B E S T I N C L A S S O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T & F O R M 1 0 - K 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 Best in ClassThrough Service Connectivity Technology Community OWENS & MINOR, THE NATION’S LEADING DISTRIBUTOR OF NATIONAL NAME BRAND MEDICAL/SURGICAL SUPPLIES, MEETS THE NEEDS OF ITS CUSTOMERS NATIONWIDE WITH “BEST IN CLASS” EXPERTISE IN SERVICE, CONNECTIVITY, TECHNOLOGY AND COMMUNITY SERVICE. 2 0 0 1 A N N U A L R E P O R T A B O U T T H E C O V E R At Owens & Minor, we have worked to earn a “best in class” reputation for our proficiency in customer service, connectivity, tech- nology and community Overview Owens & Minor, Inc., a Fortune 500 company headquartered in Rich- mond, Virginia, is the nation’s leading distributor of national name brand medical and surgical supplies. From distribution centers strategically located throughout the United States, Owens & Minor serves acute care hospitals, integrated healthcare systems and group purchasing organiza- tions. The company offers customers a wide range of state-of-the-art medical and surgical products, and provides integrated services in supply chain management, logistics and technology. The company works closely with customers and suppliers to help improve efficiency and reduce cost service. Every day the team in the supply chain. at Owens & Minor strives to meet the pressing needs of our customers and partners in healthcare, a demanding business that requires the dedication and absolute focus of its participants. Since its inception in 1882, Owens & Minor has taken a leadership role in the healthcare industry. Today, the company concentrates specifically on medical and surgical supply distribution, and on working with customers and other business partners to improve the efficiency of the supply chain. The company consistently wins high marks for customer service and has been named a leader in the innovation and use of technology. Owens & Minor is focused on creating the model for healthcare distribution, using technology to improve and grow its market share. Owens & Minor common shares are traded on the New York Stock Exchange under the symbol OMI. As of December 31, 2001, there were approximately 34 million common shares outstanding. C O N T E N T S 18 Selected Financial Data 19 Business Description 24 Management’s Discussion & Analysis 31 Consolidated Statements of Income 32 Consolidated Balance Sheets 33 Consolidated Statements of Cash Flows 34 Consolidated Statements of Changes in Shareholders’ Equity 35 Notes to Consolidated Financial Statements 55 Independent Auditors’ Report 55 Report of Management 56 Quarterly Financial Information 57 Form 10-K Annual Report 59 Corporate Officers 60 Corporate Information OWENS & MINOR 2001 ANNUAL REPORT 1 Financial Highlights (in thousands, except ratios, per share data and teammate statistics) Year ended December 31, 2001 2000 1999 Percent Change 00/99 01/00 Net sales Income before extraordinary item(1) Income per basic common share before extraordinary item(1) Income per diluted common share before extraordinary item(1) Cash dividends per common share Book value per common share at year end Stock price per common share at year end Number of common shareholders Shares of common stock outstanding Return on average common equity excluding unusual items(1) Return on total assets excluding unusual items(1) (3) Gross margin as a percent of net sales Selling, general and administrative expenses $3,814,994 30,103 $ $3,503,583 33,088 $ $3,194,134 27,979 $ 8.9% (9.0%) 9.7% 18.3% 0.86 (10.9%) 17.4% $ $ $ $ $ 0.90 0.85 0.2725 6.97 18.50 13.9 33,885 $ $ $ $ $ 1.01 0.94 0.2475 6.41 17.75 15.0 33,180 $ $ $ $ $ 0.82 0.23 5.58 8.94 15.0 32,711 (9.6%) 10.1% 8.7% 4.2% (7.3%) 2.1% 16.7% 3.8% 10.7% 16.5% 3.4% 10.7% 16.0% 3.1% 10.7% 1.2% 11.8% – 14.6% 7.6% 14.9% 98.5% – 1.4% 3.1% 9.7% – as a percent of net sales (SG&A) 7.8% 7.7% 7.8% Outstanding financing (2) Capitalization ratio (3) (4) Average receivable days sales outstanding (3) Average inventory turnover Teammates at year-end $ 273,449 $ 233,533 $ 280,790 42.6% 33.1 9.7 2,937 40.4% 33.3 9.5 2,763 47.2% 34.9 9.2 2,774 1.3% 17.1% 5.4% (0.6%) 2.1% 6.3% (1.3%) (16.8%) (14.4%) (4.6%) 3.3% (0.4%) (1) In 2001, the company recorded an impairment loss of $1.1 million on an investment in marketable equity securities, a provision for disallowed income tax deductions of $7.2 million, and a reduction in a restructuring accrual of $1.5 million, or $0.8 million net of tax. In 2000 and 1999, the company recorded reductions in the restructuring accrual of $0.8 million and $1.0 million, or $0.4 million and $0.6 million net of tax. Excluding these unusual items, income per diluted common share in 2001, 2000 and 1999 was $1.03, $0.93 and $0.80. See Notes 3, 6, 8 and 14 to the Consolidated Financial Statements. (2) Consists of debt and sales of accounts receivable outstanding under the company’s off balance sheet receivables financing facility. See Notes 8 and 9 to the Consolidated Financial Statements. (3) Assumes that receivables had not been sold under the company’s off balance sheet receivables financing facility. (4) Includes mandatorily redeemable preferred securities as equity. 2 OWENS & MINOR 2001 ANNUAL REPORT Dear Shareholders, Teammates, Customers, Suppliers and Friends, We had a very good year and advanced the company forward in many ways. My letter to you will celebrate these achievements as I comment on the financial results and list the highlights for the year. But most of this space will be devoted to talking about the company, where we are today, what we are doing that differentiates us from our com- petitors, and very importantly, where we are going. By the Numbers We grew our sales 9%, almost twice the average industry growth rate for our sector. All of our group purchasing organi- zation customers showed healthy sensitive environment. Our gross margin has been steady over the last few years. We went the wrong way on Selling, General and Administrative (SG&A) expenses by going up 0.1% to 7.8% as a percent of sales. There are some bona fide explanations for this increase in costs for the year, but the fact is, we did not man- age our expenses as well as we might have. We expect that to change in 2002. Overall, earn- ings per diluted common share, excluding the impact of the restructuring credit and unusual charges, advanced to $1.03, up 11% over 2000, and income of $37.5 million was up 15% from last year. “We grew our sales 9%,almost twice the average industry growth rate for our sector. All of our group purchasing organization customers showed healthy growth.” growth. We lost a little business along the way but we came back strong and made it up, and then some. Even more importantly, we held our gross margin at 10.7% in a very competitive, price We strengthened our balance sheet by refinancing some high- cost debt. We managed our assets very well again this year, and the net effect of all this is a 42.6% capitalization ratio with the OWENS & MINOR 2001 ANNUAL REPORT 3 mandatorily redeemable preferred securities treated as equity. We also increased our volume of business with customers using CostTrack, our industry- leading activity-based pricing model, from 22% of our sales to almost 28%. Our productivity and performance ratios, such as sales per full time equivalent (FTE), return on total assets, return on total equity and common share price, all improved from last year. So, it was a very good year. Not the greatest ever, but a year in which we moved the company forward while strengthening our balance sheet and growing our business well above the industry average. I am very pleased with it. Highlights for the Year Here is a snapshot of some of the significant events in 2001 other than financial. We renewed the long-standing agreement with Novation, our largest group pur- chasing organization partner, and we were very proud to have been selected by them to receive the 2001 VHA/Novation Partner- ship Award for our support of the Marketplace@Novation. InformationWeek magazine named us #1 out of 500 companies in the United States for the most innovative use of technology. Wow! Great work, team. Some important new customers we added this year include Baylor Health Care System in Dallas, Methodist Hospital in Houston and Kaiser Permanente all over the country. All of our sales and marketing programs such as PANDAC®, WISDOM, WISDOM2, SurgiTrack and CostTrack showed measurable improvement in sales penetration for the year. Jeff Kaczka joined the company as Senior Vice President and Chief Financial Officer; and Erika T. Davis was promoted to Senior Vice President of Human Resources. Culture, Character and Consistency These are the things that get us to the dance every day. I talk about them a lot and will continue to do so because these qualities are the foundation of our industry is blessed with good, healthy, honorable competition. Good competition makes us all better. Our character is our backbone, and has been formed over a long period of time. Circumstances and times have changed through the years but not our character. Consistency and dependability have been hallmarks of the com- pany through the years. When we say we’re going to do something, we do it. Our supply chain part- ners know we’re going to show up every day trying to figure out better ways to help them. We take nothing for granted. We’ve always built our relationships “We’ve always built our relationships around earning the business, by delivering on commitments and adding value.” Owens & Minor, the attributes that drive our success. Our culture is user friendly. People like to work here and feel they’re a part of a family, part of a team. That’s why we call everyone ‘teammate.’ Our customers and suppliers like to do business with us because of the service we pro- vide and the positive and friendly way we deliver it. And, we reach out into the communities we serve because we want to help make them better places. Our character is built around integrity and the will to win. Not winning at any price, but winning because we are clearly better than our competition. Fortunately, around earning the business, by delivering on commitments and adding value. Why Owens & Minor First of all, we not only listen to our customers, we hear them. When our customers said they wanted better information to help them run their business, we gave them WISDOM and WISDOM2. They said they wanted a realistic pricing model other than cost plus. We gave them our own common sense activity-based pricing solution, CostTrack. They said they wanted an inventory management system to help them control high-valued wound 4 OWENS & MINOR 2001 ANNUAL REPORT “Customers choose us because we are the best in class for our sector. This means that in a land of giants we are, pound for pound, better at doing what we do than our competitors.” closure inventory. So we gave them PANDAC a long time ago. In my opinion, the best is yet to come. We all use the word part- nership. Sometimes this word is overused and therefore under- valued. To Owens & Minor partnership means a two-way street with all parties at risk, and relationships built around integrity and trust. That’s why many of our customers are coming to us for help in managing their supply chain function. That’s why we have established OMSolutions to harness the value and power of our innovative and dynamic tools, and then leverage that value and power for the cus- tomer on site or off site. We expect this trend to grow. Customers choose us for our focus, for not trying to be all things to all people, for being a big company with a small company service men- tality, for the personal touch and for always thinking of their welfare first. The 9/11 tragedy brought all those things to the surface as we responded quickly and compassionately. We have always been there when needed, whether an earthquake, hurricane or tornado. We do care. Customers choose us because we are the best in class for our sector. This means that in a land of giants we are, pound for pound, better at doing what we do than our competitors. We have also realized that we must be collaborative, interactive and connected to other supply chain partners and exchanges serving our customers. We are a best-in-class company that finds a solution to a problem without bias and in the spirit of true partnership. In other words, we stake our reputation on our actions every day. Finally, I feel customers choose us because they have figured out what makes us tick. We have a burning need to be of service; we have an insatiable desire for customer success; we have a constant sense of urgency to be the best and to do what’s right; we have an unparalleled respect and ado- ration for our teammates; and a flaming desire to return great value to our shareholders and customers. People like to do business with a company that really cares, especially if that company is best-in-class like Owens & Minor. Looking Ahead Let’s look down the road and try to visualize what we will look like in five years. Now, I can’t give you any specific predictions, but I can give you a sense of what I see ahead. First of all, the supply chain as we know it today will be more dynamic, more con- nected and more demanding. Things are going to change. Traditional distribution will still have its place for some types of products and some hospitals, but more innovative and cost-effective ways of get- ting some products to the end user will arise. For instance, who will own the inventory? When will it be paid for? Who owns the information? Owens & Minor will provide the answers to these questions fortified with solution-based technology. We will be con- nected to our customers and suppliers in an integrated supply chain that we will help manage. Secondly, collaboration will be essential. We are the best in class for our sector. There are other best-in-class suppliers in other health care sectors. For the providers, these entities need to come together to develop innovative platforms for technology, managed by the hospitals to produce an integrated supply chain of value. We will be there. Actually, we already are. The systems we have developed, the value we deliver every day, and OWENS & MINOR 2001 ANNUAL REPORT 5 will serve us well down the road, includes best-in-class technology, a vision for a more efficient and integrated supply chain, and good old-fashioned service. We believe in the fundamental axiom that if we help our cus- tomers do well, we will do well also. It’s common sense. And, we believe in our people who do the work every day. They are the unsung heroes of Owens & Minor because they not only have made us what we are, but will take us to the next level. And, as I have pointed out, the next level is filled with promise and opportunity. Our plan, our actions and our determination all point to an even brighter day. We are ready. Very Simply, Thanks Craig and I would like to thank those who helped make our year so successful. To our teammates, we thank you for all you do every day and we are proud to be on your team; to our suppli- ers, thanks for partnering with us to take care of our mutual custo- mers; to our customers, thanks for your loyalty and commitment to our common dream for excel- lence; and to our shareholders, thanks for the confidence you have expressed in us. We are very much looking forward to improving our performance again in 2002. Warm regards, G. Gilmer Minor, III Chairman and Chief Executive Officer Craig R. Smith President and Chief Operating Officer the unselfish desire to do what’s best for our customers will be our ticket to ride. We are outstanding collaborators and innovators. Thirdly, there is going to be more business available. The demographics scream for it. Healthcare is a growth indus- try, for better or worse. And those who figure out how to tap into that growth will succeed very nicely, thank you. We have the fundamental values squarely planted in our very being, and we have demonstrated our ability to produce innovative solutions, and over the next five years, we will step that up. It feels good to look ahead and see the forest and the trees. In Closing We have found from historical precedent and the swiftness of changes that take place in our industry that it’s incumbent on us to re-invent our offering every three to five years. These last two years have been especially satisfy- ing. We have re-engineered our value proposition to our supply chain partners. We have added to our reputation of being the best box movers in the industry by being the best and most con- sistent solution provider in the supply chain. This new dimension, and one that OWENS & MINOR At AGlance Sheri McKone, Manager, Purchasing Technologies John Nguyen, Shift Supervisor, Richmond Sabrina Smith, Senior PANDAC® Analyst Kent Love, Director, Supply Chain Inventory Owens & Minor uses a state-of-the-art forecasting and planning system to purchase medical/surgical supplies for customers, assuring they have what they need when they need it. This allows customers to better manage their inventory requirements. Owens & Minor 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 im- proves receiving and order picking processes. Owens & Minor uses its expertise in logistics and warehousing to reduce costs for customers. In some cases, O&M handles warehousing for customers. The company also helps customers reduce cost through asset manage- ment techniques, such as, Owens & Minor’s own PANDAC wound closure asset management program. After purchasing inventory, Owens & Minor holds it for customers. Using the latest in supply chain processes, O&M delivers and invoices goods only when customers are ready. Customers reduce their costs by using “just-in-time” and stockless services, receiv- ing supplies at exactly the right time. OWENS & MINOR 2001 ANNUAL REPORT 7 Masai Sung, Project Manager, New England Anne Lee McCorey, Manager, DSS Tony Barton, Driver, Richmond Mark Smith, Technology Manager, Western Region Using its expertise in logistics, inventory control and infor- mation management, Owens & Minor is able to improve the cost and efficiency of the supply chain for custo- mers. The company’s own CostTrack activity-based management process has transferred focus from the cost of the product to the cost of the process. O&M uses technology to collect information about purchasing for its customers. With this knowledge, the company is able to help cus- tomers standardize products and increase savings. O&M developed an Internet-based tool called WISDOM to give customers access to this valu- able purchasing information. Owens & Minor delivers supplies to its customers. O&M has warehouse facilities around the nation, close to customer facilities. O&M uses its own drivers who serve as important customer service ambassadors for the company. Owens & Minor uses technol- ogy such as electronic billing and funds transfer to elimi- nate manual steps from the supply chain, thus reducing cost and improving efficiency. O&M also employs the Inter- net for the digital transfer of business information and as a platform for customer order- ing and inquiry. 8 OWENS & MINOR 2001 ANNUAL REPORT I E C V R E S OWENS & MINOR 2001 ANNUAL REPORT 9 Delivering best-in-class customer service is an essential element of the mission, vision and values of Owens & Minor. As the company enters its 120th year in operation, Owens & Minor is focused on maintaining the highest level of customer service in the medical and surgical supply distribu- tion arena. For Owens & Minor, excellence in customer service is an essential component of its leadership position in the demanding acute care market. “Delivering best-in-class customer service is an essential element of the mission, vision and values of Owens & Minor.” Owens & Minor does not rely on guesswork to gauge the satisfaction of customers; it carefully measures its performance each year. Through an annual independent survey, Owens & Minor polls its customers on the quality and consistency of service. With this information, the company has worked to improve customer service each year, knowing that satisfied customers “At Owens & Minor, customer service IS the company. We are all customer service representa- tives. We always do our best for our customers, and we have a very good determine the health of its business. rapport with them. It’s more than just business, it’s a relationship, because our partners trust us.” This year, according to the annual survey, Owens & Minor achieved a 96% satisfaction level with customers. In fact, the number of customers who report they are “very satisfied” rose this year. The company also is gaining ground with customers for its ability to “solve problems.” Owens & Minor’s customer-focused approach in 2001 resulted in: • $3.8 billion in sales • Sales growth of 9 percent, approximately twice the industry average • 11 percent growth in earnings per diluted share In today’s demanding healthcare environment, customers are free to choose supply chain partners from a wide range of options. However, a continuing focus on customer service excellence by its 2,900 teammates nationwide differentiates Owens & Minor in this highly competitive field. Cheryl Sketers Customer Service Manager Savage, Maryland Distribution Center OWENS & MINOR 2001 ANNUAL REPORT 10 Y T I V I T C E N N O C OWENS & MINOR 2001 ANNUAL REPORT 11 Owens & Minor’s ability to connect with its customers, suppliers and other business partners is one of the significant ways that the company stands out in the healthcare sector. These deep and lasting connections have been a determining factor in Owens & Minor’s steady growth in healthcare since 1882. In working with customers and other partners today, Owens & Minor aims to increase clinician satisfaction and decrease overall supply chain costs. Using proven supply-chain methodologies, along with technology, and product and process management tools, Owens & Minor works with “With the demands of healthcare today, our hospital custo- mers rely on us to make the supply customers to improve internal distribution models, providing a competitive chain work. As our hospital customers focus on the patient, we focus on the sup- ply chain. When we work together with our customers, we have an incredible engine for change.” advantage in an increasingly cost-conscious healthcare market. “Owens & Minor works with customers to improve internal distribution models, providing a competitive advantage in an increasingly cost-conscious healthcare market.” Using its logistics assessment tools and activity-based management tools such as CostTrack, the company identifies a customer’s specific needs. Owens & Minor then recommends solutions from its innovative suite of services. Expertise in logistics, derived from more than a century of experience in serving healthcare customers, has given Owens & Minor an edge in today’s demanding market. Among the company’s solution-based techniques: • “Just-in-time” and stockless services allow customers to receive medical and surgical supplies exactly when needed • Asset management, storeroom reconfiguration and space optimization provide customers a cost-effective avenue for project management and outsourcing • Using EDI (electronic data interchange) and Internet connections improves information flow and enhances visibility within the supply chain • Sharing information management expertise through WISDOM and WISDOM2, Owens & Minor’s Internet-based decision support tool, gives customers new insight into purchasing patterns and spending levels Tim Gill, Director, OMSolutions 12 OWENS & MINOR 2001 ANNUAL REPORT Y G O L O N H C E T OWENS & MINOR 2001 ANNUAL REPORT 13 A first place finish in the 2001 InformationWeek 500 survey of American businesses was a significant milestone for Owens & Minor. Cited for innova- tion and use of technology, Owens & Minor topped the prestigious list of U.S.-based companies. As a distributor, investing in technology has always been a vote of confidence in the future. Having invested in technology since the 1950s, the company was gratified to receive this significant public recog- nition of its strategy of investing for the future. “Owens & Minor has made a name for itself by using technology to improve service to customers, reduce cost and improve visibility into the supply chain.” “We have taken the lead in technology, because we’ve based our develop- ment decisions on the needs of our customers and other During 2001, the company successfully launched the second generation of WISDOM, its award winning Internet-based data-mining tool, which allows partners. We’ve customers to unlock purchasing information stored in Owens & Minor’s data always invested very prudently in tech- nology, looking to leverage our existing business, and earn a real return on our investment.” warehouse. The first generation of WISDOM helped customers improve sup- ply chain efficiency by giving them access to data on purchases from Owens & Minor. The second generation of this tool, WISDOM2, now allows hospitals to view all materials management purchasing data from all of their vendors. The company’s technology group also launched an effort to enhance the company’s Web portal. OM Direct, originally designed as a Web site for placing orders, has grown into an important tool for information manage- ment. This easy-to-use Internet tool enables customers to check the status of orders, prices and inventory. Technology has improved efficiency for Owens & Minor in many areas: • “Point-of-use” technologies streamline the ordering process in the hospital • Radio frequency, or RF, units improve efficiency in warehouse facilities • Internet-based connections, such as OM Direct, WISDOM and WISDOM2, improve information flow for customers • PANDAC®, the company’s wound closure asset management program, helps customers manage inventory Don Stoller Director, Information Management 14 14 OWENS & MINOR 2001 ANNUAL REPORT OWENS & MINOR 2001 ANNUAL REPORT Y T I N U M M O C OWENS & MINOR 2001 ANNUAL REPORT OWENS & MINOR 2001 ANNUAL REPORT 15 15 An enduring component of the Owens & Minor mission is ensuring the well-being of the communities the company serves. Across the nation, Owens & Minor teammates are vitally involved in their communities. From food banks to mentoring programs to Meals on Wheels and Habitat for “The focus on serving Humanity, teammates actively donate time, money and energy. Because is actually in our mission statement, and it isn’t just words, it’s a concept community service is fundamental to the spirit of Owens & Minor, teammates nationwide feel empowered to serve. “Because community service is fundamental to the spirit of Owens&Minor, teammates nationwide feel empowered to serve.” Each year, a steering committee of teammates designates activities, we are trying to bring events and charities for company focus. Corporate officers are selected as to life. We have an atmosphere here where we are encour- aged to get involved. This is our chance to make a difference, and it’s tremendous that we have support from the top.” sponsors of each event. At the end of the year, the teammate who most exemplifies the volunteer spirit is presented with the “volunteer of the year” award in recognition of his or her participation in community events. This sharing of corporate resources in the community is important to Owens & Minor, because it strengthens company ties to its various communities and builds lasting bonds between teammate volunteers. Volunteering is quite simply a way of life at Owens & Minor. Among the organizations that teammates serve are: • YMCA, YWCA • Chambers of Commerce • United Way • Children’s Museum of Richmond • Police Athletic League • Friends Association for Children • Special Olympics • Christmas in April • Juvenile Diabetes Foundation • Rotary and Kiwanis Clubs • SPCA In the last two years alone, Owens & Minor’s Volunteer Council has formally participated in events benefiting 19 different charities, recording more than 560 individual acts of volunteerism. Teammates across the nation participated in countless other worthwhile events. Tracy Purvis, President, Volunteer Council; Senior Credit Analyst 16 OWENS & MINOR 2001 ANNUAL REPORT Board of Directors James Ukrop Gilmer Minor Vernard Henley Henry Berling Josiah Bunting Peter Redding John Crotty James Rogers James Farinholt Anne Marie Whittemore Marshall Acuff A. Marshall Acuff, Jr. (62) 2,4,5 Retired Senior Vice President & Managing Director, Salomon Smith Barney, Inc. John T. Crotty (64) 2,3,4* Managing Partner, CroBern Management Partnership President, CroBern, Inc. Henry A. Berling (59) 1,4 Executive Vice President, Partnership Development, Owens & Minor, Inc. Josiah Bunting, III (62) 2,4,5 Superintendent, Virginia Military Institute James B. Farinholt, Jr. (67) 1,2*,4 Special Assistant to the President for Economic Development, Virginia Commonwealth University Vernard W. Henley (72) 2,3,5 Retired Chairman & CEO, Consolidated Bank & Trust Company G. Gilmer Minor, III (61) 1*,4 Chairman & CEO, Owens & Minor, Inc. Peter S. Redding (63) 2,3,4 Retired President & CEO, Standard Register Company James E. Rogers (56) 1,3*,4 President, SCI Investors Inc. James E. Ukrop (64) 3,4,5 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 2001 Financials C O N T E N T S 18 Selected Financial Data 19 Business Description 24 Management’s Discussion & Analysis 31 Consolidated Statements of Income 32 Consolidated Balance Sheets 33 Consolidated Statements of Cash Flows 34 Consolidated Statements of Changes in Shareholders’ Equity 35 Notes to Consolidated Financial Statements 55 Independent Auditors’ Report 55 Report of Management 56 Quarterly Financial Information 57 Form 10-K Annual Report 59 Corporate Officers 60 Corporate Information 1 8 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Selected Financial Data(1) (in thousands, except ratios and per share data) Summary of Operations: Net sales Income before extraordinary item(2)(3) Per Common Share: Income before extraordinary item – basic Income before extraordinary item – diluted Average number of shares outstanding – basic Average number of shares outstanding – diluted Cash dividends Stock price at year end Book value at year end Summary of Financial Position: Working capital Total assets Long-term debt Mandatorily redeemable preferred securities Shareholders’ equity Selected Ratios: 2001 2000 1999 1998 1997 $3,814,994 $ 30,103 $3,503,583 $3,194,134 $3,090,048 $3,124,062 $ 33,088 $ 27,979 $ 20,145 $ 24,320 $ $ $ $ $ 0.90 0.85 33,368 40,387 0.2725 18.50 6.97 $ $ $ $ $ 1.01 0.94 32,712 39,453 0.2475 17.75 6.41 $ $ $ $ $ 0.86 0.82 32,574 39,098 0.23 8.94 5.58 $ $ $ $ $ 0.56 0.56 32,488 32,591 0.20 15.75 4.94 $ $ $ $ $ 0.60 0.60 32,048 32,129 0.18 14.50 4.48 $ 311,778 $ 953,853 $ 203,449 $ 132,000 $ 236,243 $ 233,637 $ 219,448 $ 235,247 $ 233,789 $ 867,548 $ 865,000 $ 717,768 $ 712,563 $ 152,872 $ 174,553 $ 150,000 $ 182,550 $ 132,000 $ 132,000 $ 132,000 $ – $ 212,772 $ 182,381 $ 161,126 $ 259,301 Gross margin as a percent of net sales 10.7% 10.7% 10.7% 10.8% 10.4% Selling, general and administrative expenses as a percent of net sales Average receivable days sales outstanding(4) Average inventory turnover Return on average total equity before extraordinary item(5) Return on average total equity before extraordinary item(6) Current ratio Capitalization ratio(4)(5) Capitalization ratio(4)(6) 7.8% 33.1 9.7 7.7% 33.3 9.5 7.8% 34.9 9.2 8.0% 33.5 9.8 7.8% 32.4 9.9 9.6% 11.2% 10.5% 8.2% 9.7% 13.4% 1.8 42.6% 63.2% 16.7% 1.6 40.4% 63.2% 16.3% 1.6 47.2% 69.4% 9.6% 1.9 43.4% 68.9% 9.7% 1.9 53.0% 53.0% (1) On July 30, 1999, the company acquired certain net assets of Medix, Inc. This acquisition was accounted for as a purchase. (2) In 1998, the company incurred $11.2 million, or $6.6 million after taxes, of nonrecurring restructuring expenses which are included in income before extraordinary item. In 2001, 2000 and 1999, income before extraordinary item included reductions in the restructuring accrual of $1.5 million, $0.8 million and $1.0 million, or $0.8 million, $0.4 million and $0.6 million after taxes. See Note 3 to the Consolidated Financial Statements. In 2001, income before extraordinary item included an impairment loss of $1.1 million on an investment in marketable equity securities and a provision for disallowed income tax deductions of $7.2 million. See Notes 6 and 14 to the Consolidated Financial Statements. (3) (4) Assumes that receivables had not been sold under the company’s off balance sheet receivables financing facility. See Note 9 to the Consolidated Financial Statements. (5) Includes mandatorily redeemable preferred securities as equity. Includes mandatorily redeemable preferred securities as debt. (6) OWENS & MINOR 2001 ANNUAL REPORT 19 Business Description The Company They have forged strategic relationships with national Owens & Minor Inc. and subsidiaries (O&M or the medical and surgical supply distributors to meet the challenges company) is the leading distributor of national name brand of managing the supply procurement and distribution needs medical and surgical supplies in the United States, distributing of their entire network. The traditional role of distributors over 120,000 finished medical and surgical products produced in warehousing and delivering medical and surgical supplies by approximately 1,500 suppliers to approximately 4,000 custo- to customers is evolving into the role of assisting customers mers from 44 distribution centers nationwide. The company’s to manage the entire supply chain. customers are primarily acute care hospitals and integrated Historically, the medical/surgical supply distribution healthcare networks (IHNs), which account for more than industry has been highly fragmented. During the past decade, 90% of O&M’s net sales. Many of these hospital customers are the overall healthcare market has been characterized by the represented by national healthcare networks (Networks) or consolidation of healthcare providers into larger and more group purchasing organizations (GPOs) that offer discounted sophisticated entities seeking to lower their total costs. These pricing with suppliers and contract distribution services with providers have sought to lower total product costs through the company. Other customers include alternate care providers incremental value-added services from their medical and sur- such as clinics, home healthcare organizations, nursing homes, gical supply distributors. These trends have driven a significant physicians’ offices, rehabilitation facilities and surgery centers. and ongoing consolidation within the medical/surgical supply The company typically provides its distribution services under distribution industry due to the competitive advantages enjoyed contractual arrangements ranging from three to five years. Most by larger distributors, which include, among other things, the of O&M’s sales consist of consumable goods such as disposable ability to serve nationwide customers, buy inventory in large gloves, dressings, endoscopic products, intravenous products, volume and develop technology platforms and decision needles and syringes, sterile procedure trays, surgical products support systems. and gowns, urological products and wound closure products. Founded in 1882 and incorporated in 1926 in Richmond, The Business Virginia, as a wholesale drug company, the company refined The company purchases a high volume of medical and surgical its mission in 1992, selling the wholesale drug division to products from suppliers, inventories these items at its distribu- concentrate on medical and surgical distribution. O&M has tion centers and provides delivery services to its customers. significantly expanded and strengthened its national presence O&M’s 44 distribution centers are located throughout the over the last ten years through internal growth and acquisitions, United States and are situated close to its major customer generating $3.8 billion of net sales in 2001. facilities. These distribution centers generally serve hospitals The Industry and other customers within a 200-mile radius, delivering most medical and surgical supplies with a fleet of leased trucks. Almost Distributors of medical and surgical supplies provide a wide all of O&M’s delivery personnel are employees of the company, variety of products and services to healthcare providers, including providing effective control of customer service. Contract carriers hospitals and hospital-based systems, IHNs and alternate care and parcel services are used to transport all other medical and providers. The company contracts with these providers directly surgical supplies. The company customizes its product pallets and through Networks and GPOs. The medical/surgical supply and truckloads according to the needs of its customers, thus distribution industry has experienced growth in recent years enabling them to reduce labor on the receiving end. Further- due to the aging population and emerging medical technology more, delivery times are adjusted to customers’ needs, allowing resulting in new healthcare procedures and products. Over the them to streamline receiving activities. years, healthcare providers have continued to change and model O&M strives to make the supply chain more efficient their health systems to meet the needs of the markets they serve. through the utilization of advanced warehousing, delivery and 20 OWENS & MINOR 2001 ANNUAL REPORT Business Description (continued) purchasing techniques, enabling customers to order products • WISDOM2: The second generation of WISDOM, this using just-in-time and stockless services. A key component of Internet-based decision support tool provides customers this strategy is a significant investment in advanced information access to purchasing information for all medical/surgical technology, which includes automated warehousing technology manufacturers and suppliers recorded in their materials as well as electronic data interchange (EDI) and Internet-based management information systems. This timely information technology for communicating with both customers and helps customers identify opportunities for product suppliers. O&M provides technology so that customers can standardization, contract compliance, order optimization analyze their own purchasing data to help them maintain con- and efficiencies in their overall purchasing activity. tract compliance, create workflow efficiencies, raise employee productivity and cut costs. • PANDAC® Wound Closure Asset Management Program: This Value-Added Services information-based program provides customers with an evaluation of their current and historical wound closure The company offers its customers value-added services in the inventories and usage levels, helping them reduce their areas of supply chain management, logistics and information investment in high-cost wound management supplies and technology in order to help control healthcare costs, improve control their costs per operative case. inventory management and increase profitability. Some of these services include: • Focus On Consolidation, Utilization & Standardization (FOCUS): • CostTrack: This activity-based management program helps cus- tomers identify and track the cost drivers in their procurement and handling 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 based on the variety of services that they choose, as compared to a traditional cost-plus pricing model. In 2001, almost 28% of the company’s net sales were generated through the CostTrack program, up from 22% in 2000. This supplier partnership program drives product standardi- zation and consolidation, increasing the volume of purchases from the most efficient suppliers, which provides operational benefits and cost savings throughout the supply chain. FOCUS centers around both commodity and preference product standardization. O&M requires its FOCUS supplier partners to meet strict certification standards, such as exceeding minimum fill rates and offering a flexible returned goods policy. • WISDOM: This Internet-accessed decision support tool con- Customers nects customers, suppliers and GPOs to the company’s data warehouse. WISDOM offers customers online access to a wide variety of reports, which summarize their purchase history, contract compliance, product usage and other related data. This timely information helps customers consolidate The company currently provides its distribution services to approximately 4,000 healthcare providers, including hospitals, IHNs and alternative care providers, contracting with them directly and through Networks and GPOs. purchasing information across their healthcare systems and Networks and GPOs identify opportunities for product standardization, contract compliance and supplier consolidation. The company offers WISDOM on a subscription basis. WISDOM users represented net sales of approximately $1.5 billion for the year ended December 31, 2001. 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 OWENS & MINOR 2001 ANNUAL REPORT 21 distributors ranging from discounted product pricing to logisti- Sales and Marketing cal and clinical support. Networks and GPOs negotiate directly O&M’s sales and marketing function is organized to support its with medical and surgical product suppliers and distributors on decentralized field sales teams of approximately 220 people. behalf of their members, establishing exclusive or multi-supplier Based from the company’s distribution centers nationwide, the relationships. Networks and GPOs cannot ensure that members company’s local sales teams are positioned to respond to custo- will purchase their supplies from a given distributor. O&M is mer needs quickly and efficiently. National account directors a distributor for Novation, an organization that manages work closely with Networks and GPOs to meet their needs and purchasing for more than 5,000 healthcare organizations. coordinate activities with their individual member facilities. In Novation was created in 1998 to serve member organizations addition, O&M has a national field organization, the Medical of VHA, which O&M has served since 1985, and University Specialties Group, which is focused on assisting customers in HealthSystem Consortium (UHC), an alliance of academic the clinical environment. The company’s integrated sales and health centers. Sales to Novation members represented approxi- marketing strategy offers customers value-added services in mately 51% of the company’s net sales in 2001. The company is logistics, information management, asset management and also a distributor for Broadlane, a GPO providing national con- product mix management. O&M provides special training tracting for more than 300 acute care hospitals and more than and support tools to its sales team to help promote these 1,400 sub-acute care facilities, including Tenet Healthcare programs and services. Corporation, one of the largest for profit hospital chains in the nation. Sales to Broadlane members represented approximately Contracts and Pricing 11% of O&M’s net sales in 2001. Industry practice is for healthcare providers or their GPOs to IHNs negotiate product pricing directly with suppliers and then negotiate distribution pricing terms with distributors. Distribution IHNs are typically networks of different types of healthcare contracts in the medical/surgical supply industry establish the providers that seek to offer a broad spectrum of healthcare price at which products will be distributed and, in many cases, services and comprehensive geographic coverage to a particular specify a minimum volume of product to be purchased and are local market. IHNs have become increasingly important because terminable by the customer upon short notice. of their expanding role in healthcare delivery and cost contain- The majority of O&M’s arrangements compensate the com- ment and their reliance upon the hospital as a key component pany on a cost-plus percentage basis under which a negotiated of their organizations. Individual healthcare providers within a percentage distributor fee is added to the product cost agreed multiple-entity IHN may be able to contract individually for to by the customer and the supplier. This negotiated distributor distribution services; however, the providers’ shared economic fee is calculated either on a fixed cost-plus percentage basis or interests create strong incentives for participation in distribution a variable cost-plus percentage basis that varies according to the contracts established at the system level. Because IHNs frequently services rendered and the dollar volume of purchases. Under rely on cost containment as a competitive advantage, IHNs have this variable pricing method, as the company’s sales to an insti- become an important source of demand for O&M’s enhanced tution grow, the cost-plus percentage charged to the customer inventory management and other value-added services. generally decreases. Additionally, O&M has arrangements that Individual Providers charge incremental fees for additional distribution and enhan- ced inventory management services, such as more frequent In addition to contracting with healthcare providers at the IHN deliveries and distribution of products in small units of measure. level, and through Networks and GPOs, O&M contracts directly Although the company’s marketing and sales personnel based with individual healthcare providers. In 2001, not-for-profit hos- in the distribution centers can negotiate local arrangements and pitals represented a majority of these facilities. pricing levels with customers, corporate management has estab- lished minimum pricing levels and a contract review process. 22 OWENS & MINOR 2001 ANNUAL REPORT Business Description (continued) Pricing under O&M’s CostTrack model differs from pricing chain management and warehousing systems, sales and market- under a traditional cost-plus model. With CostTrack, the pricing ing programs and services and infrastructure enhancements. of services provided to customers is based on the variety of serv- In 2001, O&M’s capital expenditures included approximately ices that they choose, as compared to a traditional cost-plus $9.8 million for computer hardware and software. pricing model. As a result, this pricing model more accurately Owens & Minor is an industry leader in the use of aligns the distribution fees charged to the customer with the electronic commerce to conduct business transactions with costs of the individual services provided. customers and suppliers, using OM Direct, an Internet-based product catalog and direct ordering system, to supplement Suppliers existing EDI technologies. O&M believes that its size, strength and long-standing The company also provides distribution services for several relationships enable it to obtain attractive terms from suppliers, Internet-based medical and surgical supply companies. O&M is including discounts for prompt payment and volume incentives. committed to an ongoing investment in an open, Internet-based The company has well-established relationships with virtually electronic commerce platform to support the company’s supply all major suppliers of medical and surgical supplies, and uses chain management initiatives and to enable expansion into new cross-functional teams to work with its largest suppliers to market segments for medical and surgical products. create operating efficiencies in the supply chain. Approximately 16% of O&M’s net sales in 2001 were Asset Management sales of Johnson & Johnson Hospital Services, Inc. products. O&M aims to provide the highest quality of service in the Approximately 15% of O&M’s 2001 net sales were sales of medical/surgical supply distribution industry by focusing on products of the subsidiaries of Tyco International, which providing suppliers and customers with local sales and service include Kendall Healthcare Products, United States Surgical support and the most responsive, efficient and cost-effective Corporation and Mallinckrodt. distribution of medical and surgical products. The company Information Technology draws on technology to provide a broad range of value-added services to control inventory and accounts receivable. To support its strategic efforts, the company has developed information systems to manage all aspects of its operations, Inventory including warehouse and inventory management, asset Due to O&M’s significant investment in inventory to meet management and electronic commerce. O&M believes that its the rapid delivery requirements of customers, efficient asset investment in and use of technology in the management of its management is essential to the company’s profitability. operations provides the company with a significant competitive The significant and ongoing emphasis on cost control in the advantage. In 2001, the company ranked number one on the healthcare industry puts pressure on suppliers, distributors and InformationWeek 500 listing of the most innovative users of healthcare providers to create more efficient inventory manage- technology in the nation. ment systems. O&M has responded to these ongoing challenges In 1998, O&M signed a 10-year agreement with Perot by developing inventory forecasting capabilities, a client/server Systems Corporation to outsource its information technology warehouse management system, a product standardization and (“IT”) operations and to procure strategic application develop- consolidation initiative, and a vendor-managed inventory pro- ment services. This partnership has allowed the company to cess. This vendor-managed inventory process allows some of provide resources to major IT initiatives, which support internal the company’s major suppliers to monitor daily sales, inventory operations and enhance services to customers and suppliers. levels and product forecasts electronically so they can automati- The company has focused its technology expenditures on elec- cally and accurately replenish O&M’s inventory. tronic commerce, data warehouse and decision support, supply OWENS & MINOR 2001 ANNUAL REPORT 23 Accounts Receivable regulations applicable to distributors of medical and The company’s credit practices are consistent with those surgical supply products and pharmaceutical and related of other medical and surgical supply distributors. O&M actively products, as well as other general employee health and manages its accounts receivable to minimize credit risk and safety laws and regulations. does not believe that the risk of loss associated with accounts receivable poses a significant risk to its results of operations. Employees Competition At the end of 2001, the company had 2,937 full-time and part- time employees. O&M believes that ongoing employee training The medical/surgical supply distribution industry in the is critical to performance, so the company emphasizes quality United States is highly competitive and consists of three major and technology in training programs to increase employee nationwide distributors: O&M; Allegiance Corp., a subsidiary efficiency by sharpening overall customer service skills and by of Cardinal Health, Inc.; and McKesson General Medical Corp., focusing on functional best practices. Management believes a subsidiary of McKesson HBOC, Inc. The industry also includes that relations with employees are good. smaller national distributors of medical and surgical supplies and a number of regional and local distributors. Properties Competitive factors within the medical/surgical supply O&M’s corporate headquarters are located in western Henrico distribution industry include total delivered product cost, County, in a suburb of Richmond, Virginia, in facilities leased product availability, the ability to fill and invoice orders accu- from unaffiliated third parties. The company owns two undevel- rately, delivery time, services provided, inventory management, oped parcels of land adjacent to its corporate headquarters. In information technology, electronic commerce capabilities and March 2001, the company purchased an undeveloped parcel of the ability to meet special customer requirements. O&M believes land in nearby Hanover County to be used for its future corpo- its emphasis on technology, combined with its customer-focused rate headquarters. The company leases offices and warehouses approach to distribution and value-added services, enables it for 42 of its distribution centers across the United States from to compete effectively with both larger and smaller distributors unaffiliated third parties. In addition, the company has a distri- by being located near the customer and offering a high level bution center located at a customer facility in Columbia, South of customer service. Other Matters Regulation Carolina, and has a warehousing arrangement in Honolulu, Hawaii. In the normal course of business, the company regularly assesses its business needs and makes changes to the capacity and location of its distribution centers. The company believes The medical/surgical supply distribution industry is subject that its facilities are adequate to carry on its business as currently to regulation by federal, state and local government agencies. conducted. A number of leases are scheduled to terminate within Each of O&M’s distribution centers is licensed to distribute the next several years. The company believes that, if necessary, medical and surgical supplies as well as certain pharmaceutical it could find facilities to replace these leased premises without and related products. The company must comply with regula- suffering a material adverse effect on its business. tions, including operating and security standards for each of its distribution centers, of the Food and Drug Administration, 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 24 OWENS & MINOR 2001 ANNUAL REPORT Management’s Discussion & Analysis 2001 Financial Results (in thousands, except per share data) In 2001, O&M earned net income of $23.0 million, or $0.68 per diluted common share, compared with $33.1 million, or $0.94 per diluted common share in 2000, and $28.0 million, or $0.82 per diluted common share in 1999. Results from 2001 included a $1.1 million impairment loss on an investment, a $7.2 million additional tax provision related principally to disallowed interest deductions for corporate-owned life insurance for the years 1995 through 1998, and a $7.1 million after-tax extraordinary loss on the early retirement of debt. Net income in 2001, 2000 and 1999 included reductions in a restructuring reserve, originally established in 1998, of $0.8 million, $0.4 million, and $0.6 million, net of tax. Excluding these unusual items, net income for 2001 increased to $37.5 million, or $1.03 per diluted common share, from $32.7 million, or $0.93 per diluted common share, for 2000 and $27.4 million, or $0.80 per diluted common share for 1999. The increase from 2000 to 2001 was primarily due to the increase in sales, a reduction Year ended December 31, 2001 As reported Unusual items Excluding unusual items Income before income taxes and extraordinary item $ 64,577 $ 405 $ 64,172 Income tax provision Income before 34,474 7,817 26,657 extraordinary item 30,103 (7,412) 37,515 Extraordinary loss on early retirement of debt (7,068) (7,068) – Net income $ 23,035 $(14,480) $ 37,515 Per common share – diluted: Income before extraordinary item $ 0.85 $ (0.18) $ 1.03 Extraordinary loss on early retirement of debt (0.17) (0.17) – of financing costs, and a lower effective tax rate for ongoing Net income $ 0.68 $ (0.35) $ 1.03 operations. The increase from 1999 to 2000 resulted from higher sales and success in controlling operating expenses through productivity improvements. The following tables reconcile net income as reported under generally accepted accounting principles to income excluding unusual items for the years ended December 31, 2001, 2000 and 1999: Year ended December 31, 2000 As reported Unusual items Excluding unusual items $ 60,160 $ 750 $59,410 27,072 $ 33,088 $ 338 412 26,734 $32,676 $ 0.94 $ 0.01 $ 0.93 Year ended December 31, 1999 As reported Unusual items Excluding unusual items $ 50,058 $ 1,000 $ 49,058 22,079 $ 27,979 $ 441 559 21,638 $ 27,420 $ 0.82 $ 0.02 $ 0.80 Income before income taxes Income tax provision Net income Net income per diluted common share Income before income taxes Income tax provision Net income Net income per diluted common share OWENS & MINOR 2001 ANNUAL REPORT 25 Results of Operations costs related to this plan. In 2001, 2000, and 1999 amounts The following table presents the company’s consolidated of $0.3 million, $1.0 million, and $0.1 million were charged statements of income on a percentage of net sales basis: against the accrual, principally for lease payments on closed Year ended December 31, 2001 2000 1999 Medix business was completed in 2001, and the integration Net sales Cost of goods sold Gross margin 100.0% 100.0% 100.0% accrual was re-evaluated, resulting in a reduction in the accrual 89.3 10.7 89.3 10.7 89.3 10.7 of $0.6 million. This adjustment was recorded as a reduction in goodwill. The remaining accrual consists primarily of losses facilities and employee separations. The integration of the Selling, general and administrative expenses Depreciation and amortization Interest expense, net Discount on accounts receivable securitization Impairment loss on investment Distributions on mandatorily redeemable preferred securities Restructuring credit Total expenses Income before income taxes and extraordinary item Income tax provision Income before extraordinary item Extraordinary loss on early retirement of debt Net income 7.8 0.6 0.3 0.1 0.0 0.2 (0.0) 9.0 1.7 0.9 0.8 (0.2) 0.6% 7.7 0.6 0.3 0.2 – 0.2 7.8 0.6 0.4 0.1 – 0.2 on lease commitments for vacated warehouse space on leases through 2003. Management subleases the vacant space when practicable to reduce these losses. Net sales. Net sales increased by 9% to $3.81 billion for 2001, from $3.50 billion for 2000. This increase resulted from further penetration of existing accounts, as well as new business, includ- ing the addition of several large customers. In April 2001, the (0.0) (0.0) company signed a new distribution agreement with Novation, 9.0 1.7 0.8 0.9 – 9.1 1.6 0.7 0.9 – the supply company of VHA, Inc. and University HealthSystem Consortium, continuing its long-standing relationship with these organizations. Under the new three-year agreement, the company is one of two national medical and surgical supply distributors authorized to serve members in all areas of the country. Sales to Novation members represented approximately 0.9% 0.9% 51% of the company’s net sales in 2001. 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 identi- 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 increased penetration of existing accounts, most significantly Broadlane, whose distribu- tion contract began in February 1999. The company anticipates sales growth for 2002 to be fiable net assets acquired of approximately $58 million was in the 6 to 8 percent range. recorded as goodwill and has been amortized on a straight-line basis over 40 years. As the acquisition was accounted for as a pur- chase, the operating results of Medix have been included in the company’s consolidated financial statements since July 30, 1999. In connection with the acquisition, management adopted a plan for integration of the businesses that included 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 Net Sales (billions) ’01 ’00 ’99 ’98 ’97 $3.81 $3.50 $3.19 $3.09 $3.12 26 OWENS & MINOR 2001 ANNUAL REPORT Management’s Discussion & Analysis (continued) Gross margin. Gross margin as a percentage of net sales for The decreases from 1999 to 2000 as a percentage of net sales 2001 remained unchanged from 2000 and 1999 at 10.7%. were attributable to economies of scale achieved as a result of From 1999 to 2000 and from 2000 to 2001, customer margins a higher sales base without a significant increase in fixed costs, decreased slightly due to competitive pressures and changes operating efficiencies driven by improved warehouse technology, in the company’s customer mix. These decreases, however, and continued management of administrative costs, including were offset by increased margins from supplier incentives consolidation of certain administrative functions. and inventory buying opportunities. Management anticipates that in 2002, SG&A expenses as For 2002, management anticipates continued competitive a percentage of net sales will improve by a minimum of 10 basis pressure, as well as potential lessening of supplier incentives. points as compared to 2001, as the volume of customer transi- The company will continue to pursue opportunities for margin tions is expected to be lower and the company is focusing on improvement, including an emphasis on providing value-added further standardization of processes. Increased demand for low services to customers and converting more business to CostTrack, unit-of-measure delivery and other increases in levels of service which better aligns the fees charged to customers with the services as a result of customer needs could affect the company’s ability provided. The company will also continue to actively pursue to decrease SG&A expenses as a percentage of net sales, but buying opportunities in order to reduce the cost of goods sold. increased fees for these services should enable the company As a result, management anticipates that, in 2002, gross margin to preserve or enhance operating margins. as a percentage of net sales will remain consistent with 2001. Depreciation and amortization. Depreciation and amortization Gross Margin % vs. SG&A % of Net Sales increased by 4% in 2001 to $22.5 million, compared with $21.5 Gross Margin % million in 2000 and $19.4 million in 1999. Excluding goodwill 10.7% amortization of $6.0 million in 2001 and 2000 and $5.1 million 2.6% 2.8% 2.9% 3.0% 2.9% in 1999, depreciation and amortization increased by 6% from 7.8% 2000 to 2001 and by 9% from 1999 to 2000 as a result of con- SG&A % ’97 ’98 ’99 ’00 ’01 tinued capital spending associated with information technology initiatives. O&M anticipates similar increases in depreciation in 2002 as the company continues to invest in information Selling, general and administrative expenses. Selling, general and technology. In 2002, the company will adopt Statement of administrative (SG&A) expenses as a percentage of net sales Financial Accounting Standards No. (SFAS) 142, Goodwill were 7.8% in 2001 compared with 7.7% in 2000 and 7.8% in and Other Intangible Assets, and as a result, the company will 1999. The increase from 2000 to 2001 was primarily the result no longer amortize goodwill. of higher personnel, warehouse and employee benefits costs driven by customer and business transitions, including: Net interest expense and discount on accounts receivable securitization (financing costs). Net financing costs totaled $17.7 million in • higher than normal activity levels related to customer 2001, compared with $19.4 million in 2000 and $17.1 million sign-ups as a result of the Novation contract renewal, in 1999. Net financing costs included collections of customer • the addition of several large new customer accounts, and finance charges of $4.5 million in 2001, compared with $5.3 • changes in the levels of service provided to certain million in 2000 and $4.6 million in 1999. Excluding the collec- customers, such as low unit-of-measure delivery. tion of customer finance charges, financing costs decreased to $22.2 million in 2001 from $24.8 million in 2000, and increased OWENS & MINOR 2001 ANNUAL REPORT 27 Financing (millions) $450 $300 $150 $0 $30 $20 $10 $0 income for 2001, 2000 and 1999 by $0.8 million, $0.4 million and $0.6 million. In 2001, 2000 and 1999, amounts of $0.3 million, $1.8 million and $2.1 million were charged against this liability. The remaining accrual consists primarily of losses on lease commitments for vacated office space on leases through 2006, as well as anticipated asset write-offs. Management subleases the vacant space when practicable to reduce the cost of the ’97 ’98 ’99 ’00 ’01 restructuring plan. Outstanding Financing Financing Costs Income taxes. The provision for income taxes was $34.5 million in 2001, including a $7.2 million provision for estimated tax from $21.7 million in 1999. The decrease in financing costs liabilities related principally to interest deductions for corporate- from 2000 to 2001 was primarily driven by lower effective inter- owned life insurance claimed on the company’s tax returns for est rates resulting from both the refinancing of the company’s the years 1995 through 1998. Excluding this charge, the impair- long-term debt and from decreases in short-term interest rates. ment loss on investment, and the reduction of the restructuring The increase in financing costs from 1999 to 2000 was due to reserve, O&M’s effective tax rate was 41.5% in 2001, compared a combination of higher interest rates due to external market with 45.0% in 2000 and 44.1% in 1999. The reduction in rate forces and an increase in outstanding financing resulting from 2000 to 2001 resulted primarily from lower effective state from the Medix acquisition. O&M expects to continue to income tax rates and decreases in the effect of certain nonde- manage its financing costs by managing working capital levels. ductible items. The increase in the effective tax rate from 1999 Future financing costs will be affected primarily by changes in to 2000 resulted primarily from increases in certain nondeductible short-term interest rates, as well as working capital requirements. expenses. The effective tax rate is expected to decrease in 2002 as a result of the elimination of goodwill amortization expense, Impairment loss on investment. The company owns equity securities of which only a small part was deductible for income tax purposes. of a provider of business-to-business e-commerce services in the healthcare industry. The market value of these securities fell Financial Condition, Liquidity and Capital Resources significantly below the company’s original cost basis and, as man- Liquidity. Combined outstanding debt and off balance sheet agement believed that recovery in the near term was unlikely, the accounts receivable securitization increased by $39.9 million company recorded an impairment charge of $1.1 million in the from December 31, 2000 to $273.4 million at December 31, third quarter of 2001. 2001. This increase in financing levels was primarily a result of an increased investment in inventory to support growing Restructuring credits. As a result of the cancellation of a sales volume and to ensure high service levels during customer significant customer contract in 1998, the company recorded transitions. Excluding sales of accounts receivable, and their a nonrecurring restructuring charge of $6.6 million, after taxes, subsequent collections, under the company’s off balance to downsize operations. The company periodically re-evaluates sheet receivables financing facility (Receivables Financing its restructuring reserve, and since the actions under this plan Facility), $11.6 million of cash was provided by operating have resulted in lower projected total costs than originally activities in 2001, compared with $68.8 million in 2000 and anticipated, the company has recorded reductions in the reserve $61.7 million in 1999. This decrease in operating cash flow in 2001, 2000 and 1999 of $1.5 million, $0.8 million and $1.0 resulted largely from increased purchases of inventory. million. These reductions in the reserve have increased net 28 OWENS & MINOR 2001 ANNUAL REPORT Management’s Discussion & Analysis (continued) In July 1999, the company acquired certain net assets of The following is a summary of the company’s significant Medix for approximately $83 million. This acquisition was contractual obligations: funded by cash flow from operations and an increase in out- standing financing under the Receivables Financing Facility. (in millions) During 2000, the company replaced its revolving credit facility and Receivables Financing Facility with new facilities expiring in April 2003 and July 2001. The new revolving credit facility allows the company to borrow up to $225 million, unchanged from the prior facility. Under the new Receivables Financing Facility, the company can sell up to $225 million of accounts receivable, an increase of $75 million from the prior facility. In July 2001, the company extended the expiration of its Receivables Financing Facility to July 11, 2002. The company expects to renew or replace both its Receivables Financing Facility and its revolving credit facility in 2002. Payments due by period Contractual obligations Less than 1 year 1-3 years 4-5 After 5 years years Total Long-term debt $200.0 $ – $ – $ – $200.0 Mandatorily redeemable preferred securities Leases and other commitments Total contractual obligations 132.0 – – – 132.0 76.9 23.2 35.2 15.2 3.3 $408.9 $23.2 $35.2 $15.2 $335.3 On July 2, 2001, the company issued $200 million of 81⁄2% In addition, the company has two commitments to Senior Subordinated Notes which will mature in July 2011. The outsource information technology operations that are cancel- proceeds from these notes were used to retire the company’s able upon payment of termination fees. These commitments $150 million of 107⁄8% Senior Subordinated Notes and to reduce are more fully described in Note 18 to the Consolidated the amount of outstanding financing under the Receivables Financial Statements. Financing Facility. The retirement of the 107⁄8% Notes resulted in an extraordinary loss on the early retirement of debt of $7.1 Working Capital Management. The company’s working capital million, net of income tax benefit. In conjunction with the new increased by $78.1 million from December 31, 2000, to $311.8 notes, the company entered into interest rate swap agreements million at December 31, 2001, as a result of increased levels through 2011 under which the company pays counterparties a of inventory. Inventory turnover improved to 9.7 times for the variable rate based on London Interbank Offered Rate (LIBOR) year ended December 31, 2001, from 9.5 times for the year and the counterparties pay the company a fixed interest rate of ended December 31, 2000, as a result of increased sales. 81⁄2% on a notional amount of $100 million. Accounts receivable, assuming they had not been sold under The company expects that its available financing will be the company’s Receivables Financing Facility, decreased by sufficient to fund its working capital needs and long-term $7.7 million to $334.2 million at December 31, 2001. strategic growth, although this cannot be assured. At December 31, 2001, O&M had $213.6 million of unused Capital Expenditures. Capital expenditures were approximately credit under its revolving credit facility and the ability to sell $16.8 million in 2001, including $3.3 million for the purchase an additional $155.0 million of accounts receivable under the of land to be used for the company’s future headquarters. The Receivables Financing Facility. company spent $9.8 million to purchase computer hardware and software. The company expects to continue supporting strategic initiatives and improving operational efficiency through investments in technology, including system upgrades. OWENS & MINOR 2001 ANNUAL REPORT 29 Recent Accounting Pronouncements identifiable intangible assets from purchase business combina- In June 2001, the Financial Accounting Standards Board (FASB) tions that were recorded either separately or within goodwill. issued the following new accounting pronouncements: SFAS The provisions of SFAS 143 address financial accounting 141, Business Combinations, SFAS 142, Goodwill and Other Intangible and reporting for obligations associated with the retirement Assets, and SFAS 143, Accounting for Asset Retirement Obligations. of tangible long-lived assets and the associated asset retirement The provisions of SFAS 141 require that all business combi- costs. The company will be required to adopt the provisions nations initiated after June 30, 2001 be accounted for using the of this standard beginning on January 1, 2003. Management purchase method and also specify criteria that intangible assets believes that adoption of this standard will not have a acquired in a business combination must meet to be recognized material effect on the company’s financial condition or and reported apart from goodwill. The adoption of this standard results of operations. will affect the company’s accounting for future acquisitions. In August 2001, the FASB issued SFAS 144, Accounting for The provisions of SFAS 142 state that goodwill should not the Impairment or Disposal of Long-Lived Assets. The provisions of be amortized but should be tested for impairment upon adop- SFAS 144 will modify the accounting treatment for impairments tion of the standard, and at least annually, at the reporting unit of long-lived assets and discontinued operations. The company level. The company is required to adopt the provisions of this will be required to adopt the provisions of this standard begin- standard beginning on January 1, 2002. As a result, the company ning on January 1, 2002. Management believes that adoption will no longer record goodwill amortization expense. Amorti- of this standard will not have a material effect on the company’s zation expense related to goodwill for 2001, 2000 and 1999 was financial condition or results of operations. $6.0 million, $6.0 million and $5.1 million. Had SFAS 142 been in effect in 2001, 2000 and 1999, net income would have been Customer Risk increased by $5.3 million, $5.3 million and $4.8 million, or The company is subject to risks associated with changes in the $0.13, $0.13 and $0.12 per diluted common share. Management medical industry, including continued efforts to control costs, expects that implementation of SFAS 142 will increase net which place pressure on operating margin, and changes in the income by approximately $5.3 million, or $0.13 per diluted way medical and surgical services are delivered to patients. The common share, in 2002. loss of one of the company’s larger customers could have a The provisions of SFAS 142 require the company to perform significant effect on its business. However, management believes an assessment of whether there is an indication that goodwill is that the company’s competitive position in the marketplace and impaired as of the date of adoption. Any such transitional impair- its ability to control costs would enable it to continue profitable ment loss would be recognized as the cumulative effect of a operations and attract new customers in the event of such a loss. change in accounting principle in the company’s consolidated statement of income. Management does not expect to incur a Market Risk transitional impairment loss upon adoption of this standard. O&M provides credit, in the normal course of business, to its The provisions of SFAS 142 also require the company to customers. The company performs ongoing credit evaluations evaluate its existing intangible assets and goodwill that were of its customers and maintains reserves for credit losses. acquired in purchase business combinations, and to make any The company is exposed to market risk relating to changes necessary reclassifications in order to conform with the new in interest rates. To manage this risk, O&M uses interest rate classification criteria in SFAS 141 for recognition separate from swaps to modify the company’s exposure to interest rate move- goodwill. At December 31, 2001, the company had no separately ments and reduce borrowing costs. The company is exposed to 30 OWENS & MINOR 2001 ANNUAL REPORT Management’s Discussion & Analysis (continued) certain losses in the event of nonperformance by the counter- reasonable assumptions within the bounds of its knowledge parties to these swap agreements. However, O&M’s exposure of its business and operations, all forward-looking statements is not significant and, since the counterparties are investment involve risks and uncertainties and, as a result, actual results grade financial institutions, nonperformance is not anticipated. could differ materially from those projected, anticipated or The company is exposed to market risk from both changes implied by these statements. Such forward-looking statements in interest rates related to its interest rate swaps and changes in involve known and unknown risks, including, but not limited to, discount rates related to its Receivables Financing Facility. general economic and business conditions; dependence on sales Interest expense and discount on accounts receivable securitiza- to certain customers; dependence on suppliers; competition; tion are subject to change as a result of movements in interest changing trends in customer profiles; the ability of the company rates. As of December 31, 2001, O&M had $100 million of to meet customer demand for additional value added services; interest rate swaps on which the company pays a variable rate the ability to convert customers to CostTrack; the availability based on LIBOR and receives a fixed rate, as well as $70 million of supplier incentives; the ability to capitalize on buying oppor- of receivables sold under the Receivables Financing Facility. tunities; the ability to manage operating expenses; the ability Assuming similar levels of financing under the Receivables of the company to manage financing costs and interest rate risk; Financing Facility, a hypothetical increase in interest rates of the risk that a decline in business volume or profitability could 100 basis points would result in a potential reduction in future result in an impairment of goodwill; the ability to timely or ade- pre-tax earnings of approximately $1.7 million per year in con- quately respond to technological advances in the medical supply nection with the swaps and the accounts receivable securitization. industry; the ability to successfully identify, manage or integrate Forward-Looking Statements possible future acquisitions; the outcome of outstanding liti- gation; and changes in government regulations. The company Certain statements in this discussion constitute “forward-looking undertakes no obligation to update or revise any forward-looking statements” within the meaning of the Private Securities Litigation statements, whether as a result of new information, future Reform Act of 1995. Although O&M believes its expectations results, or otherwise. with respect to the forward-looking statements are based upon Consolidated Statements of Income (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 Impairment loss on investment Distributions on mandatorily redeemable preferred securities Restructuring credit Total expenses Income before income taxes and extraordinary item Income tax provision Income before extraordinary item Extraordinary loss on early retirement of debt, net of tax benefit Net income Per common share – basic: Income before extraordinary item Extraordinary loss, net of tax benefit Net income Per common share – diluted: Income before extraordinary item Extraordinary loss, net of tax benefit Net income Cash dividends per common share See accompanying notes to consolidated financial statements. O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 3 1 2001 2000 1999 $3,814,994 $3,503,583 $3,194,134 3,406,758 3,127,911 2,851,556 408,236 375,672 342,578 296,807 22,469 13,363 4,330 1,071 7,095 (1,476) 268,205 249,960 21,515 12,566 6,881 – 7,095 (750) 19,365 11,860 5,240 – 7,095 (1,000) 343,659 315,512 292,520 64,577 34,474 30,103 (7,068) 60,160 27,072 33,088 – 50,058 22,079 27,979 – $ 23,035 $ 33,088 $ 27,979 $ $ $ $ $ 0.90 (0.21) 0.69 0.85 (0.17) 0.68 0.2725 $ $ $ $ $ 1.01 1.01 0.94 – – 0.94 0.2475 $ $ $ $ $ – – 0.86 0.86 0.82 0.82 0.23 3 2 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Consolidated Balance Sheets (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 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 2001 2000 $ 953 $ 626 264,235 389,504 24,760 679,452 25,257 198,324 50,820 261,905 315,570 16,190 594,291 24,239 204,849 44,169 $953,853 $867,548 $286,656 $291,507 12,669 27,154 41,195 9,940 16,502 42,705 367,674 360,654 203,449 14,123 364 152,872 8,879 371 585,610 522,776 Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. 132,000 132,000 Shareholders’ equity 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 – 33,885 shares and 33,180 shares Paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Commitments and contingencies Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. – – 67,770 27,181 142,854 (1,562) 66,360 18,039 129,001 (628) 236,243 212,772 $953,853 $867,548 Consolidated Statements of Cash Flows (in thousands) Year ended December 31, Operating activities Income before extraordinary item Adjustments to reconcile income before extraordinary item to cash provided by operating activities: Depreciation and amortization Restructuring credit Impairment loss on investment 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 Cash provided by operating activities 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 long-term debt Payments to retire long-term debt Additions (reductions) to other debt, net Cash dividends paid Proceeds from exercise of stock options Other, net Cash provided by (used for) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes to consolidated financial statements. O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 3 3 2001 2000 1999 $ 30,103 $ 33,088 $ 27,979 22,469 (1,476) 1,071 11,268 4,264 782 21,515 (750) – (1,293) 2,973 227 19,365 (1,000) – 8,236 1,741 559 (10,000) (25,612) 30,612 6,888 (78,198) 10,049 48 4,373 1,641 – (10,147) (6,686) (858) (9,593) 23,935 (14,783) 8,926 4,522 (30,131) (42,397) 86,871 (11,232) 1,686 43,155 92,289 – (8,005) (11,622) (152) (82,699) (8,933) (13,172) (2,359) (17,691) (19,779) (107,163) 194,331 (158,594) (3,533) (9,182) 8,255 (14,900) – – (21,645) (8,156) 4,837 1,545 – – 25,178 (7,520) 80 (2,741) 16,377 (23,419) 14,997 327 626 953 $ (43) 669 $ 626 $ 123 546 669 3 4 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except per share data) Common Shares Outstanding Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance December 31, 1998 32,618 $ 65,236 $ 12,280 $ 83,610 $ – $ 161,126 Net income Comprehensive income Issuance of restricted stock, net of forfeitures Unearned compensation Cash dividends Exercise of stock options Other 27,979 (7,520) 74 6 13 148 12 26 893 (454) 71 100 Balance December 31, 1999 32,711 65,422 12,890 104,069 – Net income Other comprehensive income, net of tax: Unrealized loss on investment Comprehensive income Issuance of restricted stock, net of forfeitures Unearned compensation Cash dividends Exercise of stock options Other 33,088 (628) 102 204 355 12 710 24 622 (139) 4,541 125 (8,156) Balance December 31, 2000 33,180 66,360 18,039 129,001 (628) Net income Other comprehensive income, net of tax: Unrealized gain on investment Reclassification of unrealized loss to net income Minimum pension liability adjustment Comprehensive income Issuance of restricted stock, net of forfeitures Unearned compensation Cash dividends Exercise of stock options Other 23,035 272 642 (1,848) 55 110 696 (46) 1,392 (92) 813 (173) 9,237 (735) (9,182) 27,979 27,979 1,041 (454) (7,520) 83 126 182,381 33,088 (628) 32,460 826 (139) (8,156) 5,251 149 212,772 23,035 272 642 (1,848) 22,101 923 (173) (9,182) 10,629 (827) Balance December 31, 2001 33,885 $67,770 $27,181 $142,854 $(1,562) $236,243 See accompanying notes to consolidated financial statements. O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 3 5 Notes to Consolidated Financial Statements Note 1—Summary of Significant Accounting Policies warehouse equipment and three to eight years for computer, Basis of Presentation. Owens & Minor, Inc. is the leading office and other equipment. Straight-line and accelerated distributor of national name brand medical and surgical sup- methods of depreciation are used for income tax purposes. plies 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. Use of Estimates. The preparation of the consolidated financial statements in accordance with generally accepted accounting principles requires management to make assumptions and estimates that affect amounts reported. Estimates are used for, but not limited to, the accounting for the allowance for doubt- ful accounts, inventory valuation allowances, collectibility of rebates receivable, depreciation and amortization, tax liabilities, and other contingencies. Actual results may differ from these estimates. Goodwill. Goodwill is amortized on a straight-line basis over 40 years from the dates of acquisition. As of December 31, 2001 and 2000, goodwill was $238.3 and $238.8 million and the related accumulated amortization was $40.0 million and $34.0 million. Based upon management’s assessment of undis- counted future cash flows, the carrying value of goodwill at December 31, 2001 has not been impaired in accordance with the provisions of Statement of Financial Accounting Standards No. (SFAS) 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. Amortization expense related to goodwill for 2001, 2000 and 1999 was $6.0 million, $6.0 million and $5.1 million. Effec- tive January 1, 2002, the company will be required to adopt the provisions of SFAS 142, Goodwill and Other Intangible Assets. Cash and Cash Equivalents. Cash and cash equivalents include The provisions of SFAS 142 state that goodwill should not cash and marketable securities with an original maturity or be amortized but should be tested for impairment upon adop- maturity at acquisition of three months or less. Cash and tion of the standard, and at least annually, at the reporting unit cash equivalents are stated at cost, which approximates level. As a result, the company will no longer record goodwill market value. amortization expense. The company will be required to per- form an assessment of whether there is an indication that Accounts Receivable. The company maintains an allowance for goodwill is impaired as of the date of adoption. Any such transi- doubtful accounts based upon the expected collectibility of tional impairment loss would be recognized as the cumulative accounts receivable. Allowances for doubtful accounts of $5.3 effect of a change in accounting principle in the company’s million and $6.4 million have been applied as reductions of consolidated statement of income. accounts receivable at December 31, 2001 and 2000. The provisions of SFAS 142 also require the company to 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 evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. At December 31, 2001, the company had no separately identifiable intangible assets from purchase business combinations that are recorded either separately or within goodwill. are capitalized. Depreciation and amortization are provided Computer Software. The company develops and purchases soft- for financial reporting purposes using the straight-line method ware for internal use. Software development costs incurred over the estimated useful lives of the assets or, for capital leases during the application development stage are capitalized. and leasehold improvements, over the terms of the lease, if Once the software has been installed and tested and is ready shorter. In general, the estimated useful lives for computing for use, additional costs incurred in connection with the soft- depreciation and amortization are four to eight years for ware are expensed as incurred. Capitalized computer software 3 6 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T costs are amortized over the estimated useful life of the soft- assets or liabilities measured at fair value. The accounting ware, usually between 3 and 5 years. Computer software costs treatment for changes in the fair value of a derivative depends are included in other assets, net in the consolidated balance upon the intended use of the derivative and the resulting sheets. Unamortized software at December 31, 2001 and 2000 designation. The adoption of this Standard did not have a was $22.8 million and $23.7 million. Depreciation and amor- material impact on the company’s results of operations or tization expense includes $7.6 million, $6.1 million and financial position. $4.9 million of software amortization for the years ended The company enters into interest rate swaps as part of its December 31, 2001, 2000 and 1999. interest rate risk management strategy. The purpose of these swaps is to maintain the company’s desired mix of fixed to Investment. The company owns equity securities that are classi- floating rate financing in order to manage interest rate risk. fied as available-for-sale, in accordance with SFAS 115, These swaps are recognized on the balance sheet at their fair Accounting for Certain Investments in Debt and Equity Securities, and value, based on estimates of the prices obtained from a dealer. are included in other assets, net in the consolidated balance All of the company’s interest rate swaps since the sheets at fair value, with unrealized gains and losses, net of tax, implementation of SFAS 133 have been designated as hedges of reported as accumulated other comprehensive income or loss. the fair value of a portion of the company’s long-term debt and, Other than temporary declines in market value from original accordingly, the changes in the fair value of the swaps and the cost are reclassified to net income. changes in the fair value of the hedged item attributable to the hedged risk are recognized as a charge or credit to interest Revenue Recognition. The company recognizes product rev- expense. The company assesses, both at the hedge’s inception enue when product has been shipped, fees are determinable, and on an ongoing basis, whether the swaps are highly effective and collectibility is probable. Service revenue is recognized in offsetting changes in the fair values of the hedged items. If it ratably over the period during which services are provided. In is determined that an interest rate swap has ceased to be a December 1999, the Securities and Exchange Commission highly effective hedge, the company discontinues hedge issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition accounting prospectively. in Financial Statements, which clarifies the application of gen- Prior to the adoption of the provisions of SFAS 133, the erally accepted accounting principles to revenue recognition company entered into interest rate swaps as part of its interest in financial statements. The company adopted the provisions rate risk management strategy. The instruments were des- of SAB 101 in the fourth quarter 2000. ignated as hedges of interest-bearing liabilities and anticipated cash flows associated with off balance sheet financing. Net Stock-based Compensation. The company uses the intrinsic value payments or receipts were accrued as interest payable or receiv- method as defined by Accounting Principles Board Opinion able and as interest expense or income. Fees related to these No. 25 to account for stock-based compensation. This method instruments were amortized over the life of the instrument. If 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 the outstanding balance of the underlying liability were to drop below the notional amount of the swap, the excess portion of the swap was marked to market, and the resulting gain or loss must pay to acquire the stock. The disclosures required by included in net income. SFAS 123 are included in Note 12 to the Consolidated Finan- cial Statements. Operating Segments. As defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information, the company Derivative Financial Instruments. On January 1, 2001, the has eight operating segments, representing various geographic company adopted the provisions of SFAS 133, Accounting for areas within the United States. As each of these segments is Derivative Instruments and Hedging Activities, as amended. SFAS substantially identical to the others in each of the five 133 requires that an entity recognize all derivatives as either aggregation characteristics identified in the statement, they O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 3 7 are considered one operating segment for purposes of finan- The company paid cash of approximately $68 million and cial statement disclosure. assumed debt of approximately $15 million, which was paid off 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 hospi- tals, long-term care facilities and clinics. The acquisition has been accounted for by the purchase method and, accordingly, the operating results of Medix have been included in the company’s consolidated financial statements since the date of acquisition. Assuming the acquisition had been made at the beginning of 1999, consolidated net sales on a pro forma basis would have been approximately $3.31 billion for the year ended December 31, 1999. Consolidated net income and net 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 was 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 included closure of some Medix facilities and consolidation of certain admin- istrative functions. An accrual was established to provide for certain costs of this plan. The integration accrual was re- evaluated in the fourth quarter of 2001, resulting in a reduction in the accrual of $0.6 million. The accrual adjustment was recorded as a reduction in goodwill, as it reduced the purchase price of the Medix acquisition. The following table sets forth the major components of the accrual and activity through income per share on a pro forma basis would not have been December 31, 2001: materially different from the results reported. (in thousands) Losses under lease commitments Employee separations Other Total Exit Plan Provision $1,643 395 685 $2,723 Charges Adjustments $ 610 350 410 $1,370 $(296) (45) (210) $(551) Balance at December 31, 2001 $737 – 65 $802 The employee separations relate to severance costs for significant medical/surgical distribution contract. The employees in operations and activities that were exited. restructuring plan included reductions in warehouse space Approximately 40 employees were terminated. While the and in the number of employees in those facilities that had the integration of the Medix business has been completed, the highest volume of business under that contract. The company company continues to make payments under lease commit- periodically re-evaluates its estimate of the remaining costs to ments and other obligations. be incurred and, as a result, has reduced the accrual by $1.5 Note 3—Restructuring million in 2001, $0.8 million in 2000 and $1.0 million in 1999. Approximately 130 employees were terminated in connection In 1998, the company recorded a nonrecurring restructuring with the restructuring plan. charge of $11.2 million as a result of the cancellation of a 3 8 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T The following table sets forth the activity in the restructuring accrual through December 31, 2001: (in thousands) Restructuring Provision Charges Adjustments Losses under lease commitments Asset write-offs Employee separations Other Total $ 4,194 3,968 2,497 541 $11,200 $3,351 1,466 1,288 99 $6,204 $ 78 (1,653) (1,209) (442) $(3,226) Balance at December 31, 2001 $ 921 849 – – $1,770 Note 4—Merchandise Inventories Note 6—Investment The company’s merchandise inventories are valued on a LIFO The company owns equity securities of a provider of business- basis. If LIFO inventories had been valued on a current cost or to-business e-commerce services in the healthcare industry. first-in, first-out (FIFO) basis, they would have been greater by Net income for the year ended December 31, 2001 included $35.8 million and $31.6 million as of December 31, 2001 an impairment charge of $1.1 million, as the market value of and 2000. Note 5—Property And Equipment The company’s investment in property and equipment consists these securities fell significantly below the company’s original cost basis and management believed that recovery in the near term was unlikely. The following table summarizes the fair value (based on the quoted market price), gross unrealized gains and losses, and adjusted cost basis of the investment as of December 31, 2001 and 2000: 2001 2000 (in thousands) $ 24,906 $ 24,012 December 31, 36,449 12,991 11,440 5,065 90,851 34,137 12,683 10,540 1,743 83,115 Fair value Gross unrealized gain (loss) Adjusted cost basis 2001 2000 $627 $ 175 476 151 (1,047) 1,222 Accumulated depreciation and amortization (65,594) (58,876) Note 7—Accounts Payable Accounts payable balances were $286.7 million and $291.5 million as of December 31, 2001 and 2000, of which Property and equipment, net $ 25,257 $ 24,239 $259.7 million and $249.6 million were trade accounts payable Depreciation and amortization expense for property and Drafts payable are checks written in excess of bank balances to equipment in 2001, 2000 and 1999 was $8.9 million, be funded upon clearing the bank. and $27.0 million and $41.9 million, were drafts payable. $9.4 million and $9.3 million. of the following: (in thousands) December 31, Warehouse equipment Computer equipment Office equipment and other Leasehold improvements Land and improvements Note 8—Debt The company’s long-term debt consists of the following: (in thousands) December 31, O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 3 9 2001 2000 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 8.5% Senior Subordinated Notes, $200 million par value, mature July 2011 $203,449 $210,000 $ – $ – 10.875% Senior Subordinated Notes, $150 million par value, retired in 2001 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 software financing agreement – – – – – – 150,000 156,375 2,200 1,333 2,200 1,333 Total debt Less current maturities Long-term debt 203,449 210,000 153,533 159,908 – – (661) (661) $203,449 $210,000 $152,872 $159,247 In July 2001, the company issued $200.0 million of 8.5% the amount of indebtedness that the company may incur, Senior Subordinated 10-year notes (2011 Notes) which mature require the company to maintain certain levels of net worth, on July 15, 2011. Interest on the 2011 Notes is payable semi- current ratio, leverage ratio and fixed charge coverage, and annually on January 15 and July 15, beginning January 15, restrict the ability of the company to materially alter the charac- 2002. The 2011 Notes are redeemable on or after July 15, 2006, ter of the business through consolidation, merger or purchase at the company’s option, subject to certain restrictions. The or sale of assets. At December 31, 2001, the company was in 2011 Notes are unconditionally guaranteed on a joint and compliance with these covenants. several basis by all significant subsidiaries of the company, Net interest expense includes finance charge income of other than O&M Funding Corp. (OMF) and Owens & Minor $4.5 million, $5.3 million and $4.6 million in 2001, 2000, and Trust I. The net proceeds from the 2011 Notes were used to 1999. Finance charge income represents payments from cus- retire the 10.875% Senior Subordinated 10-year Notes due in tomers for past due balances on their accounts. Cash payments 2006 (2006 Notes) and to reduce the amount of outstanding for interest during 2001, 2000, and 1999 were $10.8 million, financing under the company’s off balance sheet receivable $16.5 million, and $16.0 million. financing facility (Receivables Financing Facility). The estimated fair value of long term debt is based on the The early retirement of the 2006 Notes resulted in an borrowing rates currently available to the company for loans extraordinary loss of $7.1 million, comprised of $8.4 million with similar terms and average maturities. As of December 31, of retirement premiums, a $3.2 million write-off of debt issu- 2001, the company had no long term debt due within the next ance costs, $0.2 million of fees, and an income tax benefit of five years. $4.7 million. The 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 0.225% and 0.30% 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 Note 9—Off Balance Sheet Receivables Financing Facility Under the terms of the Receivables Financing 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 4 0 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T equal to commercial paper rates, the Prime Rate or LIBOR ineffectiveness under the provisions of SFAS 133. Under (plus a charge for administrative and credit support services). these agreements, expiring in July 2011, the company pays The terms of the facility require the company to maintain cer- the counterparties a variable rate based on LIBOR and the tain levels of net worth, current ratio, leverage ratio and fixed counterparties pay the company a fixed interest rate of 8½%. coverage, and restrict the company’s ability to materially alter Previously, the company had similar interest rate swap the character of the business through consolidation, merger, or agreements of $100.0 million notional amounts that were purchase or sale of assets. The company continues to service designated as fair value hedges of a portion of the company’s the receivables that are transferred under the facility on behalf 2006 Notes, which were cancelled by their respective of the purchasers at estimated market rates. Accordingly, the counterparties on May 28, 2001. Under these agreements, the company has not recognized a servicing asset or liability. company paid the counterparties a variable rate based on In the second quarter of 2001, the company adopted the LIBOR and the counterparties paid the company a fixed provisions of SFAS 140, Accounting for Transfers and Servicing of interest rate ranging from 7.35% to 7.38%. Financial Assets and Extinguishments of Liabilities, a replacement The payments received or disbursed in connection with of SFAS 125 of the same title. SFAS 140 revised the standards the interest rate swaps are included in interest expense, net. for securitizations and other transfers of financial assets and Based on estimates of the prices obtained from a dealer, the expanded the disclosure requirements for such transactions, fair value of the company’s interest rate swaps at December 31, while carrying over many of the provisions of SFAS 125 without 2001 and 2000 was $3.4 million and $0.1 million. At December change. The provisions of SFAS 140 are effective for transfers 31, 2001, the swaps were recorded in other assets on the con- of financial assets and extinguishments of liabilities occurring solidated balance sheet, in accordance with the provisions of after March 31, 2001, and are to be applied prospectively. The SFAS 133. At December 31, 2000, which was prior to adoption of this Standard did not require a change in the implementation of SFAS 133, the outstanding swaps were not company’s accounting treatment of sales of accounts receivable recorded on the consolidated balance sheet. under its Receivables Financing Facility, or have any material The company is exposed to certain losses in the event of effect on the company’s consolidated financial position, results nonperformance by the counterparties to these swap agree- of operations, or cash flows. The company adopted the dis- ments. However, the company’s exposure is not material and, closure requirements of SFAS 140 in 2000. since the counterparties are investment grade financial At December 31, 2001 and 2000, net accounts receivable institutions, nonperformance is not anticipated. of $70.0 million and $80.0 million had been sold under the agreement and, as a result, have been excluded from the con- solidated balance sheets. Note 11—Mandatorily Redeemable Preferred Securities In May 1998, Owens & Minor Trust I (Trust), a statutory busi- Note 10—Derivative Financial Instruments ness trust sponsored and wholly owned by Owens & Minor, The company enters into interest rate swaps as part of its Inc. (O&M), issued 2,640,000 shares of $2.6875 Term Con- interest rate risk management strategy. The purpose of these vertible Securities, Series A (Securities), for aggregate swaps is to maintain the company’s desired mix of fixed to proceeds of $132.0 million. Each Security has a liquidation floating rate financing in order to manage interest rate risk. value of $50. The net proceeds were invested by the Trust in In July 2001, the company entered into interest rate swap 5.375% Junior Subordinated Convertible Debentures of O&M agreements of $100.0 million notional amounts that effec- (Debentures). The Debentures are the sole assets of the Trust. tively converted a portion of the company’s fixed rate O&M applied substantially all of the net proceeds of the financing instruments to variable rates. These swaps were Debentures to repurchase 1,150,000 shares of its Series B designated as fair value hedges of a portion of the company’s Cumulative Preferred Stock at its par value. 2011 Notes and, as the terms of the swaps are identical to the The Securities accrue and pay quarterly cash distributions terms of the Notes, qualify for an assumption of no at an annual rate of 5.375% of the liquidation value. Each O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 4 1 Security is convertible into 2.4242 shares of the common stock Stock options awarded under the Plans generally vest over of O&M at the holder’s option prior to May 1, 2013. The three years and expire seven to ten years from the date of Securities are mandatorily redeemable upon the maturity of the grant. The options are granted at a price equal to fair market Debentures on April 30, 2013, and may be redeemed by the value at the date of grant. Restricted stock awarded under the company in whole or in part after May 1, 2001. The obligations Plans generally vests over three or five years. At December 31, of the Trust, as provided under the term of the Securities, are 2001, there were no SARs outstanding. fully and unconditionally guaranteed by O&M. The company has a Management Equity Ownership Pro- The estimated fair value of the Securities was $130.0 mil- gram. This program requires each of the company’s officers to lion and $122.1 million at December 31, 2001 and 2000 based own the company’s common stock at specified levels, which on quoted market prices. As of December 31, 2001 and 2000, gradually increase over five years. Officers who meet specified the company had accrued $1.2 million of distributions related ownership goals in a given year are awarded restricted stock to the Securities. Note 12—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 Compensa- tion 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 compensa- tion stock options, SARs and restricted and unrestricted stock. At December 31, 2001, approximately 1.5 million common shares were available for issuance under the Plans. 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. In 2001, 2000 and 1999, the company issued 72 thousand, 117 thousand and 78 thousand shares of restricted stock, at weighted-average market values of $15.79, $8.63 and $12.04. Amortization of unearned compensation for restricted stock awards was approximately $774 thousand, $693 thousand and $534 thousand for 2001, 2000 and 1999. The following table summarizes the activity and terms of outstanding options at December 31, 2001, and for the years in the three- year period then ended: (in thousands, except per share data) 2001 2000 1999 Options Average Exercise Price Options outstanding at beginning of year 2,503 $12.82 Granted Exercised Expired/cancelled Outstanding at end of year Exercisable options at end of year 480 (696) (68) 16.03 13.01 11.56 2,219 1,413 $13.46 $13.56 Average Exercise Price $13.75 8.73 13.57 12.38 $12.82 $13.75 Options 2,448 500 (358) (87) 2,503 1,655 Average Exercise Price $13.78 13.70 12.68 13.66 $13.75 $13.83 Options 2,001 600 (6) (147) 2,448 1,560 4 2 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T At December 31, 2001, the following option groups were outstanding: Range of Exercise Prices $8.31 – 11.94 $12.56 – 14.69 $15.42 – 19.00 Outstanding Exercisable Number of Options (000’s) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Number of Options (000’s) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) 460 987 772 $ 8.92 $13.72 $15.84 2,219 $13.46 7.65 5.71 4.95 5.85 206 873 334 $ 9.54 $13.64 $15.83 1,413 $13.56 7.13 5.53 3.35 5.25 Using the intrinsic value method, the company’s 2001, 2000 age of each employee’s contribution. The plan provides for a and 1999 net income includes stock-based compensation minimum contribution by the company to the plan for all expense (net of tax benefit) of approximately $464 thousand, eligible employees of 1% of their salary. $381 thousand and $306 thousand. Had the company This contribution can be increased at the company’s dis- included in stock-based compensation expense the fair value at cretion. The company incurred approximately $3.0 million, grant date of stock option awards granted in 2001, 2000 and $2.7 million and $2.5 million of expenses related to this plan in 1999, net income would have been $21.5 million (or $0.64 per 2001, 2000, and 1999. basic and diluted common share), $32.4 million (or $0.99 per basic common share and $0.92 per diluted common share) and $26.6 million (or $0.82 per basic common share and $0.78 per diluted common share) for the years ended December 31, 2001, 2000 and 1999. The weighted average fair value of options granted in 2001, 2000 and 1999 was $5.37, $2.69 and $4.35, 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 1.4%-1.7% in 2001, 1.6%-3.0% in 2000, and 1.6%-2.4% in 1999; expected volatility of 41.4% in 2001, 36.7% in 2000, and 32.4%-38.6% in 1999; risk-free interest rate of 4.4% in 2001, 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 sat- isfy plan liabilities. As of December 31, 2001, plan assets consist primarily of equity securities, including 34 thousand shares of the company’s common stock, and U.S. Govern- 5.1% in 2000, and 6.4% in 1999; and expected lives of 4 years ment securities. in 2001, 5 years in 2000, and 2.1-5.1 years in 1999. Note 13—Retirement Plans Savings and Protection Plan. The company maintains a volun- tary Savings and Protection Plan covering substantially all full- time employees who have completed one month of service and 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 employ- ees’ compensation. The company maintains life insurance policies on plan participants to act as a financing source for have attained age 18. The company matches a certain percent- the plan. O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 4 3 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 Benefit obligation, end of year Change in plan assets Pension Plan Retirement Plan 2001 2000 2001 2000 $23,053 $22,518 $ 11,519 $ 5,888 193 1,518 – (965) (1,131) 224 1,540 – 142 (1,371) 567 878 – 1,994 (241) 466 604 3,574 1,197 (210) $22,668 $23,053 $ 14,717 $ 11,519 Fair value of plan assets, beginning of year $24,764 $27,785 $ Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets, end of year Funded status Funded status at December 31 Unrecognized net actuarial (gain) loss Unrecognized prior service cost Unrecognized net transition obligation Net amount recognized Amounts recognized in the consolidated balance sheets Prepaid (accrued) benefit cost Intangible asset Accumulated other comprehensive loss Net amount recognized (2,179) (1,650) – – (1,131) (1,371) – – 241 (241) $ – – 210 (210) $21,454 $24,764 $ – $ – $ (1,214) $ 1,711 $(14,717) $(11,519) 3,050 (294) – – – – 3,767 2,972 41 1,830 3,254 82 $ 1,836 $ 1,417 $ (7,937) $ (6,353) $ (1,214) $ 1,417 $(10,981) $ (8,255) – 3,050 – – 3,013 31 1,902 – $ 1,836 $ 1,417 $ (7,937) $ (6,353) 4 4 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T The components of net periodic pension cost for the Pen- A reconciliation of the federal statutory rate to the compa- sion and Retirement Plans are as follows: ny’s effective income tax rate is shown below: (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 2001 2000 1999 Year ended December 31, $ 760 2,396 $ 690 $ 767 Federal statutory rate 2,144 1,876 Increases in the rate resulting from: (2,130) (2,026) (1,811) income tax impact State income taxes, net of federal 282 133 (16) 41 56 41 2 41 84 Provision for tax contingencies Nondeductible goodwill amortization Other, net Effective rate 2001 2000 1999 35.0% 35.0% 35.0% 4.8 11.1 2.4 0.1 5.5 – 2.5 2.0 5.5 – 3.0 0.6 53.4% 45.0% 44.1% $ 1,405 $ 984 $ 941 significant portions of the deferred tax assets and deferred tax The tax effects of temporary differences that give rise to liabilities are presented below: The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was assumed to be 7.25% for the Pension Plan and the Retirement Plan (in thousands) December 31, in 2001 and 6.75% for the Pension Plan and 7.75% for the Retire- Deferred tax assets: 2001 2000 ment Plan in 2000. The rate of increase in future compensation Allowance for doubtful accounts $ 2,118 $ 2,567 levels used in determining the projected benefit obligation was Accrued liabilities not currently 5.5% in 2001 and 2000. The expected long-term rate of return on deductible plan assets was assumed to be 8.5% in 2001 and 2000. Note 14—Income Taxes The income tax provision consists of the following: (in thousands) Year ended December 31, Current tax provision: Federal State 2001 2000 1999 Employee benefit plans Restructuring accrual Property and equipment Tax loss carryforward, net Investment Other Total deferred tax assets 3,919 6,051 708 970 – – 1,152 14,918 3,979 4,214 1,416 201 205 419 1,301 14,302 $18,974 $23,604 $11,724 Deferred tax liabilities: 4,232 4,761 2,119 Merchandise inventories 34,218 25,133 Total current provision 23,206 28,365 13,843 Deferred tax provision (benefit): Federal State Total deferred provision 9,859 1,409 (1,131) (162) 7,206 1,030 (benefit) 11,268 (1,293) 8,236 Total income tax provision $34,474 $27,072 $22,079 Accounts receivable Goodwill Computer software Other – 2,839 3,653 1,726 700 2,080 2,422 840 Total deferred tax liabilities 42,436 31,175 Net deferred tax liability $(27,518) $(16,873) O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 4 5 Cash payments for income taxes for 2001, 2000, and 1999 However, several cases involving other corporations’ COLI were $23.5 million, $23.8 million, and $17.9 million. programs have been decided in favor of the IRS, and con- In August 2000, the company received notice from the sequently, the climate has become less favorable to taxpayers Internal Revenue Service (IRS) that it has disallowed certain with respect to these programs. As a result, an income tax prior year deductions for interest on loans associated with the provision for the estimated liability of $7.2 million for taxes and company’s corporate-owned life insurance (COLI) program for interest was recorded in 2001 as management believes that it the years 1995 to 1998. Management believes that the company has become probable that the company will not achieve a has complied with the tax law as it relates to its COLI program, favorable resolution of this matter. Notwithstanding this action, and has filed an appeal with the Internal Revenue Service. management does not agree with the IRS position and will continue to protest this matter either administratively or through litigation. Note 15—Income Per Common Share Before Extraordinary Item The following sets forth the computation of income per basic and diluted common share before extraordinary item: (in thousands, except per share data) Year ended December 31, Numerator: 2001 2000 1999 Numerator for income per basic common share before extraordinary item – income before extraordinary item $30,103 $33,088 $27,979 Distributions on convertible mandatorily redeemable preferred securities, net of taxes 4,257 3,902 3,966 Numerator for income per diluted common share before extraordinary item – income before extraordinary item after assumed conversions $34,360 $36,990 $31,945 Denominator: Denominator for income per basic common share before extraordinary item – weighted average shares Effect of dilutive securities: Conversion of mandatorily redeemable preferred securities Stock options and restricted stock Denominator for income per diluted common share before extraordinary item – adjusted weighted average shares and assumed conversions Income per basic common share before extraordinary item Income per diluted common share before extraordinary item 33,368 32,712 32,574 6,400 619 6,400 341 6,400 124 40,387 39,453 39,098 $ $ 0.90 0.85 $ $ 1.01 0.94 $ $ 0.86 0.82 During the years ended December 31, 2001, 2000 and share before extraordinary item because their exercise price 1999, outstanding options to purchase approximately 27 thou- exceeded the average market price of the common stock for sand, 1,550 thousand and 2,263 thousand common shares were the year. excluded from the calculation of income per diluted common 4 6 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Note 16—Accumulated Other Comprehensive Loss $3.0 million and $12.0 million depending upon the date of Components of other comprehensive loss consist of the following: (in thousands) Unrealized Gain/(Loss) on Investment Minimum Pension Liability Adjustment Accumulated Other Comprehensive Loss $ $ – (1,047) 419 – – – $ – (1,047) 419 (628) 1,523 – (3,081) (628) (1,558) (609) 1,233 624 Balance December 31, 1999 2000 change, gross Income tax benefit Balance December 31, 2000 2001 change, gross Income tax benefit (expense) Balance December 31, 2001 $ 286 $(1,848) $(1,562) Note 17—Shareholders’ Equity The company has a shareholder rights agreement under which 8⁄ 27ths of a Right is attendant to each outstanding share 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 $2.7 million, depending upon the date of termination. The company has a non-cancelable agreement through September 2004 to receive support and upgrades for certain computer software. Future minimum annual payments under this agreement for 2002, 2003 and 2004 are $0.5 million, $0.5 million and $0.4 million. The company has entered into non-cancelable agreements to lease most of its office and warehouse facilities with remain- ing terms ranging from one to six years. Certain leases include renewal options, generally for five-year increments. The com- pany also leases most of its trucks and material handling equipment for terms generally ranging from four to six years. At December 31, 2001, future minimum annual payments under non-cancelable operating lease agreements with original terms in excess of one year are as follows: common stock of the company. Each full Right entitles the regis- (in thousands) tered 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 ear- lier 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 2002 2003 2004 2005 2006 Later years result in ownership by a person or group of 20% or more of such Total minimum payments Total $22,737 19,497 14,769 10,061 5,153 3,264 $75,481 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 Rent expense for all operating leases for the years ended December 31, 2001, 2000, and 1999 was $31.1 million, $28.1 in certain circumstances, cash, property or other securities of the million, and $26.1 million. 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. The company has limited concentrations of credit risk with respect to financial instruments. Temporary cash investments are placed with high credit quality institutions and concen- trations within accounts and notes receivable are limited due to Note 18—Commitments And Contingencies their geographic dispersion. The company has a commitment through November 2, 2008 Net sales to member hospitals under contract with Nova- to outsource its information technology operations, including tion totaled $1.9 billion in 2001, $1.8 billion in 2000 and strategic application development services. The commitment is $1.7 billion in 1999, approximately 51%, 51% and 53% of the cancelable after November 2, 2003 with 180 days prior notice company’s net sales. As members of a group purchasing organ- and payment of a minimum termination fee of between ization, Novation hospitals have an incentive to purchase from O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 4 7 their primary selected distributor; however, they operate this time, that future defense costs and any potential liability independently and are free to negotiate directly with distrib- should be adequately covered by the insurance, subject to utors and manufacturers. Net sales to member hospitals under policy limits and insurer solvency. Most of the Lawsuits are in contract with Broadlane totaled $0.4 billion in 2001, approx- the process of trial preparation. Several Lawsuits that were imately 11% of the company’s net sales. scheduled for trial have been dismissed on summary judg- Note 19—Legal Proceedings As of December 31, 2001, approximately 185 Lawsuits (the Lawsuits), seeking compensatory and punitive damages, in most cases of an unspecified amount, have been filed in vari- ous federal and state courts against the company, product manufacturers, and other distributors and sellers of natural rubber latex products. The company has obtained dismissal or ment. 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 outcome of legal actions cannot be predicted with certainty, management believes the outcome of these proceedings will not have a mate- rial adverse effect on the company’s financial condition or summary judgment in 76 cases. The Lawsuits allege injuries results of operations. arising from the use of latex products, principally medical gloves. The active Lawsuits (109) also include claims by Note 20—Condensed Consolidating approximately 70 spouses asserting loss of consortium. The Financial Information company may be named as a defendant in additional, similar The following tables present condensed consolidating lawsuits in the future. In the course of its medical supply busi- financial information for: Owens & Minor, Inc.; on a ness, the company has distributed latex products, including combined basis, the guarantors of Owens & Minor, Inc.’s 2011 medical gloves, but it does not, nor has it ever manufactured Notes; and the non-guarantor subsidiaries of the 2011 Notes. any latex products. The company has tendered the defense of Separate financial statements of the guarantor subsidiaries the Lawsuits to manufacturer defendants whose gloves were are not presented because the guarantors are jointly, distributed by the company. Manufacturers or their insurers severally and unconditionally liable under the guarantees and have agreed to indemnify and assume the defense of the the company believes the condensed consolidating financial company in a total of ten (10) Lawsuits. The company will information is more meaningful in understanding the continue to vigorously pursue indemnification from latex financial position, results of operations and cash flows of the product manufacturers. The company’s insurers are paying all guarantor subsidiaries. costs of defense in the Lawsuits, and the company believes, at 4 8 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Condensed Consolidating Financial Information (in thousands) Year ended December 31, 2001 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 Intercompany dividend income Discount on accounts receivable securitization Impairment loss on investment Distributions on mandatorily redeemable preferred securities Restructuring credit Total expenses Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ – – – – – 17,698 (15,849) (127,857) – 1,071 – – $3,814,994 $ 3,406,758 408,236 296,072 22,469 (4,335) 34,333 13 – – – (1,476) – – – – – 735 (18,484) – 4,317 – 7,095 – $ – – – – – – – 127,857 – – – – $3,814,994 3,406,758 408,236 296,807 22,469 13,363 – – 4,330 1,071 7,095 (1,476) (124,937) 347,076 (6,337) 127,857 343,659 Income before income taxes and extraordinary item Income tax provision (benefit) 124,937 (1,005) 61,160 32,677 Income before extraordinary item 125,942 28,483 6,337 2,802 3,535 (127,857) – 64,577 34,474 (127,857) 30,103 Extraordinary loss on early retirement of debt, net of tax benefit Net income (7,068) – – – (7,068) $ 118,874 $ 28,483 $ 3,535 $(127,857) $ 23,035 Condensed Consolidating Financial Information O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 4 9 (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 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 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 – – – 137 266,684 1,384 $ – – – – 17,869 (7,904) – – – 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 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries $3,194,134 $ 2,851,556 342,578 9 249,390 $ – – – – 16,798 (6,976) – – – 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 $ – – – – – – – – – – – – – – $3,503,583 3,127,911 375,672 268,205 21,515 12,566 – 6,881 7,095 (750) 315,512 60,160 27,072 $ 33,088 Eliminations Consolidated $ – – – – – – – – – – – – – $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 Net income (loss) $ (5,505) $ 30,538 $ 2,946 $ – $ 27,979 5 0 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Condensed Consolidating Financial Information (in thousands) December 31, 2001 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 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ 507 $ 445 $ 1 $ – – 173,802 17 174,326 – – 342,497 13,708 – 389,504 58,161 24,743 472,853 25,257 198,324 15,001 36,110 264,235 – (231,963) – 32,273 – – – – – – – – – – $ 953 264,235 389,504 – 24,760 679,452 25,257 198,324 136,083 1,002 (493,581) – – 50,820 Total assets $530,531 $747,545 $ 169,358 $(493,581) $953,853 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 Total liabilities $ – – (4) 7,242 $286,656 $ 12,669 29,178 32,622 7,238 361,125 203,449 136,083 – (755) – 143,890 14,123 1,147 – – (2,020) 1,331 (689) – – – (28) $ – – – – – – $286,656 12,669 27,154 41,195 367,674 203,449 (279,973) – – – 14,123 364 346,015 520,285 (717) (279,973) 585,610 Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. – – 132,000 – 132,000 Shareholders’ equity Common stock Paid-in capital Retained earnings Accumulated other comprehensive income (loss) 67,770 27,181 89,279 286 40,879 151,145 37,084 (1,848) 5,583 16,001 16,491 – (46,462) (167,146) – – 67,770 27,181 142,854 (1,562) Total shareholders’ equity 184,516 227,260 38,075 (213,608) 236,243 Total liabilities and shareholders’ equity $530,531 $747,545 $ 169,358 $(493,581) $953,853 Condensed Consolidating Financial Information O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 5 1 (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 Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ 507 $ 118 $ 1 $ – – 129,447 17 129,971 – – 213,637 8,735 24,224 315,570 79,645 16,173 435,730 24,236 204,849 15,001 35,157 237,681 – (209,092) – 28,590 3 – – – – – – – – – $ 626 261,905 315,570 – 16,190 594,291 24,239 204,849 136,083 (364,721) – 277 – 44,169 Total assets $352,343 $714,973 $ 164,953 $(364,721) $867,548 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 Total liabilities $ – – (85) 1,717 $291,507 $ 9,940 18,828 39,331 1,632 359,606 152,200 136,083 – (930) 672 – 8,879 1,304 – – (2,241) 1,657 (584) – – – (3) $ – – – – – – (136,083) – – $291,507 9,940 16,502 42,705 360,654 152,872 – 8,879 371 288,985 370,461 (587) (136,083) 522,776 Company-obligated mandatorily redeemable preferred securities of subsidiary trust, holding solely convertible debentures of Owens & Minor, Inc. – – 132,000 – 132,000 Shareholders’ equity Common stock Paid-in capital Retained earnings (deficit) 66,360 18,039 (20,413) 40,879 167,175 136,458 Accumulated other comprehensive loss (628) – 5,583 15,001 12,956 – (46,462) (182,176) – – 66,360 18,039 129,001 (628) Total shareholders’ equity 63,358 344,512 33,540 (228,638) 212,772 Total liabilities and shareholders’ equity $352,343 $714,973 $ 164,953 $(364,721) $867,548 5 2 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Condensed Consolidating Financial Information (in thousands) Year ended December 31, 2001 Statements of Cash Flows Operating Activities Income before extraordinary item Adjustments to reconcile income before extraordinary item to cash provided by (used for) operating activities: Depreciation and amortization Restructuring credit Impairment loss on investment Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Collections of sold accounts receivable 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 Owens & Minor, Inc. Guarantor Subsidiaries Non- guarantor Subsidiaries Eliminations Consolidated $ 125,942 $ 28,483 $ 3,535 $(127,857) $ 30,103 – – 1,071 256 – – – – – – 22,469 (1,476) – 10,816 4,264 1,300 – 22,924 (78,198) 10,049 – – – 196 – (518) (10,000) (16,036) – – 10,236 3,100 (10,112) 1,248 (76) 25 – – – – – – – – – – – – Cash provided by (used for) operating activities 140,605 11,767 (22,874) (127,857) Investing Activities Additions to property and equipment Additions to computer software Decrease in intercompany investments, net Investment in intercompany debt Other, net – – 15,030 (143,890) – (10,147) (6,686) – – 139 – – – – (997) – – (15,030) 143,890 – Cash used for investing activities (128,860) (16,694) (997) 128,860 (17,691) Financing Activities Net proceeds from issuance of long-term debt Payments to retire long-term debt Reductions to other debt Proceeds from intercompany debt Change in intercompany advances Increase (decrease) in intercompany investments, net Cash dividends paid Intercompany dividends paid Proceeds from exercise of stock options Other, net 194,331 (158,594) (2,200) – (44,355) – (9,182) – 8,255 – – – (1,333) 143,890 21,484 (16,030) – (127,857) – (14,900) – – – – 22,871 1,000 – – – – – – – (143,890) – 15,030 – 127,857 – – 194,331 (158,594) (3,533) – – – (9,182) – 8,255 (14,900) Cash provided by (used for) financing activities (11,745) 5,254 23,871 (1,003) 16,377 Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period – 507 507 $ $ 327 118 445 – 1 1 $ – – – $ 327 626 953 $ 22,469 (1,476) 1,071 11,268 4,264 782 (10,000) 6,888 (78,198) 10,049 48 4,373 1,641 (10,147) (6,686) – – (858) O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 5 3 Condensed Consolidating Financial Information (in thousands) Year ended December 31, 2000 Statements of Cash Flows Operating Activities Net income (loss) Owens & Minor, Inc. Guarantor Subsidiaries Non-guarantor Subsidiaries Eliminations Consolidated $ (5,657) $ 35,150 $ 3,595 $ – $ 33,088 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization Restructuring credit Deferred income taxes Provision for LIFO reserve Provision for losses on accounts and notes receivable Collections of sold accounts receivable 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 – – (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 Cash dividends paid Proceeds from exercise of stock options Other financing, net – – (8,002) (11,622) (155) 3 (155) (19,621) (20,400) (1,245) (3) (3) – – – 27,868 (8,156) 4,837 (1,255) (146,693) 118,825 – – 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 period $ 507 $ 118 $ (3) 4 1 – – – – – – – – – – – – – – – – – – – – – – – – 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) – (8,156) 4,837 1,545 (23,419) (43) 669 $ – $ 626 5 4 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Condensed Consolidating Financial Information (in thousands) Year ended December 31, 1999 Statements of Cash Flows Operating Activities Net income (loss) Owens & Minor, Inc. Guarantor Subsidiaries Non- guarantor Subsidiaries Eliminations Consolidated $ (5,505) $ 30,538 $ 2,946 $ – $ 27,979 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization 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 – – (396) – – – – – – 19,365 (1,000) 10,407 1,741 292 – – – (1,775) – 267 30,612 1,970 (32,101) (42,397) 86,871 liabilities Other, net (39) (11,536) 3,049 (1,404) Cash provided by (used for) operating activities (2,891) 94,847 Investing Activities Net cash paid for acquisition of business Additions to property and equipment Additions to computer software – – – (82,699) (8,933) (13,172) Other, net (1,222) 63 (1,200) Cash used for investing activities (1,222) (104,741) (1,200) Financing Activities Additions to debt Change in intercompany advances Cash dividends paid Proceeds from exercise of stock options Other financing, net 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 Cash and cash equivalents at end of period $ 507 $ 118 40 158 $ 3 1 4 343 41 333 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ – $ 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 – (7,520) 80 (2,741) 14,997 123 546 669 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 5 5 Independent Auditors’ Report 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, 2001 and 2000, 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, 2001. These consolidated financial statements are the responsi- bility 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 stand- ards 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 posi- tion of Owens & Minor, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Richmond, Virginia January 30, 2002 Report of Management The management of Owens & Minor, Inc. is responsible for the preparation, integrity and objectivity of the consolidated finan- cial 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 esti- mates 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 prepara- tion 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 Jeffrey Kaczka Senior Vice President & Chief Financial Officer 5 6 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Quarterly Financial Information (in thousands, except per share data) Quarters Net sales Gross margin Income before extraordinary item Net income (loss) Per common share: Income before extraordinary item Basic Diluted Net income (loss) Basic Diluted Dividends Market price High Low Quarters Net sales Gross margin Net income Per common share: Net income Basic Diluted Dividends Market price High Low 2001 1st 2nd(1) 3rd(2) 4th $924,508 $953,531 $968,230 $968,725 98,883 100,721 103,068 105,564 7,711 7,711 $ 0.23 0.22 0.23 0.22 0.0625 $ 9,423 9,423 0.28 0.26 0.28 0.26 0.07 1,697 (5,371) 11,272 11,272 $ 0.05 0.05 $ (0.16) (0.16) 0.07 0.34 0.30 0.34 0.30 0.07 $ 17.75 $ 21.00 $ 21.69 $ 20.90 13.92 15.97 16.24 17.01 1st 2nd(1) 3rd 4th $ 856,742 $ 875,230 $ 874,318 $ 897,293 2000 91,961 6,840 0.21 0.20 0.06 12.00 8.13 $ $ 92,803 8,015 0.25 0.23 0.0625 17.19 10.25 $ $ 93,121 8,466 0.26 0.24 0.0625 18.25 14.69 $ $ 97,787 9,767 0.30 0.27 0.0625 18.38 11.88 $ $ (1) In the second quarters of 2001 and 2000, the company reduced its restructuring accrual by $1.5 million and $0.8 million, or $0.8 million and $0.4 million after taxes. See Note 3 to the Consolidated Financial Statements. (2) In the third quarter of 2001, the company recorded an impairment loss of $1.1 million on an investment in marketable equity securities, a provision for disallowed income tax deductions of $7.2 million, and an extraordinary loss on early retirement of debt of $7.1 million, net of tax benefit. See Notes 6, 8 and 14 to the Consolidated Financial Statements. Form 10-K Annual Report O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T 5 7 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, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-9810 OWENS & MINOR, INC. (Exact name of registrant as specified in its charter) Virginia (State or other jurisdiction of incorporation or organization) 4800 Cox Road, Glen Allen, Virginia (Address of principal executive offices) 54-01701843 (I.R.S. Employer Identification No.) 23060 (Zip Code) Registrant’s telephone number, including area code (804) 747-9794 Securities registered pursuant to Section 12(b) of the Act: Indicate by check mark if disclosure of delinquent filers Name of each exchange on which registered pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, Title of each class Common Stock, $2 par value Preferred Stock Purchase Rights 8 1⁄ 2% Senior Subordinated Notes due 2011 $2.6875 Term Convertible Not Listed Securities, Series A New York Stock Exchange New York Stock Exchange Not Listed 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 approx- imately $630,546,304 as of February 14, 2002. The number of shares of the Company’s Common Stock outstanding as of February 14, 2002 was 33,973,400 shares. Securities registered pursuant to Section 12(g) of the Act: Documents Incorporated by Reference 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 The proxy statement for the annual meeting of security hold- ers on April 25, 2002 is incorporated by reference for part III. 5 8 O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T Item Captions and Index – Form 10-K Annual Report Item No. Page Part I 1. 2. 3. 4. Part II 5. 6. 7. 7A. 8. 9. Part III 10. 11. 12. 13. Part IV. 14. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 19-23 23 47 N/A Market for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . 56, 60 18 24-30 29, 40 See Item 14 N/A . . . . . . . . . . . . . . . . . . . . . . .(a), 16, 59 (a) Directors and Executive Officers of the Registrant Executive Compensation . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) (a) 31 32 33 34 35-54 55 None. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a. Consolidated Statements of Income for the Years Ended Dec. 31, 2001, Dec. 31, 2000 and Dec. 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets at Dec. 31, 2001 and Dec. 31, 2000 . . . . . . . . Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 2001, Dec. 31, 2000 and Dec. 31, 1999 . . . . . . . . . . . . . Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended Dec. 31, 2001, Dec. 31, 2000 and Dec. 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements for the Years Ended Dec. 31, 2001, Dec. 31, 2000 and Dec. 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Auditors . . . . . . . . b. Reports on Form 8-K: c. The index to exhibits has been filed as separate pages of 2001 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 2002 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 7th day of March, 2002. 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 7th day of March 2002 and in the capacities indicated. /s/ G. Gilmer Minor, III G. Gilmer Minor, III /s/ Jeffrey Kaczka Jeffrey Kaczka /s/ Olwen B. Cape Olwen B. Cape /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/ 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 Chairman and Chief Executive Officer and Director (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer) Vice President and Controller (Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Director Corporate Officers G. Gilmer Minor, III (61) Chairman & Chief Executive Officer Charles C. Colpo (44) Senior Vice President, Operations 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 (50) President & Chief Operating Officer President since 1999 and Chief Operat- ing Officer since 1995. Mr. Smith has been with the company since 1989. Henry A. Berling (59) Executive Vice President, Partnership Development Executive Vice President, Partnership Development since 1995. Mr. Berling was Executive Vice President, Partner- ship Development and Chief Sales Officer from 1996 to 1998. Mr. Berling has been with the company since 1966. Timothy J. Callahan (50) Senior Vice President, Distribution Senior Vice President, Distribution since 1999. From 1997 to 1999, Mr. Callahan served as Regional Vice President, West. Prior to that, Mr. Callahan was Executive Vice President for NCI, a healthcare consulting company from 1996 to 1997. Drew St. J. Carneal (63) Senior Vice President, General Counsel & Secretary Senior Vice President, General Counsel and Secretary since 1990. Mr. Carneal has been with the company since 1989. 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. Mr. Colpo has been with the company since 1981. Erika T. Davis (38) Senior Vice President, Human Resources Senior Vice President, Human Resources since May 2001. From 1999 to 2001, Ms. Davis was Vice President of Human Resources. 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. David R. Guzmán (46) Senior Vice President & Chief Information Officer Senior Vice President and Chief Infor- mation Officer since 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 and from 1996 to 1997, Mr. Guzmán served as Chief Technology Officer, Divisional Vice President for Kmart. OWENS & MINOR 2001 ANNUAL REPORT 59 Jeffrey Kaczka (42) Senior Vice President & Chief Financial Officer Senior Vice President and Chief Financial Officer since April 2001. Mr. Kaczka most recently served as Senior Vice President and Chief Financial Officer for Allied Worldwide, Inc. from 1999 to 2001. In 1995 he served as Chief Financial Officer for I-Net, Inc. which was acquired by Wang Laboratories in 1996. Mr. Kaczka continued with Wang until 1998. Prior to that, he spent 14 years with General Electric in various financial roles, most recently as Vice President-Finance for GE Information Services. Richard F. Bozard (54) Vice President, Treasurer Acting Chief Financial Officer from 1999 to April 2001 and Vice President and Treasurer since 1991. Mr. Bozard has been with the company since 1988. Olwen B. Cape (52) 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 management positions. Hugh F. Gouldthorpe, Jr. (63) Vice President, Quality & Communications Vice President, Quality and Communica- tions since 1993. Mr. Gouldthorpe has been with the company since 1986. Hue Thomas, III (62) Vice President, Corporate Relations Vice President, Corporate Relations since 1991. Mr. Thomas has been with the company since 1970. Numbers inside parentheses indicate age. 60 OWENS & MINOR 2001 ANNUAL REPORT Corporate Information Annual Meeting Duplicate Mailings The annual meeting of Owens & Minor, Inc.’s When a shareholder owns shares in more than one account shareholders will be held on Thursday, April 25, 2002, or when several shareholders live at the same address, they at The Jefferson Hotel, 101 West Franklin Street, may receive multiple copies of annual reports. To eliminate Richmond, Virginia. Transfer Agent, Registrar and Dividend Disbursing Agent The Bank of New York Shareholder Relations Department P.O. Box 11258 Church Street Station New York, NY 10286 800-524-4458 shareowner-svcs@bankofny.com multiple mailings, please write to the transfer agent. Counsel Hunton & Williams Richmond, Virginia Independent Auditors KPMG LLP Richmond, Virginia Dividend Reinvestment and Stock Purchase Plan Market for the Registrant’s Common Equity The Dividend Reinvestment and Stock Purchase Plan offers and Related Stockholder Matters holders of Owens & Minor, Inc. common stock Owens & Minor, Inc.’s common stock trades on the an opportunity to buy additional shares automatically New York Stock Exchange under the symbol OMI. with cash dividends and to buy additional shares with As of December 31, 2001, there were approximately voluntary cash payouts. Under the plan, the company 13,900 common shareholders. pays all brokerage commissions and service charges for the acquisition of shares. Information regarding Press Releases the plan may be obtained by writing the transfer agent Owens & Minor, Inc.’s press releases are available at the following address: at www.prnewswire.com or at www.owens-minor.com. Communications and Investor Relations 804-747-9794 The Bank of New York Dividend Reinvestment Department P.O. Box 1958 Newark, NJ 07101-9774 Shareholder Records Direct correspondence concerning Owens & Minor, Inc. stock holdings or change of address to The Bank of New York’s Shareholder Services Department (listed above). Direct correspondence concerning lost or missing dividend checks to: Receive and Deliver Department-11W P.O. Box 11002 Church Street Station New York, NY 10286 2001 Vision Mission Values 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 healthcare 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. We believe in supporting the communities we serve. We believe in delivering long-term value to our shareholders. We believe in high integrity as the guiding principle of doing business. B E S T I N C L A S S O W E N S & M I N O R 2 0 0 1 A N N U A L R E P O R T & F O R M 1 0 - K 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 Best in ClassThrough Service Connectivity Technology Community OWENS & MINOR, THE NATION’S LEADING DISTRIBUTOR OF NATIONAL NAME BRAND MEDICAL/SURGICAL SUPPLIES, MEETS THE NEEDS OF ITS CUSTOMERS NATIONWIDE WITH “BEST IN CLASS” EXPERTISE IN SERVICE, CONNECTIVITY, TECHNOLOGY AND COMMUNITY SERVICE. 2 0 0 1 A N N U A L R E P O R T