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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
1997
FORM 10 - Q
For the Fiscal
FIRST QUARTER
Ended March 29, 1997
Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
MOORE MEDICAL CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 1-8903
(State of incorporation) (Commission File Number)
P.O. BOX 1500, NEW BRITAIN, CT 06050 22-1897821
(Address of principal executive offices) (I.R.S. Employer
Identification Number)
860-826-3600
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK ($.01 PAR VALUE) AMERICAN STOCK EXCHANGE
(Title of Each Class) (Name of each exchange on which registered)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
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2,930,194
Number of shares of Common Stock outstanding as of May 7,1997.
Total number of pages in the numbered original is 14
This is page 1 of 14 pages.
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1
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MOORE MEDICAL CORP.
INDEX
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<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at the end of the first quarter of
1997 and at the end of the year 1996.................. 3
Statements of Operations for the first quarters
of 1997 and 1996...................................... 4
Statements of Cash Flows for the first quarters
of 1997 and 1996...................................... 5
Notes to Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition................. 7-8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 9
Signatures...................................................... 9
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2
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<TABLE>
<CAPTION>
MOORE MEDICAL CORP.
Balance Sheets at end of
- --------------------------------------------------------------------------------
Amounts in thousands FIRST QUARTER 1997 YEAR 1996
(Unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 7 $ 16
Accounts receivable, less allowances
of $333 and $626......................... 28,765 25,761
Inventories................................. 43,703 43,828
Prepaid expenses and other current assets... 4,446 4,117
Deferred income taxes....................... 2,337 2,356
------- -------
Total Current Assets.................. 79,258 76,078
------- -------
NONCURRENT ASSETS
Equipment and leasehold improvements, net... 4,344 4,411
Other assets................................ 1,170 1,052
------- -------
Total Noncurrent Assets............... 5,514 5,463
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$84,772 $81,541
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................ $23,598 $27,071
Accrued expenses............................ 5,920 6,022
------- -------
Total Current Liabilities............. 29,518 33,093
------- -------
DEFERRED INCOME TAXES......................... 354 346
REVOLVING CREDIT FINANCING..................... 29,054 22,726
SHAREHOLDERS' EQUITY
Preferred stock - no shares outstanding..... -- --
Common stock - $.01 par value;
5,000 shares authorized;
3,246 shares issued...................... 32 32
Capital in excess of par value.............. 21,738 21,692
Retained earnings........................... 7,037 6,709
------- -------
28,807 28,433
Less treasury shares, at cost, 321 and 343
shares................................... (2,961) (3,057)
------- -------
Total Shareholders' Equity............ 25,846 25,376
------- -------
$84,772 $81,541
======= =======
</TABLE>
________________________________________________________________________________
The accompanying notes are an integral part of the financial statements.
3
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MOORE MEDICAL CORP.
<TABLE>
<CAPTION>
Statements of Operations for the
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Amounts in thousands, except per share data FIRST QUARTER
----------------------
1997 1996
(Unaudited)
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<S> <C> <C>
Net sales................................... $81,042 $75,833
Cost of products sold....................... 69,826 65,236
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Gross profit................................ 11,216 10,597
Selling, general & administrative expenses.. 10,184 9,158
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Operating income............................ 1,032 1,439
Interest expense, net....................... 517 466
------- -------
Income before income taxes.................. 515 973
Income tax provision........................ 185 340
------- -------
Net income.................................. $ 330 $ 633
======= =======
Net income per share........................ $ .11 $ .22
======= =======
</TABLE>
____________________________________________________________________________
The accompanying notes are an integral part of the financial statements.
4
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MOORE MEDICAL CORP.
<TABLE>
<CAPTION>
Statements of Cash Flows for the
- ---------------------------------------------------------------------------------------------
Amounts in thousands FIRST QUARTER
-------------------------
1997 1996
(Unaudited)
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 330 $ 633
Adjustments to reconcile net income
to net cash flows provided by operating activities
Depreciation and amortization..... 412 448
Deferred income taxes............. 27 6
Changes in operating assets and
liabilities
Accounts receivable............ (3,004) (3,076)
Inventories.................... 125 (1,511)
Other current assets........... (329) (1,950)
Accounts payable............... (3,473) 2,556
Other current liabilities...... (170) 163
------- -------
Net cash flows used in operating (6,082) (2,731)
activities....................... ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment & leasehold improvements acquired... (345) (218)
------- -------
Net cash flows used in investing activities. (345) (218)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit financing increase, net.. 6,328 2,966
Other, net................................ 90 21
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Net cash flows provided by financing
activities.......................... 6,418 2,987
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Increase (decrease) in cash.................. (9) 38
Cash at beginning of period.................. 16 39
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CASH AT END OF PERIOD........................ $ 7 $ 77
======= =======
</TABLE>
________________________________________________________________________________
The accompanying notes are an integral part of the financial statements.
5
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MOORE MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying financial statements should be read in conjunction
with the Notes to Financial Statements and Management's Discussion and
Analysis of Results of Operations and Financial Condition included in
the Company's 1996 Annual Report filed on Form 10-K and in this Form
10-Q Report.
In the opinion of management, all adjustments necessary for a fair
presentation of the results for the interim periods have been made. The
results of operations for the first quarter are not necessarily
indicative of the results to be expected for the full year. The fiscal
quarters ended March 29, 1997 and March 30, 1996.
NOTE 2 - BUSINESS DEVELOPMENTS
On April 2,1997, the Company announced that its Board of Directors had
initiated a process to explore alternatives for enhancing shareholder
value, including joint ventures or a possible sale of all or part of
the Company, giving due consideration to the interests of the Company's
shareholders, employees, customers and other constituencies. The Board
of Directors authorized the engagement of the investment banking firm
of Schroder Wertheim & Co. Incorporated to act as advisor to the
Company regarding the process. The President and CEO of this investment
banking firm is a director of the Company.
NOTE 3 - 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, has 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. Management has assessed its
estimated liability, and anticipates discussion of the identified
pricing issues with the contracting officers responsible for the
Company's contracts. The ultimate resolution of this matter potentially
could involve purchase price adjustments and associated legal costs of
approximately $3.8 million. The Company established a reserve for
this amount in December, 1996. The Company also took a charge of
$220,000 in the quarter ended March 29, 1997 for potential contract
price adjustments on sales during the quarter under the federal
government supply contracts. 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.
NOTE 4 - NET INCOME PER SHARE
Net income per share of common stock is based on the weighted average
number of common shares outstanding, adjusted for dilutive common stock
options (2,919,000 shares and 2,909,000 shares in the first quarters of
1997 and 1996, respectively.)
6
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MOORE MEDICAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
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The following table sets forth items included in the Statements of Operations as
a percentage of sales for the first quarters of 1997 and 1996. The table also
shows, for each line item, the percentage change in the 1997 period from the
comparable 1996 period.
<TABLE>
<CAPTION>
FIRST QUARTER
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% OF SALES % CHANGE
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1997 1996
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<S> <C> <C> <C>
Net sales............................... 100.0% 100.0% 7%
Cost of products sold................... 86.2 86.0 7
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Gross profit............................ 13.8 14.0 6
Selling, general & administrative 12.6 12.1 11
expenses............................... ----- -----
Operating income........................ 1.2 1.9 (28)
Interest expense, net................... .6 .6 11
----- -----
Income before income taxes.............. .6 1.3 (47)
Income tax provision.................... .2 .5 --
----- -----
Net income.............................. .4% .8% (48)%
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</TABLE>
RESULTS OF OPERATIONS
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FIRST QUARTER
1997 COMPARED WITH 1996
- -----------------------
Net sales of $81.0 million for the first quarter of 1997 increased 7% from the
same quarter of 1996. In the first quarter of 1997, sales of brand-name
pharmaceuticals increased 23%. Sales of generic pharmaceuticals decreased 24%,
primarily due to significant industry-wide deflation that resulted in lower
prices in the first quarter of 1997 compared with the first quarter of 1996.
Sales of medical/surgical supplies increased 14% during the 1997 quarter from
the comparable 1996 quarter. Growth in sales to health-care practitioner
customers accounted for most of the sales increase in medical/surgical supplies.
For the 1997 quarter, gross profit dollars increased 6% to $11.2 million. The
gross margin rate of 13.8% was slightly lower than the 14.0% in the same quarter
a year earlier due to a 1997 sales mix with more brand-name pharmaceuticals,
which have lower gross profit margin rates than the other products.
7
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Selling, general and administrative expenses in the first quarter of 1997
increase 11% from the same quarter of 1996. A significant factor accounting for
the increase was the previously announced, added costs of enlarging the sales
staff. In addition, freight expenses increased in the 1997 quarter. Also, a
charge of $220,000 ($.05 per share) was taken in the quarter for previously
announced estimated liabilities for contract price deficiencies on sales during
the quarter under federal government supply contracts.
Interest expense increased 11% in the 1997 quarter. Approximately two thirds of
the increase resulted from higher debt levels. Higher interest rates accounted
for the remainder of the increase.
Net income for the 1997 quarter decreased 48%. An increase in gross profit was
more than offset by increases in selling, general and administrative expenses
and interest expense. Approximately half of the net income reduction was
directly attributable to the charge in the 1997 quarter related to government
supply contracts.
FINANCIAL CONDITION
- -------------------
During the first quarter of 1997, funds from additional borrowings of $6.3
million and of $0.1 million from exercised stock options were used to finance
$6.1 million of net cash uses for operations and $0.3 million of equipment
purchases. The large uses of cash for operations were $3.0 million for
increases in accounts receivable and $3.5 million for decreases in accounts
payable. The increase in accounts receivable was due to higher sales in the
first quarter than for the fourth quarter of 1996. The decrease in accounts
payable was attributable to payments in the first quarter of 1997 for the
inventory position buying of brand-name pharmaceuticals at the end of 1996.
The Company's bank financing agreement provides a $35 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 March 29, 1997, the
Company was not in compliance with various financial covenants under the
agreement. The Company has received waivers from the bank regarding these
financial covenants.
Management believes that the funding needs of the Company for operating working
capital and equipment purchases will continue to be met through income from
operations and financing under its line of credit.
8
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PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 1
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Third Amendment and Waiver Agreement to Revolving Credit Agreement
by and among the Company and Bank of Boston Connecticut, dated April
14, 1997.
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed during the quarter.
SIGNATURES
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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.
(REGISTRANT)
By: /s/ John A. Murray By: /s/ Victor H. Emerson, Jr.
------------------------------ -----------------------------------
John A. Murray Victor H. Emerson, Jr.
Vice President - Finance and Controller and Chief
Chief Financial Officer Accounting Officer
May 12, 1997 May 12, 1997
9
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THIRD AMENDMENT
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AND
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WAIVER AGREEMENT
----------------
THIRD AMENDMENT AND WAIVER AGREEMENT (this "WAIVER AGREEMENT") dated as of
April 14, 1997 by and among Moore Medical Corp. (the "BORROWER"), Bank of Boston
Connecticut and certain other lending institutions (collectively, the "BANKS"),
and Bank of Boston Connecticut, as agent for the Banks (in such capacity, the
"AGENT"), amending a certain Revolving Credit Agreement dated as of January 9,
1996, as amended by the First Amendment Agreement dated as of March 1, 1996 and
the Second Amendment Agreement dated December 27, 1996 (as amended, the "CREDIT
AGREEMENT").
WITNESSETH
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WHEREAS, the Borrower has requested that the Banks amend certain terms and
conditions of the Credit Agreement and waive certain Events of Default which
exist under the Credit Agreement; and
WHEREAS, the Banks are willing to amend such terms and conditions and waive
such Events of Default on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
S1. DEFINITIONS. Capitalized terms used herein without definition that
-----------
are defined in the Credit Agreement shall have the same meanings herein as
therein.
S2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrower's
-----------------------------------
obligations and liabilities to the Agent and the Banks, and all the Agent's and
Banks' obligations and liabilities to the Borrower, as evidenced by or otherwise
arising under the Credit Agreement, the Notes and the other Loan Documents,
except as otherwise expressly modified in this Waiver Agreement upon the terms
set forth herein, are, by the Borrower's, the Agent's and Banks', execution of
this Waiver Agreement ratified and confirmed in all respects. In addition, by
the Borrower's execution of this Waiver Agreement, the Borrower represents and
warrants that, subject to the provided and provided, however, clauses of Section
-------- -------- -------
5.4 of the Credit Agreement, no counterclaim, right of set-off or defense of any
kind exists or is outstanding with respect to such obligations and liabilities.
S3. REPRESENTATIONS AND WARRANTIES. All of the representations and
------------------------------
warranties made by the Borrower in the Credit Agreement, the Notes and the other
Loan Documents are true and correct on the date hereof as if made on and as of
the date hereof, except for the Events of Default described in S5 hereof and
except to the extent that any of such representations and warranties relate by
their terms to a prior
10
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date and except to the extent of changes resulting from transactions
contemplated or permitted by the Credit Agreement and changes occurring in the
ordinary course of business that singly or in the aggregate do not have a
Material Adverse Effect.
S4. CONDITIONS PRECEDENT. The effectiveness of the amendments and waivers
--------------------
contemplated hereby shall be subject to the satisfaction on or before the date
hereof of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and
------------------------------
warranties made by the Borrower herein, whether directly or incorporated by
reference, shall be true and correct on the date hereof, except as provided in
S3 hereof.
(b) Performance; No Event of Default. The Borrower shall have
--------------------------------
performed and complied in all material respects with all terms and conditions
herein required to be performed or complied with by it prior to or at the time
hereof, and there shall exist no Default or Event of Default except for the
Events of Default described in S5 hereof.
(c) Corporate Action. All requisite corporate action necessary for
----------------
the valid execution, delivery and performance by the Borrower of this Waiver
Agreement and all other instruments and documents delivered by the Borrower in
connection therewith shall have been duly and effectively taken.
(d) Delivery. The parties hereto shall have executed and delivered
--------
this Waiver Agreement. In addition, the Borrower shall have executed and
delivered such further instruments, and take such further action as the Agent
and the Banks may have reasonably requested, in each case further to effect the
proposes of this Waiver Agreement, the Credit Agreement and the other Loan
Documents.
(e) Fees and Expenses. The Borrower shall have paid to the Agent and
-----------------
the Banks all fees and expenses incurred by the Agent in connection with this
Waiver Agreement, the Credit Agreement or the other Loan Documents on or prior
to the date hereof.
S5. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks waive those Events of Default that have occurred under the
Credit Agreement as a result of the Borrower's failure on or before March 29,
1997 to comply with those sections of the Credit Agreement set forth on
Schedule 1 attached hereto. The waiver set forth in this S5 shall be effective
- ----------
only for those Events of Defaults contained in the Credit Agreement as specified
in the preceding sentence occurring on or before March 29, 1997 and such waiver
shall not entitle the Borrower to any future waiver in similar or other
circumstances. Without limiting the foregoing, upon the occurrence of an Event
of Default after March 29, 1997, or if an Event of Default has occurred and is
continuing on the date hereof that is not set forth on Schedule 1, the Banks
----------
shall be free in their sole and absolute discretion to accelerate the payment in
full of the Borrower's
11
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indebtedness to the Agent and the Banks under the Loan Agreement and the other
Loan Documents, and may, if the Banks so elect, proceed to enforce any or all of
the Agent's and the Bank's rights under or in respect of the Credit Agreement,
the Notes and the other Loan Documents and applicable law.
S6. AMENDMENTS TO SS10.1 AND 10.2. Sections 10.1 and 10.2 of the Credit
------------------------------
Agreement are hereby amended in their entirety to read as follows:
"S10.1. Earnings Before Interest and Taxes to Total Interest Expense.
------------------------------------------------------------
The Borrower will not permit the ratio of Earnings Before Interest and Taxes to
Consolidated Total Interest Expense to be less than 1.5:1.0 for (i) the period
of two consecutive fiscal quarters of the Borrower ending on June 28, 1997, (ii)
the period of three consecutive fiscal quarters of the Borrower ending on
September 27, 1997 and (iii) any period of four consecutive fiscal quarters of
the Borrower ending on or after January 3, 1998."
"S10.2. Cash Flow to Financial Obligations. The Borrower will not
----------------------------------
permit the ratio of Consolidated Operating Cash Flow to Consolidated Financial
Obligations to be less than 1.25:1.0 for (i) the period of two consecutive
fiscal quarters of the Borrower ending on June 28, 1997, (ii) the period of
three consecutive fiscal quarters of the Borrower ending on September 27, 1997,
(iii) any period of four consecutive fiscal quarters of the Borrower ending on
or after January 3, 1998."
S7. EXPENSES. The Borrower agrees to pay to the Agent upon demand an
--------
amount equal to any and all out-of-pocket costs or expenses (including
reasonable legal fees and disbursements and appraisal expenses) incurred or
sustained by the Agent in connection with the preparation of this Waiver
Agreement and any related matters.
S8. MISCELLANEOUS.
-------------
(a) This Waiver Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut.
12
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(b) Except as otherwise expressly provided by this Waiver Agreement,
all of the respective terms, conditions and provisions of the Credit Agreement
shall remain the same and in full force and effect. It is declared and agreed
by each of the parties hereto that this Waiver Agreement and the Credit
Agreement be read and construed as one instrument, and all referenced in the
Loan Documents to the Credit Agreement shall hereafter refer to the Credit
Agreement, as amended by this Waiver Agreement.
IN WITNESS WHEREOF, each of the parties hereto have caused this Waiver
Agreement to be executed in its name and behalf by its duly authorized officer
as of the date first written above.
MOORE MEDICAL CORP.
By: /s/ John A. Murray
------------------
Title: Vice President
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By: /s/ Donald W. Peters
--------------------
Title: Vice President
13
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SCHEDULE 1
----------
Existing Events of Default under the Credit Agreement
-----------------------------------------------------
Failure to comply with SS10.1, 10.2 and 10.4 of the Credit Agreement as of
December 28, 1996 and SS10.1 and 10.2 as of March 29, 1997.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-3-1998
<PERIOD-START> DEC-30-1997
<PERIOD-END> MAR-29-1997
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 29,098
<ALLOWANCES> 333
<INVENTORY> 43,703
<CURRENT-ASSETS> 79,258
<PP&E> 14,430
<DEPRECIATION> (10,086)
<TOTAL-ASSETS> 84,772
<CURRENT-LIABILITIES> 29,518
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 25,814
<TOTAL-LIABILITY-AND-EQUITY> 84,772
<SALES> 81,042
<TOTAL-REVENUES> 81,042
<CGS> 69,826
<TOTAL-COSTS> 69,826
<OTHER-EXPENSES> 10,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> 515
<INCOME-TAX> 185
<INCOME-CONTINUING> 330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
