------------------------------------------------------- Cash provided by (used for) financing activities (23,419) 14,997 (20,073) - ---------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (43) 123 (37) Cash and cash equivalents at beginning of year 669 546 583 - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 626 $ 669 $ 546 - ----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 29 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) - --------------------------------------------------------------------------------
Accumulated Preferred Common Other Total Shares Preferred Shares Common Paid-in Retained Comprehensive Shareholders' Outstanding Stock Outstanding Stock Capital Earnings Loss Equity - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1997 1,150 $ 115,000 32,213 $64,426 $ 8,005 $ 71,870 $ - $ 259,301 Net income - - - - - 20,145 - 20,145 --------- Comprehensive income 20,145 --------- Issuance of restricted stock - - 64 128 832 - - 960 Unearned compensation - - - - (657) - - (657) Common stock cash dividends(/1/) - - - - - (6,507) - (6,507) Preferred stock cash dividends(/1/) - - - - - (1,898) - (1,898) Exercise of stock options - - 333 666 3,978 - - 4,644 Repurchase of preferred stock (1,150) (115,000) - - - - - (115,000) Other - - 8 16 122 - - 138 - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 - - 32,618 65,236 12,280 83,610 - 161,126 Net income - - - - - 27,979 - 27,979 --------- Comprehensive income 27,979 --------- Issuance of restricted stock - - 74 148 893 - - 1,041 Unearned compensation - - - - (454) - - (454) Common stock cash dividends(/1/) - - - - - (7,520) - (7,520) Exercise of stock options - - 6 12 71 - - 83 Other - - 13 26 100 - - 126 - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1999 - - 32,711 65,422 12,890 104,069 - 182,381 Net income - - - - - 33,088 - 33,088 Unrealized loss on investment, net of $419 tax benefit - - - - - - (628) (628) --------- Comprehensive income 32,460 --------- Issuance of restricted stock - - 102 204 622 - - 826 Unearned compensation - - - - (139) - - (139) Common stock cash dividends(/1/) - - - - - (8,156) - (8,156) Exercise of stock options - - 355 710 4,541 - - 5,251 Other - - 12 24 125 - - 149 - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 - $ - 33,180 $66,360 $18,039 $129,001 $(628) $ 212,772 - -------------------------------------------------------------------------------------------------------------------
(/1/)Cash dividends were $0.2475, $0.23 and $0.20 per common share in 2000, 1999 and 1998. Cash dividends were $1.65 per preferred share in 1998. See accompanying notes to consolidated financial statements. 30 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 leading distributor of national name brand medical and 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 $6.4 million and $6.5 million have been applied as reductions of accounts receivable at December 31, 2000 and 1999. 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 ac- quired 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 capi- talized. Depreciation and amortization are provided for financial reporting purposes using 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 depre- ciation 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, 2000 and 1999, goodwill was $238.8 million and the related accumulated amortization was $34.0 million and $28.0 million. Based upon management's assessment of undiscounted future cash flows, the carrying value of goodwill at December 31, 2000 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. 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. Com- puter software costs are included in other assets, net in the consolidated bal- ance sheets. Unamortized software at December 31, 2000 and 1999 was $23.7 mil- lion and $18.2 million. Depreciation and amortization expense includes $6.1 million, $4.9 million and $5.1 million of software amortization for the years ended December 31, 2000, 1999 and 1998. Investment. The company owns equity securities of a provider of business-to- business e-commerce services in the healthcare industry. The investment is classified as available-for-sale, in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and is included in other assets, net in the consolidated balance sheets at fair value, with unrealized gains and losses, net of tax, reported as accumulated other comprehensive loss. At December 31, 2000, the estimated fair value (based on the quoted market price), gross unrealized loss and cost basis of this investment were $0.2 million, $1.0 million and $1.2 million. At December 31, 1999, the investment was stated at its cost basis of $1.2 million, as there was no market for the securities at that time. 31 - -------------------------------------------------------------------------------- Revenue Recognition. The company recognizes product revenue when product has been shipped, fees are determinable, and collectibility is probable. Service revenue is recognized ratably over the period during which services are provid- ed. In December 1999, the Securities and Exchange Commission issued Staff Ac- counting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, which clarifies the application of generally accepted accounting principles to reve- nue recognition in financial statements. The company adopted the provisions of SAB 101 in the fourth quarter of 2000. No changes in accounting principles or restatements were required, as the company's revenue recognition policy was in compliance with the SAB. Reclassification of Shipping Fees. In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 00-10, Accounting for Shipping and Handling Fees and Costs. This consensus requires that all amounts billed to a customer in a sale transaction related to shipping and handling represent reve- nue and should be classified as such. Prior to the consensus, the company clas- sified certain amounts billed to customers for shipping as a reduction of out- bound freight costs in selling, general and administrative (SG&A) expenses. The company adopted the provisions of the consensus in the fourth quarter of 2000 and, accordingly, reclassified these amounts from SG&A expenses to net sales for all prior periods. As a result, net sales, gross margin, and SG&A expenses for 1999 and 1998 have been increased by $7.8 million and $7.9 million. Ship- ping costs are included in SG&A expenses. Stock-based Compensation. The company uses the intrinsic value method as de- fined by 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 disclosures required by SFAS 123 are included in Note 11 to the Consolidated Financial Statements. Derivative Financial Instruments. The company enters into interest rate swaps 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, the excess portion of the swap would be marked to market, and the resulting gain or loss included in net income. Effective January 1, 2001, the company will adopt SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of these new accounting standards is not expected to have a material effect on the company's net income, but will change the reported values of assets and liabilities recorded in the consolidated balance sheet. 32 - -------------------------------------------------------------------------------- Operating Segments. As defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information, the company has 11 operating segments, representing various geographic areas within the United States. As each of these segments is substantially identical to the others in each of the five ag- gregation characteristics identified in the statement, they are considered one operating segment for purposes of financial statement disclosure. Note 2 - Acquisition On July 30, 1999, the company acquired certain net assets of Medix, Inc. (Medix), a distributor of medical and surgical supplies, for approximately $83 million. Medix' customers, located primarily in the Midwest, included acute care hospitals, long-term care facilities and clinics. The acquisition has been accounted for by the purchase method and, accordingly, the operating results of Medix have been included in the company's consolidated financial statements since the date of acquisition. Assuming the acquisition had been made at the beginning of the periods, consolidated net sales, on a pro forma basis would have been approximately $3.31 billion and $3.28 billion for the years ended December 31, 1999 and 1998. Consolidated net income and net income per share on a pro forma basis would not have been materially different from the results re- ported. The company paid cash of approximately $68 million and assumed debt of approximately $15 million, which was paid off as part of the closing transaction. The excess of the purchase price over the fair value of the identifiable net assets acquired of approximately $58 million has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. In connection with the acquisition, management adopted a plan for integration of the businesses that includes closure of some Medix facilities and consolida- tion of certain administrative functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the major compo- nents of the accrual and activity through December 31, 2000: (in thousands) - --------------------------------------------------------------------------------
Balance at Exit Plan December 31, Provision Charges 2000 - -------------------------------------------------------------- Losses under lease commitments $1,643 $ 358 $1,285 Employee separations 395 312 83 Other 685 404 281 - -------------------------------------------------------------- Total $2,723 $1,074 $1,649 - --------------------------------------------------------------
The employee separations relate to severance costs for employees in operations and activities being exited. As of December 31, 2000, approximately 40 employees had been terminated. The integration of the Medix business is expected to be completed in 2001. 33 - ------------------------------------------------------------------------------- Note 3 - Restructuring 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 HCA - The Healthcare Company (HCA). The restructuring plan includes reductions in warehouse space and in the number of employees in those facilities that had the highest volume of business with HCA. In the second quarters of 2000 and 1999, the company re-evaluated its estimate of the remaining costs to be incurred and reduced the accrual by $0.8 million in 2000 and $1.0 million in 1999. Approximately 130 employees were terminated in connection with the restructuring plan. The following table sets forth the activity in the restructuring accrual through December 31, 2000: (in thousands) - -------------------------------------------------------------------------------
Balance at Restructuring December 31, Provision Charges Adjustments 2000 - ------------------------------------------------------------------------------ Losses under lease commitments $ 4,194 $3,058 $ 1,582 $2,718 Asset write-offs 3,968 1,466 (1,681) 821 Employee separations 2,497 1,288 (1,209) - Other 541 99 (442) - - ------------------------------------------------------------------------------ Total $11,200 $5,911 $(1,750) $3,539 - ------------------------------------------------------------------------------
Note 4 - 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 $31.6 million and $28.6 million as of December 31, 2000 and 1999. Note 5 - Property And Equipment The company's investment in property and equipment consists of the following: (in thousands) - -------------------------------------------------------------------------------
December 31, 2000 1999 - ------------------------------------------------------------ Warehouse equipment $24,012 $23,337 Computer equipment 34,137 30,606 Office and other equipment 12,683 12,804 Leasehold improvements 10,540 9,903 Land and improvements 1,743 1,743 - ------------------------------------------------------------ 83,115 78,393 Accumulated depreciation and amortization (58,876) (52,516) - ------------------------------------------------------------ Property and equipment, net $24,239 $25,877 - ------------------------------------------------------------
Depreciation and amortization expense for property and equipment in 2000, 1999, and 1998 was $9.4 million, $9.3 million and $8.6 million. Note 6 - Accounts Payable Accounts payable balances were $291.5 million and $303.5 million as of December 31, 2000 and 1999, of which $249.6 million and $264.4 million were trade accounts payable and $41.9 million and $39.1 million, were drafts payable. Drafts payable are checks written in excess of bank balances to be funded upon clearing the bank. 34 - -------------------------------------------------------------------------------- Note 7 - Debt The company's long-term debt consists of the following: (in thousands) - --------------------------------------------------------------------------------
December 31, 2000 1999 - ------------------------------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------ 10.875% Senior Subordinated Notes, mature June 2006 $150,000 $156,375 $150,000 $155,250 Revolving Credit Facility with interest based on London Interbank Offered Rate (LIBOR) or Prime Rate, expires April 2003, credit limit of $225,000 2,200 2,200 22,600 22,600 Obligation under financing agreement 1,333 1,333 2,578 2,578 - ------------------------------------------------------------------------------ Total debt 153,533 159,908 175,178 180,428 Less current maturities (661) (661) (625) (625) - ------------------------------------------------------------------------------ Long-term debt $152,872 $159,247 $174,553 $179,803 - ------------------------------------------------------------------------------
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 significant subsidiaries of the company, other than O&M Funding Corp. (OMF) and Owens & Minor Trust I. In April 2000, the company replaced its Revolving Credit Facility with a new agreement. The new Revolving Credit Facility expires in April 2003 with interest based on, at the company's discretion, LIBOR or the Prime Rate. The company is charged a commitment fee of between 0.20% and 0.275% on the unused portion of the facility and a utilization fee of 0.25% if borrowings exceed $112.5 million. 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 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, 2000, the company was in compliance with these covenants. The company entered into a financing agreement for computer software licenses. This agreement requires periodic payments through January 2002, and interest is imputed at a rate of 7.0%. Net interest expense includes finance charge income of $5.3 million, $4.6 million, and $3.0 million in 2000, 1999, and 1998. Finance charge income repre- sents payments from customers for past due balances on their accounts. Cash payments for interest during 2000, 1999, and 1998 were $16.5 million, $16.0 million, and $16.4 million. 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. The annual maturities of long-term debt within the five years subsequent to December 31, 2000 are: $0.7 million in 2001, $0.7 million in 2002 and $2.2 million in 2003. 35 - -------------------------------------------------------------------------------- Note 8 - Off Balance Sheet Receivables Financing Facility Effective July 14, 2000, the company replaced its Receivables Financing Facil- ity with a new facility expiring in July 2001. Under the terms of the new fa- cility, OMF is entitled to transfer, without recourse, certain of the company's trade receivables and to receive up to $225.0 million from a group of unrelated third party purchasers at a cost of funds equal to commercial paper rates, the Prime Rate or LIBOR (plus a charge for administrative and credit support serv- ices). The terms of the new facility require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed coverage, and re- strict the company's ability to materially alter the character of the business through consolidation, merger, or purchase or sale of assets. The company con- tinues to service the receivables that are transferred under the facility. At December 31, 2000 and 1999, net accounts receivable of $80.0 million and $105.6 million, respectively, had been sold under the agreements in effect at those dates and, as a result, have been derecognized in the consolidated balance sheet. Note 9 - Derivative Financial Instruments 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, 2000 and 1999 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 7.35% to 7.38% in 2000 and 7.29% to 7.32% in 1999. At the option of the counterparties, these swaps can be terminated in 2001. As of December 31, 1999, the company also had $65.0 million notional amount of interest rate swap agreements that effectively converted the company's variable rate financing instruments to fixed rate instruments. Under these swap agreements, which were terminated in November 2000, the company paid the counterparties a fixed rate ranging from 5.75% to 5.93% and the counterparties paid the company a variable rate based on LIBOR. The payments received or disbursed in connection with 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 $0.1 million and an unrealized loss of approximately $1.0 million at December 31, 2000 and 1999 for the fixed to variable rate swaps, and an unrealized gain of approximately $0.7 million at December 31, 1999 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 10 - 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 was $122.1 million and $79.5 million at December 31, 2000 and 1999 based on quoted market prices. As of December 31, 2000 and 1999, the company had accrued $1.2 million of distributions related to the Securities. 36 - -------------------------------------------------------------------------------- Note 11 - Stock-based Compensation The company maintains stock-based compensation plans (Plans) that 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, 2000, approximately 0.6 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, 2000, there were no SARs outstanding. The company has 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. The company also has an Annual Incentive Plan. Under the plan, certain employees may be awarded restricted stock based on pre- established objectives. Upon issuance of restricted shares, unearned compensation is charged to shareholders' equity for the market value of restricted stock and recognized as compensation expense ratably over the vesting period. Amortization of unearned compensation for restricted stock awards was approximately $693 thousand, $534 thousand and $302 thousand for 2000, 1999, and 1998. The following table summarizes the activity and terms of outstanding options at December 31, 2000, and for the years in the three-year period then ended: (in thousands, except per share data) - --------------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------------ Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ------------------------------------------------------------------------------ Options outstanding beginning of year 2,448 $13.75 2,001 $13.78 1,940 $13.50 Granted 500 8.73 600 13.70 550 13.79 Exercised (358) 13.57 (6) 12.68 (333) 12.12 Expired/cancelled (87) 12.38 (147) 13.66 (156) 13.89 - ------------------------------------------------------------------------------ Outstanding at end of year 2,503 $12.82 2,448 $13.75 2,001 $13.78 Exercisable options at end of year 1,655 $13.75 1,560 $13.83 1,137 $14.16 - ------------------------------------------------------------------------------
37 - -------------------------------------------------------------------------------- At December 31, 2000, the following option groups were outstanding: - --------------------------------------------------------------------------------
Outstanding Exercisable - --------------------------------------------------------------------------------- Weighted Weighted Average Weighted 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) - --------------------------------------------------------------------------------- $ 8.31 - 11.94 600 $ 8.85 8.71 132 $10.35 7.48 $12.50 - 17.06 1,903 $14.07 5.96 1,523 $14.04 5.49 - --------------------------------------------------------------------------------- 2,503 $12.82 6.62 1,655 $13.75 5.65 - ---------------------------------------------------------------------------------
Using the intrinsic value method, the company's 2000, 1999 and 1998 net in- come includes stock-based compensation expense (net of tax benefit) of approxi- mately $381 thousand, $306 thousand and $201 thousand. Had the company included in stock-based compensation expense the fair value at grant date of stock op- tion awards granted in 2000, 1999 and 1998, net income would have been $32.4 million (or $0.99 per basic common share and $0.92 per diluted common share), $26.6 million (or $0.82 per basic common share and $0.78 per diluted common share) and $19.0 million (or $0.52 per basic and diluted common share) for the years ended December 31, 2000, 1999 and 1998. The weighted average fair value of options granted in 2000, 1999 and 1998 was $2.69, $4.35 and $4.06, per op- tion. 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 1.6%-3.0% in 2000, 1.6%-2.4% in 1999, and 1.2%-1.5% in 1998; expected volatility of 36.7% in 2000, 32.4%-38.6% in 1999, and 32.4%- 37.9% in 1998; risk-free interest rate of 5.1% in 2000, 6.4% in 1999, and 4.7% in 1998; and expected lives of 5 years in 2000 and 2.1-5.1 years in 1999 and 1998. Note 12 - Retirement Plans Savings and Protection Plan. The company maintains a voluntary Savings and Protection Plan covering substantially all full-time employees who have completed one month of service and have attained age 18. The company matches a certain percentage of each employee's contribution. The plan provides 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 $2.7 million, $2.5 million and $2.1 million in 2000, 1999, and 1998 of expenses related to this plan. 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 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, 2000, 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. 38 - -------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- December 31, 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation, beginning of year $22,518 $22,288 $ 5,888 $ 6,094 Service cost 224 225 466 542 Interest cost 1,540 1,470 604 406 Amendment - - 3,574 - Actuarial loss (gain) 142 (571) 1,197 (978) Benefits paid (1,371) (894) (210) (176) - ------------------------------------------------------------------------------- Benefit obligation, end of year $23,053 $22,518 $ 11,519 $ 5,888 - ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets, beginning of year $27,785 $24,143 $ - $ - Actual return on plan assets (1,650) 4,536 - - Employer contribution - - 210 176 Benefits paid (1,371) (894) (210) (176) - ------------------------------------------------------------------------------- Fair value of plan assets, end of year $24,764 $27,785 $ - $ - - ------------------------------------------------------------------------------- Funded status Funded status at December 31 $ 1,711 $ 5,267 $(11,519) $(5,888) Unrecognized net actuarial (gain) loss (294) (4,112) 1,830 635 Unrecognized prior service cost (benefit) - - 3,254 (188) Unrecognized net obligation being recognized through 2002 - - 82 123 - ------------------------------------------------------------------------------- Net amount recognized $ 1,417 $ 1,155 $ (6,353) $(5,318) - ------------------------------------------------------------------------------- Amounts recognized in the consolidated balance sheets Prepaid benefit cost $ 1,417 $ 1,155 $ - $ - Accrued benefit cost - - (8,255) (5,318) Intangible asset - - 1,902 - - ------------------------------------------------------------------------------- Net amount recognized $ 1,417 $ 1,155 $ (6,353) $(5,318) - -------------------------------------------------------------------------------
39 - -------------------------------------------------------------------------------- The components of net periodic pension cost for the Pension and Retirement Plans are as follows: (in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Service cost $ 690 $ 767 $ 597 Interest cost 2,144 1,876 1,765 Expected return on plan assets (2,026) (1,811) (1,682) Amortization of prior service cost (benefit) 133 (16) (17) Amortization of transition obligation 41 41 41 Recognized net actuarial loss 2 84 57 - ------------------------------------------------------------------------ Net periodic pension cost $ 984 $ 941 $ 761 - ------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was assumed to be 6.75% for the Pen- sion Plan and 7.75% for the Retirement Plan in 2000 and 7.0% for the Pension Plan and 8.0% for the Retirement Plan in 1999. The rate of increase in future compensation levels used in determining the projected benefit obligation was 5.5% in 2000 and 1999. The expected long-term rate of return on plan assets was assumed to be 8.5% in 2000 and 1999. Note 13 - Income Taxes The income tax provision consists of the following: (in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------- Current tax provision (benefit): Federal $23,604 $11,724 $(7,690) State 4,761 2,119 (459) - ------------------------------------------------------------- Total current provision (benefit) 28,365 13,843 (8,149) - ------------------------------------------------------------- Deferred tax provision (benefit): Federal (1,131) 7,206 19,895 State (162) 1,030 2,842 - ------------------------------------------------------------- Total deferred provision (benefit) (1,293) 8,236 22,737 - ------------------------------------------------------------- Total income tax provision $27,072 $22,079 $14,588 - -------------------------------------------------------------
A reconciliation of the federal statutory rate to the company's effective income tax rate is shown below: - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ---------------------------------------------- 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 5.5 5.5 4.9 Nondeductible goodwill amortization 2.5 3.0 4.7 Nontaxable income - - (4.0) Other, net 2.0 0.6 1.4 - ---------------------------------------------- Effective rate 45.0% 44.1% 42.0% - ----------------------------------------------
40 - -------------------------------------------------------------------------------- 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, 2000 1999 - ----------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts $ 2,567 $ 2,592 Accrued liabilities not currently deductible 3,979 3,900 Employee benefit plans 4,214 3,767 Nonrecurring restructuring expenses 1,416 2,444 Property and equipment 201 - Tax loss carryforward, net 205 633 Unrealized loss on investment 419 - Other 1,301 1,156 - ----------------------------------------------------------------- Total deferred tax assets 14,302 14,492 - ----------------------------------------------------------------- Deferred tax liabilities: Merchandise inventories 25,133 24,531 Accounts receivable 700 1,400 Property and equipment - 1,869 Goodwill 2,080 1,093 Computer software 2,422 472 Other 840 385 - ----------------------------------------------------------------- Total deferred tax liabilities 31,175 29,750 - ----------------------------------------------------------------- Net deferred tax liability $(16,873) $(15,258) - -----------------------------------------------------------------
At December 31, 2000 and 1999, the company had a $0.05 million and $0.04 million valuation allowance, 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. Cash payments for income taxes for 2000, 1999, and 1998 were $23.8 million, $17.9 million, and $14.1 million, respectively. In August 2000, the company received notice from the Internal Revenue Service that it has disallowed certain prior year deductions for interest on loans associated with the company's corporate-owned life insurance (COLI) program. Management believes that the company has complied with the tax law as it relates to its COLI program, and has filed an appeal with the Internal Revenue Service. The impact of the disallowance of these deductions, if appeals were unsuccessful, would be approximately $8.5 million after tax, including interest. The ultimate resolution of this matter may take several years and a determination adverse to the company could have a material impact on the company's results of operations. 41 - -------------------------------------------------------------------------------- Note 14 - 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) - --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------ Numerator: Net income $33,088 $27,979 $20,145 Preferred stock dividends - - 1,898 - ------------------------------------------------------------------------------ Numerator for basic net income per common share - net income available to common shareholders 33,088 27,979 18,247 Distributions on convertible mandatorily redeemable preferred securities, net of taxes 3,902 3,966 - - ------------------------------------------------------------------------------ Numerator for diluted net income per common share - net income available to common shareholders after assumed conversions $36,990 $31,945 $18,247 - ------------------------------------------------------------------------------ Denominator: Denominator for basic net income per common share - weighted average shares 32,712 32,574 32,488 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities 6,400 6,400 - Stock options and restricted stock 341 124 99 Other - - 4 - ------------------------------------------------------------------------------ Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 39,453 39,098 32,591 - ------------------------------------------------------------------------------ Net income per common share - basic $ 1.01 $ 0.86 $ 0.56 - ------------------------------------------------------------------------------ Net income per common share - diluted $ 0.94 $ 0.82 $ 0.56 - ------------------------------------------------------------------------------
During the years ended December 31, 2000, 1999, and 1998, outstanding options to purchase approximately 1,550 thousand, 2,263 thousand and 461 thousand common shares were excluded from the calculation of diluted net income per share because their exercise price exceeded the average market price for the year. Note 15 - Shareholders' Equity In May 1998, the company repurchased all of the shares of its Series B preferred stock at par value. 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. 42 - -------------------------------------------------------------------------------- Note 16 - Commitments And Contingencies The company has a commitment through November 2, 2008 to outsource its informa- tion technology operations, including strategic application development servic- es. The commitment is cancelable after November 2, 2003 with 180 days prior no- tice and payment of a minimum termination fee of between $3.0 million to $12.0 million depending upon the date of termination. The company has a commitment through December 2005 to outsource the management and operation of its main- frame computer. This commitment is cancelable at any time on 180 days prior no- tice and a minimum termination fee of between $1.7 million and $3.5 million, depending upon the date of termination. The company also has entered into non-cancelable agreements to lease certain office and warehouse facilities with remaining terms ranging from one to seven years. Certain leases include renewal options, generally for five-year increments. At December 31, 2000, future minimum annual payments under non- cancelable operating lease agreements with original terms in excess of one year are as follows: (in thousands) - --------------------------------------------------------------------------------
Total - ------------------------------- 2001 $21,366 2002 18,275 2003 15,493 2004 11,677 2005 8,138 Later years 6,836 - ------------------------------- Total minimum payments $81,785 - -------------------------------
Rent expense for all operating leases for the years ended December 31, 2000, 1999, and 1998 was $28.1 million, $26.1 million, and $26.1 million. 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. Net sales to member hospitals under contract with Novation totaled $1.8 bil- lion in 2000, $1.7 billion in 1999 and $1.5 billion in 1998, approximately 51%, 53% and 49%, of the company's net sales. As members of a group purchasing organization, Novation hospitals have an incentive to purchase from their pri- mary selected distributor; however, they operate independently and are free to negotiate directly with distributors and manufacturers. Note 17 - Legal Proceedings Prior to December 1992, the company's subsidiary Stuart Medical, Inc. (Stuart), which was acquired in 1994, distributed spinal fixation devices manufactured by Sofamor S.N.C. (formerly known as Sofamor, S.A.). As of January 8, 2001, Stuart was named as a defendant in 26 lawsuits alleging personal injuries attributable to spinal fixation devices distributed by Stuart (the Cases). On August 9, 1999, Medtronic Sofamor Danek, Inc., Danek Medical, Inc. and Sofamor, S.N.C., successors to the manufacturer of the spinal fixation devices distributed by Stuart, assumed the defense of Stuart and indemnified Stuart and others against all costs of defense, any settlements and/or any adverse judgment(s) that may be entered against Stuart in these Cases. Stuart also retains insurance coverage for the defense of the Cases. In addition, the company and Stuart are 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. Management believes that Stuart's available insurance coverage, together with the indemnification rights discussed above, is adequate to cover any losses should they occur. The company is not aware of any uncertainty as to the availability and adequacy of such insurance or indemnification, although there can be no assurance that the Sofamor successor companies, Stuart's insurance carriers and former shareholders will have sufficient financial resources in the future to meet such obligations. 43 - ------------------------------------------------------------------------------- As of December 31, 2000, approximately 174 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, prod- uct manufacturers and other distributors and sellers of natural rubber latex products. The company has obtained dismissal or summary judgment in 45 cases. The Lawsuits allege injuries arising from the use of latex products, principally medical gloves. The active Lawsuits (122) also include claims by approximately 80 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 prod- ucts, 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 company. The com- pany will continue to vigorously pursue indemnification from latex product manufacturers. The company's insurers are paying all costs of defense in the Lawsuits, and the company believes, at this time, that future defense costs and any potential liability should be adequately covered by the insurance, subject to policy limits and insurer solvency. Most of the Lawsuits are at the early stages of trial preparation. Several Lawsuits that were scheduled for trial have been dismissed on summary judgment. After analyzing the above fac- tors at this point in time, it would appear that the likelihood of a material loss to the company with respect to the Lawsuits is remote. 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 pre- dicted 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 18 - 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; and the non-guarantor subsidiaries of the Notes. Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees and the company believes the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries. 44 - -------------------------------------------------------------------------------- Condensed Consolidating Financial Information (in thousands) - --------------------------------------------------------------------------------
Year ended Owens & Guarantor Non-guarantor December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------ Statements of Operations Net sales $ - $3,503,583 $ - $ - $3,503,583 Cost of goods sold - 3,127,911 - - 3,127,911 - ------------------------------------------------------------------------------------------ Gross margin - 375,672 - - 375,672 - ------------------------------------------------------------------------------------------ Selling, general and administrative expenses 137 266,684 1,384 - 268,205 Depreciation and amortization - 21,515 - - 21,515 Interest expense, net 17,869 (5,303) - - 12,566 Intercompany interest expense, net (7,904) 30,520 (22,616) - - Discount on accounts receivable securitization - 15 6,866 - 6,881 Distributions on mandatorily redeemable preferred securities - - 7,095 - 7,095 Nonrecurring restructuring credit - (750) - - (750) - ------------------------------------------------------------------------------------------ Total expenses 10,102 312,681 (7,271) - 315,512 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (10,102) 62,991 7,271 - 60,160 Income tax provision (benefit) (4,445) 27,841 3,676 - 27,072 - ------------------------------------------------------------------------------------------ Net income (loss) $ (5,657) $ 35,150 $ 3,595 $ - $ 33,088 - ------------------------------------------------------------------------------------------ Year ended Owens & Guarantor Non-guarantor December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------ Statements of Operations Net sales $ - $3,194,134 $ - $ - $3,194,134 Cost of goods sold - 2,851,556 - - 2,851,556 - ------------------------------------------------------------------------------------------ Gross margin - 342,578 - - 342,578 - ------------------------------------------------------------------------------------------ Selling, general and administrative expenses 9 249,390 561 - 249,960 Depreciation and amortization - 19,365 - - 19,365 Interest expense, net 16,798 (4,938) - - 11,860 Intercompany interest expense, net (6,976) 25,326 (18,350) - - Discount on accounts receivable securitization - 32 5,208 - 5,240 Distributions on mandatorily redeemable preferred securities - - 7,095 - 7,095 Nonrecurring restructuring credit - (1,000) - - (1,000) - ------------------------------------------------------------------------------------------ Total expenses 9,831 288,175 (5,486) - 292,520 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (9,831) 54,403 5,486 - 50,058 Income tax provision (benefit) (4,326) 23,865 2,540 - 22,079 - ------------------------------------------------------------------------------------------ Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ - $ 27,979 - ------------------------------------------------------------------------------------------
45 - -------------------------------------------------------------------------------- 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 $ - $3,090,048 $ - $ - $3,090,048 Cost of goods sold - 2,755,158 - - 2,755,158 - ------------------------------------------------------------------------------------------ Gross margin - 334,890 - - 334,890 - ------------------------------------------------------------------------------------------ Selling, general and administrative expenses 5 247,224 243 - 247,472 Depreciation and amortization - 18,270 - - 18,270 Interest expense, net 17,205 (3,139) - - 14,066 Intercompany interest expense, net (10,854) 24,469 (13,615) - - Discount on accounts receivable securitization - 67 4,588 - 4,655 Distributions on mandatorily redeemable preferred securities - - 4,494 - 4,494 Nonrecurring restructuring expense - 11,200 - - 11,200 - ------------------------------------------------------------------------------------------ Total expenses 6,356 298,091 (4,290) - 300,157 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (6,356) 36,799 4,290 - 34,733 Income tax provision (benefit) (2,574) 15,424 1,738 - 14,588 - ------------------------------------------------------------------------------------------ Net income (loss) (3,782) 21,375 2,552 - 20,145 Dividends on preferred stock 1,898 - - - 1,898 - ------------------------------------------------------------------------------------------ Net income (loss) attributable to common stock $ (5,680) $ 21,375 $ 2,552 $ - $ 18,247 - ------------------------------------------------------------------------------------------
46 - -------------------------------------------------------------------------------- Condensed Consolidating Financial Information (in thousands) - --------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------ Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 118 $ 1 $ - $ 626 Accounts and notes receivable, net - 24,224 237,681 - 261,905 Merchandise inventories - 315,570 - - 315,570 Intercompany advances, net 129,447 79,645 (209,092) - - Other current assets 17 16,173 - - 16,190 - ------------------------------------------------------------------------------------------ Total current assets 129,971 435,730 28,590 - 594,291 Property and equipment, net - 24,236 3 - 24,239 Goodwill, net - 204,849 - - 204,849 Intercompany investments 305,441 15,001 136,083 (456,525) - Other assets, net 8,735 35,157 277 - 44,169 - ------------------------------------------------------------------------------------------ Total assets $444,147 $714,973 $ 164,953 $(456,525) $867,548 - ------------------------------------------------------------------------------------------ Liabilities and shareholders' equity Current liabilities Accounts payable $ - $291,507 $ - $ - $291,507 Accrued payroll and related liabilities - 9,940 - - 9,940 Deferred income taxes (85) 18,828 (2,241) - 16,502 Other accrued liabilities 1,717 39,331 1,657 - 42,705 - ------------------------------------------------------------------------------------------ Total current liabilities 1,632 359,606 (584) - 360,654 Long-term debt 152,200 672 - - 152,872 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 8,879 - - 8,879 Deferred income taxes (930) 1,304 (3) - 371 - ------------------------------------------------------------------------------------------ Total liabilities 288,985 370,461 (587) (136,083) 522,776 - ------------------------------------------------------------------------------------------ Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. - - 132,000 - 132,000 - ------------------------------------------------------------------------------------------ Shareholders' equity Common stock 66,360 40,879 5,583 (46,462) 66,360 Paid-in capital 18,039 258,979 15,001 (273,980) 18,039 Retained earnings 71,391 44,654 12,956 - 129,001 Accumulated other comprehensive loss (628) - - - (628) - ------------------------------------------------------------------------------------------ Total shareholders' equity 155,162 344,512 33,540 (320,442) 212,772 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $444,147 $714,973 $ 164,953 $(456,525) $867,548 - ------------------------------------------------------------------------------------------
47 - -------------------------------------------------------------------------------- Condensed Consolidating Financial Information (in thousands) - --------------------------------------------------------------------------------
Owens & Guarantor Non-guarantor December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------ Balance Sheets Assets Current assets Cash and cash equivalents $ 507 $ 158 $ 4 $ - $ 669 Accounts and notes receivable, net - 112,088 114,839 - 226,927 Merchandise inventories - 342,478 - - 342,478 Intercompany advances, net 157,315 (67,049) (90,266) - - Other current assets - 19,172 - - 19,172 - ------------------------------------------------------------------------------------------ Total current assets 157,822 406,847 24,577 - 589,246 Property and equipment, net - 25,877 - - 25,877 Goodwill, net - 210,837 - - 210,837 Intercompany investments 305,441 15,001 136,083 (456,525) - Deferred income taxes 388 (243) - - 145 Other assets, net 9,894 27,788 1,213 - 38,895 - ------------------------------------------------------------------------------------------ Total assets $473,545 $686,107 $161,873 $(456,525) $865,000 - ------------------------------------------------------------------------------------------ Liabilities and shareholders' equity Current liabilities Accounts payable $ - $303,490 $ - $ - $303,490 Accrued payroll and related liabilities - 6,883 - - 6,883 Deferred income taxes (8) 17,186 (1,775) - 15,403 Other accrued liabilities 1,354 40,965 1,703 - 44,022 - ------------------------------------------------------------------------------------------ Total current liabilities 1,346 368,524 (72) - 369,798 Long-term debt 172,600 1,953 - - 174,553 Intercompany long-term debt 136,083 - - (136,083) - Accrued pension and retirement plans - 6,268 - - 6,268 - ------------------------------------------------------------------------------------------ Total liabilities 310,029 376,745 (72) (136,083) 550,619 - ------------------------------------------------------------------------------------------ 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 65,422 40,879 5,583 (46,462) 65,422 Paid-in capital 12,890 258,979 15,001 (273,980) 12,890 Retained earnings 85,204 9,504 9,361 - 104,069 - ------------------------------------------------------------------------------------------ Total shareholders' equity 163,516 309,362 29,945 (320,442) 182,381 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $473,545 $686,107 $161,873 $(456,525) $865,000 - ------------------------------------------------------------------------------------------
48 - -------------------------------------------------------------------------------- Condensed Consolidating Financial Information (in thousands) - --------------------------------------------------------------------------------
Year ended Owens & Guarantor Non-guarantor December 31, 2000 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------- Statements of Cash Flows Operating activities Net income (loss) $(5,657) $ 35,150 $ 3,595 $ - $33,088 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 21,515 - - 21,515 Nonrecurring restructuring credit - (750) - - (750) Deferred income taxes (619) (205) (469) - (1,293) Provision for LIFO reserve - 2,973 - - 2,973 Provision for losses on accounts and notes receivable - 397 (170) - 227 Collections of sold accounts receivable, net - - (25,612) - (25,612) Changes in operating assets and liabilities: Accounts and notes receivable - 87,467 (97,060) - (9,593) Merchandise inventories - 23,935 - - 23,935 Accounts payable - (14,783) - - (14,783) Net change in other current assets and current liabilities 346 8,876 (296) - 8,926 Other, net 3,191 144 1,187 - 4,522 - ------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities (2,739) 164,719 (118,825) - 43,155 - ------------------------------------------------------------------------------------------- Investing activities Additions to property and equipment - (8,002) (3) - (8,005) Additions to computer software - (11,622) - - (11,622) Other, net (155) 3 - - (152) - ------------------------------------------------------------------------------------------- Cash used for investing activities (155) (19,621) (3) - (19,779) - ------------------------------------------------------------------------------------------- Financing activities Reductions of debt (20,400) (1,245) - - (21,645) Change in intercompany advances 27,868 (146,693) 118,825 - - Other financing, net (1,255) 2,800 - - 1,545 Cash dividends paid (8,156) - - - (8,156) Proceeds from exercise of stock options 4,837 - - - 4,837 - ------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 2,894 (145,138) 118,825 - (23,419) - ------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents - (40) (3) - (43) Cash and cash equivalents at beginning of year 507 158 4 - 669 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 507 $ 118 $ 1 $ - $ 626 - -------------------------------------------------------------------------------------------
49 - -------------------------------------------------------------------------------- Condensed Consolidating Financial Information (in thousands) - --------------------------------------------------------------------------------
Year ended Owens & Guarantor Non-guarantor December 31, 1999 Minor, Inc. Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------- Statements of Cash Flows Operating activities Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ - $ 27,979 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization - 19,365 - - 19,365 Nonrecurring restructuring credit - (1,000) - - (1,000) Deferred income taxes (396) 10,407 (1,775) - 8,236 Provision for LIFO reserve - 1,741 - - 1,741 Provision for losses on accounts and notes receivable - 292 267 - 559 Sales of accounts receivable, net - - 30,612 - 30,612 Changes in operating assets and liabilities: Accounts and notes receivable - 1,970 (32,101) - (30,131) Merchandise inventories - (42,397) - - (42,397) Accounts payable - 86,871 - - 86,871 Net change in other current assets and current liabilities (39) (11,536) 343 - (11,232) Other, net 3,049 (1,404) 41 - 1,686 - ------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities (2,891) 94,847 333 - 92,289 - ------------------------------------------------------------------------------------------- Investing activities Net cash paid for acquisition of business - (82,699) - - (82,699) Additions to property and equipment - (8,933) - - (8,933) Additions to computer software - (13,172) - - (13,172) Other, net (1,222) 63 (1,200) - (2,359) - ------------------------------------------------------------------------------------------- Cash used for investing activities (1,222) (104,741) (1,200) - (107,163) - ------------------------------------------------------------------------------------------- Financing activities Additions to debt 22,600 2,578 - - 25,178 Change in intercompany advances (11,045) 10,175 870 - - Other financing, net - (2,741) - - (2,741) Cash dividends paid (7,520) - - - (7,520) Proceeds from exercise of stock options 80 - - - 80 - ------------------------------------------------------------------------------------------- Cash provided by financing activities 4,115 10,012 870 - 14,997 - ------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2 118 3 - 123 Cash and cash equivalents at beginning of year 505 40 1 - 546 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 507 $ 158 $ 4 $ - $ 669 - -------------------------------------------------------------------------------------------
50 - -------------------------------------------------------------------------------- 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) $ 21,375 $ 2,552 $ - $ 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 taxes - 22,737 - - 22,737 Provision for LIFO reserve - 1,536 - - 1,536 Provision for losses on accounts and notes receivable - 262 234 - 496 Collections of sold accounts receivable, net - - (35,000) - (35,000) Changes in operating assets and liabilities: Accounts and notes receivable - (74) 8,691 - 8,617 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 (1,895) - - (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) Other, net - 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) Reductions of debt (32,550) - - - (32,550) Change in intercompany advances 159,443 (50,126) (109,317) - - Other 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 - -------------------------------------------------------------------------------------------
51 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 (the company) as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Richmond, Virginia January 30, 2001 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/ Richard F. Bozard G. Gilmer Minor, III Richard F. Bozard Chairman & Chief Executive Officer Vice President & Treasurer Acting Chief Financial Officer 52 QUARTERLY FINANCIAL INFORMATION(/1/) - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) - ------------------------------------------------------
2000 - ------------------------------------------------------ Quarters 1st 2nd(/3/) 3rd 4th - ------------------------------------------------------ Net sales(/2/) $856,742 $875,230 $874,318 $897,293 - ------------------------------------------------------ Gross margin(/2/) 91,961 92,803 93,121 97,787 - ------------------------------------------------------ Net income 6,840 8,015 8,466 9,767 - ------------------------------------------------------ Per common share: Net income Basic $ 0.21 $ 0.25 $ 0.26 $ 0.30 Diluted 0.20 0.23 0.24 0.27 Dividends 0.06 0.0625 0.0625 0.0625 - ------------------------------------------------------ Market price High $ 12.00 $ 17.19 $ 18.25 $ 18.38 Low 8.13 10.25 14.69 11.88 - ------------------------------------------------------ 1999 - ------------------------------------------------------ Quarters 1st 2nd(/3/) 3rd 4th - ------------------------------------------------------ Net sales(/2/) $743,057 $774,351 $813,788 $862,939 - ------------------------------------------------------ Gross margin(/2/) 80,702 82,338 87,168 92,371 - ------------------------------------------------------ Net income 5,491 6,480 7,142 8,866 - ------------------------------------------------------ Per common share: Net income Basic $ 0.17 $ 0.20 $ 0.22 $ 0.27 Diluted 0.17 0.19 0.21 0.25 Dividends 0.05 0.06 0.06 0.06 - ------------------------------------------------------ Market price High $ 17.00 $ 12.44 $ 13.00 $ 10.63 Low 9.56 9.50 9.63 7.56 - ------------------------------------------------------
(/1/)On July 30, 1999, the company acquired certain net assets of Medix, Inc. This acquisition was accounted for as a purchase. (/2/)Net sales and gross margin have been restated for all periods in accordance with Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. See Note 1 to the Consolidated Financial Statements. (/3/)In the second quarters of 2000 and 1999, the company reduced the restructuring accrual by $0.8 million and $1.0 million, or $0.4 million and $0.6 million after taxes. See Note 3 to the Consolidated Financial Statements. 53 C O R P O R A T E I N F O R M A T I O N - -------------------------------------------------------------------------------- Owens & Minor, Inc. and Subsidiaries Annual Meeting The annual meeting of Owens & Minor, Inc. shareholders will be held on Thursday, April 26, 2001, 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: The Bank of New York 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 reports. To eliminate multiple mailings, please write to the transfer agent. Counsel Hunton & Williams Richmond, Virginia Independent Auditors KPMG LLP Richmond, Virginia 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, 2000, there were approximately 15,000 common shareholders. 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. Corporate Communications and Investor Relations 804-747-9794 56 - -- 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 5th day of March, 2001. OWENS & MINOR, INC. /s/ G. Gilmer Minor, III - ----------------------------- G. Gilmer Minor, III Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on the 5th day of March 2001 and in the capacities indicated. /s/ G. Gilmer Minor, III Chairman and Chief __________________________ Executive Officer and G. Gilmer Minor, III Director (Principal Executive Officer) /s/ Richard F. Bozard Vice President and __________________________ Treasurer Acting Chief Richard F. Bozard Financial Officer (Principal Financial Officer) /s/ Olwen B. Cape Vice President and __________________________ Controller (Principal Olwen B. Cape Accounting Officer) /s/ A. Marshall Acuff, Jr. Director __________________________ A. Marshall Acuff, Jr. /s/ Henry A. Berling Director __________________________ Henry A. Berling /s/ Josiah Bunting, III Director __________________________ Josiah Bunting, III /s/ John T. Crotty Director __________________________ John T. Crotty /s/ James B. Farinholt, Jr. Director __________________________ James B. Farinholt, Jr. /s/ Vernard W. Henley Director __________________________ Vernard W. Henley /s/ E. Morgan Massey Director __________________________ E. Morgan Massey /s/ Peter S. Redding Director __________________________ Peter S. Redding
/s/ James E. Rogers Director __________________________ James E. Rogers /s/ James E. Ukrop Director __________________________ James E. Ukrop /s/ Anne Marie Whittemore Director __________________________ Anne Marie Whittemore Owens & Minor, Inc. Statement of Differences 1. The printed Annual Report and Form 10-K contains numerous graphs and photographs not incorporated into the electronic Form 10-K. 2. Pages 1-13, 16 and 17 of the printed document have not been included in the electronic document, as they do not contain items required by Form 10-K. 3. The 10-K cover sheet and index, presented on pages 54 and 55 of the printed document, have been repositioned to the front of the electronic document. INDEX TO EXHIBITS DESCRIPTION 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 the Company (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q, Exhibit 3, for the quarter ended June 30, 1999) 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 April 24, 2000 by and among Owens & Minor, Inc., as Borrower, Certain of its Subsidiaries, as Guarantors, the banks identified therein, First Union National Bank and Suntrust Bank, as Syndication Agents, Bank One, N.A., as Managing Agent, The Bank of Nova Scotia, as Co-Agent, and Bank of America, N.A., as Administrative Agent (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q , Exhibit 4, for the quarter ended March 31, 2000) 4.5 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) 4.6 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) 4.7 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) 4.8 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) 4.9 Restated Certificate of Trust of Owens & Minor Trust I (included in Exhibit 4.7) 4.10 Form of $2.6875 Term Convertible Security (included in Exhibit 4.7) 4.11 Form of 5.375% Junior Subordinated Convertible Debenture (included in Exhibit 4.5) 4.12 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, as amended effective December 18, 2000* -- filed herewith 10.3 Owens & Minor, Inc. Supplemental Executive Retirement Plan, as amended and restated effective July 1, 2000* -- filed herewith 10.4 Forms of Owens & Minor, Inc. Executive Severance Agreements (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10.8, for the year ended December 31, 1998)* 10.5 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)* 10.6 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)* 10.7 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)* 10.8 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))* 10.9 Amendment to 1998 Stock Option and Incentive Plan (incorporated herein by reference to the Company's Annual Report of Form 10-K, Exhibit 10.14, for the year ended December 31, 1999)* 10.10 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))* 10.11 Amendment No. 1 to Owens & Minor, Inc. 1998 Directors' Compensation Plan (incorporated herein by reference to the Company's Annual Report on Form 10-K, Exhibit 10.15, for the year ended December 31, 1998)* 10.12 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)** 10.13 Receivables Purchase Agreement dated as of July 14, 2000 among O&M Funding Corp., Owens & Minor Medical, Inc., Owens & Minor, Inc., Falcon Asset Securitization Corporation, Receivables Capital Corporation, Liberty Street Funding Corporation, Bank One, N.A., Bank of America, National Association, and The Bank of Nova Scotia (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q , Exhibit 10(a), for the quarter ended June 30, 2000) 10.14 Receivables Sale Agreement dated as of July 14, 2000 among Koley's Medical Supply, Inc., Owens & Minor Medical, Inc., Owens & Minor West, Inc., Stuart Medical, Inc. and O&M Funding Corp. (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q , Exhibit 10(b), for the quarter ended June 30, 2000) 11.1 Calculation of Net Income Per Common Share Information related to this item is in Part II, Item 8, Notes to Consolidated Financial Statements, Note 14 - Net Income per Common Share 21.1 Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors * Management contract or compensatory plan or arrangement. ** 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-10.2 2 0002.txt EXHIBIT 10.2 Exhibit 10.2 OWENS & MINOR, INC. MANAGEMENT EQUITY OWNERSHIP PROGRAM SECTION I. DEFINITIONS - ------------------------ 1.1 Annual Bonus means the cash portion of any Incentive Award. 1.2 Annual Incentive Plan means the Company's Annual Incentive Plan approved by the shareholders of the Company on April 30, 1991 or any successor plan. 1.3 Base Salary means the annual salary paid by the Company to a Participant for performance of his job excluding any benefits, Incentive Awards, bonuses or any component of pay other than the base amount. 1.4 Board means the Board of Directors of the Company. 1.5 Business Day means any day on which the New York Stock Exchange is open and the Common Stock is traded. 1.6 Cause means conduct of the Participant amounting to (i) fraud or dishonesty against the Company, (ii) willful misconduct, repeated refusal to follow the reasonable directions of the Company's management or knowing violation of law in the performance of the duties of Participant's employment with the Company, (iii) violation of the Company's standards of conduct or other Company policies, (iv) a conviction or plea of guilty or nolo contendere to a felony or a crime involving dishonesty or (v) a breach or violation of the terms of any employment, confidentiality, non-compete or other agreement to which the Participant and the Company are party. The determination of whether the Company has or had Cause to terminate a Participant's employment shall be made by the Committee in its sole and absolute discretion. 1.7 Change in Control means that situation when (i) 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 "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the effective date of this Program), 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 (i), (ii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's 1 stockholders was approved by a vote of a majority of the directors then still in office who either (x) were directors at the beginning of such period or (y) were so elected or nominated with such approval, cease for any reason to constitute at least a majority of the Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other Company, other than (x) 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 (y) 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 (iv) 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; provided, however, that Company securities acquired directly from the Company shall be disregarded for this purpose. 1.8 Committee means the Compensation & Benefits Committee of the Board or any successor committee. 1.9 Common Stock means the Common Stock, $2.00 par value, of Owens & Minor, Inc. 1.10 Company means Owens & Minor, Inc., including its Subsidiaries. 1.11 Disability means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. 1.12 Effective Date shall have the meaning set forth in subsection 2.3 hereof. 1.13 Equity Ownership Dividend shall have the meaning specified in Section IV hereof. 1.14 Fair Market Value means, as of any given date, the closing price of a share of Common Stock as reported on the New York Stock Exchange composite tape as of such date, or if the Common Stock was not traded on the New York Stock Exchange on such day, then on the next preceding day that the Common Stock was traded on such exchange, all as reported by such source as the Administrator may select. 1.15 Fourth Quarter Fair Market Value means the greater of (i) the average Fair Market Value of a share of Common Stock for all trading days during the fourth quarter of the calendar year for which the value is calculated or (ii) the Fair Market Value on the last day in such fourth quarter that a Participant is able to purchase shares of Common Stock under the "Section 16 window period" policy set forth in the Company's Section 16 Compliance Program. 2 1.16 Incentive Award means an award under the Annual Incentive Plan (or any successor plan) approved by the Committee which entitles the recipient to shares of Common Stock, cash or a combination of Common Stock and cash. 1.17 Interim Stock Ownership Requirement shall have the meaning specified in subsection 3.2 hereof. 1.18 Own or Owns means, with respect to shares of Common Stock, shares of which the Participant is the beneficial owner within the meaning of Rule 16a-1(2) under the Securities Exchange Act of 1934, as amended, but excluding any options to purchase shares of Common Stock. Shares of Common Stock of which a Participant is the beneficial owner will include, by way of example, (i) shares, whether registered in the owner's name or in nominee name, which are owned by the Participant, his spouse or any member of his immediate family living in his household, (ii) shares held by the Participant in or through any benefit plan of the Company, (iii) shares of restricted stock (including Restricted Stock awarded under this Program) and (iv) in certain cases, shares owned by a trust of which the Participant, his spouse or an immediate family member living in his household is a trustee or beneficiary. 1.19 Participant means a Teammate designated in subsection 2.5 hereof or selected to participate in the Program by the Committee pursuant to subsection 2.5 hereof. 1.20 Program means the Owens & Minor, Inc. Management Equity Ownership Program, as it may be amended from time to time. 1.21 Restricted Period shall mean the period of time specified in this Program with respect to particular grants of Restricted Stock during which the restrictions imposed by Section VI hereof shall apply. 1.22 Restricted Stock means shares of Common Stock which are awarded by the Company under this Program subject to forfeiture, restrictions on transfer and such other restrictions as are set forth in Section VI hereof or as the Committee may determine in accordance with the provisions of Section VI of this Program. 1.23 Retirement means retirement from the Company within the meaning of the Company's Supplemental Executive Retirement Plan or any successor thereto. 1.24 Stock Purchase Period means (i) with respect to any Participant whose participation in the Program begins on the Effective Date and who has completed at least one year of service with the Company as of the Effective Date, the period of time beginning on the Effective Date and ending on December 31 of the fifth full calendar year thereafter or (ii) with respect to any Participant whose participation in the Program begins after the Effective Date (in the first, second or third quarter of a calendar year) or who has completed less than one year of service with the Company as of the Effective Date, the period of time beginning on the date the Participant first becomes a Participant under the Program and ending on December 31 of the sixth full calendar year thereafter or (iii) with respect to any Participant whose participation in the Program 3 begins after the Effective Date (in the fourth quarter of a calendar year), the period of time beginning on the date the Participant first becomes a Participant under the Program and ending on December 31st of the seventh full calendar year thereafter. 1.25 Subsidiary means a corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote is owned, directly or indirectly, by Owens & Minor, Inc. 1.26 Teammate means any person employed by the Company. 1.27 Total Stock Ownership Requirement shall have the meaning specified in subsection 3.1 hereof. Unless the context clearly requires otherwise, the masculine pronoun whenever used shall include the feminine and neuter pronouns, the singular shall include the plural and the plural shall include the singular. SECTION II. GENERAL TERMS - -------------------------- 2.1 Purpose of the Program. The purpose of the Program is to promote the interests of the Company and its shareholders by increasing the ownership of Common Stock by certain key management level Teammates to more closely align their financial rewards with the performance of the Company and to motivate these Teammates to manage the Company for long-term growth and profitability. 2.2 Administration of the Program. The Program shall be administered by the Committee which shall have exclusive and absolute authority and discretion to interpret the Program, to establish and modify rules for the administration of the Program, to impose such conditions and restrictions as it determines appropriate with respect to the Program and to take such other actions and make such other determinations as it may deem necessary or advisable for the implementation and administration of the Program. Notwithstanding any provision in the Program to the contrary, the Committee shall have the authority to waive or modify any stock ownership requirement set forth in Section 3 of the Program; provided that any such modification or waiver is applied uniformly to all Participants. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Program or any award of Restricted Stock hereunder. 2.3 Effective Date of the Program. The Program is effective on July 1, 1997 (the "Effective Date") and will continue in effect for a period of ten years or until sooner terminated by the Board. 2.4 Scope of the Program. The Program is adopted under and is part of the Annual Incentive Plan and is subject in all respects to the provisions of the Annual Incentive Plan. Upon expiration of the Annual Incentive Plan, unless 4 determined otherwise by the Board, the Program will continue under any plan that succeeds or replaces the Annual Incentive Plan and will be subject to all provisions of such successor or replacement plan. All shares of Restricted Stock issued under the Program shall be provided from shares of Common Stock authorized under the Annual Incentive Plan or such other plan as succeeds or replaces the Annual Incentive Plan. In the event there are insufficient shares of Common Stock authorized under the Annual Incentive Plan or any successor or replacement plan to make the grants of Restricted Stock contemplated by this Program, then no such grants of Restricted Stock shall be made under this Program. 2.5 Eligibility. Participants in the Program shall be selected by the Committee from among those management level Teammates who, in the opinion of the Committee, are in a position to contribute materially to the Company's growth and development and to its long-term financial success. The Chief Executive Officer, the President and any Executive Vice President, Senior Vice President, Vice President and Regional Vice President of Owens & Minor, Inc. (or, in each case, the same positions bearing different titles) shall automatically be Participants in the Program effective on the later of the Effective Date or the date on which he is appointed to or employed in such position. SECTION III. COMMON STOCK OWNERSHIP REQUIREMENTS - ------------------------------------------------- 3.1 Five-Year Ownership Requirement. Each Participant will be required to own shares of Common Stock the Fourth Quarter Fair Market Value of which as of the last day of the Participant's Stock Purchase Period and each December 31 thereafter during the term of this Program is not less than the applicable ownership multiple designated in the table below (as such ownership multiple may be changed by the Committee) multiplied by the Participant's then-current Base Salary (the "Total Stock Ownership Requirement").
Position Ownership Multiple of Base Salary -------- --------------------------------- Chief Executive Officer 4.0X President 3.0X (effective January 1, 2001) Executive Vice President 2.0X Senior Vice President 1.5X Vice President, Group Vice President, Regional Vice President 1.0X Other Management Level Teammates who are Participants As designated by the Committee
In the event a Participant is promoted to a higher position with a higher ownership multiple during the Participant's Stock Purchase Period a new Stock Purchase Period shall commence for such Participant effective January 1 following the date of promotion with an initial Interim Ownership Requirement of 5 10% and increasing ownership requirements thereafter in accordance with Section 3.2A; provided however that, with respect to the calendar year in which the promotion is made, the Participant shall continue to be required to meet the otherwise applicable Interim Stock Ownership Requirement or Total Stock Ownership Requirement based on the Participant's relevant ownership multiple and Base Salary immediately prior to the date of promotion. 3.2 Interim Ownership Requirement. As of each December 31 during a Participant's Stock Purchase Period, such Participant will be required to own shares of Common Stock the Fourth Quarter Fair Market Value of which as of each such date is not less than the respective percentages designated in the table below of the Participant's Total Stock Ownership Requirement (the "Interim Stock Ownership Requirement"). A. Participants with at Least 12 Months of Service with the Company as of the Effective Date and Whose Participation Begins on the Effective Date Percentage of Total Stock December 31 Ownership Requirement ----------- --------------------- 1st 10% 2nd 25% 3rd 45% 4th 65% 5th 85% 6th 100% B. Participants with Less Than 12 Months of Service with the Company as of the Effective Date or Whose Participation Begins after the Effective Date (in the 1st, 2nd or 3rd Quarter of a Calendar Year) Percentage of Total Stock December 31 Ownership Requirement ---------- --------------------- 1st No Requirement 2nd 10% 3rd 25% 4th 45% 5th 65% 6th 85% 7th 100% 6 C. Participants Whose Participation Begins after the Effective Date (in the 4th Quarter of a Calendar Year) Percentage of Total Stock December 31 Ownership Requirement ---------- --------------------- 1st No Requirement 2nd 5% 3rd 10% 4th 25% 5th 45% 6th 65% 7th 85% 8th 100% 3.3 Annual Incentive Deferrals. Not later than 30 days after a Participant first becomes a Participant in the Program and not later than January 1 of each full calendar year thereafter during a Participant's Stock Purchase Period, the Participant may make an irrevocable election on a form provided by the Company to receive 25% or 50% of his Annual Bonus for performance during that calendar year, if any, in shares of Restricted Stock based upon the Fair Market Value of the Common Stock on the date the Annual Bonus is awarded. The Restricted Period for any shares of Restricted Stock granted pursuant to this subsection 3.3 shall commence on the date the Annual Bonus is awarded and expire on the third January 2nd (or next succeeding Business Day) thereafter. SECTION IV. RESTRICTED STOCK AWARDS - ------------------------------------ Equity Ownership Dividends. Each Participant who, as of December 31 of any year during the term of this Program, achieves the applicable Interim Stock Ownership Requirement or Total Stock Ownership Requirement as specified in subsections 3.1 and 3.2 hereof will receive an award of Restricted Stock equal to 10% of the Fourth Quarter Fair Market Value of all Common Stock owned by the Participant up to the Total Stock Ownership Requirement (the "Equity Ownership Dividend"), subject to such terms and conditions as may be prescribed by the Committee and the full and complete authority of the Committee to modify the amount or eliminate the payment of Equity Ownership Dividends with respect to any calendar year and any Participant. Notwithstanding the foregoing, with respect to any Participant who has achieved his or her Total Stock Ownership Requirement, effective January 1, 2001, the Equity Ownership Dividend shall be reduced to 5% of the Fourth Quarter Fair Market Value of all Common Stock owned by the Participant up to the Total Stock Ownership Requirement for each year subsequent to the year in which such Total Stock Ownership Requirement was initially achieved. Each award of an Equity Ownership Dividend hereunder will be determined based on the Fourth Quarter Fair Market Value of the Common Stock on December 31 of the year in which the Interim Stock Ownership Requirement or the Total Stock Ownership Requirement, as the case may be, is achieved. Equity Ownership Dividends will be granted upon approval by the Committee not later than March 1 of the year following achievement of the applicable stock ownership requirement. The Restricted Period for any shares of Restricted Stock awarded pursuant to this Section IV shall commence on the date of grant and expire on the fifth January 2nd (or next succeeding Business Day) thereafter. 7 SECTION V. FAILURE TO ACHIEVE STOCK OWNERSHIP REQUIREMENTS - ----------------------------------------------------------- Each Participant who, as of the second December 31 during the Participant's Stock Purchase Period and each December 31 thereafter during the term of this Program, fails to achieve the applicable Interim Stock Ownership Requirement or Total Stock Ownership Requirement, will incur the following consequences:
Consequences of Failure to Achieve December 31 Stock Ownership Requirement ------------ --------------------------- 2nd 25% of Annual Bonus*, if any, will be paid in Restricted Stock 3rd 50% of Annual Bonus*, if any, will be paid in Restricted Stock 4th 75% of Annual Bonus*, if any, will be paid in Restricted Stock 5th 100% of Annual Bonus*, if any, will be paid in Restricted Stock 6th 100% of Annual Bonus*, if any, will be paid in Restricted Stock and 50% of the following year's Base Salary increase, if any, will be paid in Restricted Stock 7th and thereafter 100% of Annual Bonus*, if any, will be paid in Restricted Stock and 100% of the following year's Base Salary increase, if any, will be paid in Restricted Stock
* In each instance, the percentage of Annual Bonus payable in Restricted Stock will be the greater of the applicable amount set forth above or the percentage elected by the Participant pursuant to subsection 3.3 hereof The number of shares of Restricted Stock granted in lieu of cash payment of Annual Bonus or Base Salary increase will be determined based on the Fair Market Value of the Common Stock on the date the Annual Bonus or Base Salary increase is awarded. The Restricted Period for any shares of Restricted Stock granted pursuant to this Section V in respect of Annual Bonus shall commence on the date the Annual Bonus is awarded and expire on the third January 2nd (or next 8 succeeding Business Day) thereafter. The Restricted Period for any shares of Restricted Stock granted pursuant to this Section V in respect of Base Salary increase shall be two years from the date of grant. SECTION VI. RESTRICTED STOCK - ----------------------------- 6.1 Terms of Restricted Stock. Until the expiration of the Restricted Period or the lapse of restrictions as provided in subsection 6.4 or 6.5 hereof, shares of Restricted Stock issued to Participants under the Program shall be subject to the following restrictions and any additional restrictions that the Committee in its sole discretion, may determine; provided, however, the Participant shall have beneficial ownership of shares of Restricted Stock, including the right to receive cash dividends on and the right to vote shares of Restricted Stock: (i) Participants shall not be entitled to receive the certificate or certificates representing shares of Restricted Stock; (ii) Shares of Restricted Stock may not be sold, transferred, assigned, pledged, conveyed, hypothecated or otherwise disposed of; and (iii) Shares of Restricted Stock may be forfeited immediately as provided in subsection 6.4. Any stock dividends or other shares of Company stock or other property issued in respect of Restricted Stock, including without limitation, shares issued in connection with stock splits and recapitalizations, will be subject to the same restrictions applicable to the Restricted Stock. 6.2 Custody of Shares of Restricted Stock. Any certificates representing shares of Restricted Stock issued under the Program shall be issued in the Participant's name but shall be held by the Company (or its transfer agent) during the Restricted Period. The Company shall serve as attorney-in-fact for the Participant during the Restricted Period with full power and authority in the Participant's name to assign and convey to the Company any shares of Restricted Stock held by the Company for such Participant if the Participant forfeits the shares under the terms of the Restricted Stock. Each certificate representing shares of Restricted Stock may bear a legend referring to the Program and the risk of forfeiture of the shares and stating that such shares are nontransferable until all restrictions have been satisfied and the legend has been removed. 6.3 Distribution of Restricted Stock. If a Participant who receives shares of Restricted Stock under the Program remains in the continuous employment of the Company during the entire Restricted Period and otherwise does not forfeit such shares pursuant to subsection 6.4 hereof, all restrictions applicable to the shares of Restricted Stock shall lapse upon expiration of the Restricted Period and a certificate or certificates representing the shares of Common Stock that were granted to the Participant in the form of shares of Restricted Stock shall be delivered to the Participant. 9 6.4 Forfeiture. ---------- (a) If a Participant's employment is terminated before the expiration of the Restricted Period by reason of Retirement, Disability or death of the Participant, subject to the authority of the Committee in its sole discretion to determine otherwise, all restrictions applicable to the shares of Restricted Stock held by the Company for the Participant shall immediately lapse on the date the Participant's employment is terminated and the certificate or certificates representing the shares of Common Stock upon which the restrictions have lapsed shall be delivered to the Participant (or in the event of the Participant's death, to his estate). If a Participant's employment is terminated under this subsection (i) on or after December 31st but prior to the issuance of any Equity Ownership Dividend awarded for such year, subject to the authority of the Committee in its sole discretion to determine otherwise, the Participant shall be entitled to receive the shares issuable in respect of any such Equity Ownership Dividend free of all applicable restrictions. (b) If a Participant's employment is terminated before the expiration of the Restricted Period by the Company without Cause, subject to the authority of the Committee in its sole discretion to determine otherwise, the number of shares of Restricted Stock held by the Company for the Participant shall be reduced by the proportion of the Restricted Period remaining after the Participant's termination of employment, the restrictions on the balance of such shares of Restricted Stock shall lapse on the date the Participant's employment terminated and the certificate or certificates representing the shares of Common Stock upon which the restrictions have lapsed shall be delivered to the Participant. If a Participant's employment is terminated under this subsection (ii) on or after December 31st but prior to the issuance of any Equity Ownership Dividend awarded for such year, subject to the authority of the Committee in its sole discretion to determine otherwise, the Participant shall not be entitled to receive any portion of the shares issuable in respect of any such Equity Ownership Dividend. (c) If a Participant's employment is terminated before the expiration of the Restricted Period by the Company for Cause or by the Participant at any time, all shares of Restricted Stock held by the Company for the Participant shall be forfeited immediately and all rights of the Participant to such shares shall terminate immediately without further obligation on the part of the Company. If a Participant's employment is terminated under this subsection (iii) on or after December 31st but prior to the issuance of any Equity Ownership Dividend awarded for such year, the Participant shall not be entitled to receive any of the shares issuable in respect of any such Equity Ownership Dividend. 6.5 Change of Control. Upon any Change of Control, unless the Committee in its sole discretion determines otherwise prior to the Change of Control, all restrictions applicable to shares of Restricted Stock shall immediately lapse and the certificate or certificates representing the shares of Common Stock that were granted to the Participants in the form of shares of Restricted Stock shall be delivered to the Participants. 10 6.6 Waiver of Restrictions. The Committee, in its sole discretion, may at any time waive any or all restrictions with respect to shares of Restricted Stock. SECTION VII. MISCELLANEOUS PROVISIONS - -------------------------------------- 7.1 Termination and Amendment. The Board at any time may amend or terminate the Program. Notwithstanding any expiration or termination of the Program, unless otherwise determined by the Committee, the provisions relating to Restricted Stock contained in Section VI hereof shall continue to apply with respect to all shares of Restricted Stock outstanding as of the date of expiration or termination. 7.2 Withholding. Each Participant shall pay to the Company any amount necessary to satisfy applicable federal, state or local tax withholding requirements attributable to an award of Restricted Stock under the Program, or upon the vesting of such Restricted Stock, promptly upon notification of the amount due. Such amounts to be paid by the Participant, at the election of the Committee, may be withheld from the shares of Common Stock that otherwise would be distributed to such Participant pursuant to the Program. 7.3 Legal and Other Requirements. The grant or distribution of shares of Restricted Stock shall be subject to the condition that if at any time the Company determines in its discretion that the satisfaction of withholding tax or other tax liabilities, or the listing, registration or qualification of any shares of Common Stock upon any securities exchange or under and federal or state law, or the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with such grant or distribution, then in any such event, such grant or distribution shall not be effective unless such liabilities have been satisfied or such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 7.4 Choice of Law. The Program, its validity, interpretation and administration and the rights and obligations of all persons having an interest therein shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, except to the extent that such laws may be preempted by federal law. 7.5 Adjustment Upon Changes in Capitalization. In the event of a recapitalization, stock split, stock dividend, exchange, combination or reclassification of shares, merger, consolidation, reorganization or other change in or affecting the capital structure or capital stock of the Company, the Board, upon recommendation of the Committee, may make appropriate adjustments in the number and kind of shares subject to outstanding Restricted Stock grants as it deems equitable to prevent dilution or enlargement of the rights of Participants. 11 7.6 Fractional Shares. The Company shall not be required to issue or deliver any fractional share of Restricted Stock issuable under this Program but shall round each grant of shares of Restricted Stock hereunder up to the nearest whole share. 7.7 No Employment Contract. The Program shall not confer upon any Participant any right to continued employment by the Company nor shall the Program in any way interfere with the right of the Company to terminate the employment of any Participant at any time. 12 EX-10.3 3 0003.txt EXHIBIT 10.3 Exhibit 10.3 OWENS & MINOR, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN INTRODUCTION The Board of Directors of Owens & Minor, Inc. determined that the adoption of the Owens & Minor, Inc. Supplemental Executive Retirement Plan (the Plan) should assist it in attracting and retaining those employees whose judgment, abilities and experience will contribute to its continued progress and success. The Board of Directors also determined that the Plan should further those objectives by providing retirement and related benefits that supplement the amounts payable under the tax-qualified plans maintained by Owens & Minor, Inc. The Plan is effective July 1, 1991. Prior to that date Owens & Minor, Inc. agreed to pay certain supplemental retirement and related benefits to selected executive and management employees in accordance with the terms of individual Executive Salary Continuation Agreements. The Plan supersedes each of the Executive Salary Continuation Agreements in effect on July 1, 1991, except in the case of such agreements for which benefit payments became due before July 1, 1991. The Plan, as amended and restated herein, is effective July 1, 2000. Individuals who were eligible to participate in the Plan prior to July 1, 2000, but who are not eligible under the amended and restated Plan, are listed on Exhibit I and are subject to the Plan in the form attached as Exhibit II. The Plan is intended to provide an unfunded supplemental retirement benefit to a select group of management and highly compensated employees as such terms are used in Sections 201, 301, and 501 of the Employee Retirement Income Security Act of 1974. The Plan must be interpreted and administered in a manner that is consistent with that intent. ARTICLE I DEFINITIONS 1.01. 401(k) Plan Benefit ------------------- 401(k) Plan Benefit means the monthly benefit that would be payable to the Participant if the portion of the Participant's account balance in the Savings & Protection Plan for Teammates of Owens & Minor, Inc. attributable to nondiscretionary employer contributions were converted to an annuity (i) payable for the lifetime of the Participant, with no survivor benefits, (ii) using as factors to effect the conversion the "applicable mortality table" and "applicable interest rate" as defined in Section 417(e)(3)(A)(ii) of the Code, and (iii) commencing as of the Participant's Early Retirement Date (in the case of the payment of an Early Retirement Allowance) or as of the Participant's Normal Retirement Date (in the case of the payment of a Normal Retirement Allowance) or as of the date of the Participant's termination of employment under Section 3.04 (in the case of a payment of a Change in Control Allowance). The 401(k) Plan Benefit shall be taken into account in determining the amount 1 payable to the Participant under this Plan regardless of the benefit the Participant actually receives under the Savings & Protection Plan for Teammates of Owens & Minor, Inc. 1.02. Affiliate --------- Affiliate means any "subsidiary corporation" or "parent corporation" (within the meaning of Section 425 of the Code) of the Company. 1.03. Applicable Percentage --------------------- Applicable Percentage means (a) for purposes of Article III, 65% with respect to the Early Retirement Allowance and Normal Retirement Allowance and Change in Control Allowance of a Senior Officer; 55% with respect to the Early Retirement Allowance and Normal Retirement Allowance and Change in Control Allowance of a Holding Company Vice President; and 45% with respect to the Early Retirement Allowance and Normal Retirement Allowance and Change in Control Allowance of a Regional Vice President; and (b) for purposes of Section 4.01, 25% with respect to payments on behalf of a Senior Officer and 15% with respect to payments on behalf of a Holding Company Vice President and a Regional Vice President. 1.04. Beneficiary ----------- Beneficiary means a Participant's Spouse or one or more Lineal Descendants designated on a Beneficiary Designation Form by a Participant in accordance with procedures established by the Committee. If the Participant makes a valid designation of more than one Beneficiary then the Beneficiaries who survive the Participant shall receive a percentage interest in the benefit payable under the Plan in accordance with the Participant's instruction or, absent such instruction, shall receive equal interests. If there is no valid Beneficiary designation by the Participant, or the designated Beneficiary does not survive the Participant, the Participant's Beneficiary is the first of the following: the Participant's surviving Spouse and the Participant's Lineal Descendants per stirpes who survive the Participant. 1.05. Beneficiary Designation Form ---------------------------- Beneficiary Designation Form means a form acceptable to the Committee used by a Participant according to this Plan to name the Beneficiary or Beneficiaries who will receive all benefits under this Plan if he or she dies. 1.06. Board ----- Board means the Board of Directors of the Company. 1.07. Cause ----- Cause means a Participant's conviction of a felony involving dishonestly directed against the Company or an Affiliate or a Participant's conviction of a crime of moral turpitude that is injurious to the business reputation of the Company or an Affiliate. 2 1.08. Change in Control ----------------- Change in Control means that (i) 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 "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company 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; (ii) during any period of two consecutive years (not including any period prior to July 1, 2000), 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 (i), (ii) or (iv) 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 (x) were directors at the beginning of such period or (y) were so elected or nominated with such approval, cease for any reason to constitute at least a majority of the Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other Company, other than (x) 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 (y) 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 (iv) 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. 1.09. Change in Control Allowance --------------------------- Change in Control Allowance means the benefit described in Section 3.04. 3 1.10. Code ---- Code means the Internal Revenue Code of 1986, as amended. 1.11. Committee --------- Committee means the Compensation and Benefits Committee of the Board. 1.12. Company ------- Company means Owens & Minor, Inc. 1.13. Early Retirement Allowance -------------------------- Early Retirement Allowance means the benefit described in Section 3.02. 1.14. Early Retirement Date --------------------- Early Retirement Date means the first day of a month coincident with or following a Participant's Retirement at or after attaining age 55 and after completing a number of Years of Service that, when added to the Participant's age at the time of the Participant's Retirement, equals at least 70. 1.15. Final Average Pay ----------------- Final Average Pay means the total of (i) plus (ii), divided by 60, where: (i) is the base monthly salary of a Participant, whether paid in cash or shares of the Company's stock, during the 60 months preceding the date of reference; provided, that for purposes of determining Final Average Pay, Company stock that is issued in connection with base monthly salary shall be valued on the date of issuance, whether or not the stock is then vested and (ii) is the Participant's annual bonus, whether paid in cash or shares of the Company's stock, earned for the year in which Participant Retires and the four immediately preceding years; provided, that for purposes of determining Final Average Pay, Company stock that is issued in connection with the annual bonus shall be valued on the date of issuance, whether or not the stock is then vested. A Participant's Final Average Pay shall be determined without regard to any compensation reductions or deferrals under Section 125 or 401(k) of the Code. A Participant's Final Average Pay shall not include amounts paid as an automobile allowance or other amounts that are in addition to his or her regular base monthly salary. Any period in which a Participant suffers a Total and Permanent Disability shall be disregarded in determining his or her Final Average Pay. 1.16. Good Reason ----------- Good Reason means that after a Change in Control, (a) the Participant does not receive salary increases comparable to the salary increases that the Participant received in prior years or, if greater, that other employees in comparable positions receive in the current year; or (b) the Participant's compensation or employment related benefits are reduced; or (c) the Participant's status, title(s), office(s), working conditions, or management 4 responsibilities are diminished (other than changes in reporting or management responsibilities required by applicable federal or state law); or (d) the Participant's place of employment is relocated more than fifty (50) miles from his or her place of employment immediately before the Change in Control, without the Participant's consent. A Participant's resignation will not be considered for Good Reason unless it occurs within six months after an event described in subsection (a), (b), (c), or (d) of the preceding sentence, or within six months after the last in a series of such events. 1.17. Holding Company Vice President ------------------------------ Holding Company Vice President means an individual who holds the title of Vice President of the Company. 1.18. Lineal Descendant ----------------- Lineal Descendant means a Participant's child, grandchild, or great-grandchild, or child of any of the foregoing persons. References in this Plan to a Participant's Lineal Descendants or to a child, grandchild, or great-grandchild or child of any of the Participant or any Lineal Descendant shall include adopted persons. 1.19. Normal Retirement Allowance --------------------------- Normal Retirement Allowance means the benefit described in Section 3.01. 1.20. Normal Retirement Date ---------------------- Normal Retirement Date means the first day of a month coincident with or following a Participant's Retirement after Participant has attained age 65. 1.21. Participant ----------- Participant means an individual who has been selected to participate in the Plan in accordance with Article II. 1.22. Plan ---- Plan means the Owens & Minor, Inc. Supplemental Executive Retirement Plan. 1.23. Qualified Defined Benefit Plan ------------------------------ Qualified Defined Benefit Plan means a defined benefit pension plan that is maintained by the Company or an Affiliate and which satisfies the requirements of Section 401(a) and related sections of the Code. 1.24. Qualified Defined Benefit Plan Benefit -------------------------------------- Qualified Defined Benefit Plan Benefit means the monthly benefit that would be payable to the Participant from all Qualified Defined Benefit Plans in the form of an annuity payable for the lifetime of the Participant with no 5 survivor's benefits. The amount of the Qualified Defined Benefit Plan Benefit shall be determined as an annuity commencing as of the Participant's Early Retirement Date (in the case of the payment of an Early Retirement Allowance) or as of the Participant's Normal Retirement Date (in the case of the payment of a Normal Retirement Allowance) or as of the date of the Participant's termination of employment under Section 3.04 (in the case of a payment of a Change in Control Allowance). The Qualified Defined Benefit Plan Benefit shall be taken into account in determining the amount payable to the Participant under this Plan regardless of the benefit the Participant actually receives under any Qualified Defined Benefit Plan. 1.25. Regional Vice President ----------------------- Regional Vice President means an individual who holds the title of Regional Vice President of the Company. 1.26. Retire and Retirement --------------------- Retire and Retirement mean severance from the employment of the Company and its Affiliates (i) at or after the attainment of age 55 and after completing a number of Years of Service that, when added to Participant's age at the time of severance from employment, equals at least 70 or (ii) at or after the attainment of age 65. 1.27. Senior Officer -------------- Senior Officer means an individual who holds the title of Senior Vice President of the Company or an Affiliate or who holds a position with the Company or an Affiliate that is more senior than Senior Vice President. 1.28. Social Security Benefit ----------------------- Social Security Benefit means the monthly benefit that the Participant is entitled to receive under Section 215 of the Social Security Act, without regard to any reduction in such benefit on account of excess earnings and without regard to whether the Participant elects to receive such benefit. The amount of the Social Security Benefit shall be determined as of the Participant's Early Retirement Date (in the case of the payment of an Early Retirement Allowance) or as of the Participant's Normal Retirement Date (in the case of the payment of a Normal Retirement Allowance) or as of the date of the Participant's termination of employment under Section 3.04 (in the case of a payment of a Change in Control Allowance), and shall be reduced by .333% for each month by which the month in which the Participant's Retirement or other termination of employment occurs precedes the month in which the Participant will attain age 62. 1.29. Spouse ------ Spouse means the person to whom the Participant is legally married on the date of reference. 6 1.30. Total and Permanent Disability ------------------------------ Total and Permanent Disability means a disability which (i) resulted from bodily or mental injury or disease, (ii) has existed continuously for at least six months and (iii) in the opinion of the Committee prevents the Participant from performing his or her regularly assigned duties with the Company and its Affiliates. The Committee may require the Participant to prove his or her continued Total and Permanent Disability once during each calendar year and absent such proof the Total and Permanent Disability shall be deemed to have ceased. 1.31. Years of Service ---------------- Years of Service means the total years of service credited to a Participant for purposes of determining his or her vested or nonforfeitable interest in a Qualified Defined Benefit Plan. Notwithstanding the foregoing, a Participant shall be credited with Years of Service during a period of Total and Permanent Disability as if he or she was employed by the Company during such period. ARTICLE II PARTICIPATION ------------- Consistent with the purposes of the Plan and the Company's intent in adopting the Plan, the Committee shall designate employees of the Company and its Affiliates who are eligible to participate in the Plan. An individual shall remain a Participant only so long as the Committee continues such designation; provided, however, that a designation may not be changed or revoked after that Participant has reached his Early Retirement Date or Normal Retirement Date, or that Participant or his or her Beneficiary has become entitled to a benefit under the Plan, or during a period in which the Participant suffers a Total and Permanent Disability. Nor may a designation be changed or revoked after a Change in Control. Membership on the Board or a committee of the Board (other than the Committee) shall not by itself render an individual ineligible to participate in the Plan. An individual who is a member of the Committee may not participate in the Plan during his or her service on the Committee. ARTICLE III RETIREMENT AND CHANGE IN CONTROL ALLOWANCES ------------------------------------------- 3.01. Normal Retirement Allowance --------------------------- Subject to the requirements of Article V and Section 8.01, a Normal Retirement Allowance shall be payable to a Participant who Retires on or after his or her Normal Retirement Date. The monthly Normal Retirement Allowance shall be the difference between (i) and (ii) below where 7 (i) = the Applicable Percentage of the Participant's Final Average Pay (determined as of his or her Normal Retirement Date) and (ii) = the sum of the Qualified Defined Benefit Plan Benefit and the 401(k) Plan Benefit and the Social Security Benefit and the defined benefit pension plan(s) benefits(s) of any other prior employer or employers. 3.02. Early Retirement Allowance -------------------------- Subject to the requirements of Article V and Section 8.01, an Early Retirement Allowance shall be payable to a Participant who Retires on or after his or her Early Retirement Date and before his or her Normal Retirement Date. The monthly Early Retirement Allowance shall be equal to the benefit calculated in Section 3.01, but determined as of the Participant's Early Retirement Date, reduced by .333% for each month by which the month in which Participant's Early Retirement Date occurs precedes the month in which he or she would first have become eligible for a Normal Retirement Allowance. Notwithstanding the foregoing, the .333% reduction referenced in the preceding sentence shall not apply to a Participant who Retires at or after attainment of age 62 and after completing 20 Years of Service and before his or her Normal Retirement Date, so that the monthly Early Retirement Allowance for such a Participant shall be equal to the benefit calculated in Section 3.01, but determined as of the Participant's Early Retirement Date. 3.03. Payment of Retirement Allowances -------------------------------- The payment of the retirement allowance payable under Section 3.01 or Section 3.02 shall begin on the 15th day of the month following the month in which the Participant Retires. The payment of the retirement allowance shall continue to be paid as of the 15th day of each month thereafter until the month in which the Participant dies. No further retirement allowance payments will be made under Section 3.01 or Section 3.02 following the month in which the Participant dies. 3.04. Change in Control Allowance --------------------------- (a) Subject to the requirements of Article V and Section 8.01, a Change in Control Allowance shall be payable to a Participant who is terminated by the Company or an Affiliate (other than for Cause) or who resigns his or her employment with the Company or an Affiliate with Good Reason following a Change in Control, but prior to his or her Early Retirement Date or Normal Retirement Date. The monthly Change in Control Allowance shall be equal to (i) the benefit calculated in Section 3.01, but determined as of the date of Participant's termination in accordance with this Section 3.04, multiplied by (ii) a fraction, the numerator of which is the number of Years of Service that the Participant has accrued on the date of his or her termination under this Section 3.04, and the denominator of which is the number of Years of Service that the Participant would have accrued if he or she had remained in the continuous employ of the Company and its Affiliates through the earlier of the date that he or she would first have become eligible for an Early Retirement Allowance and the date that he or she would first have become eligible for a Normal Retirement Allowance; reduced by (iii) .333% for each month by which the month in which Participant 8 terminates employment under this Section 3.04 precedes the month in which he or she would first have become eligible for a Normal Retirement Allowance. 3.05. Payment of Change in Control Allowance -------------------------------------- The payment of the Change in Control Allowance payable under Section 3.04 shall begin on the 15th day of the month following the month in which the Participant terminates employment following a Change in Control, or, if later, on the 30th day after the Change in Control. The payment of the Change in Control Allowance shall be paid as of the 15th day of each month thereafter until the month in which the Participant dies. No further Change in Control Allowance payments will be made under Section 3.04 following the month in which the Participant dies. ARTICLE IV PAYMENTS IN THE EVENT OF DEATH ------------------------------ 4.01. Death On or Before Retirement ----------------------------- (a) Subject to the requirements of Article V and Section 8.01, a benefit shall be payable under this Section 4.01(a) if the Participant dies prior to a date on which his or her severance from employment would constitute his or her Retirement. The monthly benefit payable under this Section 4.01(a) shall be equal to the Applicable Percentage of the Participant's Final Average Pay (determined as of the last day of the month preceding the month in which the Participant died). (b) Subject to the requirements of Article V and Section 8.01, a benefit shall be payable under this Section 4.01(b) if the Participant's severance from employment due to his or her death constitutes his or her Retirement. The monthly benefit payable under this Section shall be the greater of (i) the benefit that would have been payable under Section 4.01(a) if the date of the Participant's death had not been a date on which the Participant could Retire and (ii) the monthly benefit that would have been payable under Article III if the Participant's employment had terminated on the date of his or her death for reasons other than his or her death. (c) The payment of the benefit described in the preceding Subsection (a) or (b), as applicable, shall be paid to the Participant's Beneficiary beginning on the 15th day of the month following the month in which the Participant died. The payment of that benefit to the Participant's Beneficiary will continue as of the 15th day of each month thereafter until the earlier of (i) the death of the Participant's Beneficiary and (ii) a total of 180 months' benefits have been paid to the Participant's Beneficiary. In the event of the death of the Participant's Beneficiary before a total of 180 payments have been made, the present value of the remainder of such 180 payments shall be paid in a lump sum to the estate of the Beneficiary, using the "applicable interest rate" as defined in Section 417(e)(3)(A)(ii) of the Code to calculate the present value. 9 (d) No benefit will be payable under this Section if the Participant is not survived by any Beneficiary. 4.02. Death After Retirement or Change in Control Termination ------------------------------------------------------- (a) Subject to the requirements of Article V and Section 8.01, a benefit shall be payable under this Section if the Participant dies after Retirement or after termination or employment under circumstances that entitle him or her to a Change in Control Allowance under Article III and before his or her receipt of 180 payments of that benefit. The monthly benefit payable under this Section 4.02 shall be equal to the monthly allowance to which the Participant was entitled under Article III immediately prior to the Participant's death. (b) The payment of the benefit described in the preceding Subsection (a) shall be paid to the Participant's Beneficiary beginning on the 15th day of the month following the month in which the Participant died. The payment of that benefit to the Participant's Beneficiary will continue as of the 15th day of each month thereafter until the earlier of (i) a total of 180 payments have been made under the Plan to the Participant and his or her Beneficiary, and (ii) the death of the Participant's Beneficiary. In the event of the death of Participant's Beneficiary before a total of 180 payments have been made, the present value of the remainder of such 180 payments shall be paid in a lump sum to the estate of the Beneficiary, using the "applicable interest rate" as defined in Section 417(e)(3)(A)(ii) of the code to calculate the present value. (c) No benefit will be payable under this Section if the Participant is not survived by any Beneficiary. ARTICLE V VESTING AND CONTINUOUS EMPLOYMENT --------------------------------- 5.01. Vesting ------- No benefit will be payable under the Plan unless the Participant remains in the continuous employ of the Company and its Affiliates from his or her most recent designation as a Participant by the Committee until: (i) his or her Early Retirement Date; (ii) his or her Normal Retirement Date; (iii) his or her death; or (iv) his or her termination of employment under circumstances that entitle the Participant to a Change in Control Allowance in the case of the payment of a Change in Control Allowance. Notwithstanding the foregoing, no benefit shall be payable under this Plan if the Participant's employment with the Company and its Affiliates terminates or is terminated for Cause. 10 5.02. Total and Permanent Disability ------------------------------ (a) A Participant who remains in the continuous employ of the Company and its Affiliates from his or her most recent designation as a Participant by the Committee until his or her separation from service on account of a Total and Permanent Disability shall be deemed to remain in the continuous employ of the Company and its Affiliates for purposes of the Plan (b) A Participant described in the preceding Subsection may elect to receive an Early Retirement Allowance on or after what would have been his or her Early Retirement Date. A Participant described in the preceding Subsection may elect to receive a Normal Retirement Allowance on or after what would have been his or her Normal Retirement Date. The benefit described in Section 4.01(a) or (b), as applicable, shall be payable on behalf of a Participant described in the preceding Subsection who dies without having made an election to receive an Early Retirement Allowance or a Normal Retirement Allowance pursuant to the first sentence of this Section 5.01(b). The benefit described in Section 4.02 shall be payable on behalf of a Participant described in the preceding Subsection who dies after having made an election to receive an Early Retirement Allowance or a Normal Retirement Allowance pursuant to the first sentence of this Section 5.01(b). (c) This Section shall not apply if the Participant recovers from his or her Total and Permanent Disability and does not return to the active employ of the Company and its Affiliates at that time. In that event, the Participant will be deemed to have separated from the service of the Company and its Affiliates as of the date that his or her employment terminated on account of his or her Total and Permanent Disability. 5.03. Continuous Employment --------------------- The Committee, in its discretion, shall determine the extent, if any, to which leaves or absence for military service, governmental service and other reasons shall be deemed not to have caused an interruption in a Participant's continuous employment with the Company and its Affiliates. 5.04. Non-Competition --------------- (a) As a condition for participating in the Plan, Participant acknowledges that during his or her employment by the Company and its Affiliates, he or she will have access to and obtain confidential documents and information relating to the business of the Company and its Affiliates. Participant acknowledges and agrees that because the Company is granting him or her such access and permitting him or her to obtain such confidential documents and information, any competition by him or her with the Company unfairly would result in material damage to the Company and its Affiliates and cause Company and its Affiliates to suffer irreparable damage. (b) Participant thus agrees that, once he or she has become entitled to a benefit under this Plan in accordance with Section 5.01, then during his or her employment and for a period of five years immediately following termination of his or her employment (for any reason), Participant shall not directly or indirectly own, manage, operate, join, control, be employed by or consult with 11 any firm or business entity which is in the same business as, or similar to, the Company or any of its Affiliates and which competes with the Company or any of its Affiliates. Recognizing the broad geographic scope and unique nature of the business of the Company and its Affiliates, and expressly acknowledging the Company's legitimate interest in this restriction, Participant agrees that this restriction shall apply within a radius of 500 miles from Participant's principal assignment with the Company and its Affiliates. (c) Participant further agrees that, once he or she has become entitled to a benefit under this Plan in accordance with Section 5.01, then during his or her employment and for a period of five years immediately following termination of his or her employment (for any reason), Participant will not hire, solicit for hire or encourage to leave the Company's or an Affiliate's employment any person who is then an employee of the Company or an Affiliate. (d) Participant agrees that in the event of any breach or threatened breach of his or her promises in this Section, the Company will not have an adequate remedy at law and will suffer substantial and irreparable damage. Participant accordingly agrees that the Company shall be entitled to obtain specific enforcement of his or her promises, including but not limited to temporary and permanent injunctions restraining Participant from breaching such promises. In addition to any remedy that may be afforded the Company, upon a breach or threatened breach of the promise in this Section, Participant shall forfeit all rights under this Plan and no benefit or further benefit shall be payable to Participant, or any Beneficiary. This provision shall not bar the Company from any other remedies available to it for such breach or threatened breach, including the recovery of damages and attorneys' fees. (e) The prohibitions of this Section are severable, and a finding by any court that any one prohibition is unenforceable shall not affect the validity of any other prohibition. Additionally, should any court find that any provision of this Section is unenforceable, Participant and the Company specifically authorize the court to modify that provision and to enforce that provision as modified. ARTICLE VI ADMINISTRATION OF THE PLAN -------------------------- 6.01. Generally --------- The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee may adopt such rules and regulations as may be necessary to carry out the purposes hereof. The Committee's interpretation and construction of any provision of the Plan shall be final and conclusive. 6.02. Indemnification --------------- The Company shall indemnify and save harmless each member of the Committee against any and all expenses and liabilities arising out of his or her membership on the Committee, excepting only expenses and liabilities arising out of his or her own willful misconduct. Expenses against which a member of the Committee shall be indemnified hereunder shall include without limitation, the 12 amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought or settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such member may be entitled. 6.03. Determining Benefits -------------------- In addition to the powers hereinabove specified, the Committee shall have the power to compute and certify the amount and kind of benefits from time to time payable to or on behalf of Participants under the Plan, to authorize all disbursements for such purposes, and to determine whether a Participant or a Beneficiary is entitled to a benefit under the Plan. 6.04. Cooperation ----------- To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the compensation of all Participants, their Retirement, death or other cause for termination of employment, and such other pertinent facts as the Committee may require. 6.05. Claims ------ (a) It is not necessary to file a claim in order to receive Plan benefits. (b) On receipt of a claim for Plan benefits, the Committee must respond in writing within ninety days. If necessary, the Committee's first notice must indicate any special circumstances requiring an extension of time for the Committee's decision. The extension notice must indicate the date by which the Committee expects to render a decision; an extension of time for processing may not exceed ninety days after the end of the initial period. (c) If a claim is wholly or partially denied, the Committee must give written notice within the time provided in subsection (b). An adverse notice must specify each reason for denial. There must be specific reference to provisions of the Plan or related documents on which the denial is based. If additional material or information is necessary for the claimant to perfect the claim, it must be described and there must be an explanation of why that material or information is necessary. Adverse notice must disclose appropriate information about the steps that the claimant must take if he or she wishes to submit the claim for review. If notice that a claim has been denied is not furnished within the time required in subsection (b), the claim is deemed denied. (d) The full value of a payment made according to the provisions of the Plan satisfies that much of the claim and all related claims under the Plan against the Committee and the Company and its Affiliates, each of whom, as a condition to a payment from it or directed by it, may require the Participant, Beneficiary, or legal representative to execute a receipt and release of the claim in a form determined by the person requesting the receipt and release. 13 6.06. Review of Claims ---------------- (a) On proper written request for review from a claimant to the Committee, there must be a review by the Board. The Committee must receive the written request before sixty-one days after the claimant's receipt of notice that a claim has been denied according to the preceding Plan Section. The claimant and an authorized representative are entitled to be present and heard if any hearing is used as part of the review. (b) The Board must determine whether there will be a hearing. Before any hearing, the claimant or a duly authorized representative may review all Plan documents and other papers that affect the claim and may submit issues and comments in writing. The Board must schedule any hearing to give sufficient time for this review and submission, giving notice of the schedule and deadlines for submissions. (c) The Board must advise the claimant in writing of the final determination after review. The decision on review must be written in a manner calculated to be understood by the claimant, and it must include specific reasons for the decision and specific references to the pertinent provisions of the Plan or related documents on which the decision is based. The written advice must be rendered within sixty days after the request for review is received, unless special circumstances require an extension of time for processing. If an extension is necessary, the decision must be rendered as soon as possible but no later than 120 days after receipt of the request for review. If the Board has regularly scheduled meetings at least quarterly, the following rules govern the time for the decision after review. If the claimant's written request for review is received more than thirty days before a Board meeting, the decision of the Board must be rendered at the next meeting after the request for review is received. If the claimant's written request for review is received thirty days or less before a Board meeting, the decision of the Board must be rendered at the Board's second meeting after the request for review has been received. If special circumstances (such as the need to hold a hearing) require an extension of time for processing, the decision of the Board must be rendered not later than the Board's third meeting after the request for review has been received. If an extension of time for review is required, written notice of the extension must be furnished to the claimant before the extension begins. If notice that a claim has been denied on review is not received by the claimant within the time required in this paragraph, the claim is deemed denied on review. ARTICLE VII TERMINATION, AMENDMENT OR MODIFICATION OF PLAN ---------------------------------------------- 7.01. Reservation of Rights --------------------- Except as otherwise specifically provided, the Company reserves the right to terminate, amend or modify this Plan wholly or partially at any time and from time to time. Such right to terminate, amend or modify the Plan shall be exercised by the Board. Notwithstanding the preceding, with respect to an affected Participant, the Plan may not be amended, modified or terminated after a Change in Control unless the affected Participant agrees to such amendment, modification or termination in writing. 14 7.02. Limitation of Actions --------------------- The rights of the Company set forth in the preceding Section are subject to the condition that its Board shall take no action to terminate the Plan or decrease the benefit that would become payable or is payable, as the case may be, with respect to a Participant or a Beneficiary after the Participant has reached his or her Early Retirement Date or Normal Retirement Date or the Participant, or his or her Beneficiary has become entitled to a benefit under the Plan. 7.03. Effect of Termination --------------------- Except as provided in Sections 7.01 and 7.02, upon the termination of this Plan by the Board, the Plan shall be of no further force or effect, and neither the Company nor the Participant or his or her Beneficiary shall have any further obligation or right under this Plan. ARTICLE VIII MISCELLANEOUS ------------- 8.01. Limitation on Benefits ---------------------- (a) For purposes of this Plan, the following terms shall have the meanings indicated below: (i) "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, or, for any Participant subject to an Executive Severance Agreement, such other independent accounting firm as may be appointed in accordance with that Agreement. (ii) "Capped Parachute Payments" means the largest amount of Parachute Payments that may be paid to a Participant without liability for any excise tax under Code Section 4999. (iii) "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 a Participant as in effect on the date of the payment under this Section 8.01. 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. (iv) "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. 15 (b) The benefit payable to a Participant under this Plan 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. It is the Company's intention 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 the affected Participant to receive a greater Net After Tax Amount than he or she would receive absent a reduction. The remaining provisions of this subsection describe how that intent will be effectuated. (c) The Accounting Firm will first determine the amount of any Parachute Payments that are payable to a Participant. The Accounting Firm will also determine the Net After Tax Amount attributable to that Participant's total Parachute Payments. (d) The Accounting Firm will next determine the amount of that Participant's Capped Parachute Payments. Thereafter, the Accounting Firm will determine the Net After Tax Amount attributable to that Participant's Capped Parachute Payments. (e) That Participant will receive the total Parachute Payments unless the Accounting Firm determines that the Capped Parachute Payments will yield a higher Net After Tax Amount, in which case that Participant will receive the Capped Parachute Payments. If that Participant will receive the Capped Parachute Payments, his or her benefit under this Plan will be adjusted, if at all, in the manner determined by the Committee, taking into account the provisions of any Executive Severance Agreement or other agreement to which the Participant may be subject that specifies the manner in which Parachute Payments must be reduced. The Accounting Firm will notify the Participant and the Company if it determines that the Parachute Payments must be reduced to the Capped Parachute Payments and will send the Participant and the Company a copy of its detailed calculations supporting that determination. (f) If, pursuant to Subsection (e), a Participant will receive the total Parachute Payments, the Company shall indemnify the Participant and hold him harmless against all claims, losses, damages, penalties, expenses, and excise taxes. To effect this indemnification, the Company must pay the Participant an additional amount (the "Gross-Up Payment") that after payment by the Participant 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 the Participant 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. (g) 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 8.01, it is possible that amounts will have been paid or distributed to a Participant that should not have been paid or distributed under this Section 8.01 ("Overpayments"), or that additional amounts should be paid or distributed to a Participant under this Section 8.01 ("Underpayments"). If the Accounting Firm determines, based on either controlling precedent, substantial authority or the assertion of a deficiency by the Internal Revenue Service 16 against a Participant or the Company, which assertion the Accounting Firm believes has a high probability of success, that an Overpayment has been made, then the Participant 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 the Participant's receipt of such Overpayment until the date of such repayment; provided, however, that the Participant shall be obligated to make such repayment if, and only to the extent, that the repayment would either reduce the amount on which the Participant is 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 the Participant and the Company of that determination and the Company will pay the amount of that Underpayment to the Participant 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. (h) All determinations made by the Accounting Firm under this Section 8.01 are binding on the Participant and the Company and must be made as soon as practicable but no later than thirty days after a Participant's termination of employment following a Change in Control. Within thirty days after the termination, the Company will commence payment of the Participant's Change in Control Allowance, or a reduced Change in Control Allowance as calculated by the Accounting Firm pursuant to this Section 8.01. (i) All references in this Section 8.01 to a Participant and to an amount payable to the Participant shall be interpreted to include the Participant's Beneficiary and amounts payable to the Participant's Beneficiary, if applicable. 8.02. Unfunded Plan ------------- The Company has only a contractual obligation to make payments of the benefits described in the Plan. All benefits are to be satisfied solely out of the general corporate assets of the Company which shall remain subject to the claims of its creditors. No assets of the Company will be segregated or committed to the satisfaction of its obligations to any Participant or Beneficiary under this Plan. If the Company, in its sole discretion, elects to purchase life insurance on the life of a Participant in connection with the Plan, the Participant must submit to a physical examination, if required by the insurer, and otherwise cooperate in the issuance of such policy or his or her rights under the Plan will be forfeited. 8.03. Other Benefits and Agreements ----------------------------- The benefits, if any, provided for a Participant or his or her Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program of the Company for its employees (other than an Executive Salary Continuation Agreement), and, except as may otherwise be expressly provided for, the Plan shall supplement and shall 17 not supersede, modify or amend any other plan or program of the Company in which a Participant is participating. 8.04. Withholding Taxes ----------------- The benefit, if any payable to a Participant or his or her Beneficiary under the Plan shall be reduced by the amounts which the Company, in its discretion, determines shall be withheld under applicable federal, state and local income taxes and for any applicable employment-related taxes. 8.05. Restrictions on Transfer of Benefits ------------------------------------ No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefit. If any Participant or Beneficiary under the Plan should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right to a benefit hereunder, then such right or benefit, in the discretion of the Committee, shall cease and terminate, and, in such event, the Committee may hold or apply the same or any part thereof for the benefit of such Participant or his or her Beneficiary or other dependents, or any of them, in such manner and in such portion as the Committee may deem proper. 8.06. No Guarantee of Employment -------------------------- The Plan does not in any way limit the right of the Company or an Affiliate at any time and for any reason to terminate the Participant's employment or such Participant's status as an officer of the Company or an affiliate. In no event shall the Plan by its terms or implications constitute an employment contract of any nature whatsoever between the Company or an Affiliate and a Participant. 8.07. Successors ---------- The Plan shall be binding upon the Company and its successors and assigns; subject to the powers set forth in Article VII, and upon a Participant and his or her Beneficiary and either of their assigns, heirs, executors and administrators. 8.08. Construction ------------ Headings are given for ease of reference and must be disregarded in interpreting the Plan. Masculine pronouns wherever used shall include feminine pronouns and the use of the singular shall include the plural. 18 EX-21.1 4 0004.txt EXHIBIT 21.1 Subsidiaries of Registrant Exhibit 21.1
State of Incorporation/ Subsidiary Organization Country - ------------------------------------------------------------------------------ Owens & Minor Medical, Inc. Virginia USA National Medical Supply, Inc. Delaware USA Owens & Minor West, Inc. California USA Koley's Medical Supply, Inc. Nebraska USA Lyons Physician Supply Company Ohio USA A. Kuhlman & Company Michigan USA Stuart Medical, Inc. Pennsylvania USA O&M Funding Corp. Virginia USA OMI Specialty, Inc. Virginia USA Owens & Minor Trust I Delaware USA OMI International, Ltd. N/A British Virgin Islands Asia Medical Supplies Company, Ltd.(1) N/A British Virgin Islands Owens & Minor Schmidt Co., Ltd.(2) N/A Taiwan
(1) 50% owned by OMI International (2) 100% owned by Asia Medical Supplies Company, Ltd. EX-23.1 5 0005.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Owens & Minor, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 33-04536, 33-32497, 33-41402, 33-41403, 33-63248, 33-65606, 333-58337 and 333- 58341) on Form S-8 and the Registration Statements (Nos. 33-44428 and 333-58665) on Form S-3 of Owens & Minor, Inc. of our report dated January 30, 2001, 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, 2000. Richmond, Virginia March 5, 2001 -----END PRIVACY-ENHANCED MESSAGE-----