Owens & Minor
Annual Report 2000

Plain-text annual report

OWENS & MINOR, INC. OWENS & MINOR, THE NATION’S LEADING DISTRIBUTOR OF NATIONAL NAME BRAND MEDICAL/SURGICAL SUPPLIES, USES ITS EXPERTISE IN HEALTHCARE, LOGISTICS AND TECHNOLOGY TO DELIVER THE DIFFERENCE WITH CUSTOMERS, TEAMMATES AND SHAREHOLDERS. 2 0 0 0 A N N U A L R E P O R T & F O R M 1 0 - K M I S S I O N To create consistent value for our customers and supply chain partners that will maximize shareholder value and long-term earnings growth; we will do this by managing our business with integrity and the highest ethical standards, while acting in a socially responsible manner with particular emphasis on the well-being of our teammates and the communities we serve. V I S I O N To be a world class provider of supply chain management solutions to the selected segments of the health- care industry we serve. V A L U E S We believe in our teammates and their well-being. We believe in providing superior customer service. CompanyOverview Owens & Minor, Inc., a Fortune 500 company headquartered in Richmond, Virginia, is the nation’s leading distributor of national name brand medical/surgical supplies. From its distribution centers throughout the United States, the company serves hospitals, integrated healthcare systems and group purchasing organizations. Owens & Minor offers its customers not only diverse medical/surgical products, but also integrated services in supply chain management, logistics and technology. Owens & Minor works closely with customers to help them improve inventory management and control healthcare costs. Founded in 1882 as a wholesale drug company, Owens & Minor refined its mission in 1992, selling its wholesale drug division to concentrate on medical/surgical distribution. Owens & Minor is now leading the way among healthcare distributors in exploring ways to use technology to complement and grow its business. Owens & Minor is also working to expand its role in the supply We believe in supporting the com- chain by working with manufacturers as a logistics provider. munities we serve. We believe in delivering long-term value to our shareholders. We believe in high integrity as the guiding principle of doing business. C O N T E N T S Financial Overview Letter to Shareholders O&M Delivers Delivering the Difference Board of Directors Corporate Officers Distribution Network 2000 Financials 1 2 6 8 14 15 16 17 Owens & Minor’s common shares are traded on the New York Stock Exchange under the symbol OMI. As of December 31, 2000, there were approximately 15,000 common shareholders. A B O U T T H E C O V E R At Owens & Minor, we focus squarely on delivering the difference with our customers, our teammates, and our shareholders. Throughout more than 100 years in the healthcare industry, Owens & Minor has prospered by focusing on customers, seeking ways to improve service and lower costs. The use and application of leading-edge technology is now helping us to leverage our logistics expertise and highly skilled workforce. At Owens & Minor we also strongly believe that focusing on the well-being of our teammates and the communities we serve contributes to our ability to deliver long-term value to our shareholders. 2000 Financial Overview (in thousands, except ratios, per share data and teammate statistics) Year ended December 31, Net sales(1) Net income(2) Net income per common share – basic(2) Net income per common share – diluted(2) Cash dividends per common share Book value per common share Stock price per common share at year-end Number of common shareholders Shares of common stock outstanding Return on average common equity excluding restructuring(2) Return on total assets excluding restructuring(2) (4) Gross margin as a percent of net sales(1) Selling, general and administrative 2000 $3,503,583 33,088 $ 1.01 $ 0.94 $ 0.2475 $ 6.41 $ 17.75 $ 15.0 33,180 1999 $3,194,134 27,979 $ 0.86 $ 0.82 $ 0.23 $ 5.58 $ 8.94 $ 15.0 32,711 1998 $3,090,048 20,145 $ 0.56 $ 0.56 $ 0.20 $ $ 4.94 15.75 $ 15.5 32,618 Percent Change 00/99 9.7% 18.3% 17.4% 14.6% 7.6% 14.9% 98.5% – 1.4% 99/98 3.4% 38.9% 53.6% 46.4% 15.0% 13.0% (43.2%) (3.2%) 0.3% 16.5% 16.0% 15.9% 3.1% 0.6% 3.4% 10.7% 3.1% 10.7% 3.3% 10.8% 9.7% – (6.1%) (0.9%) expenses (SG&A) as a percent of net sales(1) 7.7% 7.8% Outstanding financing(3) Capitalization ratio(4) (5) Average receivable days sales outstanding(1) (4) Average inventory turnover Teammates at year-end $ 233,533 $ 280,790 40.4% 33.3 9.5 2,763 47.2% 34.9 9.2 2,774 $ 225,000 8.0% (1.3%) (16.8%) 43.4% (14.4%) (4.6%) 33.5 3.3% 9.8 (0.4%) 2,661 (2.5%) 24.8% 8.8% 4.2% (6.1%) 4.2% (1) 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. (2) 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. Excluding restructuring, net income per diluted common share in 2000, 1999 and 1998 was $0.93, $0.80 and $0.75. See Note 3 to the Consolidated Financial Statements. (3) Consists of debt and amounts financed under the company’s off balance sheet receivables financing facility. See Notes 7 and 8 to the Consolidated Financial Statements. (4) Excludes the impact of the company’s off balance sheet receivables financing facility. (5) Includes mandatorily redeemable preferred securities as equity. Net Sales (billions) ’00 ’99 ’98 $3.50 $3.19 $3.09 Net Income Per Common Share—Diluted ’00 ’99 ’98 $0.94 $0.82 $0.56 1 Dear Shareholders, Teammates,Customers,Suppliers W e are in the business of creating and distributing value. We did an out- standing job of doing just that in 2000. Shareholders received a 98.5% increase in share price and a stronger balance sheet. Customers received the best service this industry has to offer and innovative technology to support it. Suppliers received a proactive effort to make our business together more efficient, and teammates received a share of the profits and the care and respect they richly deserve. Sales were $3.5 billion, up 10 percent from sales of $3.2 billion in 1999. This was a record for the company. Earnings per diluted common share before restructuring were $0.93, up 16 percent from the year before. We accomplished our sales, profit and asset management goals for the year. We completed the conversion of Medix by mid-year; we grew our business profitably; and we improved productivity throughout the company. Our successes show that the technol- ogy we have invested in is working and is making a difference for us and our customers. 2 2 We did all this with the greatest team in the world. As our company has grown we have worked hard as a team to preserve the values that drive our compet- itive spirit. Values such as integrity, respect for each other, super service, and trust in our customers and suppliers dominate every day. This foundation, and our nur- turing culture, coupled with an indomitable spirit and a will to win honorably gives us an edge in the marketplace. Financial Results Sales were $3.5 billion, up 10 percent from sales of $3.2 billion in 1999. This was a record for the company. Earnings per diluted common share for the year were $0.93, up 16 percent from 1999. Net income for 2000 was $32.7 million compared to $27.4 million in 1999, an increase of 19 percent. These compar- isons, and all of the other full year com- parisons in this letter, exclude the effects of $0.4 million and $0.6 million after-tax restructuring credits taken in the second quarters of 2000 and 1999, respectively. The 2000 results include a full year of sales for Medix, which was acquired in late July 1999. Excluding the sales generated by Medix, sales growth was 6 percent for the year. CostTrack is our activity-based man- agement system that employs a rational pricing matrix that rewards mutual process improvement. In 2000, 22 percent of our sales were on the CostTrack matrix, up 67 percent from and Friends, last year. We also grew our PANDAC® wound closure sales by 28 percent, leveraged by our recently formed medical specialties sales team. This team concentrates specifically on the operating room and clinical areas of the hospital. Gross margin for the year was 10.7 percent of net sales, unchanged from 1999. SG&A expenses were 7.7 percent of net sales compared to 7.8 percent in 1999 as the company continues to spread costs over a larger revenue base. Operating margin was 2.4 percent of sales compared to 2.3 percent last year. Return on common equity was 16.5 percent, compared to 16.0 percent last year. As a result of strong cash flow for the year, debt decreased by $47.3 million. The company’s debt to capitalization ratio decreased to 40.4 percent at year-end, down sub- stantially from 47.2 percent at the end of 1999. The company’s focus on balance sheet improvement produced positive results for the year. Days sales outstanding dropped 1.6 days to 33.3 days in 2000 and inventory turns increased to 9.5 turns, up from 9.2 in 1999. Capital expenditures for 2000 were $19.6 million, largely focused on technology initiatives. Behind the Numbers Our business plan for 2000 called for us to return to a growth track by raising our top line revenue growth with good solid account penetration, by using our industry leading technology to attract new customers, and by enticing direct selling manufacturers to use our effi- cient distribution network. We set out to improve our operating productivity throughout the company. Strengthening our balance sheet was another high priority for 2000. We accomplished all of these things. where we would provide outsourced logis- tics services for the direct selling units of their business. We signed logistics agree- ments with Mead Johnson NutritionalsTM and American Health Products Corporation, a manufacturer of a wide variety of med- ical gloves. These projects are in various stages of implementation and should all be operational by the end of 2001. During the year, we won acclaim for the development and use of leading- edge technology. Owens & Minor was ranked 15th in InformationWeek maga- zine’s annual survey of the most Owens& Minor was ranked 15th in InformationWeek magazine’s annual survey of the most innovative users of information technology in the country, and number one among healthcare companies. Our overall sales growth was fueled by strong improvement among our three major customer groups: Novation, Premier, Inc. and Broadlane (formerly Tenet-BuyPower). During the year we signed a distribution agree- ment with the Marketplace@Novation, becoming the first national distributor to join this online e-commerce venture. We also signed a strategic data shar- ing agreement with Premier allowing access to WISDOM, our industry-lead- ing Internet-based decision support tool. We continued to strengthen our partnership and grow our business with Broadlane. In mid-year we announced our intentions to provide enhanced supply chain services for three different manu- facturers. The first was C.R. Bard, Inc. innovative users of information tech- nology in the country, and number one among healthcare companies. Our busi- ness relationship with our technology partner, Perot Systems Corporation, continues to work very well by adding fuel to our technology initiatives. Productivity measures are an indica- tion of how well we run our business in the trenches. Boring stuff? Nosireebob! Distribution is a pennies business, and improving productivity is bread and butter to everything we do. We measure most everything, especially in the ware- house. We collect buckets of data and analyze our business from every angle. This has helped us understand how we fare in good times or bad. Let’s talk about how we have improved our pro- ductivity since 1998. 3 We are in the business of creating and distributing value. We did an outstanding job of doing just that in 2000. Shareholders received a 98.5% increase in share price and a stronger balance sheet. In our business, everything starts with a line ordered. Since 1998, we have increased sales by 13 percent, and gross margin by 12 percent. Also, we have increased warehouse lines processed by 12 percent. During this two year period, we held constant the number of hours worked by our team- mates. This resulted in productivity gains as follows: sales per full time equivalent teammate (FTE) increased by 13 percent and gross margin per FTE grew by 12 percent. New internal warehouse technology contributed to this excellent gain in productivity. Our success shows that the technology we have invested in is working and is making a difference for us and our customers. Productivity improvement is the fundamental measure of success in our business. We do an excellent job in this area. Complemented by our technology investment, we expect to continue to improve. Comings and Goings During the fourth quarter, David R. Guzmán joined the company as corpo- rate senior vice president and chief information officer. He comes to us from Office Depot where he served as senior vice president, systems develop- ment. As CIO, David has taken on responsibility for all of Owens & Minor’s industry leading technology initiatives and will oversee the technology out- sourcing relationship with Perot Systems. A. Marshall Acuff, Jr. was elected to our board in December. He is senior vice president and managing director of Salomon Smith Barney, Inc. respon- sible for equity strategy as a member of the firm’s investment committee. Marshall brings to us a wealth of expe- rience in the financial markets and will be a great benefit to the company and our shareholders. At the annual shareholder’s meet- ing in April, E. Morgan Massey will retire as a director. Morgan has served the company for the past thirteen years and has made a significant contribution. During these thirteen years, he has served on every board committee and currently chairs the strategic planning committee of the board. Morgan has helped guide us through some tremen- dous growth and a few bumps along the way. His progressive, aggressive and analytical mind has been a great source of strength. Thank you, Morgan, for a job well done. We will miss you. The Year Ahead Let us lay out for you in simple terms what we will all work very diligently to achieve in 2001. We anticipate sales growth in the 8 to 10 percent range. We anticipate the gross margin will remain in the same percent range as reported in 2000. We anticipate that SG&A expense as a percent to sales will con- tinue its downward trend. We anticipate continuing to invest in technology to maintain our leadership position in our industry, and we anticipate growing our earnings per share in the range of 4 11 to 14 percent. We are off to a good start with the recent signing of a five-year distribution agreement with the Baylor Health Care System in Dallas, Texas. Over the life of the contract, this represents the potential for $150 million in new sales volume for Owens & Minor. Overall, we expect another excellent year in 2001. And Beyond Distribution has been our business for 119 years. We are very good at it. We want to become the master distributor for healthcare, which means being the most trusted and reliable partner to our customers and suppliers for all distribution services. We want to remain the best service company in the industry; the most innovative when it comes to providing technology solutions; the most respected and trusted partner in the supply chain. By doing these things we will grow our business profitably, we will help our customers and suppliers reduce supply chain costs, and we will become indispensable as a focused technology-driven partner. We see growth coming in healthcare with the baby boomers, and we plan to be a part of it. Building on Strength We are a determined lot. There is a great deal of bulldog tenacity and competitive spirit within our organization. Both of us spend a great deal of our time on the road visiting with our teammates and our customers and suppliers. We listen carefully to their concerns and their ideas. We take their praise and cele- brate, but only for a New York second, because there is no room or time for resting on our laurels. We work on the feedback we get and we take the enthusiasm and goodwill, pass it on, and build upon it. We have much to do in an industry that is beginning to turn around in a positive way. The hospital industry has toughened up, cut costs and, so far, has been able to maintain the quality of care. Our strategy fits right into the needs of our customers and suppliers. Our investments in technology have helped us be more productive internally, to provide information and management tools to our customers, and together we have been able to take costs out of the supply chain through process improvement. We plan to leverage exist- ing assets such as our technology plat- forms, supply chain systems and skilled logistics expertise in the pursuit of new business as a logistics provider for our manufacturer partners. The strength of our company continues to be our peo- ple, our technology, our service and our focus on distribution. Our success this year is traceable to our industry leader- ship in all these areas. Thanks Now it is time to thank those who helped make our year so successful. To our teammates, we are grateful for your spirit, your tenacity and above all else, your commitment to customer service; to our suppliers, we thank you for being there again and again to partner with us in such a positive way; to our cus- tomers, we thank you for the opportunity to serve you and to be a part of your team; and to our shareholders, we thank you for your loyalty and patience, as it paid off in 2000. We believe the best is yet to come. Warm regards, G. Gilmer Minor, III Chairman and Chief Executive Officer Craig R. Smith President and Chief Operating Officer 5 Owens & Minor, a company that has been delivering the difference with customers, teammates and shareholders for more than a century, is the nation’s leading distrib- utor of national name brand medical/surgical supplies. The company blends supply chain expertise, skilled teammates and technology to serve customers and build shareholder value. ‘00 March 21, 2000 Owens & Minor signs five-year contract with Palmetto Health Alliance worth a potential $100 mil- lion in sales volume. ‘00 ‘00 June 8, 2000 Owens & Minor and Mead Johnson Nutritionals™ announce an agreement that will make Owens & Minor a logistics provider for Mead Johnson institu- tional products in the United States. May 22, 2000 Owens & Minor announces intention to design and provide enhanced supply chain services for C.R. Bard, Inc., a developer, manufac- turer and marketer of healthcare prod- ucts and services. 2000Delivering the Difference Owens & Minor purchases medical/ surgical supplies. O&M purchases medical/surgical supplies in great volume. This allows the company to streamline delivery and collect purchasing data for customers. Owens & Minor warehouses supplies in facilities around the nation. O&M has facilities around the nation, allowing it to store medical/surgical supplies close to customers. With years of experience in supply chain management, O&M has developed tools that streamline warehousing, such as CSW (client server warehousing), which improves receiving and delivery processes. Owens & Minor holds the inventory. After purchasing inventory, O&M holds it for customers. Using the latest in supply chain processes, O&M delivers and invoices goods only when cus- tomers are ready. Customers reduce their costs by using “just-in-time” and stockless services, receiving supplies at exactly the right time. 6 Owens & Minor reduces inventory costs. O&M uses its expertise in warehousing to reduce costs for customers. In many cases, O&M handles warehousing for customers. Alternatively, O&M employs a “just-in-time” delivery system that eliminates the cost of storage. ‘00 August 23, 2000 Owens & Minor signs strategic data shar- ing agreement with Premier, Inc., allowing access to WISDOM, Owens & Minor’s Internet-based deci- sion support tool. ‘01 January 30, 2001 Owens & Minor reports sales for 2000 were a record $3.5 billion, up 10 percent over 1999. Earnings per diluted common share were $0.93 before restruc- turing, up 16 percent from 1999. ‘00 September 15, 2000 Owens & Minor is ranked 1st among healthcare companies and 15 th overall in InformationWeek mag- azine’s annual survey of the most innovative users of information technology. ‘00 July 11, 2000 Owens & Minor signs logistics agreement with American Health Products Corporation, a manufacturer of med- ical gloves, to provide warehousing, distribu- tion and e-commerce development services in the United States. Owens & Minor uses technology to customize information services. O&M collects informa- tion about purchasing and inventory for its customers. With this data, the company is able to help customers maintain contract compliance and increase savings. O&M developed an Internet-based tool called WISDOM to give customers access to this valuable purchasing information. Owens & Minor delivers supplies. O&M warehouse facilities are located through- out the United States close to customer facilities. O&M uses its own drivers, who serve as an essential component of customer service. Owens & Minor adds value to inventory. O&M customizes pallets and truck loads according to customer need, thus reducing labor on the receiving end. O&M is also able to adjust delivery times to customer needs, so that it delivers only when customers are ready, allowing them to streamline receiving activities. Owens & Minor invoices and collects for supplies. O&M uses electronic billing and funds transfer, thus reducing costs for the company and for customers. O&M is also able to customize terms to suit the needs of individual customers. Many customers are members of group purchasing organizations or large hospital systems and thus are able to take advantage of favorable pricing. 7 More than 4,000 customers, including acute-care hospitals, major healthcare buying groups, and facilities such as surgery centers, depend every day on Owens & Minor’s supply chain expertise. Delivering critical medical/surgical supplies to the right place, at the right time, at a reasonable cost is the core business of Owens & Minor and the driving force behind sales and earnings growth. Beyond distribution, Owens & Minor, the leader in healthcare technology, offers integrated solutions to its supply chain partners. These solutions include CostTrack, Owens & Minor’s industry-leading, activity- based management process. Owens & Minor also created WISDOM, an award-winning, Internet-based data mining tool that gives subscribers access to their own purchasing information. To help customers in the operating room, Owens & Minor created PANDAC®, a wound closure asset management program. And, the company created OM Direct, an online catalogue and ordering system, now handling over $140 million in annualized sales, streamlining ordering for customers. At Owens & Minor, delivering the differ- ence with customers means responding to their needs with products and services that lower cost and increase efficiency. This cus- tomer service, a defining quality of Owens & Minor’s culture, is supported by a history of integrity and operational excellence. Delivering the Difference with “Working with Owens & Minor is the rare instance where customer and distrib- utor truly act as partners. The prices, orders, invoices, inventory and deliveries are always accurate and on time. They work with us to optimize our operations. Owens & Minor makes the supply chain hum through skill, integrity and warmth.” Robert J. Pallari President and CEO Legacy Health System Portland, Oregon 8 1 2 3 G E T T I N G T H E F A C T S Eleven of the nation’s top fifteen hospitals in the annual “Best Hospitals Honor Roll,” published by US News & World Report, are Owens & Minor customers. Owens & Minor reported $3.5 billion in sales in 2000, a record for the company. Owens & Minor works with 1,700 manufac- turers to offer more than 170,000 products to its customers. 4 Owens & Minor’s PANDAC® sales grew 28% in 2000. Customers Rodney Thomas, Area Manager of Logistics Solutions Joe Rosato, Area Director of Operations Mike Nugent, Area Vice President Northeast Area 9 1 2 3 4 G E T T I N G T H E F A C T S The company’s earnings per diluted common share before restructuring grew 16 percent to $0.93 in 2000. In Owens & Minor’s annual independent survey, 96.5% of customers were satisfied with the company’s ability to “consistently meet needs and expectations.” Owens & Minor serves 4,000 customers with approximately 2,800 teammates across the country. Using its 45 distribution centers throughout the nation, Owens & Minor teammates maintain close ties to customers. Delivering the 10 Marci Miller Director & Assistant Controller Financial Reporting Home Office O wens & Minor knows that its success depends on the well-being of its employ- ees, known at the company as teammates. Throughout the company, each teammate is actively engaged in the support and perpetuation of a culture of excellence. At Owens & Minor, teammates work together to make sure that customers are consistently satisfied. In its annual independent customer satisfaction survey, Owens & Minor found that 96.5% of customers were satisfied with the com- pany’s ability to “consistently meet needs and expectations.” Because the success of each Owens & Minor teammate has a direct bearing on the success of the company, the culture at Owens & Minor focuses on empowering, training and cultivating the best team in the industry. Incentives, reinforcement and recognition play a key role in this drive to maintain a quality team. Owens & Minor also believes strongly in supporting the communities it serves. Teammates are encouraged to incorporate community service into their lives. Every year, Owens & Minor teammates across the country actively volunteer in the work of charitable organizations such as the United Way, Meals on Wheels and the Make-a-Wish Foundation. Difference with Teammates “One of the great things about Owens & Minor is that every- one is given the opportunity to meet challenges and the opportunity to make a differ- ence. The company takes good care of us, and, in turn, we know that our perform- ance makes a difference with customers and with the company’s financial results.” Pauline Johnson Office Manager Minneapolis Distribution Center 11 O wens & Minor recognizes that one of its most important missions is delivering shareholder value. With more than 100 years’ experience in healthcare, Owens & Minor has a highly regarded expertise in supply chain management. This expertise, backed by the long-standing trust of customers, the strength of manufacturer relationships and a team of dedicated professionals, allows the company to maintain and build value for shareholders. Throughout its history, Owens & Minor has worked to build value for its share- holders through sales and earnings growth, fueled by development of specialized tools that help streamline the supply chain. As it looked toward the future, Owens & Minor recognized it could leverage existing assets such as distribution centers, technology and skilled logistics experts by expanding its services within the supply chain. In 2000, Owens & Minor opened the door to logistics partnerships with manufacturers, tapping a new vein of busi- ness for the company. The value embedded in Owens & Minor is the sum of long-standing customer relationships, strong sales and earnings growth, dedicated teammates and the ability to look ahead at a changing market- place. These factors form the foundation of the value of Owens & Minor. Delivering the Difference with “The strength of our com- pany continues to be our technology, our service, our focus on distribution and our people. We look ahead at what our supply chain partners will need to be successful. After lis- tening to them, we apply common sense solutions to complex issues to get the desired result. We are delivering the difference, every day.” G. Gilmer Minor, III Chairman & Chief Executive Officer Owens & Minor 12 1 2 3 G E T T I N G T H E F A C T S The company has operated successfully as a leader in the healthcare industry since 1882. During 2000, the value of Owens & Minor common stock grew 98.5%. Owens & Minor holds a 28% share of the acute care distribution marketplace, and is the leading distributor of national name brand medical/surgical supplies. 4 Owens & Minor was ranked 1st among healthcare companies and 15 th overall in InformationWeek’s 2000 survey of the nation’s most innovative users of information technology. Shareholders José Valderas Vice President, eMedExpress-Logistics Home Office 13 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 Super Markets, Inc. Chairman, First Market Bank Anne Marie Whittemore (55) 1,3,5* Partner, McGuireWoods LLP Board Committees: 1Executive Committee, 2Audit Committee, 3Compensation & Benefits Committee, 4Strategic Planning Committee, 5Governance & Nominating Committee, *Denotes Chairperson 14 CorporateOfficers 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, 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. Guzmán (45) Senior Vice President & Chief Information Officer Senior Vice President and Chief Information Officer since December 2000. Mr. Guzmán 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. Guzmán 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 DistributionNetwork Seattle Portland San Francisco Salt Lake City Des Moines Chicago Detroit Greensburg Allentown Minneapolis Rochester Green Bay Waunakee Boston Omaha Springfield Indianapolis Denver Kansas City Cincinnati Bridgeton Savage Richmond, Home Office Richmond Los Angeles San Diego St. Louis Tulsa Phoenix Oklahoma City Memphis LaFollette Knoxville Raleigh Charlotte Columbia Atlanta Birmingham Augusta Jackson New Orleans Dallas Houston Harlingen Jacksonville Orlando Ft. Lauderdale O&M Medical/Surgical Distribution Center O&M Home Office O&M Specialty Distribution 16 ✪ ✪ 2000Financials C O N T E N T S Selected Financial Data Business Description Analysis of Operations Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Changes in Shareholders’ Equity Notes to Consolidated Financial Statements Independent Auditors’ Report Report of Management Quarterly Financial Information Form 10-K Annual Report Corporate Information 18 19 23 27 28 29 30 31 52 52 53 54 56 17 S E L E C T E D F I N A N C I A L D A T A (1) Owens & Minor, Inc. and Subsidiaries (in thousands, except ratios and per share data) Summary of Operations: Net sales(2) Nonrecurring restructuring expense (credit)(3) Net income(3) Per Common Share: Net income – basic Net income – diluted Average number of shares outstanding – basic Average number of shares outstanding – diluted Cash dividends Stock price at year end Book value Summary of Financial Position: Working capital Total assets Long-term debt Mandatorily redeemable preferred securities Shareholders’ equity Selected Ratios: Gross margin as a percent of net sales(2) Selling, general and administrative expenses as a percent of net sales(2) Average receivable days sales outstanding(2)(4) Average inventory turnover Return on average total equity(5) Return on average total equity(6) Current ratio Capitalization ratio(4)(5) Capitalization ratio(4)(6) 2000 1999 1998 1997 1996 $3,503,583 $3,194,134 $3,090,048 $3,124,062 $3,025,341 $ $ $ $ $ $ $ (750) 33,088 1.01 0.94 32,712 39,453 0.2475 17.75 6.41 $ $ $ $ $ $ $ (1,000) 27,979 0.86 0.82 32,574 39,098 0.23 8.94 5.58 $ $ $ $ $ $ $ 11,200 20,145 0.56 0.56 32,488 32,591 0.20 15.75 4.94 $ $ $ $ $ $ $ – 24,320 0.60 0.60 32,048 32,129 0.18 14.50 4.48 $ $ $ $ $ $ $ – 12,965 0.25 0.25 31,707 31,809 0.18 10.25 3.99 $ 233,637 $ 219,448 $ 235,247 $ 233,789 $ 192,990 $ 867,548 $ 865,000 $ 717,768 $ 712,563 $ 679,501 $ 152,872 $ 174,553 $ 150,000 $ 182,550 $ 167,549 $ 132,000 $ 132,000 $ 132,000 $ – $ – $ 212,772 $ 182,381 $ 161,126 $ 259,301 $ 242,400 10.7% 10.7% 10.8% 10.4% 10.1% 7.7% 33.3 9.5 11.2% 16.7% 1.6 40.4% 63.2% 7.8% 34.9 9.2 10.5% 16.3% 1.6 47.2% 69.4% 8.0% 33.5 9.8 8.2% 9.6% 1.9 43.4% 68.9% 7.8% 32.4 9.9 9.7% 9.7% 1.9 53.0% 53.0% 7.9% 37.3 8.9 5.4% 5.4% 1.7 54.8% 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 Customers 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 incor- porated 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 man- aging the supply procurement and distribution needs of their entire network. The traditional role of a distributor in ware- housing 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 tech- nology 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. O&M distributes over 170,000 finished medical and surgical products produced by approximately 1,700 suppliers to approxi- mately 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™ 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 ) 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 compre- hensive 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 partici- pation in distribution contracts established at the system level. Because IHNs frequently rely on cost containment as a com- petitive advantage, IHNs have become an important source of demand for O&M’s enhanced inventory management and other 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 relation- ships with its largest suppliers to create operating efficiencies in the supply chain. Owens & Minor, Inc. and Subsidiaries 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 nation- wide 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 require- ments. 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 distrib- utors is expected to continue through the purchase of smaller distributors by larger companies as a result of competitive pressures in the marketplace. 20 S E L E C T E D F I N A N C I A L D A T A 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) opera- tions 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 approxi- mately $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. Owens & Minor, Inc. and Subsidiaries Electronic Commerce. Owens & Minor is an industry leader in the use of electronic commerce to exchange business trans- actions 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 com- mitted 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 cus- tomer needs quickly and efficiently. In addition, Owens & Minor has introduced a field organization focused on assisting cus- tomers 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 manage- ment 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 manage- ment 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 ) • WISDOM: This award-winning Internet-accessed deci- sion 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® 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 guaran- tees 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 stan- dardization. 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. Owens & Minor, Inc. and Subsidiaries 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 busi- ness, 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 A N A L Y S I S O F O P E R A T I O N S 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 opera- tions 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, Net sales Cost of goods sold Gross margin Selling, general and administrative expenses Depreciation and amortization Interest expense, net Discount on accounts receivable securitization Distributions on mandatorily redeemable preferred securities Nonrecurring restructuring expenses Total expenses Income before income taxes Income tax provision Net income 2000 1998 1999 100.0% 100.0% 100.0% 89.3 10.7 89.3 10.7 89.2 10.8 7.7 0.6 0.3 0.2 0.2 – 9.0 1.7 0.8 0.9% 7.8 0.6 0.4 0.1 0.2 – 9.1 1.6 0.7 0.9% 8.0 0.6 0.5 0.1 0.1 0.4 9.7 1.1 0.4 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 approxi- mately $58 million has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. As the Owens & Minor, Inc. and Subsidiaries acquisition was accounted for as a purchase, the operating results of Medix have been included in the company’s consoli- dated financial statements since July 30, 1999. This acquisition strengthens the company’s presence in the Midwest and pro- vides 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 facili- ties 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. Net Sales (billions) ’00 ’99 ’98 ’97 ’96 $3.50 $3.19 $3.09 $3.12 $3.03 23 A N A L Y S I S O F O P E R A T I O N S ( c o n t i n u e d ) 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. Gross Margin % vs. SG&A % of Net Sales Gross Margin % 10.7% 2.2% 2.6% 2.8% 2.9% 3.0% SG&A% ’96 ’97 ’98 ’99 ’00 7.7% 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 amorti- zation 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. 24 Owens & Minor, Inc. and Subsidiaries Net interest expense and discount on accounts receiv- able 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 com- pany 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 Financing (millions) $450 $300 $150 $0 $30 $20 $10 $0 ’96 ’97 ’98 ’99 ’00 Outstanding Financing Financing Costs S E L E C T E D F I N A N C I A L D A T A 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 attribut- able 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 Owens & Minor, Inc. and Subsidiaries 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 approxi- mately $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 improv- ing 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 A N A L Y S I S O F O P E R A T I O N S ( c o n t i n u e d ) 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 posi- tion, 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, man- agement 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. Owens & Minor, Inc. and Subsidiaries 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 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) Year ended December 31, Net sales Cost of goods sold Gross margin Selling, general and administrative expenses Depreciation and amortization Interest expense, net Discount on accounts receivable securitization Distributions on mandatorily redeemable preferred securities Nonrecurring restructuring expense (credit) Total expenses Income before income taxes Income tax provision Net income Dividends on preferred stock Net income attributable to common stock Net income per common share – basic Net income per common share – diluted Cash dividends per common share See accompanying notes to consolidated financial statements. 2000 1999 1998 $3,503,583 3,127,911 $3,194,134 2,851,556 $3,090,048 2,755,158 375,672 268,205 21,515 12,566 6,881 7,095 (750) 342,578 249,960 19,365 11,860 5,240 7,095 (1,000) 334,890 247,472 18,270 14,066 4,655 4,494 11,200 315,512 292,520 300,157 60,160 27,072 33,088 – 33,088 1.01 0.94 0.2475 $ $ $ $ 50,058 22,079 27,979 – 27,979 0.86 0.82 0.23 $ $ $ $ 34,733 14,588 20,145 1,898 18,247 0.56 0.56 0.20 $ $ $ $ 27 C O N S O L I D A T E D B A L A N C E S H E E T S (in thousands, except per share data) December 31, Assets Current assets Cash and cash equivalents Accounts and notes receivable, net Merchandise inventories Other current assets Total current assets Property and equipment, net Goodwill, net Deferred income taxes Other assets, net Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable Accrued payroll and related liabilities Deferred income taxes Other accrued liabilities Total current liabilities Long-term debt Accrued pension and retirement plans Deferred income taxes Total liabilities Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 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 Paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Commitments and contingencies Owens & Minor, Inc. and Subsidiaries 2000 1999 $ 626 $ 669 261,905 315,570 16,190 594,291 24,239 204,849 – 44,169 226,927 342,478 19,172 589,246 25,877 210,837 145 38,895 $867,548 $865,000 $291,507 $303,490 9,940 16,502 42,705 360,654 152,872 8,879 371 6,883 15,403 44,022 369,798 174,553 6,268 – 522,776 550,619 132,000 132,000 – – 66,360 18,039 129,001 (628) 65,422 12,890 104,069 – 212,772 182,381 Total liabilities and shareholders’ equity $867,548 $865,000 See accompanying notes to consolidated financial statements. 28 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Owens & Minor, Inc. and Subsidiaries (in thousands) Year ended December 31, Operating activities Net income Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization Nonrecurring restructuring provision (credit) Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Sales of (collections of sold) accounts receivable, net Changes in operating assets and liabilities: Accounts and notes receivable Merchandise inventories Accounts payable Net change in other current assets and current liabilities Other, net 2000 1999 1998 $33,088 $ 27,979 $ 20,145 21,515 (750) (1,293) 2,973 227 (25,612) (9,593) 23,935 (14,783) 8,926 4,522 19,365 (1,000) 8,236 1,741 559 30,612 (30,131) (42,397) 86,871 (11,232) 1,686 18,270 11,200 22,737 1,536 496 (35,000) 8,617 8,899 (23,375) (651) (389) Cash provided by operating activities 43,155 92,289 32,485 Investing activities Net cash paid for acquisition of business Additions to property and equipment Additions to computer software Other, net Cash used for investing activities Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities Repurchase of preferred stock Additions to debt Reductions of debt Other financing, net Cash dividends paid Proceeds from exercise of stock options – (8,005) (11,622) (152) (82,699) (8,933) (13,172) (2,359) – (8,053) (4,556) 160 (19,779) (107,163) (12,449) – – – (21,645) 1,545 (8,156) 4,837 – – 25,178 – (2,741) (7,520) 80 127,268 (115,000) – (32,550) 5,554 (9,268) 3,923 Cash provided by (used for) financing activities (23,419) 14,997 (20,073) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (43) 669 123 546 (37) 583 Cash and cash equivalents at end of year $ 626 $ 669 $ 546 See accompanying notes to consolidated financial statements. 29 C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) Balance December 31, 1997 Net income Comprehensive income Issuance of restricted stock Unearned compensation Common stock cash dividends(1) Preferred stock cash dividends(1) Exercise of stock options Repurchase of preferred stock Other Balance December 31, 1998 Net income Comprehensive income Issuance of restricted stock Unearned compensation Common stock cash dividends(1) Exercise of stock options Other Balance December 31, 1999 Net income Unrealized loss on investment, net of $419 tax benefit Comprehensive income Issuance of restricted stock Unearned compensation Common stock cash dividends(1) Exercise of stock options Other Balance December 31, 2000 Preferred Shares Outstanding Preferred Stock Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss 1,150 $ 115,000 32,213 $64,426 $ 8,005 $ 71,870 $ – – – – – – – – – – – – (1,150) (115,000) – – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – – – – – – – 64 – – – – – 20,145 128 – – – 832 (657) – – – – (6,507) (1,898) 333 666 3,978 – 8 – 16 – 122 32,618 65,236 12,280 – – – – – 83,610 27,979 148 – – 12 26 893 (454) – 71 100 – – (7,520) – – 32,711 65,422 12,890 104,069 – – – – 102 204 – – 355 12 – – 710 24 – – 622 (139) 33,088 – – – – (8,156) 4,541 125 – – – 74 – – 6 13 Total Shareholders’ Equity $ 259,301 20,145 20,145 960 (657) (6,507) (1,898) 4,644 (115,000) 138 161,126 27,979 27,979 1,041 (454) (7,520) 83 126 182,381 33,088 (628) 32,460 826 (139) (8,156) 5,251 149 – – – – – – – – – – – – – – – – – – (628) – – – – – 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 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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 acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Normal maintenance and repairs are expensed as incurred, and renovations and betterments are capitalized. Depreciation and amortization are provided for financial reporting purposes 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 deprecia- tion 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. Owens & Minor, Inc. and Subsidiaries 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 pur- chases 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 connec- tion with the software are expensed as incurred. Capital- ized computer software costs are amortized over the estimated useful life of the software, usually between 3 and 5 years. Computer software costs are included in other assets, net in the consolidated balance sheets. Unamortized software at December 31, 2000 and 1999 was $23.7 million 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 determin- able, and collectibility is probable. Service revenue is recognized ratably over the period during which services are provided. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, which clarifies the application of generally accepted accounting principles to revenue 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 revenue and should be classified as such. Prior to the consensus, the company classified certain amounts billed to customers for shipping as a reduction of outbound 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, accord- ingly, 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. Shipping costs are included in SG&A expenses. Stock-based Compensation. The company uses the intrinsic value method as defined by Accounting Principles Board Opinion No. 25 to account for stock-based compensa- tion. 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 aggregation characteris- tics 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 acquisi- tion 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 approxi- mately $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 reported. 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 consolidation of certain adminis- trative functions. An accrual was established to provide for certain costs of this plan. The following table sets forth the major components of the accrual and activity through December 31, 2000: (in thousands) Exit Plan Provision Charges Balance at December 31, 2000 Losses under lease commitments Employee separations Other $1,643 $ 358 $1,285 395 685 312 404 83 281 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) Losses under lease commitments Asset write-offs Employee separations Other Total Restructuring Provision $ 4,194 3,968 2,497 541 $11,200 Charges Adjustments $3,058 1,466 1,288 99 $5,911 $ 1,582 (1,681) (1,209) (442) $(1,750) Balance at December 31, 2000 $2,718 821 – – $3,539 Note 4 – Merchandise Inventories 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. 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, Warehouse equipment Computer equipment Office and other equipment Leasehold improvements Land and improvements Accumulated depreciation and amortization 2000 1999 $24,012 $23,337 34,137 12,683 10,540 1,743 30,606 12,804 9,903 1,743 83,115 78,393 (58,876) (52,516) Property and equipment, net $24,239 $25,877 34 Note 7 – Debt The company’s long-term debt consists of the following: (in thousands) December 31, 10.875% Senior Subordinated Notes, mature June 2006 Revolving Credit Facility with interest based on London Interbank Offered Rate (LIBOR) or Prime Rate, expires April 2003, credit limit of $225,000 Obligation under financing agreement Total debt Less current maturities Long-term debt 2000 1999 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $150,000 $156,375 $150,000 $155,250 2,200 1,333 2,200 1,333 22,600 2,578 22,600 2,578 153,533 159,908 175,178 180,428 (661) (661) (625) (625) $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 represents payments from cus- tomers for past due balances on their accounts. Cash pay- ments 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 Facility with a new facility expiring in July 2001. Under the terms of the new facility, 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 services). The terms of the new facility require the company to maintain certain levels of net worth, current ratio, leverage ratio and fixed coverage, and restrict the company’s ability to materi- ally alter the character of the business through consolidation, merger, or purchase or sale of assets. The company contin- ues 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. 36 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 distribu- tions at an annual rate of 5.375% of the liquidation value. Each Security is convertible into 2.4242 shares of the com- mon 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. 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) Options outstanding beginning of year Granted Exercised Expired/cancelled Outstanding at end of year Exercisable options at end of year Options 2,448 500 (358) (87) 2,503 1,655 2000 1999 1998 Average Exercise Price Average Exercise Price Average Exercise Price Options Options $13.75 2,001 $13.78 1,940 $13.50 8.73 13.57 12.38 $12.82 $13.75 600 (6) (147) 2,448 1,560 13.70 12.68 13.66 $13.75 $13.83 550 (333) (156) 2,001 1,137 13.79 12.12 13.89 $13.78 $14.16 37 At December 31, 2000, the following option groups were outstanding: Range of Exercise Prices $ 8.31 – 11.94 $12.50 – 17.06 Outstanding Exercisable Number of Options (000’s) 600 1,903 2,503 Weighted Average Exercise Price $ 8.85 $14.07 $12.82 Weighted Average Remaining Contractual Life (Years) 8.71 5.96 6.62 Number of Options (000’s) 132 1,523 1,655 Weighted Average Exercise Price $10.35 $14.04 $13.75 Weighted Average Remaining Contractual Life (Years) 7.48 5.49 5.65 Using the intrinsic value method, the company’s 2000, 1999 and 1998 net income includes stock-based compensa- tion expense (net of tax benefit) of approximately $381 thousand, $306 thousand and $201 thousand. Had the company included in stock-based compensation expense the fair value at grant date of stock option 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 option. 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) December 31, Change in benefit obligation Benefit obligation, beginning of year Service cost Interest cost Amendment Actuarial loss (gain) Benefits paid Pension Plan Retirement Plan 2000 1999 2000 1999 $22,518 $22,288 $ 5,888 $ 6,094 224 1,540 – 142 (1,371) 225 1,470 – (571) (894) 466 604 3,574 1,197 (210) 542 406 – (978) (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 Actual return on plan assets Employer contribution Benefits paid $27,785 (1,650) – (1,371) $24,143 4,536 – (894) $ – – 210 (210) $ – – 176 (176) Fair value of plan assets, end of year $24,764 $27,785 $ – $ – Funded status Funded status at December 31 Unrecognized net actuarial (gain) loss Unrecognized prior service cost (benefit) Unrecognized net obligation being recognized through 2002 Net amount recognized $ 1,711 (294) $ 5,267 (4,112) – – – – $(11,519) $(5,888) 1,830 3,254 82 635 (188) 123 $ 1,417 $ 1,155 $ (6,353) $(5,318) Amounts recognized in the consolidated balance sheets Prepaid benefit cost Accrued benefit cost Intangible asset $ 1,417 $ 1,155 $ – – – – – (8,255) 1,902 $ – (5,318) – Net amount recognized $ 1,417 $ 1,155 $ (6,353) $(5,318) 39 The components of net periodic pension cost for the Note 13 – Income Taxes Pension and Retirement Plans are as follows: The income tax provision consists of the following: (in thousands) Year ended December 31, Service cost Interest cost Expected return on plan assets Amortization of prior service cost (benefit) Amortization of transition obligation Recognized net actuarial loss Net periodic pension cost 2000 1999 1998 $ 690 2,144 $ 767 1,876 $ 597 1,765 (2,026) (1,811) (1,682) (in thousands) Year ended December 31, Current tax provision (benefit): Federal State Total current 2000 1999 1998 $23,604 $11,724 $ (7,690) 4,761 2,119 (459) 133 (16) (17) provision (benefit) 28,365 13,843 (8,149) 41 2 41 84 41 57 Deferred tax provision (benefit): Federal State Total deferred (1,131) (162) 7,206 1,030 19,895 2,842 $ 984 $ 941 $ 761 provision (benefit) (1,293) 8,236 22,737 The weighted average discount rate used in determining the actuarial present value of the projected benefit obliga- tions was assumed to be 6.75% for the Pension 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. 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, Federal statutory rate Increases (reductions) in the rate resulting from: State income taxes, net of federal income tax impact Nondeductible goodwill amortization Nontaxable income Other, net 2000 1999 1998 35.0% 35.0% 35.0% 5.5 2.5 – 2.0 5.5 3.0 – 0.6 4.9 4.7 (4.0) 1.4 Effective rate 45.0% 44.1% 42.0% 40 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. 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, Deferred tax assets: Allowance for doubtful accounts Accrued liabilities not currently deductible Employee benefit plans Nonrecurring restructuring expenses Property and equipment Tax loss carryforward, net Unrealized loss on investment Other 2000 1999 $ 2,567 $ 2,592 3,979 4,214 1,416 201 205 419 1,301 3,900 3,767 2,444 – 633 – 1,156 Total deferred tax assets 14,302 14,492 Deferred tax liabilities: Merchandise inventories Accounts receivable Property and equipment Goodwill Computer software Other 25,133 24,531 700 – 2,080 2,422 840 1,400 1,869 1,093 472 385 Total deferred tax liabilities 31,175 29,750 Net deferred tax liability $(16,873) $(15,258) 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, Numerator: Net income Preferred stock dividends Numerator for basic net income per common share – net income available to common shareholders Distributions on convertible mandatorily redeemable preferred securities, net of taxes 2000 1999 1998 $33,088 $27,979 – – $20,145 1,898 33,088 27,979 18,247 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 Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities Stock options and restricted stock Other Denominator for diluted net income per common share – adjusted weighted average shares and assumed conversions Net income per common share – basic Net income per common share – diluted 32,712 32,574 32,488 6,400 341 – 6,400 124 – – 99 4 39,453 39,098 32,591 $ 1.01 $ 0.86 $ 0.56 $ 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 Net sales to member hospitals under contract with The company has a commitment through November 2, 2008 to outsource its information technology operations, includ- ing strategic application development services. The commit- ment is cancelable after November 2, 2003 with 180 days prior notice 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 mainframe computer. This commitment is cancelable at any time on 180 days prior notice 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) 2001 2002 2003 2004 2005 Later years Total minimum payments Total $21,366 18,275 15,493 11,677 8,138 6,836 $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. Novation totaled $1.8 billion 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 pur- chase from their primary 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, distrib- uted 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 products, including medical gloves, but it does not, nor has it ever manufactured any latex products. The company has tendered the defense of the Lawsuits to manufacturer defendants whose gloves were distributed by the company. The company will continue to vigorously pursue indemnifica- tion 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 prepara- tion. Several Lawsuits that were scheduled for trial have been dismissed on summary judgment. After analyzing the above factors 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 out- come of legal actions cannot be predicted with certainty, management believes the outcome of these proceedings will not have a material adverse effect on the company’s financial condition or results of operations. Note 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 December 31, 2000 Statements of Operations Net sales Cost of goods sold Gross margin Selling, general and administrative expenses Depreciation and amortization Interest expense, net Intercompany interest expense, net Discount on accounts receivable securitization Distributions on mandatorily redeemable preferred securities Nonrecurring restructuring credit Total expenses Income (loss) before income taxes Income tax provision (benefit) Net income (loss) Year ended December 31, 1999 Statements of Operations Net sales Cost of goods sold Gross margin Selling, general and administrative expenses Depreciation and amortization Interest expense, net Intercompany interest expense, net Discount on accounts receivable securitization Distributions on mandatorily redeemable preferred securities Nonrecurring restructuring credit Total expenses Income (loss) before income taxes Income tax provision (benefit) Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ – – – $3,503,583 $ 3,127,911 375,672 – – – $ 137 – 17,869 (7,904) – – – 266,684 1,384 21,515 (5,303) 30,520 15 – (750) – – (22,616) 6,866 7,095 – 10,102 312,681 (7,271) (10,102) (4,445) 62,991 27,841 7,271 3,676 $ (5,657) $ 35,150 $ 3,595 $ – – – – – – – – – – – – – – $3,503,583 3,127,911 375,672 268,205 21,515 12,566 – 6,881 7,095 (750) 315,512 60,160 27,072 $ 33,088 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ – – – 9 – 16,798 (6,976) – – – $3,194,134 $ 2,851,556 342,578 249,390 19,365 (4,938) 25,326 32 – (1,000) $ – – – 561 – – (18,350) 5,208 7,095 – 9,831 288,175 (5,486) (9,831) (4,326) 54,403 23,865 5,486 2,540 – – – – – – – – – – – – – – $3,194,134 2,851,556 342,578 249,960 19,365 11,860 – 5,240 7,095 (1,000) 292,520 50,058 22,079 $ 27,979 45 Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ Condensed Consolidating Financial Information (in thousands) Year ended December 31, 1998 Statements of Operations Net sales Cost of goods sold Gross margin Selling, general and administrative expenses Depreciation and amortization Interest expense, net Intercompany interest expense, net Discount on accounts receivable securitization Distributions on mandatorily redeemable preferred securities Nonrecurring restructuring expense Total expenses Income (loss) before income taxes Income tax provision (benefit) Net income (loss) Dividends on preferred stock Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ – – – 5 – 17,205 (10,854) – – – $3,090,048 $ 2,755,158 334,890 247,224 18,270 (3,139) 24,469 67 – 11,200 $ – – – 243 – – (13,615) 4,588 4,494 – 6,356 298,091 (4,290) (6,356) (2,574) (3,782) 1,898 36,799 15,424 21,375 – 4,290 1,738 2,552 – – – – – – – – – – – – – – – – – $3,090,048 2,755,158 334,890 247,472 18,270 14,066 – 4,655 4,494 11,200 300,157 34,733 14,588 20,145 1,898 $ 18,247 Net income (loss) attributable to common stock $ (5,680) $ 21,375 $ 2,552 $ 46 Condensed Consolidating Financial Information (in thousands) December 31, 2000 Balance Sheets Assets Current assets Cash and cash equivalents Accounts and notes receivable, net Merchandise inventories Intercompany advances, net Other current assets Total current assets Property and equipment, net Goodwill, net Intercompany investments Other assets, net Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable Accrued payroll and related liabilities Deferred income taxes Other accrued liabilities Total current liabilities Long-term debt Intercompany long-term debt Accrued pension and retirement plans Deferred income taxes Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ 507 $ 118 $ 1 $ – – 129,447 17 24,224 315,570 79,645 16,173 237,681 – (209,092) – 129,971 435,730 28,590 – – 305,441 8,735 24,236 204,849 15,001 35,157 3 – – – – – – – – – $ 626 261,905 315,570 – 16,190 594,291 24,239 204,849 – 136,083 (456,525) 277 – 44,169 $444,147 $714,973 $ 164,953 $(456,525) $867,548 $ – – (85) 1,717 $291,507 $ 9,940 18,828 39,331 $ – – (2,241) 1,657 1,632 359,606 (584) 152,200 136,083 – (930) 672 – 8,879 1,304 – – – (3) – – – – – – (136,083) – – $291,507 9,940 16,502 42,705 360,654 152,872 – 8,879 371 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. Shareholders’ equity Common stock Paid-in capital Retained earnings Accumulated other comprehensive loss – – 132,000 – 132,000 66,360 18,039 71,391 (628) 40,879 258,979 44,654 – 5,583 15,001 12,956 – (46,462) (273,980) – – 66,360 18,039 129,001 (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) December 31, 1999 Balance Sheets Assets Current assets Cash and cash equivalents Accounts and notes receivable, net Merchandise inventories Intercompany advances, net Other current assets Total current assets Property and equipment, net Goodwill, net Intercompany investments Deferred income taxes Other assets, net Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable Accrued payroll and related liabilities Deferred income taxes Other accrued liabilities Total current liabilities Long-term debt Intercompany long-term debt Accrued pension and retirement plans Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ 507 $ 158 $ 4 $ – – 112,088 342,478 114,839 – 157,315 (67,049) (90,266) – 19,172 – 157,822 406,847 24,577 – – 305,441 388 9,894 25,877 210,837 15,001 (243) 27,788 – – 136,083 (456,525) – 1,213 – – – – – – – – – – $ 669 226,927 342,478 – 19,172 589,246 25,877 210,837 – 145 38,895 $473,545 $686,107 $161,873 $(456,525) $865,000 $ – – (8) 1,354 $303,490 $ 6,883 17,186 40,965 $ – – (1,775) 1,703 1,346 368,524 (72) 172,600 136,083 1,953 – – 6,268 – – – – – – – – – (136,083) – $303,490 6,883 15,403 44,022 369,798 174,553 – 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. Shareholders’ equity Common stock Paid-in capital Retained earnings – – 132,000 – 132,000 65,422 12,890 85,204 40,879 258,979 9,504 5,583 15,001 9,361 (46,462) (273,980) 65,422 12,890 – 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 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated Condensed Consolidating Financial Information (in thousands) Year ended December 31, 2000 Statements of Cash Flows Operating activities Net income (loss) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization Nonrecurring restructuring credit Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Collections of sold accounts receivable, net Changes in operating assets and liabilities: Accounts and notes receivable Merchandise inventories Accounts payable Net change in other current assets and current liabilities Other, net $(5,657) $ 35,150 $ 3,595 $ – – (619) – – – – – – 21,515 (750) (205) 2,973 397 – 87,467 23,935 (14,783) 346 3,191 8,876 144 – – (469) – (170) (25,612) (97,060) – – (296) 1,187 Cash provided by (used for) operating activities (2,739) 164,719 (118,825) Investing activities Additions to property and equipment Additions to computer software Other, net Cash used for investing activities Financing activities Reductions of debt Change in intercompany advances Other financing, net Cash dividends paid Proceeds from exercise of stock options – – (155) (8,002) (11,622) 3 (155) (19,621) (20,400) (1,245) (3) – – (3) – 27,868 (146,693) 118,825 (1,255) (8,156) 4,837 2,800 – – – – - Cash provided by (used for) financing activities 2,894 (145,138) 118,825 Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year – 507 (40) 158 Cash and cash equivalents at end of year $ 507 $ 118 $ (3) 4 1 $ – – – – – – – – – – – – – – – – – – – – – – – – – – $33,088 21,515 (750) (1,293) 2,973 227 (25,612) (9,593) 23,935 (14,783) 8,926 4,522 43,155 (8,005) (11,622) (152) (19,779) (21,645) – 1,545 (8,156) 4,837 (23,419) (43) 669 $ 626 49 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ (5,505) $ 30,538 $ 2,946 $ Condensed Consolidating Financial Information (in thousands) Year ended December 31, 1999 Statements of Cash Flows Operating activities Net income (loss) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization Nonrecurring restructuring credit Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Sales of accounts receivable, net Changes in operating assets and liabilities: Accounts and notes receivable Merchandise inventories Accounts payable Net change in other current assets and current liabilities Other, net Investing activities Net cash paid for acquisition of business Additions to property and equipment Additions to computer software Other, net – – (396) – – – – – – 19,365 (1,000) 10,407 1,741 292 – – – (1,775) – 267 30,612 1,970 (32,101) (42,397) 86,871 (39) (11,536) 3,049 (1,404) – – – (82,699) (8,933) (13,172) (1,222) 63 (1,200) – – 343 41 333 – – – Cash provided by (used for) operating activities (2,891) 94,847 Cash used for investing activities (1,222) (104,741) (1,200) Financing activities Additions to debt Change in intercompany advances Other financing, net Cash dividends paid Proceeds from exercise of stock options 22,600 (11,045) – (7,520) 80 2,578 10,175 (2,741) – – – 870 – – – Cash provided by financing activities 4,115 10,012 870 Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year 2 505 118 40 Cash and cash equivalents at end of year $ 507 $ 158 $ 3 1 4 $ 50 – – – – – – – – – – – – – – – – – – – – – – – – – – – $ 27,979 19,365 (1,000) 8,236 1,741 559 30,612 (30,131) (42,397) 86,871 (11,232) 1,686 92,289 (82,699) (8,933) (13,172) (2,359) (107,163) 25,178 – (2,741) (7,520) 80 14,997 123 546 $ 669 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated Condensed Consolidating Financial Information (in thousands) Year ended December 31, 1998 Statements of Cash Flows Operating activities Net income (loss) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization Nonrecurring restructuring provision Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Collections of sold accounts receivable, net Changes in operating assets and liabilities: Accounts and notes receivable Merchandise inventories Accounts payable Net change in other current assets and current liabilities Other, net $ (3,782) $ 21,375 $ 2,552 $ – – – – – – – – – 18,270 11,200 22,737 1,536 262 – (74) 8,899 (23,375) 460 1,506 (1,952) (1,895) – – – – 234 (35,000) 8,691 – – 841 – Cash provided by (used for) operating activities (1,816) 56,983 (22,682) Investing activities Additions to property and equipment Additions to computer software Other, net Cash used for investing activities Financing activities Net proceeds from issuance of mandatorily redeemable preferred securities Repurchase of preferred stock Reductions of debt Change in intercompany advances Other financing, net Cash dividends paid Proceeds from exercise of stock options – – – – (8,053) (4,556) 160 (12,449) – – – – (4,732) (115,000) (32,550) – – – 132,000 – – 159,443 (50,126) (109,317) – 5,554 (9,268) 3,923 – – – – – Cash provided by (used for) financing activities 1,816 (44,572) 22,683 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year – 505 (38) 78 Cash and cash equivalents at end of year $ 505 $ 40 $ 1 – 1 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ 20,145 18,270 11,200 22,737 1,536 496 (35,000) 8,617 8,899 (23,375) (651) (389) 32,485 (8,053) (4,556) 160 (12,449) 127,268 (115,000) (32,550) – 5,554 (9,268) 3,923 (20,073) (37) 583 $ 546 51 I N D E P E N D E N T A U D I T O R S ’ R E P O R T 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. Richmond, Virginia January 30, 2001 R E P O R T O F M A N A G E M E N T 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. G. Gilmer Minor, III Chairman & Chief Executive Officer 52 Richard F. Bozard Vice President & Treasurer Acting Chief Financial Officer Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N (1) Owens & Minor, Inc. and Subsidiaries (in thousands, except per share data) Quarters Net sales(2) Gross margin(2) Net income Per common share: Net income Basic Diluted Dividends Market price High Low Quarters Net sales(2) Gross margin(2) Net income Per common share: Net income Basic Diluted Dividends Market price High Low 2000 1st 2nd(3) 3rd 4th $856,742 $875,230 $874,318 $897,293 91,961 6,840 92,803 8,015 93,121 8,466 97,787 9,767 $ $ 0.21 0.20 0.06 12.00 8.13 $ $ 0.25 0.23 0.0625 17.19 10.25 $ $ 0.26 0.24 0.0625 18.25 14.69 1999 $ 0.30 0.27 0.0625 $ 18.38 11.88 1st 2nd(3) 3rd 4th $743,057 $774,351 $813,788 $862,939 80,702 5,491 82,338 6,480 87,168 7,142 92,371 8,866 $ $ 0.17 0.17 0.05 17.00 9.56 $ $ 0.20 0.19 0.06 12.44 9.50 $ $ 0.22 0.21 0.06 13.00 9.63 $ 0.27 0.25 0.06 $ 10.63 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 F O R M 1 0 - K A N N U A L R E P O R T 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 (State or other jurisdiction of incorporation or organization) 54-01701843 (I.R.S. Employer Identification No.) 4800 Cox Road, Glen Allen, Virginia (Address of principal executive offices) 23060 (Zip Code) Registrant’s telephone number, including area code (804) 747-9794 Securities registered pursuant to Section 12(b) of the Act: 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. Title of each class Common Stock, $2 par value Preferred Stock Purchase Rights 107⁄8% Senior Subordinated Notes due 2006 $2.6875 Term Convertible Securities, Series A Name of each exchange on which registered New York Stock Exchange New York Stock Exchange New York Stock Exchange Not Listed 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 54 ITEM CAPTIONS AND INDEX – FORM 10-K ANNUAL REPORT Item No. Page Part I 1. 2. 3. 4. Part II Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-22 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 43-44 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . N/A 5. Market for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . 53, 56 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 18 6. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 23-26 7A. Quantitative and Qualitative Disclosures 8. 9. about Market Risk . . . . . . . . . . . . . . . . . . . . . . 26, 35-36 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . See Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . N/A Part III 10. Directors and Executive Officers of 11. 12. 13. Part IV 14. the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . (a), 14-15 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . (a) Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . (a) Certain Relationships and Related Transactions . . . . . (a) 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. 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 G. Gilmer Minor, III /s/ Richard F. Bozard Richard F. Bozard Chairman and Chief Executive Officer and Director (Principal Executive Officer) Vice President and Treasurer Acting Chief Financial Officer (Principal Financial Officer) /s/ Olwen B. Cape Olwen B. Cape Vice President and Controller (Principal Accounting Officer) /s/ A. Marshall Acuff, Jr. A. Marshall Acuff, Jr. /s/ Henry A. Berling Henry A. Berling /s/ Josiah Bunting, III Josiah Bunting, III /s/ John T. Crotty John T. Crotty /s/ James B. Farinholt, Jr. James B. Farinholt, Jr. /s/ Vernard W. Henley Vernard W. Henley /s/ E. Morgan Massey E. Morgan Massey /s/ Peter S. Redding Peter S. Redding /s/ James E. Rogers James E. Rogers /s/ James E. Ukrop James E. Ukrop /s/ Anne Marie Whittemore Anne Marie Whittemore Director Director Director Director Director Director Director Director Director Director Director 55 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 Duplicate Mailings 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 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. 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 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 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 corre- spondence 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 56 50 YearsOf Sales Growth (in thousands) Owens & Minor, founded in 1882 and incorporated in 1926, is the nation’s leading distributor of national name brand medical/surgical sup- plies. In the last five decades, the company has achieved an impressive record of sales growth. With this strong foundation, Owens & Minor is prepared for the future. Year 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Net Sales Year Net Sales 3,406 3,692 4,233 4,533 4,550 4,815 6,706 7,393 7,773 7,616 9,035 9,660 10,630 11,210 11,981 13,271 14,602 15,472 16,564 19,816 22,994 28,578 33,745 38,230 43,365 54,476 1976 1977 1978 1979 1980 1981(1) 1981(2) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 67,724 83,532 100,971 112,685 131,520 149,543 143,684 211,356 255,218 306,657 367,257 467,582 576,805 731,565 952,935 1,219,617 1,029,464 1,179,633 1,399,855 2,399,587 2,981,265 3,025,341 3,124,062 3,090,048 3,194,134 3,503,583 Source: Company Records. Years prior to 1991 may not be comparable as data has not been restated for changes in accounting principles or acquisitions accounted for under the pooling of interests method. Data for years prior to 1981 is for fiscal years ended March 31. (1) Year ended March 31st. (2) Nine months ended December 31st. OWENS & MINOR, INC. C O R P O R A T E O F F I C E Street Address 4800 Cox Road Glen Allen, Virginia 23060 Mailing Address Post Office Box 27626 Richmond, Virginia 23261-7626 804-747-9794 

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