-----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, NY3HTbXR8XNU9+0VLS5z7KvZsm+2iy8Kl+wi5yg6iftavWiYypgjvhLvSLVq3bN9 ZKMf9C8qsjeZ10/GURdAuQ== 0000950109-99-001115.txt : 19990331 0000950109-99-001115.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950109-99-001115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-08903 FILM NUMBER: 99577470 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-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________ 1998 FORM 10 - K ANNUAL REPORT For the fiscal year ended January 2, 1999 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. [ ] The aggregate market value of the voting stock held by non-affiliates (i.e. other than identified 5% holders, and holdings attributed to executive officers and directors) of the registrant as of March 23, 1999 was $18,163,104. Determination of affiliate status for such purpose is not a conclusive determination thereof for other purposes. Number of shares of Common Stock outstanding (exclusive of 306,854 treasury shares) as of March 23, 1999: 2,989,221. - -------------------------------------------------------------------------------- Documents Incorporated By Reference The portions of the registrant's proxy statement for its 1999 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 38. This is page 1 of 38 pages. ================================================================================ Moore Medical Corp. 1998 Annual Report on Form 10-K Table of Contents Part I - ------------------------------------------------------------------------------------------------------- Item 1. Business 3 Item 2. Properties 6 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 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis Results of Operations and Financial Condition 9 Item 8. Financial Statements and Supplementary Data 13 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 96,000 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 8,500 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. Most customers use the products in their healthcare practices, rather than buying for resale. 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 its customers receive orders within two business days. The Company is in its fifty-third year of operation, and it has served healthcare practitioner customers for over 25 years. In 1997, the Company decided to exit from its wholesale drug distribution business in order to concentrate on its more profitable healthcare practitioner distribution business, and the description of its operations in this report focuses on the healthcare practitioner business. RECENT DEVELOPMENTS During 1998, the Company: . received substantially all its revenues from healthcare practitioners, . successfully concluded its withdrawal from the wholesale drug distribution business, a lower margin operation which had been responsible for approximately 60% of its sales in 1997, . increased its gross profit margin rate to over 31% from 13.5% in the prior year, . realigned its senior-most executive management by establishing an office of the president which placed all chief executive officer responsibilities directly with its chief finance, marketing and operations officers, effective January 1, 1999, . completed staff changes to serve healthcare practitioners in non-hospital settings rather than, as in earlier years, have most of its staff in the wholesale business, and . expanded its electronic commerce (e-commerce) presence through on-line marketing and sale of the full line of its products (www.mooremedical.com). DISTRIBUTION OF HEALTHCARE PRODUCTS Most product manufacturers will not sell directly to healthcare practitioners in non-hospital settings the small quantities of products they regularly purchase. 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. 3 The overall market for healthcare products at non-hospital sites has been growing, largely because of: . an aging population, . increases in the amount and variety of products available for diagnosis and treatments, as a result of medical advances, and . an increase in healthcare at more economical sites than hospitals, as a result of cost containment pressures. Governmental programs such as Medicare and Medicaid, and HMO's, managed care and other insurance programs limit funding for healthcare products. This has contributed to consolidations of: . physician customers, as sole practitioners form groups and as practice organizations, (PPO's) form to provide business management for large numbers of physicians, . other customer groups, notably emergency medical services and podiatrists, . distributors of healthcare products into larger organizations serving broader geographic areas, and . manufacturers of healthcare products. In addition, customers expect better prices and services. Services expectations include a broad selection of products, speed of delivery, reliability of supply, ease of ordering, and more extensive information on product specifications, product use and pricing and on government regulations. PRODUCTS The Company distributes approximately 8,500 healthcare product stock keeping units (SKUs) consisting of medical/surgical supplies and pharmaceuticals. Its 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. The Company exited the wholesale drug distribution business, in which it sold primarily pharmaceuticals, during the fourth quarter of 1997. Most of the Company's medical/surgical supply sales are 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 the sales and the percentages of total sales for the past three years of pharmaceuticals and medical/surgical supplies: Dollars in thousands 1998 1997 1996 - -------------------- ---- ---- ---- Medical/surgical supplies $ 90,635 $ 91,030 $ 78,731 75.0% 31.5% 27.5% Pharmaceuticals $ 30,211 $197,483 $ 207,618 25.0% 68.5% 72.5% 4 CUSTOMERS The Company's approximately 96,000 healthcare practitioner customers typically use its 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. 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 (www.mooremedical.com). Many customers order through one of the Company's toll free 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. 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 550 manufacturers of medical/surgical supplies and pharmaceuticals. It purchases most products directly from manufacturers, but also purchases some products from other distributors. In 1998, the largest suppliers of the products which it sold in its healthcare practitioner business were Graham-Field Health Products, Inc., Johnson & Johnson Healthcare Systems, Inc., Laerdal Medical Corp., Microflex Medical Corp., Ortho Diagnostic Systems, Inc., 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 1998 5 accounted for less than 5% of total sales. 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 1996 market research report by a national brokerage firm, five national distributors larger than the Company account for approximately 40% of the sales volume of healthcare supplies to the physician 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, the Company expects that 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. 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 2, 1999, the Company had 323 full-time employees and 24 part-time employees. Of the full-time employees, 168 worked in its marketing and sales 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 nine 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. 6 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 1998. 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 1997, the high and low sale prices of the common stock on the American Stock Exchange Composite Tape.
1998 1997 ------------------------------------------- QUARTERS: HIGH LOW HIGH LOW ---- --- ---- --- First.............................. $12 1/4 $ 10 5/8 $ 11 3/8 $ 8 7/8 Second............................. 13 1/2 11 1/4 13 1/2 8 Third.............................. 14 3/16 10 3/16 12 13/16 9 3/4 Fourth............................. 14 15/16 10 3/4 11 1/2 9 7/8
The high and low sale prices of the common stock on March 23, 1999 were $10 7/8 and $10 3/4 respectively. The estimated number of holders (including estimated beneficial holders) of the Company's common stock as of March 23, 1999 was approximately 1,500. 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. 7 ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------ Amounts in thousands, except per share data 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Net sales $120,846 $288,513 $286,349 $289,062 $271,799 Cost of products sold 83,143 249,451 243,949 247,556 232,795 -------- -------- -------- -------- -------- Gross profit 37,703 39,062 42,400 41,506 39,004 Selling, general and administrative expenses 33,326 41,857 41,481 35,410 31,553 -------- -------- -------- -------- -------- Operating income (loss) 4,377 (2,795) 919 6,096 7,451 Interest (income) expense, net (82) 1,898 1,813 2,609 2,042 -------- -------- -------- -------- -------- Income (loss) before income taxes 4,459 (4,693) (894) 3,487 5,409 Income tax provision (benefit) 1,650 (1,772) (329) 1,168 1,896 -------- -------- -------- -------- -------- Net income (loss) $ 2,809 $ (2,921) $ (565) $ 2,319 $ 3,513 ======== ======== ======== ======== ======== Basic net income (loss) per share $ .96 $ (1.00) $ (.19) $ .80 $ 1.23 ======== ======== ======== ======== ======== Diluted net income (loss) per share $ .95 $ (1.00) $ (.19) $ .80 $ 1.21 ======== ======== ======== ======== ======== Basic weighted average shares outstanding 2,932 2,921 2,910 2,888 2,858 ======== ======== ======== ======== ======== Diluted weighted average shares outstanding 2,949 2,923 2,921 2,900 2,908 ======== ======== ======== ======== ======== BALANCE SHEET DATA Working capital $ 18,521 $ 20,142 $ 42,985 $ 41,816 $ 42,029 ======== ======== ======== ======== ======== Total assets $ 38,481 $ 39,203 $ 81,541 $ 75,363 $ 75,477 ======== ======== ======== ======== ======== Debt $ - $ 1,512 $ 22,726 $ 21,672 $ 23,798 ======== ======== ======== ======== ======== Shareholders' equity $ 25,553 $ 22,623 $ 25,376 $ 25,856 $ 23,309 ======== ======== ======== ======== ========
8 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 ------------------------- 1998 1997 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of products sold 68.8 86.5 85.2 ----- ----- ----- Gross profit 31.2 13.5 14.8 Selling, general & administrative expenses 27.6 14.5 14.5 ----- ----- ----- Operating income (loss) 3.6 (1.0) 0.3 Interest (income) expense, net (.1) 0.6 0.6 ----- ----- ----- Income (loss) before income taxes 3.7 (1.6) (0.3) Income tax provision (benefit) 1.4 (0.6) (0.1) ----- ----- ----- Net income (loss) 2.3% (1.0)% (0.2)% ===== ===== =====
RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 Sales for 1998 decreased 58% to $120.8 million from $288.5 million in 1997. This was due primarily to exiting the wholesale drug distribution business in the fourth quarter of 1997. Sales in the wholesale drug distribution business decreased $175.0 million in 1998 as compared with 1997. Sales in the healthcare practitioner business increased $7.4 million or 7% as compared to 1997. Gross profit decreased 4% to $37.7 million in 1998. This decease was due primarily to the reduced sales volume as a result of exiting the wholesale drug distribution business. Overall gross margin rates increased to 31.2% from 13.5% in the prior year. This improvement was primarily due to the higher margins in the healthcare practitioner business. The Company's sales prices generally reflect changes in product acquisition costs, rather than the effects of inflation or deflation on the gross profit margin rate, which were not significant. In 1997, 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. Selling, general and administrative expenses during 1998 decreased 20%, compared to 1997. The decrease was primarily attributable to reductions in staff, freight expense and other 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 in 1998 carried (and continues to carry) the fixed selling, general and administrative expenses related to all facilities, systems, management and other overhead. In addition, in 1997, a pre- tax charge of $0.8 million was taken in connection with exiting various federal government supply contracts and a charge of approximately $1.0 million was taken related to exiting the wholesale drug business. All debt was retired in 1998 and the Company therefore recorded income from its cash holdings instead of interest expense, as was the case in 1997. The effective income tax provision rate of 37.0% was higher than the federal statutory tax rate due primarily to state income tax provision. Management estimates the 1999 effective income tax rate will be approximately 36.5%. 9 1997 COMPARED WITH 1996 In the fourth quarter of 1997, the Company exited from its wholesale drug distribution business. 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 the effects of inflation or deflation on the gross profit margin rate were therefore 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 by $800,000 ($.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 Note 9 to the financial statements.) Selling, general and administrative expenses for 1998 benefited 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 carried the fixed selling, general and administrative expenses related to all facilities, systems, management and other overheads from the date of exiting in the fourth quarter. 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. 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. FINANCIAL CONDITION During 1998 the financial condition of the Company significantly improved. The Company retired all of its debt during the first quarter of 1998. The retirement of debt and the significant reductions in other assets 10 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 1998 was $9.8 million, of which $1.5 million was used to retire debt and $4.8 million was used for capital expenditures. Operating activities generated cash sources of $5.8 million from a decrease in accounts receivable, $2.8 million from net non-cash elements in earnings and $2.3 million from a net change in other assets and liabilities. Operating activities used cash sources of $3.6 million in accounts payable and $0.3 million for inventory. 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 2, 1999, the Company was in compliance with the financial covenants under the agreement. Management believes that the funding needs of the Company for operating working capital and equipment purchases will continue to be met through cash flow from operations and financing available under its line of credit. Capital expenditures for 1999 are expected to be approximately $2.4 million. The most significant 1999 planned capital expenditure, estimated to be $1.1 million, is for the completion of 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 the limited availability of computer programmers. YEAR 2000 ISSUES Year 2000 issues are the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company's computer programs with date sensitive functions are not year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, an inability to process transactions, send invoices or engage in other normal business activities. The Company has identified its Year 2000 risks in three categories: internal business software, internal non-information technology software, and external vendor compliance. INTERNAL INFORMATION TECHNOLOGY - ------------------------------- During 1998, as part of a modernization program intended to improve productivity and increase profitability by upgrading data processing, integrating systems and enhancing internal reporting, the Company purchased an integrated enterprise system which includes software which the vendor has represented to be Year 2000 compliant. The total estimated hardware, software, installation and training cost of the integrated enterprise system, of which Year 2000 compliance is a by- product, is $5.5 million, of which $4.6 million has been incurred to date, funded through operating cash flow. The Company is in the implementation phase for this system, with full implementation scheduled for mid-1999. Based on this schedule, the Company plans its internal information technology systems to be in substantial compliance before the year 2000. However, if due to unforeseen circumstances the implementation is not completed in a timely manner, Year 2000 issues could have a material adverse impact on the Company's operations. Contingency plans are being developed for areas where management considers there may be some risk to modify certain of the major existing internal information technology systems to be Year 2000 compliant. 11 Internal Non-Information Technology - ----------------------------------- The Company plans to assess the Year 2000 compliance of its internal non- information software and of the technology embedded in such systems as security, telecommunications and building systems by contacting the providers of such systems by mid-1999. Since the Company is in the information gathering phase, it does not have sufficient data to estimate the scheduling or costs of achieving Year 2000 compliance for such systems or have a contingency plan in place therefore. External Vendor Compliance - -------------------------- The Company is in the process of identifying and contacting its major suppliers, service providers and contractors ("vendors") to determine the extent of their Year 2000 compliance. It plans that the process will be completed by mid-1999. To the extent that responses are unsatisfactory, the Company intends to consider changing its major vendors to those who have represented Year 2000 readiness, but cannot be assured that it will be successful in finding alternative vendors. In the event that major vendors are not Year 2000 compliant and the Company does not replace them with new vendors, its business could be materially adversely affected. The Company plans to consider formulating a contingency plan for major vendors' Year 2000 non-compliance in mid-1999, after it receives responses from vendors. 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," "scheduled," "could have," "intended," 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 be aware of factors that could have an impact on the Company's business, financial position or performance. These include possible: pressures on the Company's revenues resulting, for example, from customer consolidations or changes in customer buying patterns; reductions in healthcare funding affecting its customers' services or revenues, resulting, for example, from changes in legislation or regulations or in HMO, managed care or other insurance programs; 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 or systems 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 or Year 2000 issues (including regarding costs, scheduling, implementation, vendor compliance, and the Company's plans and expectations regarding such); pending adjustments of pricing under exited government contracts or unfavorable outcomes of litigation; the effects of vesting chief executive officer responsibilities directly with the Company's chief financial, marketing and operations officers rather than with a single individual; 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 Annual Report on Form 10-K, which 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 12 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data have been filed as part of this Annual Report as indicated in the index to Financial Statements and Financial Statement Schedules appearing on page 14. 13 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 1998 and 1997 16 Statements of Operations for the years 1998, 1997 and 1996 17 Statements of Cash Flows for the years 1998, 1997 and 1996 18 Notes to Financial Statements 19 - 26 Financial Statement Schedule VIII - Valuation and Qualifying Accounts 32 for the years ended 1998, 1997 and 1996
14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Moore Medical Corp. In our opinion, the accompanying balance sheets and the related statements of income and cash flows present fairly, in all material respects, the financial position of Moore Medical Corp. (the "Company") at January 2, 1999 and January 3, 1998 and the results of its operations and its cash flows for each of the three years in the period ended January 2, 1999, 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. PricewaterhouseCoopers LLP Hartford, Connecticut February 4, 1999 15 MOORE MEDICAL CORP.
BALANCE SHEETS AT END OF YEARS - --------------------------------------------------------------------------------------------- Amounts in thousands 1998 1997 - --------------------------------------------------------------------------------------------- ASSETS Current Assets Cash............................................................. $ 3,520 $ 54 Accounts receivable, less allowances of $372 and $891........................................... 9,385 15,212 Inventories...................................................... 13,684 13,416 Prepaid expenses and other current assets........................ 1,992 2,960 Deferred income taxes............................................ 2,500 3,354 -------- -------- Total Current Assets.......................................... 31,081 34,996 -------- -------- Noncurrent Assets Equipment and leasehold improvements, net........................ 7,038 3,511 Other assets..................................................... 362 696 -------- -------- Total Noncurrent Assets....................................... 7,400 4,207 -------- -------- $ 38,481 $ 39,203 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................................................. $ 5,421 $ 9,053 Accrued expenses................................................. 7,139 5,801 -------- -------- Total Current Liabilities..................................... 12,560 14,854 -------- -------- Deferred Income Taxes.............................................. 368 214 Revolving Credit Financing......................................... - 1,512 Commitments and Contingencies...................................... - - Shareholders' Equity Preferred stock, no shares outstanding........................... - - Common stock-$.01 par value; 5,000 shares authorized; 3,246 shares issued................... 33 32 Capital in excess of par value................................... 21,667 21,644 Retained earnings................................................ 6,597 3,788 -------- -------- 28,297 25,464 Less treasury shares, at cost, 308 and 319 shares................ (2,744) (2,841) -------- -------- Total Shareholders' Equity.................................... 25,553 22,623 -------- -------- $ 38,481 $ 39,203 ======== ========
- -------------------------------------------------------------------------------- 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 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Net sales....................................................... $120,846 $288,513 $286,349 Cost of products sold........................................... 83,143 249,451 243,949 -------- -------- -------- Gross profit.................................................... 37,703 39,062 42,400 Selling, general and administrative expenses.................... 33,326 41,857 41,481 -------- -------- -------- Operating income (loss)......................................... 4,377 (2,795) 919 Interest (income) expense, net.................................. (82) 1,898 1,813 -------- -------- -------- Income (loss) before income taxes.............................. 4,459 (4,693) (894) Income tax provision (benefit).................................. 1,650 (1,772) (329) -------- -------- -------- Net income (loss)............................................... $ 2,809 $ (2,921) $ (565) ======== ======== ======== Basic net income (loss) per share............................... $ .96 $ (1.00) $ (.19) ======== ======== ======== Diluted net income (loss) per share............................. $ .95 $ (1.00) $ (.19) ======== ======== ========
- -------------------------------------------------------------------------------- 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 1998 1997 1996 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $ 2,809 $ (2,921) $ (565) Adjustments to reconcile net income (loss) to net cash flow provided by operating activities: Depreciation and amortization............................. 1,251 1,481 1,675 Deferred income taxes..................................... 1,008 (1,130) (1,838) Other..................................................... 455 603 288 Changes in operating assets and liabilities Accounts receivable.................................... 5,827 10,549 (2,871) Inventories............................................ (268) 30,412 (2,931) Other current assets................................... 968 1,157 642 Accounts payable....................................... (3,632) (18,018) 2,372 Other current liabilities.............................. 1,338 (221) 3,333 ------- -------- ------- Net cash flows provided by operating activities........... 9,756 21,912 105 ------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Equipment and leasehold improvements acquired............... (4,778) (660) (1,182) ------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit financing (decrease) increase, net......... (1,512) (21,214) 1,054 ------- -------- ------- Increase (decrease) in cash................................. 3,466 38 (23) Cash at the beginning of year............................... 54 16 39 ------- -------- ------- CASH AT END OF YEAR......................................... $ 3,520 $ 54 $ 16 ======= ======== =======
- -------------------------------------------------------------------------------- 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 96,000 healthcare practitioner customers in non- hospital settings. Primary customer groups are emergency medical services, medical departments at industrial sites, physicians, podiatrists, and university/school health services. It markets approximately 8,500 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-third 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 2, 1999, January 3, 1998 and December 28, 1996 and comprised 52 weeks in 1998 and 1996 and 53 weeks in 1997. 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 2, 1999 and January 3, 1998, $362,000 and $459,000, respectively, of direct response catalog advertising expenses were deferred. Catalog advertising expense totaled $2,881,000, $3,213,000 and $2,983,000 in 1998, 1997 and 1996, 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. 19 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 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 - Income Taxes The income tax provision (benefit) consists of the following:
- --------------------------------------------------------------------------------- Amounts in thousands 1998 1997 1996 - --------------------------------------------------------------------------------- Current Federal $ 625 $ (733) $ 1,421 State 17 91 88 ------ ------- -------- Total current 642 (642) 1,509 ------ ------- -------- Deferred 1,008 (1,130) (1,838) ------ ------- -------- Total provision (benefit) $1,650 $(1,772) $ (329) ====== ======= ========
A reconciliation of the statutory federal income tax rate and the effective income tax rate as a percentage of pretax income is as follows:
- ----------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------- Statutory federal income tax rate 34.0% (34.0)% (34.0)% State income taxes, net of federal tax benefit 3.8 (5.6) 11.6 Valuation allowance (2.2) - (16.8) Other - net 1.4 1.8 2.4 ---- ------ ------ Effective income tax rate 37.0% (37.8)% (36.8)% ==== ====== ======
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 1998 1997 - -------------------------------------------------------------------------------- Allowance for doubtful accounts $ 316 $ 485 Inventories 661 1,457 Accrued expenses 1,446 1,690 Other 134 187 ------ ------ Deferred Tax Assets 2,557 3,819 ------ ------ Accumulated depreciation - (49) Prepaid pension expense (418) (418) Catalog advertising (7) (212) ------ ------ Deferred Tax Liabilities (425) (679) ------ ------ $2,132 $3,140 ====== ======
Income tax payments totaled $1,091,000, $459,000 and $1,762,000 in 1998, 1997 and 1996, respectively. 20 Note 3 - Equipment and Leasehold Improvements Equipment, leasehold improvements and accumulated depreciation are summarized as follows:
- ------------------------------------------------------------------------- Amounts in thousands 1998 1997 - ------------------------------------------------------------------------- Equipment $ 14,799 $10,145 Leasehold improvements 3,086 2,962 -------- ------- 17,885 13,107 Less accumulated depreciation (10,847) (9,596) -------- ------- $ 7,038 $ 3,511 ======== =======
Note 4 - 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 2, 1999, the Company was in compliance with all financial covenants under the agreement.
- ------------------------------------------------------------------------------- Amounts in thousands 1998 1997 1996 - ------------------------------------------------------------------------------- Borrowings Average $ 149 $19,904 $23,798 Maximum $1,859 $32,312 $28,849 Weighted daily average interest rate For the year 0.0% 9.5% 7.6% At year end 0.0% 8.5% 7.6%
Cash payments for interest on revolving credit financing totaled $55,000, $1,898,000, and $1,893,000 in 1998, 1997 and 1996, respectively. 21 NOTE 5 - EMPLOYEE BENEFITS 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).
Pension disclosure requirements of Financial Accounting Standards no. 132: ------------------------------------------------------------------------------------- Amounts in thousands 1998 1997 1996 ------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year $3,467 $3,326 $3,780 Service Cost 333 373 418 Interest Cost 260 250 284 Actuarial Gain 317 46 (789) Benefits Paid (707) (528) (367) ------ ------ ------ Benefit Obligation at End of Year $3,670 $3,467 $3,326 ====== ====== ====== CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Year $4,865 $4,371 $3,700 Actual Return on Plan Assets 682 714 484 Employer Contribution - 309 554 Benefits Paid (707) (529) (367) ------ ------ ------ Fair Value of Plan Assets at End of Year $4,840 $4,865 $4,371 ====== ====== ====== Funded Status $1,170 $1,398 $1,045 Unrecognized Net Actuarial Loss (314) (387) (112) Unrecognized Prior Service Cost 41 46 50 Unrecognized Transition Cost 25 37 49 ------ ------ ------ Prepaid Benefit Cost $ 922 $1,094 $1,032 ====== ====== ====== WEIGHTED-AVERAGE ASSUMPTIONS AS OF PERIOD ENDING Discount Rate 7.50% 7.50% 7.50% Expected Return on Plan Assets 9.00% 9.00% 9.00% Rate of Compensation Increases 5.00% 5.00% 5.00% COMPONENTS OF NET PERIODIC BENEFIT COST Service Cost $ 333 $ 373 $ 418 Interest Cost 260 250 284 Expected Return on Plan Assets (438) (393) (333) Amortization Prior Service Cost 5 5 5 Amortization Transition Cost 12 12 12 ------ ------ ------ Net Periodic Benefit Cost $ 172 $ 247 $ 386 ====== ====== ======
22 The present value of the projected benefit obligation was determined using a discount rate of 7.5% in 1998, 1997 and 1996. 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. 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 1998, 1997 and 1996 amounted to $469,000, $562,000 and $588,000, respectively. Accrued expenses include accrued bonus at January 2, 1999 and January 3, 1998 of $857,000 and $86,000, respectively. NOTE 6 - SHAREHOLDERS' EQUITY At January 2, 1999, 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 2, 1999 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 - ---------------------------------------------------------------------------------- 1996 Beginning balance 3,246 $ 32 $21,680 $ 7,274 (352) $(3,130) Net (loss) (565) Stock options/stock compensation 12 9 73 ----- ----- ------- ------- ---- ------- Ending balance 3,246 32 21,692 6,709 (343) (3,057) 1997 Net (loss) (2,921) Stock options/stock compensation (48) 24 216 ------ ----- ------- ------- ---- ------- Ending balance 3,246 32 21,644 3,788 (319) (2,841) 1998 Net income 2,809 Stock options/stock compensation 1 23 11 97 ----- ----- ------- ------- ---- ------- Ending balance 3,246 $ 33 $21,667 $ 6,597 (308) $(2,744) ===== ===== ======= ======= ==== =======
23 The Shareholder Rights Plan which the Company adopted in March 1989 expired on March 16, 1999. In November 1998, the Company adopted a successor Shareholder Rights Plan and declared a dividend distribution, effective March 17, 1999, 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 or group acquires 15% or more of the Company's common stock or announces an offer to acquire 15% or more. When exercisable, with some exceptions, each Right will entitle its holder (other than the party or group acquiring 15% or more or offering to acquire 15% 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 $70.00. Upon the occurrence of certain events, Rightsholders (other than such party or group) 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, 2009 or ten days following the acquisition of or offer for 15% of the Company's common stock. NOTE 7 - 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 OPTIONS WEIGHTED AVERAGE EXERCISE PRICE - ----------------------------------------------------------------------------------------- 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 Granted 5,000 11.38 Canceled (55,075) 11.77 Exercised (7,975) 10.89 ------- OUTSTANDING AT END OF 1998 48,400 $11.65 =======
At the end of 1998 there were exercisable 29,250 options at a weighted average price of $11.42 and at the end of 1997 there were exercisable 77,425 options at a weighted average price of $11.45. The Company's Board of Director's adopted and approved the 1998 Stock Incentive Plan (the "Plan") for directors, officers and key employees. The Plan permits the granting of non-qualified stock options of the Company's stock exercisable in four cumulative annual installments commencing one year from the date of the grant and expiring five years from the grant date. The Company issued the following non-qualified options to purchase shares of common stock:
Date Options Price per Option Expiration Date ---- ------- ---------------- --------------- 02/17/98 95,700 $10.88 02/16/03 08/17/98 5,000 13.44 08/16/03 08/19/98 10,000 13.50 08/18/03 10/22/98 5,000 12.75 10/21/03 12/01/98 36,000 14.25 11/30/03
24 At the end of 1998 there were 140,600 options outstanding and zero options exercisable. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees". 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 1998 and 1997 results of operations would not have been materially affected. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for grants during the year ended January 2, 1999: dividend yield of 0%; risk-free rates ranging from 4.7% to 5.4%, expected volatility factors ranging from 34% to 38%; and an expected option term of a five year period. NOTE 8 - 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 1998, the reserve balance was $3.2 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. In 1997, the Company established a $4.5 million restructuring reserve relating to its exit from the wholesale drug distribution business. At the end of 1998, $1.0 million was remaining and will be substantially utilized during 1999. 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 2, 1999, under all leases are as follows: 1999 $1,260,000; 2000, $1,073,000; 2001, $784,000; 2002, $233,000 and later years $18,000. Rental expense amounted to $1,416,000, $1,537,000 and $1,507,000 in 1998, 1997 and 1996, respectively. 25 NOTE 9 - SELECTED QUARTERLY INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------- Amounts in NET INCOME thousands, except NET SALES GROSS PROFIT NET INCOME (LOSS) PER per share data (LOSS) SHARE - ----------------------------------------------------------------------------------- 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) ======== ======= ======= ====== 1998 First $ 30,939 $ 9,338 $ 405 $ .14 Second 30,042 9,357 709 .24 Third 32,529 10,207 1,056 .36 Fourth 27,336 8,801 639 .21 -------- ------- ------- ------ Year $120,846 $37,703 $ 2,809 $ .95 ======== ======= ======= ====== - -----------------------------------------------------------------------------------
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," "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," 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 15. 2. FINANCIAL STATEMENT SCHEDULES. The financial statement schedules filed as part of this Form 10-K are listed in the index on page 15. 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 ended amended. January 3, 1981, Exhibit 1 to Form 10-Q for the quarter ended June 29, 1985, Exhibit 3.1 to Form 10-K for the fiscal year ended January 2, 1988, and Certificate of Correction filed herewith. .2 Certificate of Designation under Exhibit 3.2 to Form 10-K for the fiscal year ended Delaware General Corporation Law. January 3, 1981, Exhibit 2 to Form 8-K dated March 8, 1989, and Exhibit 3 to Form 8-A filed December 30, 1998. .3 By-law, as amended. Exhibit 3.3 to Form 10-K for the fiscal year ended January 3, 1981, Exhibit 3.3 to Form 10-K for the fiscal year ended December 30, 1989, and filed herewith. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS .1 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. .2 Rights Agreement, between the Company and Exhibit 4 to Form 8-K dated December 22, 1998. American Stock Transfer & Trust Co., dated November 18, 1998 (includes as Exhibit B the forms of Rights Certificate and Election to Purchase, and as Exhibit C the form of Amended and Restated Certificate of Designations of Series I Junior Preferred Stock Certificate).
28 10. MATERIAL CONTRACTS .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. .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 Exhibit 10.7 to Form 10-K for fiscal year ended January forms of options. 3, 1998. .8 Change of Control and Position Payment Plan. Exhibit 10.8 to Form 10-K for fiscal year ended January 3, 1998. .9 1999 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.
29 .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. .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 March Agreement by the Company and BankBoston 29, 1997. Connecticut, dated April 14, 1997. .17 Fourth Amendment to Revolving Credit Exhibit 10.17 to Form 10-K for fiscal year ended January 3, Agreement by the Company and BankBoston, 1998. N.A., dated March 30, 1998. 21. SUBSIDIARIES Exhibit 22 to Form 10-K for the fiscal year ended December 28, 1991. .1 Subsidiaries, identifiable pursuant to Item 601 (21) of Regulation S-K. 23. CONSENT OF EXPERT .1 Consent of PricewaterhouseCoopers LLP. Filed herewith
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, dated December 22, 1998, during the quarter ended January 2, 1999, on December 30, 1998, reporting information under Item 5 thereof.. 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/ David V. Harper BY: /s/ David V. Harper ---------------------------------------------------------------- ------------------------------------------- David V. Harper, Member, Office of the President (Chief David V. Harper, Executive Vice President - Executive Office), Executive Vice President -Finance and Chief Finance and Chief Financial Officer Financial Officer March 30, 1999 March 30, 1999 BY: /s/ Richard A. Bucchi BY: /s/ Susan G. D'Amato ---------------------------------------------------------------- ------------------------------------------- Richard A. Bucchi, Member, Office of the President (Chief Susan G. D'Amato, Controller and Executive Office), Executive Vice President -Marketing and Chief Accounting Officer Sales March 30, 1999 March 30, 1999 BY: /s/ Kenneth S. Kollmeyer ---------------------------------------------------------------- Kenneth S. Kollmeyer, Member, Office of the President (Chief Executive Office), Executive Vice President - Operations March 30, 1999
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/ Robert H. Steele /s/ Peter C. Sutro - --------------------------------------------------------- ------------------------------------------------------- Robert H. Steele, Director Peter C. Sutro, Director March 30, 1999 March 30, 1999 /s/ Steven Kotler /s/ Wilmer J. Thomas, Jr. - --------------------------------------------------------- ------------------------------------------------------- Steven Kotler, Director Wilmer J. Thomas, Jr., Director March 30, 1999 March 30, 1999 /s/ Dan K. Wassong - --------------------------------------------------------- Dan K. Wassong, Director March 30, 1999
31 SCHEDULE VIII MOORE MEDICAL CORP. VALUATION AND QUALIFYING ACCOUNTS ALLOWANCES FOR RETURNS AND UNCOLLECTIBLES AND CUSTOMER REBATES
Additions ------------- Balance at Balance at Beginning of Charged to End of Period Expenses Deductions Period -------------- --------------- -------------- ------------- ALLOWANCE FOR RETURNS AND UNCOLLECTIBLES Fiscal Year End January 2, 1999 $ 891 $ 112 $ (631) $ 372 Fiscal Year End January 3, 1998 $ 320 $ 1,115 $ (544) $ 891 Fiscal Year End December 28, 1996 $ 188 $ 528 $ (396) $ 320 ALLOWANCE FOR CUSTOMER REBATES Fiscal Year End January 2, 1999 $ 0 $ 0 $ 0 $ 0 Fiscal Year End January 3, 1998 $ 306 $ 82 $ (388) $ 0 Fiscal Year End December 28, 1996 $ 546 $ 2,824 $ (3,064) $ 306
32 EX-3.1 2 CERTIFICATE OF CORRECTION EXHIBIT 3.1 CERTIFICATE OF CORRECTION OF MOORE MEDICAL CORP. ----------------------------------------- PURSUANT TO SECTION 103(F) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE ----------------------------------------- I, Mark Karp, President of Moore Medical Corp., a corporation organized and existing under the General Corporation law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103(f) of such law, DO HEREBY CERTIFY that: 1. The Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on June 30, 1981 (the "June 30, 1981 Amendment") inadvertently set forth an inaccurate record of the corporate action therein referred to. 2. Paragraph FIRST of the June 30, 1981 Amendment should be corrected by deleting the words "By striking out the whole of Article FOURTH thereof as it now exists and inserting in lieu and instead thereof a new Article FOURTH, reading as follows: "in the second paragraph of Paragraph FIRST of the June 30, 1981 Amendment and replacing such words with the following; "By deleting the first full paragraph of Article Fourth thereof and substituting the following:". 3. This Certificate of Correction shall not be deemed to amend or correct (a) any other provision of the June 30, 1981 Amendment or (b) any certificate of amendment of the Corporation's Certificate of Incorporation of certificate or designations of the Corporation filed with the Secretary of State of the State of Delaware at any time after June 30, 1981. IN WITNESS WHEREOF, I have executed and subscribed this Certificate of Correction and do affirm the foregoing as true under the penalties or perjury this 6th day of November, 1998. /s/ --------------------------------- Mark Karp President ATTEST: /s/ - ------------------------------- Joseph Greenberger Secretary 33 EX-3.3 3 BY-LAW, AS AMENDED EXHIBIT 3.3 RESOLVED, that the following new Section 11 is herewith added to Article III of the By-laws: Section 11. Office of the President. The Office of the ----------------------- President shall have all the duties and powers of Chief Executive Officer during any period in which there is no President serving because of his or her resignation, removal or death, upon the Board establishing such an Office and electing two or more officers as its members. 34 EX-10.9 4 1999 CORPORATE VICE PRESIDENTS' BONUS PLAN EXHIBIT 10.9 MOORE MEDICAL CORP. - 1999 EXECUTIVE VICE PRESIDENT BONUS PLAN 1. Purpose; Eligibility; Etc. This Plan is designed to offer the ------------------------- incentive of bonus compensation to the Company's executive vice-presidents. The Plan is for the Company's 1999 fiscal year. Only employees who are executive vice-presidents, elected to such position by the Company's Board of Directors, or Executive Committee, are participants in the Plan. (As of January 1, 1999, the executive vice-presidents, Richard Bucchi, David V. Harper and Kenneth Kollmeyer.) 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 executive 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 1999, 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 1999 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%...........$8,205,400 25%.........$5,861,000 45%...........$7,736,520 20%.........$5,392,120 40%...........$7,267,640 15%.........$4,923,240 35%...........$6,798,760 12.5%.........$4,688,800 30%...........$6,329,880 A participant's Base Salary is his W-2 gross pay for 1999, 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 $4,688,800. 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. 35 EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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. PricewaterhouseCoopers LLP Hartford, Connecticut March 18, 1999 36 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS JAN-02-1999 JAN-03-1998 JAN-04-1998 DEC-29-1996 JAN-02-1999 JAN-03-1998 3,520 54 0 0 9,757 16,103 372 891 13,684 13,416 4,492 6,314 17,885 13,107 10,847 9,596 38,481 39,203 12,560 14,854 0 0 0 0 0 0 33 33 25,520 22,590 38,481 39,203 120,846 288,513 120,846 288,513 83,143 249,451 83,143 249,451 33,326 41,857 0 0 (82) 1,898 4,459 (4,693) 1,650 (1,772) 2,809 (2,921) 0 0 0 0 0 0 2,809 (2,921) .96 (1.00) .95 (1.00)
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