-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VVGp12vTGcZG/IaEpzxgknsl97LQPF5n9v/WzJvNlV55gMXM+KAEdC8UxJ/h9b3Y JHiCLpO8GlFuJJUEXLVprg== 0000950109-98-002437.txt : 19980406 0000950109-98-002437.hdr.sgml : 19980406 ACCESSION NUMBER: 0000950109-98-002437 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980403 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOORE MEDICAL CORP CENTRAL INDEX KEY: 0000074691 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 221897821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08903 FILM NUMBER: 98586858 BUSINESS ADDRESS: STREET 1: PO BOX 1500 STREET 2: 389 JOHN DOWNEY DR CITY: NEW BRITAIN STATE: CT ZIP: 06050 BUSINESS PHONE: 2038263600 MAIL ADDRESS: STREET 1: 389 JOHN DOWNEY DRIVE STREET 2: 389 JOHN DOWNEY DRIVE CITY: NEW BRITAIN STATE: CT ZIP: 06050 FORMER COMPANY: FORMER CONFORMED NAME: OPTEL CORP DATE OF NAME CHANGE: 19850611 10-K405 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________ 1997 FORM 10 - K ANNUAL REPORT For the fiscal year ended January 3, 1998 Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934 MOORE MEDICAL CORP. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- DELAWARE 1-8903 (State of incorporation) (Commission File Number) P.O. BOX 1500, NEW BRITAIN, CT 06050 22-1897821 (Address of principal executive offices) (I.R.S. Employer Identification Number) 860-826-3600 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK ($.01 PAR VALUE) AMERICAN STOCK EXCHANGE (Title of Each Class) (Name of each exchange on which registered) - -------------------------------------------------------------------------------- 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 twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No__________ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates (i.e. other than identified 10% holders, and holdings attributed to executive officers and directors) of the Registrant as of March 27, 1998 was $20,349,779. Number of shares of Common Stock outstanding (exclusive of 313,753 treasury shares) as of March 27, 1998: 2,932,061. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE The portions of the registrant's proxy statement for its 1998 Annual Meeting of Shareholders referred to in Part III of this report are incorporated by reference. The exhibit index is located on pages 28-30. Total number of pages in the numbered original (including exhibits) is 62. This is page 1 of 62 pages. ================================================================================ 1 MOORE MEDICAL CORP. 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I - --------------------------------------------------------------------------------------------------------------- ITEM 1. Business 3 ITEM 2. Properties 7 ITEM 3. Legal Proceedings 7 ITEM 4. Submission of Matters to a Vote of Security Holders 7 PART II - --------------------------------------------------------------------------------------------------------------- ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters 8 ITEM 6. Selected Financial Data 9 ITEM 7. Management's Discussion and Analysis Results of Operations and Financial Condition 10 ITEM 8. Financial Statements and Supplementary Data 14 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 PART III - --------------------------------------------------------------------------------------------------------------- ITEM 10. Directors and Executive Officers of the Registrant 27 ITEM 11. Executive Compensation 27 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 27 ITEM 13. Certain Relationships and Related Transactions 27 PART IV - --------------------------------------------------------------------------------------------------------------- ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28 SIGNATURES 31
2 ITEM 1. BUSINESS Moore Medical Corp. (the "Company") is a national marketer and distributor of healthcare products, to approximately 100,000 healthcare practitioner customers in non-hospital settings. Primary customer groups are physicians, emergency medical services, medical departments at industrial sites, podiatrists, and university/school health services. It markets approximately 7,000 medical/surgical and pharmaceutical supply products (SKUs) through direct mail, telesales, and a small field sales force. Most customer orders are processed by call center representatives. The Company fulfills orders from its regional distribution centers in Connecticut, Florida, Illinois and California and ships orders nationwide by common carriers. More than 90% of customers receive orders within two business days. The Company is in its fifty-second year of operation, and it has served healthcare practitioner customers for over 25 years. In 1997, the Company exited its wholesale drug distribution business, and the description of its operations in this report focuses on its remaining healthcare practitioner business. RECENT DEVELOPMENTS In October, 1997, the Company decided to exit from its wholesale drug distribution business, in which sales to pharmacies continued to experience increased competition and shrinking gross margins, in order to concentrate on its remaining and more profitable healthcare practitioner business. The wholesale drug distribution business sold primarily pharmaceuticals, while sales of the healthcare practitioner business are mainly medical/surgical products. The exit plan has been substantially completed: most of the excess pharmaceutical inventory has been sold; most of the accounts receivable from pharmacy customers have been collected; and the staff has been reorganized and downsized. The liquidation of inventory and accounts receivable generated cash which was used to reduce the Company's debt to $1.5 million at the end of 1997. During 1997, the Company's wholesale drug distribution business generated approximately 60% of the Company's total sales while its healthcare practitioner business generated approximately 40% of its total sales, with gross margins of 30%. Sales to healthcare practitioners increased by over 20% in 1997 over the prior year. The Company incurred non-recurring inventory markdowns and write- offs, costs and expenses of approximately $6 million ($1.28 per share) in 1997 in connection with its withdrawing from the wholesale drug distribution business. See Note 2 to financial statements. In April, 1997, the Company decided to exit various supply contracts with the U.S. Department of Veterans Affairs and the Defense Department due to the highly competitive nature of the business, the complexity of contractual price compliance regulations and related administrative burdens. A $4 million ($.90 per share) non-recurring charge was made to 1996 earnings for contract price deficiencies, associated costs and 1996 costs related to the decision to exit the supply contracts. In addition, in 1997 the Company incurred non-recurring charges to earnings of $800,000 ($.18 per share) for costs of exiting that business. The final amount of the price deficiency adjustments is subject to the outcome of contract settlement discussions which the Company has requested with the governmental agencies or to an adjudicated disposition. See Notes 2 and 9 to financial statements. 3 DISTRIBUTION OF HEALTHCARE PRODUCTS Most product manufacturers will not sell directly to healthcare practitioners in the small quantities of products they regularly use. Moreover, most healthcare practitioners prefer the administrative efficiencies of purchasing their supplies from one or a few sources rather than from hundreds of manufacturers. Healthcare product distributors, by selling a very wide range of products purchased from many manufacturers, economically move products from the manufacturers' large, but separately narrow, product inventories to the smaller volume, but much more varied, product selections required by healthcare practitioners. Customers find it efficient and convenient to rely on the availability from distributors of thousands of different products, manufactured by hundreds of manufacturers, offered at competitive prices, with prompt delivery and a variety of other services. The market for healthcare products at non-hospital sites has been growing and is expected to continue to grow in the United States for several reasons: . Healthcare cost containment pressures which cause an increasing proportion of healthcare to be provided at more economical sites than hospitals. . Medical advances that increase the amount of care available and the variety of products for diagnosis and treatment. . An aging population. Cost containment pressures and the emergence of managed care in the United States have resulted in several trends which affect the delivery of healthcare products: . Consolidations of physician customers, as sole practitioners form groups and as physician practice organizations (PPO's) form to provide business management for large numbers of physicians. . Consolidations of other customer groups, notably emergency medical services and podiatrists. . Consolidations of distributors of healthcare products into larger organizations, serving broader geographic areas. . Evidence of consolidations among manufacturers of healthcare products. There is a trend toward increasing expectations by customers for better services and prices. Services include: a broad selection of products, speed of delivery, reliability of supply, and ease of ordering. Moreover, customers require increasing amounts of information on product specifications, product use, pricing and government regulation. PRODUCTS The Company distributes approximately 7,000 healthcare product stock keeping units ("SKUs") consisting of medical/surgical supplies and pharmaceuticals. The Company's broad and diversified selection of medical/surgical supplies includes gauze and wound dressings, examination room supplies, diagnostic tests and equipment, personal protection products, surgical instruments, emergency response supplies, continuing care products and infection control supplies. Although most of its products are consumables and disposables, the Company also sells small-dollar medical/surgical equipment. It is one of the few distributors of medical/surgical products to non-hospital healthcare practitioners that also offers pharmaceuticals. Pharmaceutical products include unit-dose medications, vaccines, injectables and ointments. The Company purchases all its products, primarily direct from manufacturers, and does not manufacture any product. 4 The Company exited the wholesale drug distribution business, in which it sold primarily pharmaceuticals, during the fourth quarter of 1997. See "Recent Developments," above. Most of the Company's medical/surgical supply sales were to healthcare practitioner end-users, while before withdrawing from its wholesale drug distribution business most of its pharmaceutical sales were to pharmacies for resale. The following table shows sales and the percentages of total sales for the past three years of pharmaceuticals and medical/surgical supplies:
Dollars in thousands 1997 1996 1995 - -------------------- ---- ---- ---- Pharmaceuticals $197,483 $207,618 $220,085 68.5% 72.5% 76.1% Medical/surgical supplies $ 91,030 $ 78,731 $ 68,977 31.5% 27.5% 23.9%
CUSTOMERS The Company's approximately 100,000 healthcare practitioner customers typically use the Company's products in non-hospital settings. Its most significant customer groups, which account for approximately 85% of its sales, are physicians, emergency medical services, medical departments at industrial sites, podiatrists and university/school health services. Most of the customers use the products in their healthcare practice as opposed to buying the products for resale. An insignificant portion of the Company's direct customers are individual medical patients. No healthcare practitioner customer in 1997 accounted for more than 2% of the Company's total sales to these customers. MARKETING AND DISTRIBUTION The Company markets nationally to existing and prospective customers through direct mail, outbound telesales calls, and a small number of national account field sales representatives. The Company considers direct marketing to be one of its core strengths. Catalogs and other product literature are designed by the Company's in-house advertising department with different products featured for targeted customer groups. Mailings are regularly made to current customers based on buying patterns and to prospective customers based on mailing lists. The Company provides for electronic ordering by customers through both a CD-ROM catalog and an internet presence. Many customers order through one of the Company's 800 telephone numbers in response to direct mail catalogs or other advertising literature. Their orders are processed by representatives in the Company's inbound call center. Call center representatives are trained on product features, to respond to customer inquiries and on the Company's computerized order entry procedures. In addition, the Company has a staff of outbound telesales representatives who specialize in one or more customer groups. They are trained on selling techniques to effectively promote sales and establish new customers. An advanced phone system supports each call center and telesales representative, and each is equipped with a computer terminal for access to customer and product information and the order entry processing system. A small number of field sales representatives build relationships and negotiate sales terms with the Company's larger customers in the industrial market. 5 The Company fulfills orders from its regional distribution centers in Connecticut, Florida, Illinois and California. Customer orders are directed by its computer systems from the call center and telesales to the distribution center closest to the customer. There, orders are picked, packed and shipped to customers by common carriers. The Company utilizes United Parcel Services (UPS) for the shipment of most of its customers' orders and, accordingly, is dependent on UPS for efficient delivery services. More than 90% of customers receive orders within two business days. The Company considers distribution reliability to be a core strength. The Company's marketing, sales, distribution and purchasing processes are information intensive, making its computer systems essential to efficient operations. SUPPLIERS The Company distributes the products of approximately 650 manufacturers of medical/surgical supplies and pharmaceuticals. It purchases most products directly from manufacturers, but also purchases some products from other distributors. In 1997 the largest suppliers of the products which it sold in its healthcare practitioner business were Allied Healthcare Products, Inc., Graham-Field Health Products, Inc., Johnson & Johnson Healthcare Systems, Inc., Laerdal Medical Corp., Microflex Medical Corp., SmithKline Beecham Pharmaceuticals, and Tillotson Healthcare Corporation. Management believes the Company is a significant customer of a small portion of its vendors. It has several competing sources for many medical/surgical supplies and pharmaceuticals. Sales of products from its largest supplier in 1997 accounted for less than 5% of total sales to healthcare practitioner customers. The Company does not have any significant long-term purchase commitments with its suppliers, nor does it have any exclusive rights for a territorial area. COMPETITION Competitors consist of large national distributors, regional distributors and local distributors. Some use primarily direct marketing methods, like the Company, and others make sales and deliveries to their customers with a dedicated sales force and fleet of delivery vehicles. According to a market research report by a national brokerage firm, in the physician market, five national distributors larger than the Company account for approximately 40% of the sales volume of healthcare supplies to this market. These national distributors have been growing in recent years through both internal growth and through acquisitions of regional and local distributors. The remaining distributors to this market are believed to be smaller than the Company and consist primarily of regional and local distributors. In each of the Company's other markets, the competition is more fragmented and the Company believes it is one of the top five leading distributors. The strongest competitors in each market area generally compete with the Company in only one or a few of its market areas. Generally, the Company competes with other distributors on breadth of product line, delivery speed, price, order completion rates, and other value-added customer service factors. Customers place high value on reliability, ease of doing business and speed. As more healthcare practices consolidate into larger, more geographically spread, organizations, there will be a growing number of large customers that will require their distributor of choice to be able to reliably service many locations in numerous states and/or regions of the country. 6 REGULATION The manufacturing, marketing, labeling, packaging and distribution of medical/surgical products and pharmaceuticals are subject to regulation by federal, state and local governmental authorities. The Company is licensed to distribute pharmaceutical products, including certain controlled substances. Its operating and security practices must comply with statutes and regulations of the U.S. Food and Drug Administration, the federal Drug Enforcement Agency and state boards of pharmacy and health. The Company believes that it is in material compliance with the applicable statutes and regulations. The Company is indirectly affected by Medicare, Medicaid and other governmental regulations to which many of its customers are subject and by managed care plans in which many participate. Such programs' payment and reimbursement policies encourage customers to economize in purchasing healthcare products. EMPLOYEES As of January 3, 1998, the Company had 320 full-time employees and 32 part-time employees. Of the full-time employees, 140 worked in its sales and marketing operations. All the Company's operations are non-union. ITEM 2. PROPERTIES The Company owns no real property and it leases all its operating facilities. Its distribution centers are located in New Britain, Connecticut (92,000 square feet), Jacksonville, Florida (60,000 square feet), Lemont, Illinois (44,000 square feet), and Visalia, California (51,000 square feet). The Jacksonville, Visalia, and Lemont facilities have been constructed within the last eight years and are well equipped and laid out for operating efficiencies. The older New Britain facility is well equipped and maintained but less favorably arranged for operating efficiencies. Management considers all of the distribution centers to be in satisfactory condition. The Company's main offices are located in an industrial park in New Britain, Connecticut, where it occupies three buildings (43,000 square feet) adjacent to its main distribution center in a campus-like setting. In these offices, the business functions of order processing, telesales, marketing, purchasing, information services, finance, and administration are performed. Office space is adequate for the Company's present needs. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders during the fiscal fourth quarter of 1997. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is listed on the American Stock Exchange (trading symbol "MMD"). The following sets forth, for each quarter since the beginning of 1996, the high and low sale prices of the common stock on the American Stock Exchange Composite Tape.
1997 1996 ------------------------------------ ------------------------------- Quarters: High Low High Low -------- ----- -------- ------ First.............................. $ 11 3/8 $ 8 7/8 $ 12 1/2 $ 9 5/8 Second............................. 13 1/2 8 14 10 3/8 Third.............................. 12 13/16 9 3/4 12 3/8 9 5/8 Fourth............................. 11 1/2 9 7/8 11 1/8 9 1/8
The high and low sale prices of the common stock on March 27, 1998 were $11 1/4 and $11 1/6 respectively. The estimated number of holders (including estimated beneficial holders) of the Company's common stock as of March 27, 1998 was approximately 2,500. The Company has paid no cash dividends and has no plans to do so in the foreseeable future. Its loan agreement contains restrictions on dividend payments. 8 ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------ Amounts in thousands, except per share data 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Net sales $288,513 $286,349 $289,062 $271,799 $275,722 Cost of products sold 249,451 243,949 247,556 232,795 239,501 -------- -------- -------- -------- -------- Gross profit 39,062 42,400 41,506 39,004 36,221 Selling, general and administrative expenses 41,857 41,481 35,410 31,553 28,618 -------- -------- -------- -------- -------- Operating income (loss) (2,795) 919 6,096 7,451 7,603 Interest expense, net 1,898 1,813 2,609 2,042 2,688 -------- -------- -------- -------- -------- Income (loss) before income taxes (4,693) (894) 3,487 5,409 4,915 Income tax provision (benefit) (1,772) (329) 1,168 1,896 1,796 -------- -------- -------- -------- -------- Net income (loss) $ (2,921) $ (565) $ 2,319 $ 3,513 $ 3,119 ======== ======== ======== ======== ======== Basic and diluted net income (loss) per share $(1.00) $(.19) $.80 $1.21 $1.08 ======== ======== ======== ======== ======== Weighted average shares outstanding 2,923 2,921 2,900 2,908 2,887 ======== ======== ======== ======== ======== BALANCE SHEET DATA Working capital $ 20,142 $ 42,985 $ 41,816 $ 42,029 $ 42,107 ======== ======== ======== ======== ======== Total assets $ 39,203 $ 81,541 $ 75,363 $ 75,477 $ 73,483 ======== ======== ======== ======== ======== Debt $ 1,512 $ 22,726 $ 21,672 $ 23,798 $ 27,183 ======== ======== ======== ======== ======== Shareholders' equity $ 22,623 $ 25,376 $ 25,856 $ 23,309 $ 19,741 ======== ======== ======== ======== ========
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW The following table sets forth items included in the Statements of Operations as a percentage of net sales for the fiscal years indicated.
% OF NET SALES -------------------------------------------------------------- 1997 1996 1995 ----- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of products sold 86.5 85.2 85.6 ----- ----- ----- Gross profit 13.5 14.8 14.4 Selling, general & administrative expenses 14.5 14.5 12.3 ----- ----- ----- Operating income (loss) (1.0) 0.3 2.1 Interest expense, net 0.6 0.6 0.9 ----- ----- ----- Income (loss) before income taxes (1.6) (0.3) 1.2 Income tax provision (benefit) (0.6) (0.1) 0.4 ----- ----- ----- Net income (loss) (1.0)% (0.2)% 0 .8% ===== ===== =====
RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 In the fourth quarter of 1997, the Company exited from its wholesale drug distribution business. (See Note 2 to the financial statements.) This involved notifying customers of the planned withdrawal from the business, selling off excess pharmaceutical inventory, collecting accounts receivables from pharmacy customers and staff reorganizations and downsizing. This business generated approximately 60% of the Company's 1997 sales, while its remaining healthcare practitioner business generated approximately 40% of its sales, with gross margins of 30%. The Company incurred non-recurring inventory markdowns and write-offs, costs and expenses of approximately $6.0 million ($1.28 per share) in 1997 in connection with its withdrawing from the wholesale drug distribution business. Net sales for the year 1997 of $288.5 million increased slightly from 1996. Sales to wholesale drug distribution customers decreased approximately 10% in 1997 while sales to healthcare practitioner customers increased over 20%. Sales of pharmaceuticals decreased 5%, primarily due to exiting from the wholesale drug distribution business. Sales of medical/surgical supplies for the year increased 16% to $91.0 million due to growth in sales to healthcare practitioners. Gross profit decreased 8% to $39.1 million in 1997 and the overall gross margin rate of 13.5% for 1997 was lower than the 14.8% in the prior year. Gross profit was negatively affected due to almost $5.0 million of inventory markdowns and write-offs associated with exiting from the wholesale drug distribution business and to approximately $500,000 of inventory markdowns for discontinued medical/surgical supplies associated with narrowing the product offerings to healthcare practitioners. The Company's sales prices generally reflect changes in product acquisition costs, and, therefore, the effects of inflation and deflation on the gross profit margin rate are not significant. Selling, general and administrative expenses overall for 1997 increased slightly from the prior year. Expenses for personnel increased primarily due to an enlarged sales staff and freight expenses increased in 1997. In the fourth quarter of 1997, the Company recorded over $1.0 million of charges related to exiting from the wholesale drug distribution business, primarily to reserve for uncollectible accounts receivable. Selling, general and administrative expenses were also negatively affected $800,000 ($.18 per share) during the first two quarters of 1997 in connection with exiting various federal government supply contracts. In the fourth quarter of 1996, the Company recorded $4.0 million ($.90 per share) of charges related to the government supply contracts. (See Notes 2 and 9 to the financial statements.) 10 Selling, general and administrative expenses for 1998 will benefit from reductions in staff, freight expense and other variable expenses previously associated with the wholesale drug distribution business. As a result of exiting from this part of the business, the remaining healthcare practitioner business will bear the fixed selling, general and administrative expenses related to all facilities, systems, management and other overheads. The Company's infrastructure now has the capacity to support higher sales, and the profitability of the remaining healthcare practitioner business is expected to be low in early 1998 until planned sales growth more fully utilizes the Company's capacity. Interest expense increased slightly during 1997. The effect on interest expense of higher interest rates in 1997 was mostly offset by lower debt levels in 1997, particularly during the second half of the year. The effective income tax benefit rate of 37.8% was higher than the federal statutory tax rate due primarily to state income tax benefits. Management estimates the 1998 effective income tax rate will be approximately 37%. The net loss for 1997 was primarily attributable to the charges associated with exiting from the wholesale drug distribution business. The costs associated with exiting from federal government supply contracts also negatively affected the 1997 net loss. Management estimates that a strike at United Parcel Services in the third quarter of 1997 increased the loss per share by approximately $.08 for the year. 1996 COMPARED WITH 1995 Net sales of $286.3 million decreased 1% from 1995. Sales of medical/surgical supplies increased 14% in 1996 to $78.7 million. Growth in sales to healthcare practitioner customers accounted for most of the sales increase in medical/surgical supplies. Brand-name pharmaceutical sales were essentially the same in both years. Dollar sales volume of generic pharmaceuticals decreased 13% in 1996 due to a significant industry-wide deflation in prices. Gross profit increased approximately 2% to $42.4 million in 1996. Gross profit benefited significantly from the increased sales of medical/surgical supplies, which have higher gross margin rates than pharmaceuticals. Management estimates that gross profit was reduced by at least $2.0 million in 1996 versus 1995 as a result of the significant drop in prices of generic pharmaceuticals from the prior year. Overall, the gross margin rate for 1996 was 14.8%, an increase from 14.4% in 1995. The Company's sales prices generally reflect changes in product acquisition costs, and, therefore, the effects of inflation and deflation on the gross profit margin rate are not significant. Selling, general and administrative expenses for the year 1996 increased $6.1 million, or 17%. In the fourth quarter of 1996, the Company recorded $4.0 million of charges related to various government supply contracts. (See Notes 2 and 9 to the financial statements.) Higher freight expense in 1996 also contributed to the increase in selling, general and administrative expenses for the year and fourth quarter. Selling, general and administrative expenses were also higher for the fourth quarter of 1996 due to the hiring and training of additional sales personnel. Operating income in 1996 decreased from 1995, primarily due to the $4.0 million of charges related to government contracts and the significant deflation in prices of generic pharmaceuticals. Interest expense decreased 31% in 1996. Approximately two thirds of the decrease resulted from lower debt levels, achieved primarily through inventory reductions. The inventory reductions were attributable, in part, to deflation of generic pharmaceuticals and the planned shift in product mix from pharmaceuticals toward medical/surgical supplies. Lower interest rates from the new line of credit established in early 1996 also reduced interest expense. The effective income tax benefit rate was 36.8%, which varies from the federal statutory rate due primarily to reductions of tax valuation allowances and to minimum state income taxes. The net loss for 1996 was primarily attributable to the $4.0 million ($.90 per share) of charges related to government supply contracts. The price deflation in generic pharmaceuticals also negatively affected 1996 net income by at least an estimated $1.2 million ($.41 per share). 11 FINANCIAL CONDITION During 1997 the financial condition of the Company improved. Debt of $1.5 million at the end of 1997 was at the lowest level in over ten years. The significant reduction in debt and significant reductions in other assets and liabilities were the result of the withdrawal from the Company's wholesale drug distribution business during the fourth quarter of 1997. Net cash provided by operating activities in 1997 was $21.9 million, of which $21.2 million was used to pay down debt and $0.7 million was used for capital expenditures. Operating activities generated cash sources of $30.4 million from a decrease in inventories, $10.5 million from a decrease in accounts receivable, $1.0 million from net non-cash elements in earnings and $0.9 million from a net change in other assets and liabilities. In addition to paying down debt and purchasing equipment, these cash sources were used to pay down $18.0 million of accounts payable and fund the net loss for the year of $2.9 million. The Company's present bank financing agreement, provides a $10 million revolving line of credit through December, 1999. The facility provides for funding limited by a formula using accounts receivable balances and inventory levels as the primary variables. Interest on loans is charged at the prime rate or, at the option of the Company, at the Eurodollar rate plus a rate in a range of 1% to 2% depending on the financial leverage of the Company. In addition, the Company pays a 1/4% commitment fee on the unused line of credit. Substantially all assets of the Company have been pledged as collateral and the agreement contains covenants and restrictions relating to asset protection, financial condition, dividends, investments, acquisitions and certain other matters. At January 3, 1998, the Company was not in compliance with various financial covenants under the agreement due to the non-recurring charges associated with exiting from the wholesale drug distribution business. The Company has received waivers from the bank regarding these financial covenants and the financial covenants in the agreement have been amended to reflect the new financial condition and reduced borrowing needs of the Company. Management believes that the funding needs of the Company for operating working capital and equipment purchases will continue to be met through income from operations and financing available under its line of credit. Capital expenditures for 1998 are expected to be approximately $5.5 million. The most significant 1998 planned capital expenditure, estimated to be $4.5 million, is for the development of computer software to replace substantially all of the Company's business computer systems. Maintenance of the current systems, which were developed internally and enhanced over many years, has become expensive and problematic due to the age of the systems, the complexity of changes to the systems and the high cost and lack of availability of computer programmers. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Adoption of this Statement of Position is required for the Company's 1999 fiscal year, however, early adoption is permitted. Management has not determined when it will adopt this Statement of Position or the impact of adoption on the Company's results of operations, but believes that adoption would not have a material effect on the Company's financial condition. YEAR 2000 ISSUE The Year 2000 date issue arises from the fact that many computer programs use only two digits to identify a year in a date field. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, an inability to process transactions, send invoices, or engage in similar normal business activities. Although the Company's present computer systems are not Year 2000 compliant, the majority of these systems are in the process of being replaced with fully-compliant new systems. The new systems' implementation is planned to be completed by the end of 1998. Management does not expect costs associated with the Year 2000 issue to have a material adverse impact on the Company's financial position, results of operations or liquidity. However, the Company could be adversely impacted by the Year 2000 date issue if its suppliers, service providers, customers and other businesses do not address this issue successfully. Management plans to assess these risks in order to reduce the impact on the Company. 12 FORWARD-LOOKING INFORMATION From time to time, the Company or its representatives may have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but, not limited to, press releases, oral statements made by or with the approval of an authorized executive officer, or in this report or other filings made by the Company with the Securities and Exchange Commission. The words or phrases "trend," "expect," "grow," "will," "could," "likely result," "planned," "continued," "anticipated," "estimated," "projected" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to maximize to the fullest extent possible the protections of the safe harbor established in the said Act. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements. Investors should also be aware of factors that could have an impact on the Company's business or financial position or performance. These include possible: pressures on revenues resulting, for example, from customer consolidations or changes in customer buying patterns; intensified competition resulting, for example, from distributor consolidations or pricing pressures from distributors able to benefit from economies of scale or other operating efficiencies; disruptions in services on which the Company is dependent, such as by truckers in deliveries from its suppliers, by UPS or other common carriers in deliveries to its customers, by its catalog printers or in telecommunication services, or relating to its computer systems; unfavorable outcomes of litigation to which the Company may become a party; and other factors detailed from time to time in the Company's Securities and Exchange Commission filings or other readily available or generally disseminated writings. The risks identified here are not all inclusive. Reference is also made to other parts of this report that include additional information concerning factors that could adversely impact the Company's business or financial position or performance. Moreover, the Company operates in a changing and very competitive business environment. New risks may emerge from time to time, and it is not possible for management to predict all risk factors, nor can it necessarily identify or assess the impact of all such factors on the Company or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MOORE MEDICAL CORP. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page No. -------- Report of Independent Accountants 15 Balance Sheets at the end of years 1997 and 1996 16 Statements of Operations for the years 1997, 1996 and 1995 17 Statements of Cash Flows for the years 1997, 1996 and 1995 18 Notes to Financial Statements 19 - 26 Financial Statement Schedule VIII - Valuation and Qualifying Accounts 32 for the years ended 1997, 1996 and 1995.
14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Moore Medical Corp. In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Moore Medical Corp. at January 3, 1998 and December 28, 1996, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Hartford, Connecticut February 16, 1998, except for Note 5, as to which the date is March 30, 1998. 15 MOORE MEDICAL CORP. BALANCE SHEETS AT END OF YEARS
- ---------------------------------------------------------------------------------------------------------------- Amounts in thousands 1997 1996 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash............................................................. $ 54 $ 16 Accounts receivable, less allowances of $891 and $626........................................... 15,212 25,761 Inventories...................................................... 13,416 43,828 Prepaid expenses and other current assets........................ 2,960 4,117 Deferred income taxes............................................ 3,354 2,356 -------- -------- Total Current Assets.......................................... 34,996 76,078 -------- -------- NONCURRENT ASSETS Equipment and leasehold improvements, net........................ 3,511 4,411 Other assets..................................................... 696 1,052 -------- -------- Total Noncurrent Assets....................................... 4,207 5,463 -------- -------- $ 39,203 $ 81,541 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable................................................. $ 9,053 $ 27,071 Accrued expenses................................................. 5,801 6,022 -------- -------- Total Current Liabilities..................................... 14,854 33,093 -------- -------- DEFERRED INCOME TAXES.............................................. 214 346 REVOLVING CREDIT FINANCING......................................... 1,512 22,726 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, no shares outstanding........................... - - Common stock-$.01 par value; 5,000 shares authorized; 3,246 shares issued................... 32 32 Capital in excess of par value................................... 21,644 21,692 Retained earnings................................................ 3,788 6,709 -------- -------- 25,464 28,433 Less treasury shares, at cost, 319 and 343 shares................ ( 2,841) ( 3,057) -------- -------- Total Shareholders' Equity.................................... 22,623 25,376 -------- -------- $ 39,203 $ 81,541 ======== ========
______________________________________________________________________________ The accompanying notes are an integral part of the financial statements. 16 MOORE MEDICAL CORP. STATEMENTS OF OPERATIONS FOR THE YEARS
- ---------------------------------------------------------------------------------------------------------------------- Amounts in thousands, except per share data 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Net sales............................................................. $288,513 $286,349 $289,062 Cost of products sold................................................. 249,451 243,949 247,556 -------- -------- -------- Gross profit.......................................................... 39,062 42,400 41,506 Selling, general and administrative expenses.......................... 41,857 41,481 35,410 -------- -------- -------- Operating income (loss)............................................... (2,795) 919 6,096 Interest expense, net................................................. 1,898 1,813 2,609 -------- -------- -------- Income (loss) before income taxes..................................... (4,693) (894) 3,487 Income tax provision (benefit)........................................ (1,772) (329) 1,168 -------- -------- -------- Net income (loss)..................................................... $ (2,921) $ (565) $ 2,319 ======== ======== ======== Basic and diluted net income (loss) per share......................... $(1.00) $(0.19) $0.80 ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 17 MOORE MEDICAL CORP. STATEMENTS OF CASH FLOWS FOR THE YEARS
- ---------------------------------------------------------------------------------------------------------- Amounts in thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $ (2,921) $ (565) $ 2,319 Adjustments to reconcile net income (loss) to net cash flow provided by operating activities: Depreciation and amortization............................. 1,481 1,675 1,670 Deferred income taxes..................................... (1,130) (1,838) 328 Other..................................................... 603 288 (54) Changes in operating assets and liabilities Accounts receivable.................................... 10,549 (2,871) (1,737) Inventories............................................ 30,412 (2,931) 2,263 Other current assets................................... 1,157 642 (50) Accounts payable....................................... (18,018) 2,372 167 Other current liabilities.............................. (221) 3,333 (625) -------- ------- ------- Net cash flows provided by operating activities........... 21,912 105 4,281 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Equipment and leasehold improvements acquired............... (660) (1,182) (2,175) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit financing increase (decrease),net.......... (21,214) 1,054 (2,126) -------- ------- ------- (Decrease) increase in cash................................. 38 (23) (20) Cash at the beginning of year............................... 16 39 59 -------- ------- ------- CASH AT END OF YEAR......................................... $ 54 $ 16 $ 39 ======== ======= ======= - ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 18 MOORE MEDICAL CORP. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL - The Company is a national marketer and distributor of healthcare products, to approximately 100,000 healthcare practitioner customers in non- hospital settings. Primary customer groups are physicians, emergency medical services, medical departments at industrial sites, podiatrists, and university/school health services. It markets approximately 7,000 medical/surgical and pharmaceutical supply products (SKUs) through direct mail, telesales, and a small field sales force. Most customer orders are processed by call center representatives. The Company fulfills orders from its regional distribution centers in Connecticut, Florida, Illinois and California and ships orders nationwide by common carriers. The Company is in its fifty-second year of operation, and it has served healthcare practitioner customers for over 25 years. FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to December 31. The fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995 and comprised 53 weeks in 1997 and 52 weeks in 1996 and 1995. INVENTORIES - Inventories, consisting of products purchased for resale, are stated at the lower of average cost or market value. Market values are based on estimated sales prices of products. EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment is recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives (3-7 years) of the assets. Leasehold improvements are depreciated over the useful life of the asset or the term of the lease, whichever is shorter. Expenditures for maintenance and repairs are charged to expense as incurred. Major improvements to equipment are capitalized. The cost of assets sold or retired and the related amounts of accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is included in income. SALES RECOGNITION POLICY AND CUSTOMERS - Sales are recorded upon shipment of products to customers. Accounts receivable have been reduced by estimated amounts for allowances related to future charges for uncollected accounts and product returns. ADVERTISING - The cost of direct response catalog advertising is deferred and amortized over the expected revenues. Direct response catalog advertising consists primarily of catalog production expenses. Catalogs are effective for varying time periods but the largest catalogs are generally effective for less than a year. At January 3, 1998 and December 28, 1996, $459,000 and $460,000, respectively, of direct response catalog advertising expenses were deferred. Catalog advertising expense totaled $3,213,000, $2,983,000 and $3,150,000 in 1997, 1996 and 1995, respectively. INCOME TAXES - The liability method is used to calculate deferred income taxes. Under this method, deferred income tax assets and liabilities are recognized on temporary differences between the financial statement and tax bases of assets and liabilities, using applicable tax rates, and on tax carryforwards. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE - In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," for all periods presented. Basic earnings per share computations are determined based on the weighted average number of shares outstanding during the period. The effect of the exercise and conversion of all securities, including stock options are included in the diluted earnings per share calculation. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 19 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Subsequent actual outcomes could differ from those estimated and assumed. Note 2 - BUSINESS DEVELOPMENTS In October, 1997, the Company decided to exit from its wholesale drug distribution business, in which sales to pharmacies continued to experience increased competition and shrinking gross margins, in order to concentrate on its remaining and more profitable healthcare practitioner business. The wholesale drug distribution business sold primarily pharmaceuticals, while sales of the healthcare practitioner business are mainly medical/surgical products. The exit plan has been substantially completed: most of the excess pharmaceutical inventory has been sold; most of the accounts receivable from pharmacy customers have been collected; and the staff has been reorganized and downsized. The liquidation of inventory and accounts receivable generated cash which was used to reduce the Company's debt to $1.5 million at the end of 1997. During 1997, the Company's wholesale drug distribution business generated approximately 60% of the Company's total sales, while its healthcare practitioner business generated approximately 40% of its total sales, with gross margins of 30%. Sales to healthcare practitioners increased by over 20% in 1997 over the prior year. The Company incurred non-recurring inventory markdowns and write-offs, costs and expenses of approximately $6 million or $1.28 per share (unaudited) in 1997 in connection with its withdrawing from the wholesale drug distribution business. In April, 1997, the Company decided to exit various supply contracts with the U.S. Department of Veterans Affairs and the Defense Department due to the highly competitive nature of the business, the complexity of contractual price compliance regulations and related administrative burdens. A $4 million ($.90 per share) non-recurring charge was made to 1996 earnings for contract price deficiencies, associated costs and 1996 costs related to the decision to exit the supply contracts. In addition, in 1997, the Company incurred non-recurring charges to earnings of $800,000 ($.18 per share) for costs of exiting that business. The final amount of the price deficiency adjustments is subject to the outcome of contract settlement discussions which the Company has requested with the governmental agencies or to an adjudicated disposition. 20 NOTE 3 - INCOME TAXES The income tax provision consists of the following:
- ------------------------------------------------------------------------------------- Amounts in thousands 1997 1996 1995 - ------------------------------------------------------------------------------------- Current Federal $ (733) $ 1,421 $ 797 State 91 88 43 ------- ------- ------ Total current (642) 1,509 840 ------- ------- ------ DEFERRED (1,130) (1,838) 328 ------- ------- ------ Total provision (benefit) $(1,772) $ (329) $1,168 ======= ======= ======
A reconciliation of the statutory federal income tax rate and the effective income tax rate as a percentage of pretax income is as follows:
- ------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------- Statutory federal income tax rate (34.0)% (34.0)% 34.0% State income taxes, net of federal tax benefit (5.6) 11.6 2.4 Valuation allowance - (16.8) (2.2) Other - net 1.8 2.4 (0.7) ----- ----- ---- Effective income tax rate (37.8)% (36.8)% 33.5% ===== ===== ====
Deferred income tax assets and liabilities at the end of each year consist of the tax effects of temporary differences related to the following:
- ------------------------------------------------------------------------ Amounts in thousands 1997 1996 - ------------------------------------------------------------------------ Allowance for doubtful accounts $ 485 $ 274 Inventories 1,457 954 Accrued expenses 1,690 1,393 Other 187 56 ------ ------ Deferred Tax Assets 3,819 2,677 ------ ------ Accumulated depreciation (49) (162) Prepaid pension expense (418) (351) Catalog advertising (212) (154) ------ ------ Deferred Tax Liabilities (679) (667) ------ ------ $3,140 $2,010 ====== ======
Income tax payments totaled $459,000, $1,762,000 and $742,000 in 1997, 1996 and 1995, respectively. 21 NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment, leasehold improvements and accumulated depreciation are summarized as follows:
- ------------------------------------------------------------------------- Amounts in thousands 1997 1996 - ------------------------------------------------------------------------- Equipment $10,145 $11,112 Leasehold improvements 2,962 3,098 ------- ------- 13,107 14,210 Less accumulated depreciation (9,596) (9,799) ------- ------- $ 3,511 $ 4,411 ======= =======
NOTE 5 - REVOLVING CREDIT FINANCING The Company has a bank financing agreement which provides a $10 million revolving line of credit through December 31, 1999. The facility provides for funding limited by a formula using accounts receivable balances and inventory levels as the primary variables. Interest on loans is charged at the prime rate or, at the option of the Company, at the Eurodollar rate plus a rate in a range of 1% to 2% depending on the financial leverage of the Company. In addition, the Company pays a 1/4% commitment fee on the unused line of credit. Substantially all assets of the Company have been pledged as collateral and the agreement contains covenants and restrictions relating to asset protection, financial condition, dividends, investments, acquisitions and certain other matters. At January 3, 1998, the Company was not in compliance with various financial covenants under the agreement due to the non-recurring charges associated with exiting from the wholesale drug distribution business. The Company has received waivers from the bank regarding these financial covenants. Additionally in March, 1998, the financial covenants under the agreement were amended to reflect the new financial condition and reduced borrowing needs of the Company. The fair value of the revolving credit debt as of January 3, 1998 approximated its reported balance.
- --------------------------------------------------------------------------------------- Amounts in thousands 1997 1996 1995 - --------------------------------------------------------------------------------------- BORROWINGS Average $19,904 $23,798 $29,777 Maximum $32,312 $28,849 $38,415 WEIGHTED DAILY AVERAGE INTEREST RATE For the year 9.5% 7.6% 8.8% At year end 8.5% 7.6% 8.5%
Cash payments for interest on revolving credit financing totaled $1,898,000, $1,893,000, and $2,634,000 in 1997, 1996 and 1995, respectively. 22 NOTE 6 - RETIREMENT PLANS All employees meeting eligibility requirements participate in the Company's defined benefit pension plan under which pension benefits are based on the employee's highest consecutive five year average annual compensation. The Company's funding policy is to comply with the minimum funding requirements set by the Employee Retirement Income Security Act of 1974 (ERISA). The components of net pension expense are as follows:
- ------------------------------------------------------------------------------------------------- Amounts in thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 373 $ 418 $ 395 Interest cost on projected benefit obligation 250 284 250 Actual return on assets (723) (501) (625) Net amortization and deferral 347 185 367 ------ ------- ------ $ 247 $ 386 $ 387 ====== ======= ======
The funded status and balance sheet amounts at the end of each year are as follows:
- ------------------------------------------------------------------------------------------------------ Amounts in thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Actuarial present value of accumulated benefit obligation including vested benefits of $2,548, $2,228, and $2,169 $2,701 $2,420 $2,296 ====== ====== ====== Actuarial present value of projected benefit obligation for services to date $3,467 $3,326 $3,781 Plan assets at fair value 4,865 4,370 3,700 ------ ------ ------ Plan assets more (less)than projected benefit obligation 1,398 1,044 (81) Unrecognized prior service cost 46 50 54 Unamortized loss at transition 37 49 62 Unrecognized net (gain)loss (387) (111) 840 ------ ------ ------ Prepaid pension expense included in the balance sheet $1,094 $1,032 $ 875 ====== ====== ======
The present value of the projected benefit obligation was determined using a discount rate of 7.5% in 1997, 1996 and 1995. The present value of the projected benefit obligation is based on actuarial assumptions and on estimates, including an assumed discount rate which may change in the future and significantly affect the amount of this obligation. The effect of changes in the discount rate has been to increase this obligation by $390,000 in 1995. In 1996, the employee turnover assumption used to calculate the actuarial present value of the projected benefit obligation, was changed to more accurately reflect actual employee turnover. The effect of this change in assumption was to decrease the actuarial present value of the projected benefit obligation by $671,000. The compensation rate increase assumption for all years was 5%. The assumed long-term rate of return on plan assets, which consist primarily of investments in various marketable securities, was 9% for all years presented. In addition to the pension plan, the Company has a 401(k) defined contribution retirement plan available to employees meeting eligibility requirements. This plan provides for Company contributions of up to 3% of employees' compensation plus additional Company contributions to partially match employee contributions. The Company's expense in connection with this plan for the years 1997, 1996 and 1995 amounted to $562,000, $588,000 and $537,000, respectively. 23 NOTE 7 - SHAREHOLDERS' EQUITY At January 3, 1998, the Company had three classes of preferred stock: Class A Cumulative Convertible, $5.00 par value, 200,000 shares authorized; Class B Cumulative Convertible, $10.00 par value, 70,002 shares authorized; and Class C, $1.00 par value, 1,000,000 shares authorized of which 35,000 shares have been designated as a Series I Junior Participating Preferred Stock. Changes in Shareholders' Equity for the three years ended January 3, 1998 are as follows:
Common Stock Capital $.01 par value in Excess -------------------- Shares Par of Par Retained Treasury Stock -------------------------- Amounts in thousands Issued Value Value Earnings Shares Cost - -------------------------------------------------------------------------------------------------------- 1995 Beginning balance 3,246 $32 $21,772 $ 4,955 (388) $(3,450) Net income 2,319 Stock options/stock compensation (92) 36 320 ---- ---- ------- ----- ---- ------- Ending balance 3,246 32 21,680 7,274 (352) (3,130) 1996 Net income (loss) (565) Stock options/stock compensation 12 9 73 ---- ---- ------- ----- ---- ------- Ending balance 3,246 32 21,692 6,709 (343) (3,057) 1997 Net income (loss) (2,921) Stock options/stock compensation (48) 24 216 ---- ---- ------- ---- ---- ------- Ending balance 3,246 $32 $21,644 $ 3,788 (319) $(2,841) ===== ==== ======= ===== ==== =======
In 1989, the Company adopted a Shareholder Rights Plan and declared a dividend distribution of one Preferred Stock Purchase Right (the "Rights") for each outstanding share of common stock. The Rights will become exercisable, with certain exceptions, only if a party acquires 15% or more of the Company's common stock or announces an offer to acquire 30% or more. When exercisable, with some exceptions, each Right will entitle its holder (other than the party acquiring 15% or more or offering to acquire 30% or more of the common stock) to buy one one-hundredth of a share of a Series I Junior Participating Preferred Stock at a purchase price of $75.00. Upon the occurance of certain events, Rightsholders (other than such party) will be entitled to purchase either preferred stock of the Company or shares of the acquiring company at half of their market value. The Company will generally be entitled to redeem the Rights at $.01 per Right at any time prior to the earlier of the expiration of the Rights in March, 1999 or ten days following the acquisition of 15% of the Company's common stock. 24 NOTE 8 - STOCK OPTIONS The 1992 Incentive Stock Option Plan authorizes stock option grants for 200,000 shares. Under the plan, options may be granted for ten years at prices not less than 100% of the fair market value of the common stock on the date of grant. The options are exercisable as determined by the Stock Option Committee of the Board of Directors at the time of grant and are typically exercisable in four or five cumulative annual installments beginning one year after the date of grant and expiring five to ten years from the date of grant. The table below summarizes share activity and weighted average price under this plan and a predecessor 1982 Incentive Stock Option Plan.
- --------------------------------------------------------------------------------------------- NUMBER OF SHARES WEIGHTED AVERAGE PRICE - --------------------------------------------------------------------------------------------- OUTSTANDING AT END OF 1994 144,863 $ 9.18 Canceled ( 10,200) 9.14 Exercised ( 26,963) 4.64 -------- OUTSTANDING AT END OF 1995 107,700 10.28 Granted 50,000 12.25 Canceled ( 9,850) 11.93 Exercised ( 3,250) 10.10 -------- OUTSTANDING AT END OF 1996 144,600 10.91 Canceled (17,400) 11.68 Exercised (20,750) 6.36 -------- OUTSTANDING AT END OF 1997 106,450 $11.66 ========
At the end of 1997 there were exercisable 77,425 shares at a weighted average price of $11.45 and at the end of 1996 there were exercisable 77,213 shares at a weighted average price of $8.79. In November, 1992, the Company issued a non-qualified option to purchase 7,500 shares of common stock at a price of $11.75 per share. All non-qualified options were exercisable at the end of 1997 and expire in November, 1998. If compensation expense had been recognized based on the fair value of options at their grant date, as prescribed in Financial Accounting Standard No.123, the Company's 1997 and 1996 results of operations would not have been materially affected. NOTE 9 - COMMITMENTS AND CONTINGENCIES Beginning in 1991, the Company entered into various supply contracts with the U.S. Department of Veterans Affairs and the Defense Department. In April 1997, the Company completed a review of its compliance with various pricing provisions of these contracts and, with the assistance of special legal counsel, concluded that adjustments may be due to the federal agencies for potential unasserted claims against the Company relating to pricing deficiencies under product supply contracts subject to General Services Administration and Department of Defense regulations. In the fourth quarter of 1996, the Company established a $3.8 million reserve for estimated pricing deficiency liabilities and associated legal costs. As of the end of 1997, the reserve balance was $3.3 million. The final amount of the pricing deficiency adjustment is subject to the outcome of contract settlement discussions which the Company has requested with the governmental agencies or to an adjudicated disposition. In management's opinion, the ultimate resolution of this matter will not have a material adverse effect on the Company's financial position. Although management believes that the reserve is sufficient, it is possible the final resolution could exceed such reserve and could have a material impact on the statement of operations and cash flow in such period. 25 The Company leases its distribution centers, office facilities and certain equipment. Lease commitments under these agreements expire at various dates through 2006. Future minimum lease payments, as of January 3, 1998, under all leases are as follows: 1998, $1,360,000; 1999 $973,000; 2000, $727,000; 2001, $554,000; 2002, $233,000 and later years $18,000. Rental expense amounted to $1,537,000, $1,507,000 and $1,426,000 in 1997, 1996 and 1995, respectively. NOTE 10 - SELECTED QUARTERLY INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------------------------------- Amounts in thousands, NET INCOME PER except per share data NET SALES GROSS PROFIT NET INCOME SHARE - -------------------------------------------------------------------------------------------------- 1995 First $ 77,778 $10,366 $ 485 $ .17 Second 72,271 10,237 432 .15 Third 72,296 10,798 675 .23 Fourth 66,717 10,105 727 .25 -------- ------- ------- ------ Year $289,062 $41,506 $ 2,319 $ .80 ======== ======= ======= ====== 1996 First $ 75,833 $10,597 $ 633 $ .22 Second 72,840 10,782 641 .22 Third 67,610 10,765 580 .20 Fourth* 70,066 10,256 (2,419) (.83) -------- ------- ------- ------ Year $286,349 $42,400 $ (565) $ (.19) ======== ======= ======= ====== 1997 First $ 81,042 $11,216 $ 330 $ 11 Second 77,038 11,351 266 .09 Third 71,660 11,594 730 .25 Fourth* 58,773 4,901 (4,247) (1.45) -------- ------- ------- ------ Year $288,513 $39,062 $(2,921) $(1.00) ======== ======= ======= ======
___________________________________________________________________ *Note: The fourth quarter of 1997 includes non-recurring charges described in Note 2 of approximately $6.0 million relating to exiting from the wholesale drug distribution business and $500,000 of inventory markdowns for medical/surgical supplies. The fourth quarter of 1996 includes charges of $4.0 million relating to government supply contracts. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to information under the caption "Certain Information Regarding Management's Nominees" and "Executive Officers" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to information under the caption "Executive Compensation, " "Employment Agreement," "Defined Benefit Plans," "Stock Options," "Compensation Committee Interlocks and Insider Participation," "Executive Committee's Compensation Report," "Performance Graph," and "Fees Paid to Directors" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to information under the caption "Principal Holders of Common Stock," "Certain Information Regarding Management's Nominees," and "Executive Officers" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to information under the captions "Fees Paid to Directors," "Executive Compensation," "Employment Agreement ," and "Defined Benefit Plans" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A. 27 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this Form 10-K. 1. FINANCIAL STATEMENTS. The financial statements filed as part of this Form 10-K are listed in the index on page 14. 2. FINANCIAL STATEMENT SCHEDULES. The financial statement schedules filed as part of this Form 10-K are listed in the index on page 14. Financial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS FILED UNDER ITEM 601 OF REGULATION FILED HEREWITH OR INCORPORATED BY REFERENCE TO: S-K 3. Articles of Incorporation and By-Laws .1 Certificate of Incorporation, as Exhibit 3.1 to Form 10-K for the fiscal year amended. ended January 3, 1981, Exhibit 1 to Form 10-Q for the quarter ended June 29, 1985, and Exhibit 3.1 to Form 10-K for the fiscal year ended January 2, 1988. .2 Certificate of Designation under Exhibit 3.2 to Form 10-K for the fiscal year Delaware General Corporation Law. ended January 3, 1981 and Exhibit 2 to Form 8-K dated March 8, 1989. .3 By-Laws, as amended. Exhibit 3.3 to Form 10-K for the fiscal year ended January 3, 1981 and Exhibit 3.3 to Form 10-K for the fiscal year ended December 30, 1989. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS .2 Rights Agreement, as amended, dated Exhibit 1 to Form 8-K dated March 8, 1989 and Exhibit 1 March 8, 1989. to Form 8-K dated March 8, 1990. 10. MATERIAL CONTRACTS .1 Second Restated Amended Exhibit 10.1G to Form 10-K for the fiscal year ended Employment Agreement dated as of January 2, 1993. January 1, 1993 between the Company and Mark E. Karp. .2 Amendment to Second Restated Amended Filed herewith Employment Agreement between the Company and Mark E. Karp effective January 1, 1998. .3 Leases of property located in New Exhibit 10.3A to Form 10-K for the fiscal year ended Britain, Connecticut, as amended. December 28, 1985 and Exhibit 10.3 to Form 10-K for the fiscal year ended December 30, 1989.
28 .4A MetLife Savings Plan Program - Exhibit 10.4A to Form 10-K for the fiscal year ended Defined Contribution Basic Plan December 31, 1994. Document dated March 30, 1994. .4B MetLife Savings Plan Program - Exhibit 10.4B to Form 10-K for the fiscal year ended 401(K) Plan Adoption Agreement dated December 31, 1994. October 20, 1994. .4C MetLife Savings Plan Program- Exhibit 10.4C to Form 10-K for the fiscal year ended Prototype Plan Amended & Restated January 1, 1994. Trust Agreement. .4D MetLife Savings Plan Program - Exhibit 10.4D to Form 10-K for the fiscal year ended Service Agreement. January 1, 1994. .5 Defined Benefit Pension Plan and Trust Exhibits 10.5A, 10.5B and 10.5C to Form 10-K for the Agreement dated September 26, 1994, as fiscal year ended December 31, 1994. amended. .6 Incentive Stock Option Plan and form of Exhibit A to the 1982 Proxy Statement, Exhibit 10.2 to stock option. Form 10-K for the fiscal year ended January 1, 1983 and Exhibit 4(d) to a Registration statement on Form S-8 (commission file No. 33-20037) effective February 29, 1988 and Exhibit A to the 1992 Proxy Statement. .7 1998 Non-qualified Stock Option Plan, with Filed herewith. forms of options. .8 Change of Control and Position Payment Filed herewith. Plan. .9 1998 Corporate Vice Presidents' Bonus Plan Filed herewith. .12 Revolving Credit Agreement by and among Exhibit 1 to Form 8-K dated January 9, 1996. the Company, Bank of Boston Connecticut, the other lenders which are or may become parties thereto and Bank of Boston Connecticut, as agent, dated January 9, 1996. .13 Security Agreement by and between the Exhibit 2 to Form 8-K dated January 9, 1996. Company and Bank of Boston Connecticut dated January 9, 1996. .14 First Amendment to Revolving Credit Exhibit 10.14 to Form 10-K for the fiscal year ended Agreement by and among the Company, December 28, 1996. Bank of Boston Connecticut and certain other lending institutions, dated March 1, 1996.
29 .15 Second Amendment to Revolving Credit Exhibit 10.15 to Form 10-K for the fiscal year ended Agreement by and among the Company, December 28, 1996. Bank of Boston Connecticut and certain other lending institutions, dated December 27, 1996. .16 Third Amendment to Revolving Credit Exhibit 1 to Form 10-Q for the first quarter, ended Agreement by the Company and BankBoston March 29, 1997. Connecticut, dated April 14, 1997. .17 Fourth Amendment to Revolving Credit Filed herewith Agreement by the Company and BankBoston, N.A., dated March 30, 1998. 21. SUBSIDIARIES Exhibit 22 to Form 10-K for the fiscal year ended .1 Subsidiaries, identifiable pursuant to Item December 28, 1991. 601 (21) of Regulation S-K. 23. CONSENT OF EXPERT Filed herewith .1 Consent of Price Waterhouse LLP.
(b) Reports on Form 8-K: The Company did not file any Current Report on Form 8-K during the quarter ended January 3, 1998. 30 SIGNATURES 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. MOORE MEDICAL CORP. BY: /s/ Mark E. Karp BY: /s/ John A. Murray -------------------------------------------- -------------------------------------------- Mark E. Karp, President and John A. Murray, Vice President and Chief Executive Officer Chief Financial Officer April 1, 1998 April 1, 1998 BY: /s/ Susan G. D'Amato -------------------------------------------- Susan G. D'Amato, Controller and Chief Accounting Officer April 1, 1998
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 and in the capacities and on the dates indicated. /s/ Mark E. Karp /s/ Peter C. Sutro - ----------------------------------------------- ___________________________________________________ Mark E. Karp, Director Peter C. Sutro, Director April 1, 1998 April 1, 1998 /s/ Steven Kotler /s/ Wilmer J. Thomas, Jr. - ----------------------------------------------- --------------------------------------------------- Steven Kotler, Director Wilmer J. Thomas, Jr., Director April 1, 1998 April 1, 1998 /s/ Robert H. Steele /s/ Dan K. Wassong - ----------------------------------------------- ___________________________________________________ Robert H. Steele, Director Dan K. Wassong, Director April 1, 1998 April 1, 1998
31 SCHEDULE VIII MOORE MEDICAL CORP. VALUATION AND QUALIFYING ACCOUNTS ALLOWANCES FOR RETURNS AND UNCOLLECTIBLES AND CUSTOMER REBATES
Additions ---------------------------- Charged Balance at (credited) to Balance at Beginning of Charged to Other End of Period Expenses Accounts Deductions Period ------------ ---------- ------------- ---------- ---------- ALLOWANCE FOR RETURNS AND UNCOLLECTIBLES Fiscal Year End January 3, 1998 $320 $1,115 $ (544) $891 Fiscal Year End December 28, 1996 $188 $ 528 $ (396) $320 Fiscal Year End December 30, 1995 $225 $ 310 $ (347) $188 ALLOWANCE FOR CUSTOMER REBATES Fiscal Year End January 3, 1998 $306 $ 82 $ (388) $ 0 Fiscal Year End December 28, 1996 $546 $2,824 $(3,064) $306 Fiscal Year End December 30, 1995 $160 $4,066 $(3,680) $546
32 EX-10.2 2 1998 AMENDENT TO 2ND RESTATED AMD EMPMNT AGREE. Exhibit 10.2 1998 AMENDMENT TO SECOND RESTATED AMENDED EMPLOYMENT AGREEMENT AMENDMENT TO SECOND RESTATED AMENDED EMPLOYMENT AGREEMENT, dated November 11, 1992, as amended by a Corrective Amendment , dated May 18, 1994, and by an Amendment, dated February 27, 1997, effective as of December 31, 1996 (as so amended, the "Employment Agreement"), between MOORE MEDICAL CORP., a Delaware corporation (the "Employer"), and MARK E. KARP of 274 Wild Oak Drive, Southington, Connecticut 06489 (the "Employee"). The Employer and Employee herewith agree that the Employment Agreement is further amended as follows: 1. Amended Term. The first sentence of Section 1 of the Employment Agreement is ------------ herewith deleted and replaced by the following: Continuing from January 1, 1998 and for a period through December 31, 1998 (subject to the provisions of paragraphs 8 and 9, relating to death and incapacity) (the "Term"), the Employer shall employ the Employee, and the Employee shall serve the Employer and perform the chief executive and administrative duties of President of the Employer, subject at all times to the general supervision and direction of the Board of Directors and the Executive Committee of the Board of Directors of the Employer. 2. Amended Salary. Section 2 of the Employment Agreement is herewith deleted -------------- and replaced by the following: As compensation, the Employer shall pay the Employee a salary for his services (a) at the rate of $421,173 per annum for the period from January 1, 1998 through February 28, 1998, and (b) at the rate of $360,000 per annum for the period during the Term from March 1, 1998 through December 31, 1998. For purposes of this Agreement, the term "Base Salary" shall mean a salary at the rate of $360,000 per annum. 3. Amended Incentive Compensation. Section 3 of the Employment Agreement is ------------------------------ herewith deleted and replaced by the following: (a) As incentive compensation, the Employer shall pay the Employee, within 75 days after the end of its 1998 fiscal year, the percentage of his Base Salary set forth in Column A if its pre-tax income for said fiscal year, as shown in its audited financial statements for the year (subject to adjustment as hereinafter provided for), exceeds the amount set forth opposite said percentage in Column B: A B - - 55.0% $5,735,000 49.5% $5,485,000 44.0% $5,235,000 38.5% $4,985,000 33.0% $4,735,000 27.5% $4,485,000 22.0% $4,235,000 16.5% $4,000,000 34 No such incentive compensation shall be paid if the Employer's pre-tax income for said year does not exceed $4,000,000. If the pre-tax income shown on said financial statements is effected by any charge or associated cost or change in a prior year's reserve relating to a federal government contract pricing deficiency, for purposes of Column B the amount of such pre-tax income shall be subject to such adjustment (if any) as the Compensation Committee of the Board of Directors of the Employer may, in its sole and absolute discretion, determine. (b) Section 3(e) of the Second Restated Amended Employment Agreement effective as of January 1, 1993 between the Employer and the Employee is herewith reinstated and incorporated by reference herein with the same effect as if set out herein in full. 4. Change of Control. Sections 4(a) and 4(b) of said Second Restated ----------------- Amended Employment Agreement is herewith reinstated and incorporated by reference herein with the same effect as if set out herein in full, except that: (a) the period at the end of Section 4(b)(ii) thereof shall be deemed deleted and replaced by a comma, and the following shall be deemed added following "such acquiring person or entity," in Section 4(b) thereof: or (iii) either (x) the election or removal of a majority of the directors of the Employer as a result of a solicitation subject to Rule 14a-11 (or successor Rule) under the Securities Exchange Act of 1934 relating to the election or removal of directors, or (y) the election of directors constituting a majority of the directors of the Employer by other than the action of directors a majority of whom consist of Continuing Directors; for purposes hereof, a Continuing Director" means a director (aa) for whose election the Employer solicited proxies pursuant to a proxy statement under Regulation 14A of said Act, or (bb) who was elected by action of the directors a majority of whom were elected as described in clause (aa) hereof, or (cc) who was elected by action of directors a majority of whom were elected as described in clause (aa) and/or clause (bb) hereof. (b) the clause "three years" appearing in Section 4(a)(i) shall be deleted and replaced by the clause "one year", and (c) the following clause in Section 4(a), following Section 4(a)(ii): an amount equal to three times the average of the prior five calendar year's compensation (including pension, profit sharing and 401(k) contributions, and payment under paragraph 7) accrued by the Employer for the Employee's compensation, as reflected in the Employer's financial statements used for purposes of paragraph 3(c) hereof, shall be replaced by the clause: an amount equal to the Base Salary. 35 IN WITNESS WHEREOF, the parties have executed this amendment to the Employment Agreement on March 20, 1998, effective as of January 1, 1998. MOORE MEDICAL CORP. By: /s/ Robert H. Steele ---------------------------------- Robert H. Steele, Chairman of the Board of Directors /s/ Mark E. Karp ---------------------------------- MARK E. KARP 36 EX-10.7_1 3 1998 NON-QUALIFIED STOCK OPTION PLAN EXHIBIT 10.7 MOORE MEDICAL CORP. P. O. Box 1500 389 John Downey Drive New Britain, CT 06050-1500 1998 NON-QUALIFIED STOCK OPTION PLAN 1. Purpose. The purpose of this 1998 Non-Qualified Stock Option Plan (the -------- "Plan") is to provide a continuing incentive to selected directors, officers, and key employees of Moore Medical Corp., a Delaware corporation (the "Company"), by the grant of non-qualified, non-incentive stock options ("options") under the Plan. Options granted under the Plan are not intended to be eligible for the tax consequences provided for in Sections 421 through 424 of the Internal Revenue Code of 1986, as amended ("the Code"). 2. Shares Covered by Plan. The number of shares which may be issued ---------------------- pursuant to options granted under the Plan shall not exceed 100,000 shares of the Company's common stock, par value $.01 ("Common Stock"). If any option granted under the Plan shall terminate, expire or be canceled, for any reason whatsoever, without having been exercised in full, the shares not purchased under such option shall be available again for the purposes of the Plan. The maximum number of shares in respect to which options may be granted under the Plan to any particular director, officer, or employee participating in the Plan shall be 20,000 per calendar year. 3. Administration. The Plan shall be administered by a committee of -------------- directors of the Company (the "Committee") to be appointed from time to time by the Company's Board of Directors and to consist of not less than the maximum number of persons from time to time required by Rule 16(b)-3 promulgated by the Securities Exchange Act of 1934, or any successor rule or regulation thereto as in effect from time to time ("Rule 16(b)-3") and Section 162(m) of the Internal Revenue Code of 1986, as amended, or any successor statue, rule or regulation ("Code"), each of whom, to the extant necessary to comply with Rule 16(b)-3 and Section 162(m) of the Code only, is intended to be a "disinterested person" within the meaning of Rule 16(b)-3 and an "outside director" within the meaning of Section 162(m) of the Code; provided that, the mere fact that a Committee -------- member shall fail to qualify under either or both of these requirements shall not invalidate any award made or action taken by the Committee which award or action would otherwise be validly made under this Plan. Any determination in writing signed by all the members of the Committee shall be fully effective as if made by a majority vote at a meeting. The Committee may hold meetings telephonically. The Committee may appoint a Secretary, who shall keep minutes of its meetings, and the Committee may make such rules and regulations for the conduct of its business and for the carrying out of the Plan as it shall deem appropriate. In addition to the express powers and authorizations conferred upon the Committee by the Plan, the Committee shall have the authority to (i) interpret and administer the Plan and any instrument or agreement relating to or option made under the Plan and (ii) correct any defects, supply any omission and reconcile any inconsistency in the Plan. The interpretations and constructions by the Committee of any provisions of the Plan or of any option granted thereunder, and such determinations of the Committee as it shall deem appropriate for the administration of the Plan and of options granted thereunder, shall be final, binding and conclusive on all persons having any interest thereunder. 4. Eligibility. Options may be granted under the Plan to directors, ----------- officers, and key employees of the Company, selected by the Committee or the Board of Directors. 5. Granting of Options. The Committee and Board of Directors shall each be ------------------- authorized to select the directors, officers, and key employees eligible to receive options under the Plan, and to grant options to such directors, officers, and key employees providing for the number of shares to be included under each option, the installments (if any) in which it may be exercised, the date upon which each option expires, and the other terms and conditions of each option, all subject to and within the limitations of the Plan. Notwithstanding that an option provides that it may be exercised in installments, it may, if so authorized by the Committee or Board also provide that it becomes fully exercisable earlier ( subject to the provision of Sections 8(a)(ix) and 8(a)(x) of this Plan), in the event of and on a Change of Control and Position (hereinafter defined). 37 6. Option Period. The date of grant of an option shall be the date on -------------- which the Committee or Board shall award the option. The Committee or the Board of Directors may make options exercisable for up to five years from the date of grant. 7. Option Price. The price to be paid for shares on exercise of each ------------ option shall be fixed by the Committee or the Board of Directors upon the date of grant. The price shall not be less than 100% of the fair market value of the Common Stock on the date of the grant. 8. Terms and Conditions of Options. ------------------------------- (a) Each option shall be deemed to include the following terms and conditions: (i) The holder of an option may exercise his or her option by delivering to the Company written notice of the number of shares with respect to which option rights are to be exercised together with full payment of the purchase price of the such shares. In addition, the holder of an option will be required to pay all withholding taxes when due by reason of said exercise. In either case (at the election of the holder of the option) payment may be made either (x) in cash, (y) in Common Stock, or (z) by a combination of cash and Common Stock. If payment, in whole or part, is made in Common Stock, it shall be valued by the Committee at its fair market value on the close of business on the date prior to the date of payment. Common Stock used for payment must have been held by the optionee for at least six months. Upon receipt by the Chief Financial Officer of the Company of payment in full, the option holder shall be deemed the holder of record of the Common Stock issuable upon such exercise, notwithstanding that certificates representing such Common Stock shall not then be actually delivered to the option holder. (ii) No option and no right under any such option may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the optionee other than by will or the laws of descent and distribution, and it may be exercised during his or her lifetime only by the optionee. (iii) If the holder of an option dies during the period of his or her employment by the Company, the number of shares for which the option was exercisable as of the date of death may be exercised by the option holder's personal representative, or transferee entitled to acquire the right to exercise the option by will or pursuant to the laws of descent and distribution, until the earlier of the date upon which his or her option expires or ninety days following the date of death. (iv) If the employment of the option holder is terminated by the option holder by reason of his or her permanent disability, or terminated by the Company for any reason (except to the extent the option provides otherwise with respect to termination for cause), the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ninety days following the date of such termination. (v) If the option holder terminates his or her employment with the Company for any reason other than permanent disability, the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ten days following the date of such termination. (vi) No fractional shares shall be issued upon the exercise of an option. With respect to any fraction of a share otherwise issuable upon any exercise hereof, the Company shall pay to the option holder an amount in cash equal to the fair value of such fraction. (vii) The option holder shall not, by virtue thereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the option holder are limited to those provided by this Plan and (to the extant consistent therewith) those expressed in the option. (viii) If the term of the option holder as a director of the Company terminates for any reason other than his death, the number of shares for which the option was exercisable as of the date of termination 38 may be exercised by the option holder until the earlier of the date upon which his option expires or 10 days (90 days in the event of death) following the date of such termination. (ix) Notwithstanding anything to the contrary contained in an option granted under the Plan, it shall not become exercisable to the extent that, and so long as, an exercise (when aggregated with all other option exercises by an option holder subject to the Section 162(m) provisions hereinafter referred to) thereof would, pursuant to Section 162(m) of the Code, limit the amount deductible by the Company as compensation for federal income tax purposes. (x) Notwithstanding anything to the contrary in an option granted under the Plan, it shall not become exercisable to the extent that, and so long as, an exercise (when aggregated with any other payment which would be subject to the "parachute payment" provisions hereinafter referred to) would cause a "parachute payment" under Section 280G of the Code. (xi) The Company may require an option holder, and the option holder's legal representative, heir, legatee, or distributee, as a condition of any exercise of the option, to give written assurance satisfactory to the Company that the shares are being acquired for investment only, with no view to the distribution, and that any subsequent resale thereof will be made pursuant to an effective and current registration statement under the Securities Act of 1933, or pursuant to an exemption from registration under said Act, and all certificates representing the shares subject to options shall bear the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933. Said shares have been acquired for investment, and may not be sold, transferred or assigned except pursuant to an effective registration statement for said shares under said Act or an opinion of the Company's counsel that such registration is not required under said Act. (b) Each option may be made subject to such other terms and conditions consistent with the Plan as the Committee or Board of Directors may approve and provide for. (c) A "Change of Control and Position" shall be deemed to have occurred if a "change of control" described in (i) occurs on or before December 31, 1999 and a "change in position" described in (ii) or (iii) occurs within twelve months after the "change of control." (i) A "change of control" is: (aa) either (x) any merger or consolidation of the Company into or with another corporation (other than a subsidiary of the Company), or (y) the acquisition by another person or entity of beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 50% of the common stock of the Company, unless, immediately after such merger, consolidation or acquisition, the holders of common stock of the Company immediately prior to such merger, consolidation or acquisition own more than 50% of the voting capital stock of such other corporation or the voting equity interests of such person or entity; or (bb) any sale by the Company of substantially all of the assets and business of the Company for cash, stock, or any combination thereof, unless, immediately after such sale, the holders of common stock of the Company immediately prior to such sale own 50% or more of the voting capital stock of the acquiring corporation or, if the acquiring person or entity is not a corporation, more than 50% of the voting equity interests of such acquiring person or entity; or (cc) either (x) the election or removal of a majority of the directors of the Company as a result of a solicitation subject to Rule 14a-11 (or successor Rule) under the Securities Exchange Act of 1934 relating to the election or removal of directors, or (y) the election of directors constituting a majority of the directors of the 39 Company by other than the action of directors a majority of whom consist of Continuing Directors; for purposes hereof, a "Continuing Director" means a director (aa) for whose election the Company solicited proxies pursuant to a proxy statement under Regulation 14A of said Act, or (bb) who was elected by action of the directors a majority of whom were elected as described in clause (aa) hereof, or (cc) who was elected by action of directors a majority of whom were elected as described in clause (aa) and/or clause (bb) hereof. (ii) A "change of position" with respect to an option granted to an employee of the Company is the termination of the original option holder's employment by the Company (other than by reason of death, disability or a material breach of his or her duties to the Company) or a substantial change in his or her duties. Such an option holder will be considered to have had a substantial change in his or her duties only if: (aa) (x)the position level of the participant is lowered, or (y) the duties of the participant (if he or she held a corporate Vice President - position level immediately prior to the change of control) are changed to (aa) primarily consist of new duties not based upon his or her training or experience, or (bb) include substantial duties performed immediately prior to the change of control by employees of the Company previously subordinate to the participant, or (z) the principle location of employment by the Company of the participant is changed to a location more than 75 miles from his or her residence (for purposes hereof, such residence is to be the participant's residence when the intent of any party to cause a "change of control" becomes actually known to the participant or is first publicly disclosed); and (bb) within 90 days after the occurrence of any of the events referred to in clause (x), (y), or (z) of Section 8(c)(ii)(aa) hereof, he or she terminates his or her employment by the Company. (iii) A "change of position" with respect to an option granted to a non-employee director of the Company is the original option holder's ceasing to be a director of the Company by reason of a (aa) transaction described in clause (aa) or (bb) of Section 8(c)(i) hereof, if he or she is not, or in connection therewith does not become, a director or officer of the other corporation, another person, or acquiring person or entity referred to in said clauses (aa) or (bb), or (bb) a solicitation subject to Rule 14a-11 (or successor Rule) under the Securities Exchange Act of 1934 relating to the election or removal of the directors of the Company. 9. Amendments to and Termination of Plan. The Board of Directors of the ------------------------------------- Company may from time to time make such amendments to the Plan as it may deem proper and in the best interests of the Company, provided that no amendment -------- shall be made which would impair, without the consent of the optionee, any option theretofore granted under the Plan or deprive any optionee of any shares of stock of the Company which he may have acquired through or as a result of an option under the Plan. The Plan may be terminated at any time by the Company's Board of Directors, except with respect to options then outstanding under the Plan. 10. Adjustments. In the event that the Committee or the Board of Directors ------------ determines that any dividend or other distribution (whether in the form of cash, shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares or other similar corporate transaction or event affects the shares such that an adjustment is determined by the Committee or the Board of Directors to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee or the Board of Directors shall, in such manner as it may deem equitable, adjust any or all of the following (i) the number and type of shares (or other securities or property) with respect to which options may be granted, (ii) the number and type of shares (or other securities or property) subject to outstanding options and (iii) the grant or exercise price with respect to any option or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding option in full satisfaction of the Company's obligations to the holder thereunder. 40 11. General Provisions. ------------------ (a) Options May Be Granted Separately or Together. Options may, --------------------------------------------- in the discretion of the Committee or the Board of Directors, be granted either alone or in addition to, in tandem with, or in substitution for any other option granted under the Plan or award granted under any other plan of the Company or any affiliate of the Company. (b) No limit on Other Compensation Arrangements. Nothing ------------------------------------------- contained in the Plan shall prevent the Company or its affiliates from adopting or continuing in effect other compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (c) No Right to Continued Employment or Tenure as Director. The ------------------------------------------------------ grant of an option shall not be construed as giving a participant in the Plan the right to be retained in the employ of the Company or any of its affiliates or, if a director of the Company or any of its affiliates, to continue as a director. Further, the Company or its affiliates may at any time dismiss a participant in the Plan from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any award evidencing an option. (d) Governing Law. The validity, construction, and effect of ------------- the Plan and any rule and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware. (e) No Trust or Fund Created. Neither the Plan nor any option ------------------------ shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any of its affiliates and a participant in the Plan or any other person. To the extant that any person acquires a right to receive payments from the Company or any of its affiliates pursuant to an option, such right shall be no greater than the right of any unsecured general creditor of the Company or its affiliates. 12. Effective Date and Term of Plan. ------------------------------- (a) The Plan was adopted and became effective on February 17, 1998, the date on which it was approved by the Board of Directors of the Company. (b) Unless sooner terminated, this Plan shall terminate on February 16, 2008 and no options shall thereafter be made under the Plan. 41 EX-10.7_2 4 SECOND STOCK OPTION PLAN EXHIBIT 10.7 MOORE MEDICAL CORP. P.O. BOX 1500 389 JOHN DOWNEY DRIVE NEW BRITAIN, CT 06050-1500 __________________ __________________ __________________ Re: Non-Qualified Stock Option ---- shares of Common Stock ------------------------------------------------------ Dear Mr. _____________: The Board of Directors of the Moore Medical Corp., a Delaware Corporation (the "Company"), today, pursuant to the 1998 Non-Qualified Stock Option Plan of the Company (the "Plan"), granted you a non-qualified stock option, which is evidenced hereby, to purchase _____ shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of _______ per share (the fair market value of the stock on the date hereof),exercisable (subject to Section 8 hereof) as follows: _______ shares not earlier than February 17, 1999 and not later than February 16, 2003; an additional ________ shares not earlier than February 17, 2000 and not later than February 16, 2003; an additional ____shares not earlier than February 17, 2001 and not later than February 16, 2003, and an additional ____ shares not earlier than February 17, 2002 and not later than February 16, 2003; provided, however, that, notwithstanding the above, this option shall (subject - -------- ------- to Section 9 hereof) become exercisable in full on the occurance of a Change of Control and Position (as defined in the Plan). Pursuant to the Plan which governs this option, it is subject to all the terms and conditions of the Plan, and to the following terms and conditions: 1. Section 16(b) The following provisions of this paragraph are applicable ---------------- only if this option is being granted to an officer of the Company subject to Section 16 of the Securities Exchange Act of 1934: The grant of this option and the acquisition pursuant to the option of the shares issuable on its exercise were approved by the Board of Directors of the Company on February 17, 1998, and neither such grant nor acquisition constitutes or will constitute an intra-plan transfer involving an issuer equity securities fund, or a cash distribution funded by a volitional disposition of an issuer equity security. Accordingly, the Company intends that such grant and acquisition 42 are exempt from Section 16(b) of the Securities Exchange Act of 1934, pursuant to Rule 16(b)-3(d)(1) thereunder. 2. Exercise; Payment The holder of an option may exercise his or her -------------------- option by delivering to the Company written notice, substantially in the form of Exhibit A, of the number of shares with respect to which option rights are to be exercised together with full payment of the purchase price of the such shares. In addition, the holder of this option shall pay all withholding taxes when due by reason of said exercise. In both cases (at the election of the holder of the option) payment may be made either (x) in cash, (y) in Common Stock, or (z) by a combination of cash and Common Stock. If payment, in whole or part, is made in Common Stock, it shall be valued by the Committee at 100% of its fair market value on the close of business on the date prior to the date of payment. Common Stock used for payment must have been held by the optionee for at least six months. Upon receipt by the Chief Financial Officer of the Company of payment in full, the option holder shall be deemed the holder of record of the Common Stock issuable upon such exercise, notwithstanding that certificates representing such Common Stock shall not be actually delivered to the option holder at that time. 3. No Transfer Neither this option nor any right under this option may be -------------- assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the holder of this option other than by will or the laws of descent and distribution and may be exercised during his or her lifetime only by the optionee. 4. Termination of Optionee's Employment (a) If the holder of an option --------------------------------------- dies during the period of his or her employment by the Company, the number of shares for which the option was exercisable as of the date of death may be exercised by the option holder's personal representative, or transferee entitled to acquire the right to exercise the option by will or pursuant to the laws of descent and distribution, until the earlier of the date upon which his or her option expires or ninety days following the date of death. (b) If the employment of the option holder is terminated by the option holder by reason of his or her permanent disability, or terminated by the Company for any reason (except culpable cause, that is, an intentional material breach of by the option holder of his or her duties as an employee of the Company), the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ninety days following the date of such termination. (c) If the option holder terminates his or her employment with the Company for any reason other than permanent disability, the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ten days following the date of such termination. (d) If the employment of the option holder is terminated by the Company by reason of culpable cause (that is, an intentional material breach by the option holder of his or her duties as an employee of the Company), this option, and all rights thereunder, shall terminate. 43 5. No Right to Continued Employment Term as Officer No obligation, express --------------------------------------------------- or implied, to continue the option holder as an officer or employee of the Company, or for the option holder to continue to remain as an officer or employee, arises from the grant of this option. 6. No Fractional Shares No fractional shares shall be issued upon the ----------------------- exercise of an option. With respect to any fraction of a share otherwise issuable upon any exercise hereof, the Company shall pay to the option holder an amount in cash equal to the fair value of such fraction. 7. No Rights as Shareholders The option holder shall not, by virtue ---------------------------- thereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the option holder are limited to those provided by this Plan and (to the extant consistent therewith) those expressed in the option. 8. No "Section 162(m) Payment" Notwithstanding anything to the contrary in ------------------------------ this option, it shall not become exercisable to the extent that, and so long as, an exercise (when aggregated with all other option exercises of the option holder subject to the Section 162(m) provisions hereinafter referred to) would, pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, limit the amount deductible by the Company as compensation for federal income tax purposes. 9. No "Parachute Payment" Notwithstanding anything to the contrary in this ------------------------- option, it shall not become exercisable to the extent that, and so long as, an exercise (when aggregated with any other payment which would be subject to the "parachute payment" provisions hereinafter referred to) would cause a "parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended. 10. Securities Act Restrictions The Company may require an option holder, ------------------------------- and the option holder's legal representative, heir, legatee, or distributee, as a condition of any exercise of the Option, to give written assurance satisfactory to the Company that the shares are being acquired for investment only, with no view to the distribution, and that any subsequent resale thereof will be made pursuant to an effective and current registration statement under the Securities Act of 1933, or pursuant to an exemption from registration under said Act, and all certificates representing the shares subject to options shall bear the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933. Said shares have been acquired for investment, and may not be sold, transferred or assigned except pursuant to an effective registration statement for said shares under said Act or an opinion of the Company's counsel that such registration is not required under said Act. 44 The Plan governing this option is available at the Company's offices for your inspection. This option is limited and conditioned as provided in the Plan, and as provided in this option. Very truly yours, MOORE MEDICAL CORP. By:__________________________ Mark E. Karp, President ACCEPTED, IN ACCORDANCE WITH ABOVE: ________________________ __________________ Social Security No. ________________ 45 EXHIBIT A --------- NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION - ------------------------------------------------ MOORE MEDICAL CORP. P.O. Box 1500 389 John Downey Drive New Britain, CT 06050-1500 Date of Exercise: _________________________ This constitutes notice under my Non-Qualified Stock Option that I elect to exercise it by purchasing shares of Common Stock, $.01 par value, of MOORE MEDICAL CORP. as follows: Grant Date: _______ Exercise Price: _______ Total Number of Shares Granted Under Option: _______ shares Available to Exercise at Present Date: _______ shares Less Previously Exercised: _______ shares Total Presently Exercisable: _______ shares Present Exercise: _______ shares Purchase Price - Check #: $______ Please register and send the share certificate to me at the following address: 46 The following is applicable only if the offer and sale of securities under said option and resale of the securities issuable on exercise of said option are not subject to an effective registration statement under the Securities Act of 1933: I am familiar with the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Company's stock on this option exercise. The Company has provided me with the opportunity to obtain such information, including its most recent Form 10-K, subsequent Form 10-Qs and Form-8-Ks and its most recent proxy statement. I am purchasing (or, if I am the legal representative of the original option holder's estate, the estate is purchasing) the stock for my own (or said estate's) account for investment purposes only and not with a view to, or for the resale in connection with, any distribution thereof. I understand that (a) said stock has not been registered under the Securities Act of 1933, in reliance upon an exemption registration which depends upon, among other things, the bona fide nature of said investment intent, (b) said stock must be held indefinitely unless subsequently registered under the Securities Act of 1933 or an exemption from registration is available, (c) the Company is under no obligation to register said stock, and (d) the certificate evidencing said stock will be imprinted with a legend which prohibits the transfer of said stock unless they are so registered or such registration is not required in the opinion of counsel for the Company. In addition, I understand that my (or said estate's) exercise of the option has tax consequences, and I have consulted my (or said estate's) tax advisor, and not relied on the Company, regarding the tax consequences. Very truly yours, ________________________________ (Signature) ________________________________ (Print Name) 47 EX-10.7_3 5 THIRD STOCK OPTION PLAN EXHIBIT 10.7 MOORE MEDICAL CORP. P.O. BOX 1500 389 JOHN DOWNEY DRIVE NEW BRITAIN, CT 06050-1500 __________________ __________________ __________________ Re: Non-Qualified Stock Option ---- shares of Common Stock ------------------------------------------------------ Dear Mr. _____________: The Board of Directors of the Moore Medical Corp., a Delaware Corporation (the "Company"), today, pursuant to the 1998 Non-Qualified Stock Option Plan of the Company (the "Plan"), granted you a non-qualified stock option, which is evidenced hereby, to purchase _____ shares of the Company's common stock, $.01 par value ("Common Stock"), at the price of $_______ per share (the fair market value of the stock on the date hereof),exercisable (subject to Section 8 hereof) as follows: _______ shares not earlier than February 17, 1999 and not later than February 16, 2003; an additional ________ shares not earlier than February 17, 2000 and not later than February 16, 2003; an additional ____shares not earlier than February 17, 2001 and not later than February 16, 2003, and an additional ____ shares not earlier than February 17, 2002 and not later than February 16, 2003; Pursuant to the Plan which governs this option, it is subject to all the terms and conditions of the Plan, and to the following terms and conditions: 1. Section 16(b) The following provisions of this paragraph are applicable ---------------- only if this option is being granted to an officer of the Company subject to Section 16 of the Securities Exchange Act of 1934: The grant of this option and the acquisition pursuant to the option of the shares issuable on its exercise were approved by the Board of Directors of the Company on February 17, 1998, and neither such grant nor acquisition constitutes or will constitute an intra-plan transfer involving an issuer equity securities fund, or a cash distribution funded by a volitional disposition of an issuer equity security. Accordingly, the Company intends that such grant and acquisition are exempt from Section 16(b) of the Securities Exchange Act of 1934, pursuant to Rule 16(b)-3(d)(1) thereunder. 48 2. Exercise; Payment The holder of an option may exercise his or her -------------------- option by delivering to the Company written notice, substantially in the form of Exhibit A, of the number of shares with respect to which option rights are to be exercised together with full payment of the purchase price of the such shares. In addition, the holder of this option shall pay all withholding taxes when due by reason of said exercise. In both cases (at the election of the holder of the option) payment may be made either (x) in cash, (y) in Common Stock, or (z) by a combination of cash and Common Stock. If payment, in whole or part, is made in Common Stock, it shall be valued by the Committee at 100% of its fair market value on the close of business on the date prior to the date of payment. Common Stock used for payment must have been held by the optionee for at least six months. Upon receipt by the Chief Financial Officer of the Company of payment in full, the option holder shall be deemed the holder of record of the Common Stock issuable upon such exercise, notwithstanding that certificates representing such Common Stock shall not be actually delivered to the option holder at that time. 3. No Transfer Neither this option nor any right under this option may be -------------- assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the holder of this option other than by will or the laws of descent and distribution and may be exercised during his or her lifetime only by the optionee. 4. Termination of Optionee's Employment (a) If the holder of an option --------------------------------------- dies during the period of his or her employment by the Company, the number of shares for which the option was exercisable as of the date of death may be exercised by the option holder's personal representative, or transferee entitled to acquire the right to exercise the option by will or pursuant to the laws of descent and distribution, until the earlier of the date upon which his or her option expires or ninety days following the date of death. (b) If the employment of the option holder is terminated by the option holder by reason of his or her permanent disability, or terminated by the Company for any reason (except culpable cause, that is, an intentional material breach of by the option holder of his or her duties as an employee of the Company), the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ninety days following the date of such termination. (c) If the option holder terminates his or her employment with the Company for any reason other than permanent disability, the number of shares for which the option was exercisable as of the date of termination may be exercised by the option holder until the earlier of the date upon which his or her option expires or ten days following the date of such termination. (d) If the employment of the option holder is terminated by the Company by reason of culpable cause (that is, an intentional material breach by the option holder of his or her duties as an employee of the Company), this option, and all rights thereunder, shall terminate. 5. No Right to Continued Employment Term as Officer No obligation, express --------------------------------------------------- or implied, to continue the option holder as an officer or employee of the Company, or for the option holder to continue to remain as an officer or employee, arises from the grant of this option. 49 6. No Fractional Shares No fractional shares shall be issued upon the ----------------------- exercise of an option. With respect to any fraction of a share otherwise issuable upon any exercise hereof, the Company shall pay to the option holder an amount in cash equal to the fair value of such fraction. 7. No Rights as Shareholders The option holder shall not, by virtue ---------------------------- thereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the option holder are limited to those provided by this Plan and (to the extant consistent therewith) those expressed in the option. 8. No "Section 162(m) Payment" Notwithstanding anything to the contrary in ------------------------------ this option, it shall not become exercisable to the extent that, and so long as, an exercise (when aggregated with all other option exercises of the option holder subject to the Section 162(m) provisions hereinafter referred to) would, pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, limit the amount deductible by the Company as compensation for federal income tax purposes. 9. Securities Act Restrictions The Company may require an option holder, ------------------------------ and the option holder's legal representative, heir, legatee, or distributee, as a condition of any exercise of the Option, to give written assurance satisfactory to the Company that the shares are being acquired for investment only, with no view to the distribution, and that any subsequent resale thereof will be made pursuant to an effective and current registration statement under the Securities Act of 1933, or pursuant to an exemption from registration under said Act, and all certificates representing the shares subject to options shall bear the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933. Said shares have been acquired for investment, and may not be sold, transferred or assigned except pursuant to an effective registration statement for said shares under said Act or an opinion of the Company's counsel that such registration is not required under said Act. The Plan governing this option is available at the Company's offices for your inspection. This option is limited and conditioned as provided in the Plan, and as provided in this option. Very truly yours, MOORE MEDICAL CORP. By:__________________________ Mark E. Karp, President ACCEPTED, IN ACCORDANCE WITH ABOVE: ________________________ ________________________ Social Security No. ________________ 50 EXHIBIT A --------- NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION - ------------------------------------------------ MOORE MEDICAL CORP. P.O. Box 1500 389 John Downey Drive New Britain, CT 06050-1500 Date of Exercise: _________________________ This constitutes notice under my Non-Qualified Stock Option that I elect to exercise it by purchasing shares of Common Stock, $.01 par value, of MOORE MEDICAL CORP. as follows: Grant Date: _______ Exercise Price: _______ Total Number of Shares Granted Under Option: _______ shares Available to Exercise at Present Date: _______ shares Less Previously Exercised: _______ shares Total Presently Exercisable: _______ shares Present Exercise: _______ shares Purchase Price - Check #: $______ Please register and send the share certificate to me at the following address: The following is applicable only if the offer and sale of securities under said option and resale of the securities issuable on exercise of said option are not subject to an effective registration statement under the Securities Act of 1933: I am familiar with the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Company's stock on this option exercise. The Company has provided me with the opportunity to obtain such information, including its most recent Form 10-K, subsequent Form 10-Qs and Form-8-Ks and its most recent proxy statement. I am purchasing (or, if I am the legal representative of the original option holder's estate, the estate is purchasing) the stock for my own (or said estate's) account for investment purposes only and not with a view to, or for the resale in connection with, any distribution thereof. 51 I understand that (a) said stock has not been registered under the Securities Act of 1933, in reliance upon an exemption registration which depends upon, among other things, the bona fide nature of said investment intent, (b) said stock must be held indefinitely unless subsequently registered under the Securities Act of 1933 or an exemption from registration is available, (c) the Company is under no obligation to register said stock, and (d) the certificate evidencing said stock will be imprinted with a legend which prohibits the transfer of said stock unless they are so registered or such registration is not required in the opinion of counsel for the Company. In addition, I understand that my (or said estate's) exercise of the option has tax consequences, and I have consulted my (or said estate's) tax advisor, and not relied on the Company, regarding the tax consequences. Very truly yours, ____________________________________ (Signature) ____________________________________ (Print Name) 52 EX-10.8 6 CHANGE OF CONTROL & POSITION PLAN EXHIBIT 10.8 MOORE MEDICAL CORP. P. O. BOX 1500 389 JOHN DOWNEY DRIVE NEW BRITAIN, CT 06050-1500 CHANGE OF CONTROL AND POSITION PAYMENT PLAN 1. Purpose ------- The plan is designed to offer an incentive to selected key employees of the Company to continue in its employ by providing for severance payments if they should be affected by a "change in position" as a result of a "change of control and position." 2. Eligibility ----------- The participants in this plan are the key employees of the Company selected for participation by the President, as evidenced by his letter to the employee advising him or her of participation, and extent of participation, in the plan. A participant's eligibility will terminate in the event of, and on, the material breach of his or her duties to the Company. 3. Severance Payment Conditions ---------------------------- Severance will be payable to participants only if the following two defined conditions are both satisfied: (a) a "change of control" on or before December 31, 1999, and (b) a "change in position" within twelve months after the control party change. (a) A "change of control" is: (i) either (x) any merger or consolidation of the Company into or with another corporation (other than a subsidiary of the Company), or (y) the acquisition by another person or entity of beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 50% of the common stock of the Company unless, immediately after such merger, consolidation or acquisition, the holders of common stock of the Company immediately prior to such merger, consolidation or acquisition own more than 50% of the voting capital stock of such other corporation or the voting equity interests of such person or entity; or (ii) any sale by the Company of substantially all of the assets and business of the Company for cash, stock, or any combination thereof, unless, immediately after such sale, the holders of common stock of the Company immediately prior to such sale own 50% or more of the voting capital stock of the acquiring corporation or, if the acquiring person or entity is not a corporation, more than 50% of the voting equity interests of such acquiring person or entity; or (iii) either (x) the election or removal of a majority of the directors of the Company as a result of a solicitation subject to Rule 14a-11 (or successor Rule) under the Securities Exchange Act of 1934 relating to the election or removal of directors, or (y) the election of directors constituting a majority of the directors of the Company by other than the action of directors a majority of whom consist of Continuing Directors; for purposes hereof, a "Continuing Director" means a director (aa) for whose election the 53 Company solicited proxies pursuant to a proxy statement under Regulation 14A of said Act, or (bb) who was elected by action of the directors a majority of whom were elected as described in clause (aa) hereof, or (cc) who was elected by action of directors a majority of whom were elected as described in clause (aa) and/or clause (bb) hereof. (b) A participant's "change of position" is the termination of his or her employment by the Company (other than by reason of death, disability, or a material breach by the participant of his or her duties as an employee of the Company) or a substantial change in his or her duties. A participant will be considered to have had a substantial change in his or her duties only if: (i) (x)the position level of the participant is lowered, or (y) the duties of the participant (if he or she held a corporate Vice President- position level immediately prior to the change of control) are changed to (aa) primarily consist of new duties not based upon his or her training or experience, or (bb) include substantial duties performed immediately prior to the change of control by employees of the Company previously subordinate to the participant, or (z) the principle location of employment by the Company of the participant is changed to a location more than 75 miles from his or her residence (for purposes hereof, such residence is to be the participant's residence when the intent of any party to cause a "change of control" becomes actually known to the participant or is first publicly disclosed); and (ii) within 90 days after the occurance of any of the events referred to in clause (x), (y), or (z) of Section 3(b)(i) hereof, he or she terminates his or her employment by the Company. 4. Severance Amount ------------------ Each participant's severance amount will be the amount stated in the President's letter referred to in paragraph 2, above, as a percentage of the participant's annualized W-2 gross salary plus employee 401(k) contribution, but will not include any amount computed with respect to any incentive or bonus compensation, Company 401(k) contribution, car allowance, or other Company provided benefit. Payment of severance amounts will be made within 45 days after the quarter-end during which the later of the two conditions described in paragraph 3, above, occurs. In no event shall the amount payable under this paragraph exceed an amount which would (when aggregated with any other amounts which would be subject to the Section 280G or Section 162(m) provisions hereinafter referred to) result in any part of a payment otherwise to be made under this paragraph constituting a "parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, or a payment which, pursuant to Section 162(m) of said Code, would not be deductible by the Company as compensation for federal income tax purposes.. 5. Administration; Determinations ------------------------------ The plan will be administered by the Board's Compensation Committee. All interpretations and implementations of the plan by the Committee not expressly inconsistent with the plan will be final and binding on the Company and all participants. Neither this plan nor any letter to a participant under Section 2 thereof can be changed orally and can be changed only by a writing specifically making a change and signed by the President of the Company. 54 EX-10.9 7 1998 CORPORATE VP BONUS PLAN EXHIBIT 10.9 MOORE MEDICAL CORP. - 1998 CORPORATE VICE-PRESIDENTS' BONUS PLAN 1. Purpose; Eligibility; Etc. This Plan is designed to offer the ------------------------- incentive of bonus compensation to the Company's corporate vice-presidents. The Plan is for the Company's 1998 fiscal year. Only employees who are corporate vice-presidents, elected to such position by the Company's Board of Directors, or Executive Committee, are participants in the Plan. (As of February 17, 1998, the corporate vice-presidents, Richard Bucchi, Kenneth Kollmeyer and John A. Murray.) No bonus compensation will be payable if a participant breaches a material obligation to the Company. This Plan does not constitute an employment contract or confer a right to continued employment. An employee first elected a corporate vice president by the Board or its Executive Committee during the year is eligible from the date of election, on an elapsed day basis from that date. If a participant should cease being continually employed by the Company on a full-time basis during 1998, his bonus compensation will be computed on an elapsed day basis to the date of cessation. 2. Bonus. As bonus compensation, the Company will pay each participant, ----- within 75 days after its 1998 fiscal year end, the percentage of his Base Salary (defined below) set forth in Column A if its pre-tax income for that fiscal year, as shown in its audited financial statements for the year (subject to adjustment as hereinafter provided for), exceeds the amount set forth opposite said percentage in Column B:
A B A B - - - - 50%...........$5,735,000 25%.........$4,485,000 45%...........$5,485,000 20%.........$4,235,000 40%...........$5,235,000 15%.........$3,985,000 35%...........$4,985,000 10%.........$3,735,000 30%...........$4,735,000 5%.........$3,485,000
A participant's Base Salary is his W-2 gross pay for 1998, excluding any bonus under this Plan and pay for periods during which he was not actively working for the Company, such as a period of disability or severance pay. No bonus compensation will be paid if the Company's pre-tax income for the fiscal year does not exceed $3,485,000. If the pre-tax income is effected by any charge or associated cost or change in a prior year's reserve relating to a federal government contract pricing deficiency, for purposes of Column B the amount of the pre-tax income will be subject to such adjustment (if any) as the Compensation Committee of the Board of Directors of the Company may, in its sole and absolute discretion, determine. 55 EX-10.17 8 FOURTH AMEND TO WAIVER PLAN EXHIBIT 10.17 FOURTH AMENDMENT ---------------- AND --- WAIVER AGREEMENT ---------------- FOURTH AMENDMENT AND WAIVER AGREEMENT (this "WAIVER AGREEMENT") dated as of March 30, 1998 by and among Moore Medical Corp. (the "BORROWER"), BankBoston, N.A. (as successor by merger to Bank of Boston Connecticut) and certain other lending institutions (collectively, the "BANKS"), and BankBoston, N.A. (as successor by merger to Bank of Boston Connecticut), as agent for the Banks (in such capacity, the "AGENT"), amending a certain Revolving Credit Agreement dated as of January 9, 1996, as amended by the First Amendment Agreement dated as of March 1, 1996, the Second Amendment Agreement dated as of December 27, 1996 and the Third Amendment and Waiver Agreement dated as of April 14, 1997 (as amended, the "CREDIT AGREEMENT"). W I T N E S S E T H ------------------- WHEREAS, the Borrower has requested that the Banks amend certain terms and conditions of the Credit Agreement and waive certain Events of Default which exist under the Credit Agreement; and WHEREAS, the Banks are willing to amend such terms and conditions and waive such Events of Default on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: (S)1. DEFINITIONS. Capitalized terms used herein without definition ----------- that are defined in the Credit Agreement shall have the same meanings herein as therein. (S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrower's ----------------------------------- obligations and liabilities to the Agent and the Banks, and all the Agent's and Banks' obligations and liabilities to the Borrower, as evidenced by or otherwise arising under the Credit Agreement, the Notes and the other Loan Documents, except as otherwise expressly modified in this Waiver Agreement upon the terms set forth herein, are, by the Borrower's, the Agent's and Banks', execution of this Waiver Agreement ratified and confirmed in all respects. In addition, by the Borrower's execution of this Waiver Agreement, the Borrower represents and warrants that, subject to the provided and provided, however, clauses of Section -------- -------- ------- 5.4 of the Credit Agreement, no counterclaim, right of set-off or defense of any kind exists or is outstanding with respect to such obligations and liabilities. 56 (S)3. REPRESENTATIONS AND WARRANTIES. All of the representations and ------------------------------ warranties made by the Borrower in the Credit Agreement, the Notes and the other Loan Documents are true and correct on the date hereof as if made on and as of the date hereof, except for the Events of Default described in (S)5 hereof and except to the extent that any of such representations and warranties relate by their terms to a prior date and except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and changes occurring in the ordinary course of business that singly or in the aggregate do not have a Material Adverse Effect. (S)4. CONDITIONS PRECEDENT. The effectiveness of the amendments and -------------------- waivers contemplated hereby shall be subject to the satisfaction on or before the date hereof of each of the following conditions precedent: (a) Representations and Warranties. All of the representations ------------------------------ and warranties made by the Borrower herein, whether directly or incorporated by reference, shall be true and correct on the date hereof, except as provided in (S)3 hereof. (b) Performance; No Event of Default. The Borrower shall have -------------------------------- performed and complied in all material respects with all terms and conditions herein required to be performed or complied with by it prior to or at the time hereof, and there shall exist no Default or Event of Default except for the Events of Default described in (S)5 hereof. (c) Corporate Action. All requisite corporate action necessary ---------------- for the valid execution, delivery and performance by the Borrower of this Waiver Agreement and all other instruments and documents delivered by the Borrower in connection therewith shall have been duly and effectively taken. (d) Delivery. The parties hereto shall have executed and -------- delivered this Waiver Agreement. In addition, the Borrower shall have executed and delivered such further instruments, and take such further action as the Agent and the Banks may have reasonably requested, in each case further to effect the purposes of this Waiver Agreement, the Credit Agreement and the other Loan Documents. (e) Fees and Expenses. The Borrower shall have paid to the Agent ----------------- and the Banks all fees and expenses incurred by the Agent in connection with this Waiver Agreement, the Credit Agreement or the other Loan Documents on or prior to the date hereof. (S)5. WAIVERS. Subject to the satisfaction of the conditions set forth ------- below, the Banks waive those Events of Default that have occurred under the Credit Agreement as a result of the Borrower's failure on or before April 3, 1998 to comply with those sections of the Credit Agreement set forth on Schedule -------- 2 attached hereto. The waiver set forth in this (S)5 shall be effective only for - - those Events of Defaults contained in the Credit Agreement as specified in the preceding sentence occurring on or before April 3, 1998 and such waiver shall not entitle the Borrower to any future waiver in similar or other circumstances. Without limiting the foregoing, upon the occurrence of an Event of Default after April 3, 1998, or if an Event of Default has occurred and is continuing on the date hereof that is not set forth on Schedule 2, the Banks shall be free in ---------- their 57 sole and absolute discretion to accelerate the payment in full of the Borrower's indebtedness to the Agent and the Banks under the Loan Agreement and the other Loan Documents, and may, if the Banks so elect, proceed to enforce any or all of the Agent's and the Banks' rights under or in respect of the Credit Agreement, the Notes and the other Loan Documents and applicable law. (S)6. AMENDMENTS TO (S)(S)10.1, 10.2, 10.4 and 10.5. Effective as of -------------- -------------------------- January 4, 1998, Sections 10.1, 10.2, 10.4 and 10.5 of the Credit Agreement are hereby amended in their entirety to read as follows: "(S)10.1. Earnings Before Interest and Taxes to Total Interest ---------------------------------------------------- Expense. The Borrower will not permit the ratio of Earnings Before ------- Interest and Taxes to Consolidated Total Interest Expense to be less than 1.5:1.0 for (i) the fiscal quarter of the Borrower ended April 4, 1998, (ii) the period of two consecutive fiscal quarters of the Borrower ending on July 4, 1998, (iii) the period of three consecutive fiscal quarters of the Borrower ending on October 3, 1998 and (iv) any period of four consecutive fiscal quarters of the Borrower ending on or after January 2, 1999." "(S)10.2. Cash Flow to Financial Obligations. The Borrower will ---------------------------------- not permit the ratio of (a) the sum of (i) Consolidated Operating Cash Flow plus (ii) up to $2,500,000 of Capital Expenditures incurred by the Borrower ---- solely in connection with the upgrade of its computer systems to (b) Consolidated Financial Obligations to be less than 1.25:1.0 for (i) the fiscal quarter of the Borrower ended April 4, 1998, (ii) the period of two consecutive fiscal quarters of the Borrower ending on July 4, 1998, (iii) the period of three consecutive fiscal quarters of the Borrower ending on October 3, 1998, (iv) any period of four consecutive fiscal quarters of the Borrower ending on or after January 2, 1999." "(S)10.4. Consolidated Tangible Net Worth Ratio. The Borrower ------------------------------------- will not permit Consolidated Tangible Net Worth to be less than the sum of $22,500,000 plus, on a cumulative basis, fifty percent (50%) of positive ---- Consolidated Net Income for each fiscal year of the Borrower ending on or after January 2, 1999." "(S)10.5. Capital Expenditures. The Borrower will not make or -------------------- permit any Subsidiary of the Borrower to make, Capital Expenditures in any fiscal year that exceed, in the aggregate, $5,500,000. (S)7. AMENDMENT OF SCHEDULE 1. Schedule 1 to the Credit Agreement is ----------------------- ---------- hereby amended in its entirety to read as set forth on Schedule 1 attached ---------- hereto. (S)8. EXPENSES. The Borrower agrees to pay to the Agent upon demand an -------- amount equal to any and all out-of-pocket costs or expenses (including reasonable legal fees and disbursements and appraisal expenses) incurred or sustained by the Agent in connection with the preparation of this Waiver Agreement and any related matters. 58 (S)9. MISCELLANEOUS. ------------- (a) This Waiver Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. (b) Except as otherwise expressly provided by this Waiver Agreement, all of the respective terms, conditions and provisions of the Credit Agreement shall remain the same and in full force and effect. It is declared and agreed by each of the parties hereto that this Waiver Agreement and the Credit Agreement be read and construed as one instrument, and all referenced in the Loan Documents to the Credit Agreement shall hereafter refer to the Credit Agreement, as amended by this Waiver Agreement. IN WITNESS WHEREOF, each of the parties hereto have caused this Waiver Agreement to be executed in its name and behalf by its duly authorized officer as of the date first written above. MOORE MEDICAL CORP. By: /s/ John A. Murray ------------------- Title: Vice President BANKBOSTON, N.A. (AS SUCCESSOR BY MERGER TO BANK OF BOSTON CONNECTICUT) INDIVIDUALLY AND AS AGENT By: /s/ Donald W. Peters --------------------- Title: Vice President 59 SCHEDULE 1 ---------- TO -- REVOLVING CREDIT AGREEMENT --------------------------
- --------------------------------------------------------------------------------------------------- BANK COMMITMENT COMMITMENT ---- ---------- ---------- PERCENTAGE ---------- - --------------------------------------------------------------------------------------------------- BankBoston, N.A. 100.00% $10,000,000 81 West Main Street Waterbury, Connecticut 06702 Attn: Donald Peters, Vice President Telephone: (203) 575-3733 Telecopy: (203) 574-7599 - --------------------------------------------------------------------------------------------------- TOTAL COMMITMENT 100% $10,000,000 - ---------------- ------ ----------- - ---------------------------------------------------------------------------------------------------
60 SCHEDULE 2 ---------- Existing Events of Default under the Credit Agreement ----------------------------------------------------- Failure to comply with (S)(S)10.1, 10.2 and 10.4 of the Credit Agreement as of January 3, 1998. 61 EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-20037 and 33-68128) and in the Prospectuses on Form S-3 included therein of Moore Medical Corp. of our report dated February 16, 1998, except for Note 5, as to which the date is March 30, 1998, appearing on page 15 of this form 10-K. We also consent to the reference to us under the heading "Experts" in such Prospectuses. Price Waterhouse LLP Hartford, Connecticut March 30, 1998 62 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS JAN-3-1998 DEC-28-1996 DEC-29-1996 JAN-01-1996 JAN-3-1998 DEC-28-1996 54 16 0 0 16,103 26,387 891 626 13,416 43,828 6,314 6,473 13,107 14,210 9,596 9,799 39,203 81,541 14,854 33,093 0 0 0 0 0 0 33 32 22,590 25,344 39,203 81,541 288,513 286,349 288,513 286,349 249,451 243,949 249,451 243,949 41,857 41,481 0 0 1,898 1,813 (4,693) (894) (1,772) (329) (2,921) (565) 0 0 0 0 0 0 (2,921) (565) (1.00) (.19) (1.00) (.19)
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