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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
1999
FORM 10 - K
ANNUAL REPORT
For the fiscal year ended January 1, 2000
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)
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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
Rights to Purchase Series I Junior Preferred Stock American Stock Exchange
(Title of Each Class) (Name of each exchange on which registered)
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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 _________
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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 3, 2000 was $17,001,778.
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 204,604 treasury
shares) as of March 3, 2000: 3,041,426.
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Documents Incorporated By Reference
The portions of the registrant's proxy statement for its 2000 Annual Meeting of
Shareholders referred to in Part III of this report are incorporated by
reference. The exhibit index is located on pages 29-31. Total number of pages in
the numbered original (including exhibits) is 44.
This is page 1 of 33 pages.
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Moore Medical Corp.
1999 Annual Report on Form 10-K
Table of Contents
Part I
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Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 4A. Executive Officers of the Registrant 9
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Part III
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Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
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Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 29
Signatures 32
2
ITEM 1. Business
Moore Medical Corp. is a national marketer and distributor of healthcare
products, on a business-to-business basis, to approximately 92,000 healthcare
practitioner customers operating in non-hospital settings. The Company serves,
in addition to physicians and surgeons, podiatrists, emergency medical
technicians, schools and colleges, correctional facilities, municipalities and
occupational/industrial physicians and nurses. The Company believes that it is a
significant factor in several of these specialty practice communities. Most
customers buy Moore Medical's products for use in their healthcare practices,
rather than for resale.
Moore Medical Corp. and its early-phase e-commerce subsidiary market
approximately 8,500 medical/surgical and pharmaceutical supply products (SKUs)
through catalogs, other direct mail literature, telesales, a small field sales
force and, to a limited degree, the Internet. Most customer orders are processed
by our customer support center representatives. We fulfill more than 500,000
orders annually from our distribution centers in Connecticut, Florida, Illinois
and California, and we ship orders nationwide by common carriers. More than 85%
of our customers' orders are delivered within two business days.
Our distribution business has served healthcare practitioners for more than 25
years, and has distributed healthcare products for more than 50 years. In 1997,
we exited from our lower margin wholesale drug distribution business, which
represented approximately two-thirds of our revenues, in order to concentrate on
our more profitable healthcare practitioner distribution business. This report
focuses on our continuing healthcare practitioner business.
Recent Developments
. Strategic Commitment to Transform Company into Full B2B Electronic Commerce
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Enterprise: We initiated a program of web enablement in mid-year to assess
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the costs and benefits of moving in the direction from our existing
electronic catalog website to a comprehensive e-business platform. In the
process we: surveyed current e-commerce customers; tracked their buying
behaviors by industry markets; interviewed customers who were not among
those early adopters; developed a detailed functional specification; and
selected a design firm (from among eight respondents) to assist in the
implementation of our design goals.
Given our early results with an unpromoted transaction site, and the
progress toward our design goals, Moore Medical's Board of Directors
approved the Company's plan for transformation. The Board recognizes the
level of investment required to accomplish Moore's Internet strategy and
made a commitment to acquire the talent and develop the infrastructure
needed to exploit this business opportunity. We anticipate incurring losses
over the next two years as part of the accelerated spending plan required
to fully web enable the Company. Our investment in the Internet is
fundamental to our strategy and future sustainable growth as it provides:
. more data on our customers' buying patterns,
. greater ability to target our customers' needs,
. the opportunity to streamline our buying decisions and to reduce
relative inventory levels,
. an enhanced selling environment at lower costs,
. the ability to exploit the latest technological applications to
eliminate labor intensive processes, and
. the opportunity to reinvest any efficiencies realized through
anticipated website economies in marketing and technology
efforts.
Our goal is to rapidly grow the size and revenue of the Company through web
enablement of customers and employees. To accomplish this we will:
. migrate and retain as many of our nearly 100,000 customers as
possible to the e-business platform,
. attract as many new customers as possible, leveraging our domain
expertise in customer communities, and
. increase the average annual expenditures that customers make with
Moore Medical.
Moore Medical's customer community based e-business site has entered beta
testing and a 2000 launch is anticipated.
. Market recognition: The 1999 Physician's Office World Class Survey ranked
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Moore Medical Corp. as follows, based on the comparative quality of our
products, competitive pricing and customer service:
. #1 in North Central Region by geographic region
. #2 in Northeast Region by geographic region
. #3 in Direct Marketing overall ranking by market segment
. Implemented our new Enterprise Resource Planning (ERP) system: In 1998,
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we prepared a comprehensive plan for a new ERP system. The plan encompassed
new software and hardware, and the training of our entire staff, at all
levels of our organization. It was implemented in 1999.
We lost no sales days as a result of the implementation. However, the
transition did adversely impact our day-to-day sales operations, during the
transition period, as customers experienced some delays in reaching
customer support representatives. The transition whose impact on revenues
and income cannot be quantified, was completed in 1999.
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. Remained debt-free for the second consecutive year: We maintained a very
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strong balance sheet, as evidenced by our cash position, cash flow and
debt-free balance sheet at the end of each fiscal year. Despite
expenditures on technology in 1999 of approximately $5.3 million, we
reduced our debt to zero, utilizing operating funds and cash at the
beginning of the year.
The Healthcare Products Distribution Industry
Most product manufacturers will not sell directly to healthcare practitioners in
non-hospital settings for the small quantities of products regularly purchased.
Moreover, most healthcare practitioners prefer the administrative efficiencies
of purchasing supplies from 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.
Overall, the healthcare distribution industry has experienced a growth in
demand, cost containment pressures, and the introduction of e-commerce as a
marketing tool and as an easy to use efficient supply source.
The demand for healthcare products at non-hospital sites has continued to grow,
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.
4
However, governmental programs such as Medicare and Medicaid, and HMOs, managed
care and other insurance programs, have limited funding for healthcare products.
This has contributed to continued consolidations of:
. physician practices, as sole practitioners have formed groups and as
practice organizations (PPOs) have formed to provide business management
for large numbers of physicians,
. other customer groups, notably emergency medical services and podiatrists,
. local or regional distributors of healthcare products into larger
organizations serving broader geographic areas, and
. manufacturers of healthcare products.
In addition, customers have continued to expect better prices and services.
Service expectations include a broad selection of products, speed of delivery,
reliability of supply, extensive information on product specifications, product
use and pricing, and the ability to conveniently place orders and access such
information on the distributor's Internet site. Increasingly, customers have
come to rely on their distributors' websites for product-related information and
for ordering products, as a means of reducing their operating costs and as a
convenience.
Our Marketing and Distribution
We market nationally, on a business-to-business basis, to existing and
prospective customers through catalogs, other direct mail literature, outbound
specialty practice specific calls, an early-phase e-commerce website, and a
small number of national account field sales representatives. We consider direct
marketing to be one of our core strengths.
Our in-house Creative Media Department designs our catalogs, product packaging,
promotional literature and web screens, with distinct features for each
specialty practice area. We mail our catalogs and promotional literature
regularly to current customers based on their buying patterns, and to
prospective customers based on market-specific or targeted mailing lists. In the
fourth quarter of 1999 and early 2000, we freshly redesigned our catalogs and
developed and launched a new company logo and corporate brand identity to
re-vitalize our capabilities. Extensive customer surveys, in person and online,
were conducted to arrive at our brand platform of service, expertise and
hospitality.
We invested in a new digital studio which enables us to develop and employ both
the video and still digital images necessary to provide our customers with the
most effective and pleasing projection of our products. These new digital video
capabilities allow us to record and edit video messages, demonstrations and
training. The video is formatted for both electronic and conventional viewing.
The new digital photo studio includes a high-end digital camera, specialized
lighting, color correction and image scripting software, and a new publications
network and server. This process images simultaneously for both electronic and
print media. In the second half of 1999 we captured over 2,500 new digital
images.
We fulfill orders from our distribution centers in Connecticut, Florida,
Illinois and California. Customer orders are directed by our ERP system from our
support and customer support center in Connecticut to our distribution center
closest to the customer's delivery location. At the distribution center, we
pick, pack and ship orders to our customers by common carriers. We use United
Parcel Service (UPS) to ship most of our customers' orders, and we are dependent
on UPS for efficient delivery services. More than 85% of our customers' orders
are delivered within two business days. We consider distribution reliability to
be one of our core strengths.
5
Our Product Lines
We distribute approximately 8,500 SKUs of medical/surgical supply and
pharmaceutical products, encompassing a broad and diversified selection of
supplies such as 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 our products are consumables and disposables,
we also sell medical/surgical equipment. We are one of the few distributors of
medical/surgical products to non-hospital healthcare practitioners who also
offer pharmaceuticals. Pharmaceutical products include unit-dose medications,
vaccines, injectables and ointments.
We purchase our products primarily direct from manufacturers and do not
manufacture or assemble any products, except for medical and first aid kits,
which we assemble. Insurance coverage against potential losses due to product
liability claims has been adequate.
We exited the wholesale drug distribution business, in which we sold primarily
pharmaceuticals, during the fourth quarter of 1997, and we substantially
concluded our disposal of our related inventory in the second quarter of 1998.
Prior to the exit, most of our sales were of pharmaceuticals to pharmacies for
resale, while in 1998 and 1999 most of our sales were of medical/surgical
supplies and pharmaceuticals to healthcare practitioner end-users.
The following table shows our sales and the percentages of our total sales for
the past three years of medical/surgical supplies and pharmaceuticals:
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Medical/surgical supplies $88,792 $90,635 $ 91,030
75.0% 75.0% 31.5%
Pharmaceuticals $29,662 $30,211 $197,483
25.0% 25.0% 68.5%
Our Customers
Our approximately 92,000 healthcare practitioner customers typically use our
products in non-hospital settings. Our more significant customer groups which
accounted for approximately 85% of our sales are in addition to physicians and
surgeons, podiatrists, emergency medical services, medical departments at
industrial sites, municipalities, university and school health services and
correctional facilities. We believe that we are an important factor in several
of these specialty practice communities. Approximately 8,000 of the 12,000
podiatrists in the United States are our customers. Most of our customers use
our products in their healthcare practice, rather than for resale. Typically,
our customers order an average of five to six times a year, though some
specialties order more frequently.
Our Sales Force
Our sales efforts are designed to establish and strengthen our customers'
allegiance to us through frequent direct marketing contact supported by our
staff of approximately thirty inbound customer support representatives and
twenty outbound specialty practice-specific representatives, as well as through
personal visits by a small field sales force.
Our customer support representatives assist our customers in making purchasing
decisions, as well as with product pricing and availability questions. They also
market promotional and complementary products in support of our media offerings.
We use outbound industry-specific representatives and programs to market our
products to customer accounts identified as high volume or high order frequency
accounts. Outbound representatives strive to achieve long-term relationships
with their assigned customers through regularly scheduled telephone contacts and
personalized service. We integrated our
6
inbound and outbound groups in 1999 as "flex teams" to handle inbound calls
during periods of peak call volume and to increase our market-specific
information level.
Our representatives use on-line PCs to enter customer orders and to access
information about products, product availability, pricing, promotions and
customer buying history. Each representative undergoes a minimum of three weeks
of training, with the outbound representatives also receiving market-specific
training. In addition, all representatives attend periodic training sessions and
special sales programs, and they earn bonus incentives or monthly commissions.
Our field sales representatives concentrate on selected large accounts and on
attracting new customers and increasing sales, cross-enterprise, to customers
who do not currently order a high percentage of their total product needs from
us, as a complement to our direct marketing and telesales strategies. Once a
field sales representative has established a relationship with a customer, she
or he encourages the customer to use our automated ordering process or customer
support representatives for its day-to-day needs. This simplifies the ordering
process for the customer and it increases the effectiveness of our field sales
representatives, consistent with our plans for increased computer integration.
Our Customer Relations Department provides access to knowledgeable support
representatives for up to ten (8am-6pm EST) hours a day. Our representatives
resolve customer-related issues, process catalog requests, authorize returns,
allowances and exchanges, maintain high standards of service, expertise and
hospitality, and foster long-term customer relationships. Subject to guidelines,
they are empowered to make decisions regarding vendor and shipping related
inquiries.
Our Suppliers
We distribute the products of approximately 650 manufacturers of
medical/surgical supplies and pharmaceuticals. We purchase most products
directly from manufacturers, but we also purchase some products from other
distributors. In 1999, our largest product suppliers were 3M, Allied Healthcare
Products, Inc., Aventis Pasteur, Banta Healthcare Products, Inc., Graham-Field
Surgical Co., Johnson & Johnson Healthcare System, Laerdal Medical Corp.,
Microflex, Ortho Diagnostic Systems, Inc., and Tillotson Healthcare. We have
several competing sources for many medical/surgical supplies and
pharmaceuticals. Sales of products from our largest supplier in 1999 accounted
for less than 5% of total sales. The pharmaceutical market continues to
introduce alternative products affecting the product acquisition costs and
obtainable margins. We do not have any significant long-term purchase
commitments with our suppliers, nor do we have any exclusive product rights.
Competition
Our competitors are large national distributors, regional distributors and local
distributors. Some primarily use direct mailing and telemarketing methods, like
ours, some rely on the Internet and others make sales and deliveries to their
customers with a dedicated sales force and a fleet of distributor-operated
delivery vehicles.
Ease of entry into the healthcare products distribution industry has changed
significantly with the onset of the Internet. There were at least six new
entrants in 1999 into our markets. Although several of the entrants have
substantially greater financial resources than we do, few entered the market
with as significant an established customer base as we have. E-commerce
competitors generally compete aggressively on price and access to information.
However, our strongest competitors (traditional or e-commerce) in each market
generally compete with us in only one or a few of our specialty market areas.
Generally, we compete with other distributors on breadth of product line, brand
recognition, 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, we expect that there will
continue to be a growing number of large customers who will require their
distributor of choice to be able to reliably service many delivery locations in
different regions across the country. As the Internet becomes a more prominent
marketing tool and order placement vehicle, we expect that the expanded selling
opportunity will increase the order frequency of our present and prospective
customers. We plan to take advantage of the shift to
7
the Internet as our marketing and sales medium of choice by employing distinct
strategies by customer group to enhance the order size and frequency of known
buying patterns.
Regulation
We are subject to federal, state and local statutes and regulations governing
the sale, marketing, packaging and distribution of prescription drugs, including
controlled substances and medical devices. In addition, we and our customers are
subject to licensing requirements governing the various aspects of the
healthcare delivery system. Our operating and security practices comply with the
statutes and regulations of the Federal Drug Administration (FDA), Federal Drug
Enforcement Agency (DEA) and state boards of pharmacy, health and wholesale drug
distributor licensing boards in all material respects.
We operate four distribution centers, in New Britain, Connecticut, Jacksonville,
Florida, Lemont, Illinois, and Visalia, California. Each of these distribution
centers is registered with the Drug Enforcement Agency and as a wholesale
distributor of prescription drugs and devices in each state that requires
registration and/or licensure. This registration and licensure is mandated by
the Prescription Drug Marketing Act of 1987, with which we believe we are in
material compliance. In addition, we are registered with the Federal Drug
Administration as a Drug Establishment and as a Device Establishment. We are
also mandated by the Prescription Drug Marketing Act of 1987 and the Control
Substance Act to validate our customers for purchases of regulated products. We
require documentary evidence of our customers' regulatory authority to purchase
regulated products and we are in material compliance with applicable federal and
state statutes which protect against the diversion of those products.
Our Information Systems
In 1999, our Information Systems Department completed the conversion of our
legacy computer systems to a fully integrated software solution providing a
stable database structure for all facets of our operations. Our new Enterprise
Resource Planning (ERP) system gives our financial, sales, marketing, purchasing
and warehousing functions database integration. In contrast to our legacy
system, enhancements to the ERP system can be accomplished efficiently, with a
better utilization of resources. Within the conversion, our main computer
hardware was consolidated from two computer systems to one large
multi-processing system. This allows for orders entered from our outbound and
inbound sales forces to generate picking documents at our four distribution
centers in a more timely manner. In 1999, we also developed and implemented our
data warehousing technology; it gives our operating departments immediate access
to historical sales order and real-time customer and product data. This enables
our sales, marketing, financial and purchasing teams to analyze and project
sales, customer and product information.
Employees
As of January 1, 2000, we had 307 full-time employees and 12 part-time
employees. Of the full-time employees, 112 worked in its marketing, sales and
sales support. The average tenure of our distribution centers' workforce is over
fifteen years. All of our operations are non-union.
8
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 ten years and are well equipped and
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 (41,000 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
As of the date of this document there are no material legal proceedings
which are material to the financial statements.
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 1999.
ITEM 4A. Executive Officers of the Registrant
The following table shows our current executive officers and their areas of
responsibility:
Name Age Position
---- --- --------
Linda M. Autore 49 President and Chief Executive Officer
Kenneth S. Kollmeyer 50 Executive Vice President of Operations
Joseph P. Savidge 43 Senior Vice President and Chief
Financial Officer
Peter T. Hood 54 Senior Vice President of Information
Systems
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
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 1998 the high and low sale prices of the common stock on
the American Stock Exchange Composite Tape.
1999 1998
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Quarters: High Low High Low
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First............................ $ 13 7/8 $ 10 1/2 $ 12 1/4 $ 10 5/8
Second........................... 12 5/8 9 1/2 13 1/2 11 1/4
Third............................ 14 7/8 7 3/8 14 3/16 10 3/16
Fourth........................... 10 11/16 7 14 15/16 10 3/4
The high and low sale prices of the common stock on March 3, 2000 were $12
13/16 and $12 1/4 respectively. The estimated number of holders (including
estimated beneficial holders) of the Company's common stock as of March 3,
2000 was approximately 1,400.
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.
9
ITEM 6. Selected Financial Data
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Amounts in thousands, except per share data 1999 1998 1997 1996 1995
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SUMMARY OF OPERATIONS
Net sales $118,454 $120,846 $288,513 $286,349 $289,062
Cost of products sold 81,573 83,143 249,451 243,949 247,556
-------- -------- -------- -------- --------
Gross profit 36,881 37,703 39,062 42,400 41,506
Selling, general and administrative expenses 34,465 33,326 41,857 41,481 35,410
-------- -------- -------- -------- --------
Operating income (loss) 2,416 4,377 (2,795) 919 6,096
Interest (income) expense, net (8) (82) 1,898 1,813 2,609
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,424 4,459 (4,693) (894) 3,487
Income tax provision (benefit) 572 1,650 (1,772) (329) 1,168
-------- -------- -------- -------- --------
Net income (loss) $ 1,852 $ 2,809 $ (2,921) $ (565) $ 2,319
======== ======== ======== ======== ========
Basic net income (loss) per share $ .63 $ .96 $ (1.00) $ (.19) $ .80
Diluted net income (loss) per share $ .63 $ .95 $ (1.00) $ (.19) $ .80
Basic weighted average shares outstanding 2,939 2,932 2,921 2,910 2,888
Diluted weighted average shares outstanding 2,943 2,949 2,923 2,921 2,900
BALANCE SHEET DATA
Working capital $ 18,508 $ 18,521 $ 20,142 $ 42,985 $ 41,816
Total assets $ 41,966 $ 38,481 $ 39,203 $ 81,541 $ 75,363
Debt $ - $ - $ 1,512 $ 22,726 $ 21,672
Shareholders' equity $ 27,450 $ 25,553 $ 22,623 $ 25,376 $ 25,856
10
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
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1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 68.9 68.8 86.5
------ ----- -----
Gross profit 31.1 31.2 13.5
Selling, general & administrative expenses 29.1 27.6 14.5
------ ----- -----
Operating income (loss) 2.0 3.6 (1.0)
Interest (income) expense, net - (0.1) 0.6
------ ----- -----
Income (loss) before income taxes 2.0 3.7 (1.6)
Income tax provision (benefit) .5 1.4 (0.6)
------ ----- -----
Net income (loss) 1.5% 2.3% (1.0)%
====== ===== =====
Results of Operations
1999 Compared with 1998
Net sales for the year declined 2% to $118.5 million from $120.8 million in the
prior year. Net income for the year decreased to $1.9 million compared with $2.8
million. Earnings per share decreased to $.63 from $.96 a year ago. The 1999
decrease in sales and net income is attributable to installation and
implementation of the ERP system, which is designed to enable Moore Medical to
utilize advanced technologies to provide greater responsiveness to our
customers' needs. We lost no sales days as a result of the implementation.
However, the transition did adversely impact our day-to-day sales operations, as
customers experienced some delays in reaching customer support representatives.
The transition, whose impact on revenues and income cannot be quantified, was
completed in 1999. The 1999 results follow five year record earnings in 1998,
which benefited from non-recurring inventory disposition sales in our
discontinued wholesale drug distribution business.
The gross profit margin rate was above 31% for both years. However, the gross
profit dollars decreased slightly due to lower volumes, as well as greater
competitive pricing on certain pharmaceutical products.
Selling, general and administrative expenses increased 3% compared to 1998.
During 1999, we made investments in our staff to broaden the breadth of its
abilities, our technology and technological applications to more effectively and
efficiently serve our customers, and in our marketing resource so that we could
more effectively compete in our changing industry. The increase in selling,
general and administrative expense was primarily due to increased freight as
well as increases in depreciation, consulting and legal expenses associated with
the Company's investment in technology.
We ended the year with no debt, while investing over $5.3 million on technology
capital. Further, at year-end 1999, we invested approximately $0.7 million in
cash and equivalents.
Our effective income tax provision rate of 23.6% was lower than the federal
statutory tax rate due primarily to a net income tax benefit of $0.3 million
recorded from the favorable settlement of a prior year's tax matter.
11
1998 Compared with 1997
Net 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. Net sales in the wholesale drug distribution
business decreased $175.0 million in 1998 as compared with 1997. Net 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 decrease 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.
Financial Condition
During 1999 our financial condition continued to remain stable. We ended the
year debt-free for the second consecutive year. Net cash provided by operating
activities in 1999 was $2.6 million. This cash combined with $3.5 million of
cash at the beginning of the year, was used for $5.3 million of capital
expenditures, primarily in technology. Operating activities generated cash
sources of $3.9 million from net non-cash elements in earnings and $2.1 million
from increase in accounts payable. Operating activities used cash sources of
$2.1 million in accounts receivable, $2.6 million from net change in other
assets and liabilities and $0.6 million for inventory.
We have an unsecured bank financing agreement which provides a $10 million
revolving line of credit that was extended through March 30, 2000. Interest on
loans is charged at the prime rate or, at our option, at the Eurodollar rate
plus a rate in a range of 1% to 1.5% depending on our financial leverage. In
addition, we pay a 1/4% commitment fee on the unused line of credit. As of
January 1, 2000 we were in compliance with all the financial covenants under the
agreement.
As our business grows, management believes that the funding needs for our
operating working capital and investments will continue to be met through cash
flow from operations and financing available under our line of credit.
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. Our computer programs
with date sensitive functions were sufficiently converted to be Year 2000
compliant. We experienced no failures, miscalculations, disruptions of
operations, inability to process transactions, send invoices or interruptions in
other normal business
12
activities as a result of the year 2000 arrival. This was essentially due to
information technology planning and the implementing of Year 2000 compliant
systems.
We identified our 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 ERP system which includes
software which the vendor has represented to be Year 2000 compliant. The total
estimated hardware, software, installation, enhancements and training cost of
the integrated ERP system, of which Year 2000 compliance was a by-product, was
$7.3 million which was primarily funded through operating cash flow. We
substantially completed the implementation of the system during the second
quarter of 1999. With this implementation, we believed that our internal
information technology systems to be in substantial compliance. Contingency
plans were developed for areas where management considered there may have been
some risk to modify certain of the major existing internal information
technology systems to be Year 2000 compliant.
Internal Non-Information Technology
- -----------------------------------
We have assessed 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. Written assurance of Year 2000 compliance had been received from
substantially all providers.
External Vendor Compliance
- --------------------------
The Company had identified and contacted its major suppliers, service providers
and contractors ("vendors") to determine the extent of their Year 2000
compliance. To the extent that responses were unsatisfactory, the Company had
contingency plans in place, which included a number of measures such, where
necessary, changing the vendors to those who have represented Year 2000
readiness.
When the year 2000 arrived, the Company had not experienced any material Year
2000 problems, nor had the Company experienced any material problems with any of
its key customers or 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," "transform," "planned," "continued," "anticipated,"
"estimated," "believes," "continuing," "considers," "may be," "assessed,"
"contingency," "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
13
economies of scale or other operating efficiencies; and new Internet
unanticipated expenses, delays on technical problems associated with the
Company's planned Internet site; 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; pending adjustments of pricing under exited government contracts or
unfavorable outcomes of litigation; 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 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 7A. Quantitative and Qualitative Disclosures About Market Risk
We have no material market risk exposure associated with activities in
derivative financial statements, other financial instruments, or derivative
commodity instruments.
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 15.
14
MOORE MEDICAL CORP.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page No.
Report of Independent Accountants 16
Balance Sheets at the end of years 1999 and 1998 17
Statements of Operations for the years 1999, 1998 and 1997 18
Statements of Cash Flows for the years 1999, 1998 and 1997 19
Notes to Financial Statements 20-27
Financial Statement Schedule II - Valuation and Qualifying Accounts 33
for the years ended 1999, 1998 and 1997
15
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. and its subsidiary at January 1, 2000 and January 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
February 14, 2000
16
MOORE MEDICAL CORP.
Balance Sheets at End of Years
- --------------------------------------------------------------------------------------------------------------
Amounts in thousands 1999 1998
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash................................................................. $ 744 $ 3,520
Accounts receivable, less allowances
of $200 and $372................................................... 11,488 9,385
Inventories.......................................................... 14,242 13,684
Prepaid expenses and other current assets ........................... 1,852 1,992
Deferred income taxes................................................ 2,330 2,500
-------- ---------
Total Current Assets............................................. 30,656 31,081
-------- ---------
Noncurrent Assets
Equipment and leasehold improvements, net ........................... 10,641 7,038
Other assets......................................................... 669 362
-------- ---------
Total Noncurrent Assets.......................................... 11,310 7,400
-------- ---------
$ 41,966 $ 38,481
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 7,483 $ 5,421
Accrued expenses..................................................... 4,665 7,139
-------- ---------
Total Current Liabilities........................................ 12,148 12,560
-------- ---------
Deferred Income Taxes..................................................... 2,368 368
Shareholders' Equity
Preferred stock, no shares outstanding .............................. - -
Common stock-$.01 par value;
5,000 shares authorized; 3,246 shares issued ...................... 33 33
Capital in excess of par value....................................... 21,675 21,667
Retained earnings.................................................... 8,449 6,597
-------- ---------
30,157 28,297
Less treasury shares, at cost, 305 and 308 shares.................... (2,707) (2,744)
-------- ---------
Total Shareholders' Equity....................................... 27,450 25,553
-------- ---------
$ 41,966 $ 38,481
======== =========
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
17
MOORE MEDICAL CORP.
Statements of Operations for the Years
- ---------------------------------------------------------------------------------------------------------------------
Amounts in thousands, except per share data 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Net sales....................................................... $118,454 $120,846 $288,513
Cost of products sold........................................... 81,573 83,143 249,451
-------- -------- --------
Gross profit.................................................... 36,881 37,703 39,062
Selling, general and administrative expenses.................... 34,465 33,326 41,857
-------- -------- --------
Operating income (loss)......................................... 2,416 4,377 (2,795)
Interest (income) expense, net.................................. (8) (82) 1,898
-------- -------- --------
Income (loss) before income taxes............................... 2,424 4,459 (4,693)
Income tax provision (benefit) ................................. 572 1,650 (1,772)
-------- -------- --------
Net income (loss)............................................... $ 1,852 $ 2,809 $ (2,921)
======== ======== ========
Basic net income (loss) per share............................... $ .63 $ .96 $ (1.00)
Diluted net income (loss) per share............................. $ .63 $ .95 $ (1.00)
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
18
MOORE MEDICAL CORP.
Statements of Cash Flows for the Years
- ----------------------------------------------------------------------------------------------------------------------------
Amounts in thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss)................................................. $ 1,852 $ 2,809 $ (2,921)
Adjustments to reconcile net income (loss) to net cash flow
provided by operating activities:
Depreciation and amortization................................ 1,733 1,251 1,481
Deferred income taxes........................................ 2,170 1,008 (1,130)
Other........................................................ (262) 455 603
Changes in operating assets and liabilities
Accounts receivable...................................... (2,103) 5,827 10,549
Inventories.............................................. (558) (268) 30,412
Other current assets..................................... 140 968 1,157
Accounts payable......................................... 2,062 (3,632) (18,018)
Other current liabilities................................ (2,474) 1,338 (221)
--------- --------- ----------
Net cash flows provided by operating activities ............. 2,560 9,756 21,912
--------- --------- ----------
Cash Flows From Investing Activities
Equipment and leasehold improvements acquired..................... (5,336) (4,778) (660)
--------- --------- ----------
Cash Flows From Financing Activities
Revolving credit financing decrease, net.......................... - (1,512) (21,214)
--------- --------- ----------
(Decrease) increase in cash....................................... (2,766) 3,466 38
Cash at the beginning of year..................................... 3,520 54 16
--------- --------- ----------
Cash At End Of Year............................................... $ 744 $ 3,520 $ 54
========= ========= ==========
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
19
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 92,000 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
customer support 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-fourth 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 1, 2000, January 2, 1999 and January 3, 1998
were comprised of 52 weeks in 1999 and 1998 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 and amortization 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. Additionally, in 1999, the Company adopted AICPA Statement
of Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires capitalization of certain costs
incurred in the development of internal-use software. 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 and related postage costs.
Catalogs are effective for varying time periods but the largest catalogs are
generally effective for less than a year. At January 1, 2000 and January 2,
1999, $669,000 and $362,000, respectively, of direct response catalog
advertising expenses were deferred. Catalog advertising expense totaled
$2,485,000, $2,881,000 and $3,213,000 in 1999, 1998 and 1997, 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.
20
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.
Reclassification - Certain prior year amounts have been reclassified to conform
with the current year presentation.
Note 2 - Income Taxes
The income tax provision (benefit) consists of the following:
- ------------------------------------------------------------------------------------------------------
Amounts in thousands 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Current
Federal $ (1,554) $ 625 $ (733)
State (44) 17 91
---------- --------- --------
Total current (1,598) 642 (642)
---------- --------- --------
Deferred 2,170 1,008 (1,130)
---------- --------- --------
Total provision (benefit) $ 572 $ 1,650 $(1,772)
========== ========= ========
A reconciliation of the statutory federal income tax rate and the effective
income tax rate as a percentage of pretax income is as follows:
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit 3.8 3.8 (5.6)
Valuation allowance 2.8 (2.2) -
Other - net (17.0) 1.4 1.8
-------- --------- ----------
Effective income tax rate 23.6% 37.0% (37.8)%
======== ========= ==========
The effective income tax provision rate of 23.6% was lower than the federal
statutory tax rate due primarily to a net income tax benefit of $0.3 million or
12% recorded from a favorable settlement of a prior year's tax matter.
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 1999 1998
- -----------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 360 $ 316
Inventories 463 661
Accrued expenses 1,216 1,446
Other 209 134
--------- --------
Deferred Tax Assets 2,248 2,557
--------- --------
Accumulated depreciation/amortization (1,937) -
Prepaid pension expense (350) (418)
Catalog advertising - (7)
--------- --------
Deferred Tax Liabilities (2,287) (425)
--------- --------
$ (39) $ 2,132
========= ========
Income tax payments totaled $1,004,000, $1,091,000 and $459,000 in 1999, 1998
and 1997, respectively.
21
Note 3 - Equipment and Leasehold Improvements
Equipment, leasehold improvements and accumulated depreciation are summarized as
follows:
- --------------------------------------------------------------------------------------------
Amounts in thousands 1999 1998
- --------------------------------------------------------------------------------------------
Equipment $ 6,030 $ 5,667
Computer equipment and software 13,995 9,132
Leasehold improvements 3,196 3,086
--------- ---------
23,221 17,885
Less accumulated depreciation (12,580) (10,847)
--------- ---------
$ 10,641 $ 7,038
========= =========
Note 4 - Revolving Credit Financing
The Company has an unsecured bank financing agreement which provides a $10
million revolving line of credit through March 30, 2000. 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 1.5% depending on the financial leverage of
the Company. In addition, the Company pays a 1/4% commitment fee on the unused
line of credit. As of January 1, 2000, the Company was in compliance with all
the covenants under the agreement.
- ---------------------------------------------------------------------------------------------------
Amounts in thousands 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Borrowings
Average $ 545 $ 149 $19,904
Maximum $ 2,661 $ 1,859 $32,312
Weighted daily average interest rate
For the year 8.1% 0.0% 9.5%
At year end 0.0% 0.0% 8.5%
Cash payments for interest on revolving credit financing totaled $44,000,
$55,000, and $1,898,000 in 1999, 1998 and 1997, respectively.
22
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 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 3,670 $ 3,467 $ 3,326
Service cost 327 333 373
Interest cost 275 260 250
Actuarial gain 262 317 46
Benefits paid (812) (707) (528)
--------- --------- ---------
Benefit obligation at end of year $ 3,722 $ 3,670 $ 3,467
========= ========= =========
Change in plan assets
Fair value of plan assets at beginning of year $ 4,840 $ 4,865 $ 4,371
Actual return on plan assets 1,061 682 714
Employer contribution 129 - 309
Benefits paid (812) (707) (529)
--------- --------- ---------
Fair value of plan assets at end of year $ 5,218 $ 4,840 $ 4,865
========= ========= =========
Funded Status $ 1,497 $ 1,170 $ 1,398
Unrecognized net actuarial loss (613) (314) (387)
Unrecognized prior service cost 37 41 46
Unrecognized transition cost 12 25 37
--------- --------- ---------
Prepaid benefit cost $ 933 $ 922 $ 1,094
========= ========= =========
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 $ 327 $ 333 $ 373
Interest cost 275 260 250
Expected return on plan assets (436) (438) (393)
Amortization prior service cost 5 5 5
Amortization transition cost 12 12 12
Recognized net actuarial loss (65) - -
--------- --------- ---------
Net periodic benefit cost $ 118 $ 172 $ 247
========= ========= =========
23
The present value of the projected benefit obligation was determined using a
discount rate of 7.5% in 1999, 1998 and 1997. 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 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 1999, 1998 and
1997 amounted to $622,000, $469,000 and $562,000, respectively.
Accrued expenses include accrued bonus at January 1, 2000 and January 2, 1999 of
$234,000 and $857,000, respectively.
Note 6 - Shareholders' Equity
At January 1, 2000, 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 1, 2000 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
- --------------------------------------------------------------------------------------------------------
1997
Beginning balance 3,246 $ 32 $21,692 $ 6,709 (343) $(3,057)
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)
1999
Net income 1,852
Stock options/stock
compensation 8 3 37
------- ------ ------- ------- -------- --------
Ending balance 3,246 $ 33 $21,675 $ 8,449 (305) $(2,707)
======= ====== ======= ======= ======== ========
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
24
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 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
Canceled (17,750) 11.76
Exercised (2,750) 11.95
-----------
Outstanding at end of 1999 27,900 $11.55
===========
At the end of 1999 there were exercisable 23,925 options at a weighted average
price of $11.44 and at the end of 1998 there were exercisable 29,250 options at
a weighted average price of $11.42.
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:
- ---------------------------------------------------------------------------------------------------------------
Number of Options Weighted Average Exercise Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of 1997 - $ 0.00
Granted 151,700 11.99
Canceled (10,500) 10.88
-----------
Outstanding at end of 1998 141,200 12.08
Granted 41,000 11.23
Canceled (67,700) 12.49
-----------
Outstanding at end of 1999 114,500 $11.54
===========
25
At the end of 1999, there were 114,500 options outstanding and 18,375 options
exercisable, and at the end of 1998 there were 141,200 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 1999 and 1998 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 1, 2000:
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 1999, the reserve balance was $3.1 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 1999,
$0.3 million was remaining and believes it will be substantially utilized during
2000.
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 1, 2000, under all
leases are as follows: 2000, $1,190,000; 2001, $1,007,000; 2002, $467,000; 2003,
$252,000 and later years $59,000. Rental expense amounted to $1,218,000,
$1,416,000 and $1,537,000 in 1999, 1998 and 1997, respectively.
26
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
- ----------------------------------------------------------------------------------------------
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
======== ======== ======== =======
1999
First $ 29,055 $ 9,509 $ 477 $ .16
Second 29,367 9,215 428 .15
Third 31,077 9,446 803 .27
Fourth 28,955 8,711 144 .05
-------- -------- -------- -------
Year $118,454 $ 36,881 $ 1,852 $ .63
======== ======== ======== =======
- ----------------------------------------------------------------------------------------------
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
27
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.
28
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. Exhibit 3.1 to
Form 10-K for the fiscal year ended January 2, 1999.
.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 Exhibit 3.3 to
Form 10-K for the fiscal year ended January 2, 1999.
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).
29
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
Agreement dated September 26, 1994, as the fiscal year ended December 31, 1994 and
amended. Exhibit 10.5D filed herewith.
.6 Incentive Stock Option Plan. Exhibit A to the 1982 Proxy Statement, Exhibit 10.2 to
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 Non-qualified Stock Option Plan. Exhibit 10.7 to Form 10-K for fiscal year ended
January 2, 1999.
.8 Change of Control and Position on Payment Filed herewith.
Plan.
.9 Change of Control Payment 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.
30
.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
Agreement by the Company and BankBoston March 29, 1997.
Connecticut, dated April 14, 1997.
.17 Fourth Amendment to Revolving Credit Exhibit 10.17 to Form 10-K for fiscal year ended
Agreement by the Company and BankBoston, N.A., January 3, 1998.
dated March 30, 1998.
.18 Fifth Amendment to Revolving Credit Exhibit 10.18 to Form 10-Q for the second quarter ended
Agreement by the Company and BankBoston, July 3, 1999.
N.A., dated April 30, 1999.
.19 Sixth Amendment to Revolving Credit Filed herewith.
Agreement by the Company and BankBoston,
N.A., dated December 23, 1999.
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 no Current Report on Form 8-K during
the quarter ended January 1, 2000.
31
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/ Linda M. Autore BY: /s/ Joseph P. Savidge
------------------------------------------ ----------------------------------------------------
Linda M. Autore, President and Chief Joseph P. Savidge, Senior Vice
Executive Officer President and Chief Financial Officer
March 31, 2000 March 31, 2000
BY: /s/ Susan G. D'Amato
----------------------------------------------------
Susan G. D'Amato, Vice President -
Finance and Chief Accounting Officer
March 31, 2000
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
- ---------------------------------------------- --------------------------------------------------------
Robert H. Steele, Director Peter C. Sutro, Director
March 31, 2000 March 31, 2000
/s/ Steven Kotler /s/ Wilmer J. Thomas, Jr.
- ---------------------------------------------- -------------------------------------------------------
Steven Kotler, Director Wilmer J. Thomas, Jr., Director
March 31, 2000 March 31, 2000
/s/ Dan K. Wassong
- ---------------------------------------------- --------------------------------------------------------
Dan K. Wassong, Director Christopher W. Brody, Director
March 31, 2000 March 31, 2000
32
SCHEDULE II
MOORE MEDICAL CORP.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR RETURNS AND UNCOLLECTIBLES AND CUSTOMER REBATES
Balance at Additions Balance at
Beginning Charged to End of
of Period Expenses Deductions Period
------------ ----------- ------------ ----------
Allowance for Returns and Uncollectibles
Fiscal Year End January 1, 2000 $ 372 $ 16 $ (188) $ 200
Fiscal Year End January 2, 1999 $ 891 $ 112 $ (631) $ 372
Fiscal Year End January 3, 1998 $ 320 $1,115 $ (544) $ 891
Allowance for Customer Rebates
Fiscal Year End January 1, 2000 $ 0 $ 0 $ 0 $ 0
Fiscal Year End January 2, 1999 $ 0 $ 0 $ 0 $ 0
Fiscal Year End January 3, 1998 $ 306 $ 82 $ (388) $ 0
33