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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)
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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
(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 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.
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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.
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Moore Medical Corp.
1998 Annual Report on Form 10-K
Table of Contents
Part I
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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
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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
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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
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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
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Amounts in thousands, except per share data 1998 1997 1996 1995 1994
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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