<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended October 24, 1998
OR
/__/ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number 0-21379
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
(Exact name of registrants as specified in their charters)
Delaware 22-1833660
22-3349976
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
800 Cottontail Lane
Franklin Township
Somerset, New Jersey 08873
(Address of principal executive offices)
(732) 748-8900
(Registrants' telephone number, including area code)
251 Industrial Parkway
Branchburg Township
Somerville, New Jersey 08876
(Former address of registrants)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No /___/
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<PAGE>
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Item Page
Number Number
- ------- ------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Community Distributors, Inc.
Condensed Statements of Operations (Unaudited) - For the
Three Months Ended October 24, 1998 and October 25, 1997............................. 3
Condensed Balance Sheets (Unaudited) - As of July 25, 1998 and October 24, 1998......... 4
Condensed Statements of Cash Flows (Unaudited) - For the
Three Months Ended October 24, 1998 and October 25, 1997............................. 5
Notes to Condensed Financial Statements of
Community Distributors, Inc.......................................................... 6
CDI Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations (Unaudited) - For the
Three Months Ended October 24, 1998 and October 25, 1997............................. 8
Condensed Consolidated Balance Sheets (Unaudited) - As of October 24, 1998
and July 25, 1998.................................................................... 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the
Three Months Ended October 24, 1998 and October 25, 1997............................. 10
Notes to Condensed Consolidated Financial Statements of
CDI Group, Inc. and Subsidiary....................................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 17
PART II. OTHER INFORMATION
Item 4. Other Information....................................................................... 19
Item 5. Exhibits and Reports on Form 8-K........................................................ 19
Signatures.............................................................................. 20
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Operations
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 24, October 25,
1998 1997
----------- -------
<S> <C> <C>
Net sales $ 60,121 $ 54,722
Cost of sales 44,428 39,671
----------- -----------
Gross profit 15,693 15,051
Selling, general and administrative expenses 14,338 12,678
Administrative fees 63 63
Depreciation and amortization 1,650 1,467
Other income, net 501 105
----------- -----------
Operating income 143 948
Interest expense, net 1,941 718
----------- -----------
Income (loss) before income taxes (1,798) 230
Provision (benefit) for income taxes (971) 349
------------ -----------
Net loss $ (827) $ (119)
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
Condensed Balance Sheets
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
As of As of
October 24, July 25,
1998 1998
----------- ---------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ -- $ 10,770
Accounts receivable 4,707 1,079
Inventory 40,395 29,246
Prepaid expenses and other current assets 2,450 1,013
----------- -----------
TOTAL CURRENT ASSETS 47,552 42,108
Property and equipment, net 10,821 10,080
Deferred charges and other assets 5,732 6,290
Goodwill, net 31,124 31,603
----------- -----------
TOTAL ASSETS $ 95,229 $ 90,081
------------ -----------
------------ -----------
LIABILITIES:
Revolver borrowings $ 1,850 $ --
Accounts payable 21,637 11,035
Accrued expenses and other current liabilities 6,066 8,237
Current portion of supplier advances 1,068 1,068
----------- -----------
TOTAL CURRENT LIABILITIES 30,621 20,340
Long-term debt 74,000 80,000
Supplier advances, net of current portion 1,616 629
Other long-term liabilities 4,205 3,498
----------- -----------
TOTAL LIABILITIES 110,442 104,467
------------ -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital -- --
Retained earnings 2,329 3,156
Distribution in excess of capital (17,542) (17,542)
------------ -----------
TOTAL STOCKHOLDER'S DEFICIT (15,213) (14,386)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 95,229 $ 90,081
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Cash Flows
Increase (decrease) in Cash and Cash Equivalents
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 24, October 25,
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (827) $ (119)
Depreciation and amortization 1,650 1,500
Non-cash rent expense 129 119
LIFO provision 150 300
Gain on repurchase of Senior Notes (395) --
Changes in operating assets and liabilities (7,789) (4,755)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (7,082) (2,955)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,365) (663)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES: (1,365) (663)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from revolver borrowings 2,850 --
Repayments of revolver borrowings (1,000) --
Cash overdraft 1,432 --
Payments made on long-term debt -- (29,269)
Proceeds from issuance of Senior Notes -- 80,000
Repurchase of Senior Notes (5,605) --
Transaction fees paid -- (3,086)
Dividend paid to parent -- (45,000)
Additional capital received from parent -- 242
----------- -----------
NET CASH (USED IN) FROM FINANCING ACTIVITIES (2,323) 2,887
Net decrease in cash and cash equivalents (10,770) (731)
Cash and cash equivalents at beginning of period 10,770 1,870
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 1,139
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
Notes to Condensed Financial Statements
(Dollars in Thousands)
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying financial statements should be read in conjunction
with the audited financial statements of Community Distributors, Inc.
(the "Company"), and the notes thereto contained in the Company's
annual report on Form 10-K dated October 15, 1998. The Company, a
wholly owned subsidiary of CDI Group, Inc. (the "Parent"), is engaged
in the operation of retail stores throughout New Jersey. These interim
financial statements are unaudited but, in the opinion of the Company,
include all adjustments, consisting only of normal recurring items,
necessary to fairly present the financial position and operating
results for the interim periods. Results for interim periods are not
necessarily indicative of results for the full year. The year end
balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted
accounting principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of
these lawsuits should not have a material impact on the Company's
results of operations, financial position, and cash flows.
(4) DEBT OFFERING:
On October 16, 1997, the Company issued $80,000 of 10 1/4% Senior Notes
Due 2004 ("Senior Notes") which are guaranteed by the Parent. The net
proceeds from the sale of the Senior Notes was approximately $77,000.
The Company used $29,000 of the net proceeds to refinance substantially
all of its then existing indebtedness and $45,000 of the net proceeds
were used to pay a dividend to the Parent, which then distributed a
dividend in the same amount to its stockholders. Under the relevant
debt agreements, in the event of a change in control, as defined, the
Company is required to repurchase all outstanding Senior Notes.
On October 16, 1997, the Company replaced its then existing credit
facility with a $20,000 five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. At
October 25, 1997, there were no borrowings under the Facility. This
Facility bears interest at either prime rate or the London Interbank
Offered Rate ("LIBOR") plus 1.75% and is secured by the Company's
eligible accounts receivable and inventory balances, as defined.
Included in the Facility is a $5,000 letter of credit facility.
Outstanding letters of credit, guaranteeing certain contingent
purchases which are not reflected in the accompanying financial
statements, aggregated approximately $198 and $130 at October 24,
1998 and October 25, 1997, respectively. The Facility contains
certain financial and operating covenants, including a minimum
fixed charge ratio. Additionally, the Company cannot make any
dividend or other distributions with respect to any share of stock
other than in certain limited circumstances. In October 1998, the
Company obtained a waiver from the lender under the Facility to
permit the repurchase of an aggregate of $6,000 principal amount of
Senior Notes.
6
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
Notes to Condensed Financial Statements
(Dollars in Thousands)
(Unaudited)
On October 6, 1998, the Company repurchased an aggregate of $5,000
principal amount of Senior Notes at a purchase price of $930 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. On
October 13, 1998, the Company repurchased an additional $1,000
principal amount of Senior Notes at a purchase price of $925 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. As
of October 24, 1998, $74,000 aggregate principal amount of Senior Notes
remained outstanding.
(5) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO)
basis which is determined based on estimates of gross profit rate,
inflation rates and inventory levels, and is adjusted for the results
of physical inventories which are taken twice a year. The results of
the last physical inventory, which was taken on July 25, 1998, did not
have a material impact on the results of operations.
(6) SIGNIFICANT EVENT:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In
connection therewith, the Company is pursuing collection of
approximately $455 of Third Party Plan prescription receivables that
were purchased by The Pharmacy Fund Receivables, Inc. Subsequent to the
filing for bankruptcy, the Company entered into a settlement agreement
with The Pharmacy Fund Receivables, Inc. and expects to collect the
uncollected receivables.
7
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 24, October 25,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 60,121 $ 54,722
Cost of sales 44,428 39,671
----------- -----------
Gross profit 15,693 15,051
Selling, general and administrative expenses 14,338 12,678
Administrative fees 63 63
Depreciation and amortization 1,650 1,467
Other income, net 501 105
----------- -----------
Operating income 143 948
Interest expense, net 2,380 1,241
----------- -----------
Loss before income taxes (2,237) (293)
Provision (benefit) for income taxes (1,125) 166
------------ -----------
Net loss $ (1,112) $ (459)
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
As of As of
October 24, July 25,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ -- $ 10,770
Accounts receivable 4,728 1,098
Inventory 40,395 29,246
Prepaid expenses and other current assets 2,604 1,582
----------- -----------
TOTAL CURRENT ASSETS 47,727 42,696
Property and equipment, net 10,821 10,080
Deferred charges and other assets 5,732 6,290
Goodwill, net 31,124 31,603
----------- -----------
TOTAL ASSETS $ 95,404 $ 90,669
----------- -----------
----------- -----------
LIABILITIES:
Revolver borrowings $ 1,850 $ --
Accounts payable 21,637 11,035
Accrued expenses and other current liabilities 6,066 8,237
Current portion of supplier advances 1,068 1,068
----------- -----------
TOTAL CURRENT LIABILITIES 30,621 20,340
----------- -----------
Long-term debt 74,000 80,000
Subordinated debt 18,958 18,517
Supplier advances, net of current portion 1,616 629
Other long-term liabilities 2,256 2,118
----------- -----------
TOTAL LIABILITIES 127,451 121,604
----------- -----------
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862 authorized,
issued and outstanding, redemption value $100 per share 786 786
Redeemable shares of Class A voting common stock, 57,963
shares issued and outstanding at net redemption
value at October 24, 1998 and July 25, 1998 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized 600,000 shares,
196,632 issued and outstanding at
October 24, 1998 and July 25, 1998 -- --
Class B voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
October 24, 1998 and July 25, 1998 -- --
Additional paid-in capital -- --
Retained earnings 1,278 2,390
Distribution in excess of capital (34,604) (34,604)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT (33,326) (32,214)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 95,404 $ 90,669
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 24, October 25,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (1,112) $ (459)
Depreciation and amortization 1,650 1,500
Non-cash rent expense 129 119
LIFO provision 150 300
Non-cash interest expense 441 527
Gain on repurchase of Senior Notes (395) --
Changes in operating assets and liabilities (7,945) (5,037)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (7,082) (3,050)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,365) (663)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (1,365) (663)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from revolver borrowings 2,850 --
Payments made on revolver borrowings (1,000) --
Cash overdraft 1,432 --
Payments made on long-term debt -- (29,269)
Proceeds from issuance of Senior Notes -- 80,000
Repurchase of Senior Notes (5,605) --
Transaction fees paid -- (3,086)
Dividend paid to stockholders -- (45,000)
Proceeds from exercise of stock options -- 242
Proceeds from loans to officers and directors -- 182
Payments of subordinated debt -- (87)
----------- ------------
NET CASH (USED IN) FROM FINANCING ACTIVITIES (2,323) 2,982
Net decrease in cash and cash equivalents (10,770) (731)
Cash and cash equivalents at beginning of period 10,770 1,870
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 1,139
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
10
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of CDI
Group, Inc. and Subsidiary (the "Company"), and the notes thereto
contained in the Company's annual report on Form 10-K dated October 15,
1998. The Company, and these consolidated financial statements, consist
of an operating entity, Community Distributors, Inc. (the "Subsidiary")
which is engaged in the operation of retail stores throughout New
Jersey, and a holding company, CDI Group, Inc. (the "Parent") which
conducts no independent operations. These interim consolidated
financial statements are unaudited but, in the opinion of the Company,
include all adjustments, consisting only of normal recurring items,
necessary to fairly present the financial position and operating
results for the interim periods. Results for interim periods are not
necessarily indicative of results for the full year. The year end
balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted
accounting principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of
these lawsuits should not have a material impact on the Company's
consolidated results of operations, financial position, and cash flows.
(4) DEBT OFFERING:
On October 16, 1997, the Subsidiary issued $80,000 of 10 1/4% Senior
Notes Due 2004 ("Senior Notes") which are guaranteed by the Company.
The net proceeds from the sale of the Senior Notes was approximately
$77,000. The subsidiary used $29,000 of the net proceeds to refinance
substantially all of its then existing indebtedness and $45,000 of the
net proceeds were used to pay a dividend to the Parent, which then
distributed a dividend in the same amount to its stockholders. Under
the relevant debt agreements, in the event of a change in control, as
defined, the Company is required to repurchase all outstanding Senior
Notes.
11
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
On October 16, 1997, the Company's wholly owned and consolidated
subsidiary replaced its then existing credit facility with a $20,000
five year revolving credit facility (the "Facility") concurrent with
the issuance of the Senior Notes. At October 25, 1997, there were no
borrowings under the Facility. This Facility bears interest at either
prime rate or LIBOR plus 1.75% and is secured by the Company's eligible
accounts receivable and inventory balances, as defined. Included in the
Facility is a $5,000 letter of credit facility. Outstanding letters of
credit, guaranteeing certain contingent purchases which are not
reflected in the accompanying financial statements, aggregated
approximately $198 and $130 at October 24, 1998 and October 25, 1997,
respectively. The Facility contains certain financial and operating
covenants, including a minimum fixed charge ratio. Additionally, the
Company cannot make any dividend or other distributions with respect to
any share of stock other than in certain limited circumstances. In
October 1998, the Company obtained an amendment to the facility
permitting the repurchase of an aggregate of $6,000 principal amount of
Senior Notes.
On October 6, 1998, the Company repurchased an aggregate of $5,000
principal amount of Senior Notes at a purchase price of $930 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. On
October 13, 1998, the Company repurchased an additional $1,000
principal amount of Senior Notes at a purchase price of $925 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. As
of October 24, 1998, $74,000 aggregate principal amount of Senior Notes
remained outstanding.
In addition to the outstanding Senior Notes issued by the subsidiary,
the Parent had outstanding long term debt, consisting of senior
subordinated notes due January 31, 2005, in the amount of $18,958 and
$18,517 at October 24, 1998 and July 25, 1998, respectively, which
includes accrued interest.
(5) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO)
basis which is determined based on estimates of gross profit rate,
inflation rates and inventory levels, and is adjusted for the results
of physical inventories which are taken twice a year. The results of
the last physical inventory, which was taken on July 25, 1998, did not
have a material impact on the results of operations.
(6) SIGNIFICANT EVENT:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In
connection therewith, the Company is pursuing collection of
approximately $455 of Third Party Plan prescription receivables that
were purchased by The Pharmacy Fund Receivables, Inc. Subsequent to the
filing for bankruptcy, the Company entered into a settlement agreement
with The Pharmacy Fund Receivables, Inc. and expects to collect the
uncollected receivables.
12
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Cautionary Note
This Quarterly Report on Form 10-Q may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended, including, but not
limited to, (i) statements about possible changes in the rate of increase of
pharmacy sales to Third Party Plans as a percentage of total pharmacy sales, and
its impact on profitability; (ii) the impact on Community Distributors, Inc.
(the "Company") of its entrance into a lease for new headquarters and warehouse
space; (iii) the ability of the Company to meet its debt service obligations and
to fund anticipated capital expenditures and working capital requirements in the
future; (iv) the amount and sufficiency of the Company's planned expenditures to
address the year 2000 dating problem; (v) the impact on the Company of the
bankruptcy of The Pharmacy Fund Receivables, Inc. and the Company's expectations
regarding the recovery of funds owed to it by such party; and (vi) certain other
statements identified or qualified by words such as "likely", "will",
"suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. These forward-looking
statements represent the best judgment of the Company and the Holding Company as
of the date of this Quarterly Report on Form 10-Q, and the Company and the
Holding Company caution readers not to place undue reliance on such statements.
Actual performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to certain risks
and uncertainties, including, but not limited to, the risks and uncertainties
described or discussed in the section "Risk Factors" in the Prospectus dated
February 13, 1998 of the Company and of CDI Group, Inc. (the "Holding Company").
These risks include, among others, the following:
- Risks relating to the Company's substantial leverage and interest
expense obligations.
- Risks that the possible repeal of "Freedom of Choice" and "Any
Willing Provider" legislation in the State of New Jersey will
hurt the Company's competitive position vis-a-vis larger drug
store chains.
- Risks that the Company's right to use the tradenames "Drug Fair"
and "Cost Cutters" may be challenged.
- Risks that adverse changes in economic, competitive and
regulatory conditions in northern and central New Jersey, or the
country as a whole, may negatively impact the Company's operating
results.
- Risks that uncertainty in the Company's ability to renew leases
for its more profitable locations may negatively impact the
Company's operating results.
- Risks that increased participation by the Company's customers in
Third Party Plans will continue to erode the Company's margins on
the sale of pharmacy products.
- Risks of increased competition from mass merchandisers and chain
drugstores.
- Risks imposed by state and federal regulation of the sale of
pharmacy products and health care in general.
- Risks that the Company will be unable to find suitable locations
for expansion or that new store locations will not prove
profitable within a reasonable period of time.
General
The Company was founded in 1954 and until 1990 was managed primarily by
its founders. The Holding Company is the owner of all of the outstanding capital
stock of the Company. Since 1990, the Company has experienced significant growth
led by Frank Marfino, the Company's current Chief Executive Officer. The Company
currently operates a chain of 47 drug and general merchandise stores, with 30
drugstores operating under the "Drug Fair" name, 17 general merchandise stores
operating under the "Cost Cutters" name.
13
<PAGE>
Results of Operations
Except where indicated below, the following discussion relates to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
Comparison of the Three Months Ended October 24, 1998 (the "1999 Period") with
the Three Months Ended October 25, 1997 (the "1998 Period").
Net sales for the 1999 Period was $60.1 million as compared to $54.7
million for the 1998 Period, an increase of $5.4 million, or 9.9%. This
increase, which includes a 3.9% increase in same-store sales, was primarily due
to (i) a 6.1% increase in sales of non-pharmacy products, from $40.3 million for
the 1998 Period to $42.8 million for the 1999 Period, and (ii) a 20.2% increase
in pharmacy sales, from $14.4 million for the 1998 Period to $17.3 million for
the 1999 Period, including a 27.1% increase in pharmacy sales to Third Party
Plans from $10.7 million for the 1998 Period to $13.6 million for the 1999
Period. The Company attributes the increase in net sales of non-pharmacy
products to the opening of three new store locations and the acquisition of
inventory and customer lists of an independent pharmacy during the 1999 Period
as compared to no new store locations or customer list acquisitions during the
1998 Period, as well as increased customer traffic in the Company's stores
associated with the increase in total pharmacy sales. The number of
prescriptions filled (including prescriptions filled for Third Party Plans) was
approximately 425,000 for the 1999 Period as compared to approximately 379,000
for the 1998 Period, an increase of approximately 46,000, or 12.1%. The number
of prescriptions filled for Third Party Plan customers increased to
approximately 335,000 for the 1999 Period, as compared to 278,000 for the 1998
Period, an increase of 20.5%. Pharmacy sales to non-Third Party Plan customers
were $3.7 million in both the 1998 and 1999 Periods, remaining unchanged
primarily as the result of increased participation of the Company's customers in
Third Party Plans coupled with a decrease in the volume of pharmacy products
sold to non-Third Party Plan customers, which was partially offset by increased
prices on pharmacy products, as prescriptions filled for such customers
decreased from approximately 101,000 prescriptions in the 1998 Period to
approximately 90,000 in the 1999 Period.
Gross profit was $15.7 million for the 1999 Period, as compared to
$15.1 million for the 1998 Period, an increase of 4.0%. Gross profit as a
percentage of net sales was 26.1% for the 1999 Period as compared to 27.5% for
the 1998 Period. This 1.4% decrease in gross profit as a percentage of sales was
due primarily to (i) a decline in the margin on both pharmacy and non-pharmacy
merchandise, and (ii) the fact that pharmacy sales, which generate lower margins
than sales of other merchandise, represented a higher percentage of total sales
in the 1999 Period as compared to the 1998 Period. Although management expects
that Third Party Plans sales as a percentage of total sales will continue to
increase, management believes that as this rate of increase slows, margins will
stabilize, resulting in pharmacy gross profit growth that more closely
approximates pharmacy sales growth rates. Management believes that the rate of
increase in Third Party Plan prescription sales as a percentage of total
pharmacy sales will slow because the current growth rate, if continued, would
quickly reach the point at which almost all members of the population who may be
eligible for enrollment in Third Party Plans will be so covered. However,
management believes there will always be some pharmacy customers who do not
enroll in Third Party Plans. The Company is unable to estimate when this
increase will slow, or stop, if at all. Because of the lower margins on
prescription sales to Third Party Plan participants, management believes that
the increase in Third Party Plan prescription sales as a percentage of total
pharmacy sales will negatively impact profit margin, although this may be partly
or wholly offset by increases in non-pharmacy sales that may result from
increased floor traffic associated with increased pharmacy sales. There can be
no assurance, however, that the increase in Third Party Plan prescription sales
as a percentage of total prescription sales will continue, or that any resulting
decrease in overall margins will be offset.
Gross profit on total pharmacy sales (including sales to Third Party
Plans) was $3.4 million for the 1999 Period as compared to $3.0 million for the
1998 Period, an increase of 13.3%, which was primarily the result of the
increase in sales on a same store basis combined with the maturing of new stores
opened in the 1998 and 1997 fiscal years. Gross profit on sales to Third Party
Plans was $2.2 million for the 1999 Period as compared to $1.7 million for the
1998 Period, and increase of 29.4%, which was primarily the result of the
increase in sales of prescriptions to Third Party Plan customers as a percent of
total sales of prescriptions. Gross profit on sales of pharmacy products to
14
<PAGE>
non-Third Party Plan customers was $1.3 million in both the 1999 and 1998
Periods, remaining unchanged as a result of the lower volume of sales to
non-Third Party Plan customers.
Gross profit on non-pharmacy sales was $12.3 million for the 1999
Period, as compared to $12.1 million for the 1998 Period, an increase of 1.6%.
Gross profit as a percentage of non-pharmacy sales was 28.6% for the 1999 Period
as compared to 29.9% for the 1998 Period, a decrease of 1.3%. Gross profit on
non-pharmacy sales declined primarily due to increased levels of competition in
the Company's market, which caused the Company to reduce the gross profit on
advertised merchandise as well as higher levels of sales in lower gross profit
categories, including convenience foods.
Selling, general and administrative expense as a percentage of net
sales was 23.8% for the 1999 Period, as compared to 23.2% for the 1998 Period,
an increase of 0.6%. This increase in selling, general and administrative
expenses is primarily due to the higher cost of occupancy in connection with the
Company's consolidation of its warehouses and corporate office into one larger
facility as well as higher levels of selling, general and administrative
expenses incurred at its three new store openings during the period as new store
pre-opening costs are expensed as incurred.
Net interest expense was $1.9 million in the 1999 Period as compared to
$0.7 million in the 1998 Period, an increase of $1.2 million resulting from the
higher level of outstanding debt incurred in connection with the issuance of $80
million of the Company's 10 1/4% of Senior Notes Due 2004 ("Senior Notes") in
October 1997. Non-cash interest expense on the Holding Company's outstanding
subordinated debt was $0.4 million for the 1999 Period as compared to $0.5
million for the 1998 Period, a decrease of $0.1 million, resulting from the
higher principal amount outstanding during the 1998 Period under a loan to an
officer of the Company which was repaid concurrently with the issuance of the
Senior Notes.
Depreciation and amortization expense for the 1999 Period was $1.7
million as compared to $1.5 million for the 1998 Period, an increase of
13.3%. The 1999 Period included a one-time write off of $0.3 million of
unamortized deferred financing costs related to the repurchase of Senior
Notes while the 1998 Period included a one-time write off of unamortized
deferred financing costs of $0.4 million related to paydown of the Company's
old credit facility in connection with the issuance of the Senior Notes.
Excluding the above one-time charges in both the 1999 and 1998 Periods,
depreciation and amortization expense for the 1999 Period was $1.4 million as
compared to $1.1 million for the 1998 Period, an increase of 27.3%, which
resulted from the higher level of amortization of deferred financing costs
incurred in connection with the issuance of the Senior Notes.
Other income, net was $0.5 million for the 1999 Period as compared to
$0.1 million for the 1998 Period, an increase of $0.4 million which is the
result of the one time gain on the repurchase of the aggregate $6.0 million of
Senior Notes in the 1999 Period.
The net loss for the 1999 Period was $0.8 million as compared to a
net loss of $0.1 million in the 1998 Period, an increased loss of $0.7
million which is due to lower operating income and to increased levels of
interest, depreciation and amortization incurred. The net loss for the
Holding Company for the 1999 Period was $1.1 million as compared to a net
loss of $0.5, an increase of $0.6 million, principally as a result of the
factors described above as well as the compounded interest incurred on the
Holding Company's outstanding subordinated debt.
Liquidity and Capital Resources
Comparison of the Three Months Ended October 24, 1998 (the "1999 Period") with
the Three Months Ended October 25, 1997 (the "1998 Period").
During the 1999 Period, cash used in operations was $7.1 million as
compared to $3.0 million for the 1998 Period, an increase of $4.1 million. The
increase in cash used in operations is the result of the higher level of
investment in seasonal inventory due to the greater number of stores, the result
of the investment in inventory for three new store openings during the 1999
Period as compared to no new openings during the 1998 Period, and the result of
slower collection of Third Party Plan prescription receivables due to the
bankruptcy filing of The Pharmacy Fund Receivables, Inc. with whom the Company
had an arrangement to factor its Third Party Plan prescription receivables. Cash
used in investing activities was $1.4 million during the 1999 Period as compared
15
<PAGE>
to $0.7 million during the 1998 Period, an increase of $0.7 million, which was
the result of the three new store openings during the 1999 Period as compared
to no new store openings during the 1998 Period. Cash used in financing
activities was $2.3 million during the 1999 Period as compared to cash
provided by financing activities of $2.9 million during the 1998 Period.
During the 1998 Period, the cash provided by financing activities resulted
from the net proceeds, after payment of the dividend to the common
shareholders of the Holding Company, of the issuance of the $80.0 million of
Senior Notes. The cash used during the 1999 Period consisted of $5.6 million
for the repurchase of $6.0 million aggregate principal amount of Senior Notes
offset by $3.3 million of borrowings on the Company's $20.0 million revolving
credit facility (the "Facility"), inclusive of a cash overdraft of $1.4
million.
The Company believes that, based on anticipated levels of operations,
it will be able to meet its debt service obligations, including interest
payments on the Senior Notes, when due and to fund anticipated capital
expenditures and working capital requirements, and to comply with the terms of
its debt agreements during the remainder of its fiscal years ending July 31,
1999 and July 29, 2000. The Company's ability to make scheduled payments of
principal or interest on, or to refinance its indebtedness will depend on future
operating performance and cash flow, which are subject to prevailing economic
conditions, prevailing interest rates and financial, competitive, business and
other factors beyond its control. Although the Company's cash flow and
borrowings under the Facility are intended to cover the Company's debt service
obligations and working capital requirements over the near term, the Facility
does not mature until October 2002, and the Senior Notes do not mature until
October 2004. Accordingly, the Company's principal financing expenses over the
near term are expected to relate to the payment of interest on such
indebtedness. The Company expects that substantially all of its borrowings under
its credit facility will bear interest at floating rates, therefore, the
Company's financial condition will be affected by any changes in prevailing
rates.
To date, the Company has repurchased $6.0 million of its outstanding
Senior Notes. The Company may in the future repurchase additional Senior Notes
if it is able to obtain appropriate waivers under the Facility and such Senior
Notes are available at a discount. Any such repurchases could affect the
Company's ability to cover its debt service obligations and working capital
requirements in the future.
Year 2000
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. To the extent that a business system does not fail or make
miscalculations as a result of the Year 2000 date change, such a system is
described as being "Year 2000 Compliant." While the Company believes that it has
been taking adequate steps to make sure that its business systems are Year 2000
Compliant, and does not believe that it will incur material costs to prepare for
the Year 2000 date change, achieving complete Year 2000 Compliance is subject to
various risks and uncertainties, and there can be no assurance that the Year
2000 date change will not lead to failures of such systems that may have a
material adverse effect on the Company's future results of operations and
financial condition. The Company has been aware of the possible impact of Year
2000 issues on its operations for some time and has focused on making its
business systems Year 2000 Compliant since that time.
In anticipation of the Company's continued growth and need for
additional functionality, the Company has sought to acquire packaged software
solutions as compared to the internal development of software solutions. As a
result, a majority of the Company's Year 2000 Compliance issues have been
resolved by continuously deploying the most recently available versions of the
packaged software solutions. During 1996, the Company decided to deploy the JDA
Software, Inc. Merchandise Management System ("MMS"), which it believes, based
on representations from its licensor, to be Year 2000 Compliant. The cost
incurred for the implementation of the MMS was approximately $1.6 million, was
completed in October 1998, and was paid for out of the Company's budgeted
capital expenditures during fiscal years 1997 and 1998 and first fiscal quarter
of 1999. The MMS addresses the Year 2000 Compliance issue in the areas of
purchasing, inventory management, cost management, retail price management,
sales audit, and accounts payable. The Company has evaluated its other packaged
software solutions for the areas of payroll, human resources, general ledger,
budgeting, cost allocations, fixed assets, point-of-sale, and pharmacy and has
16
<PAGE>
determined that the implementation of the next version of the applicable
packaged software solutions, estimated to be implemented by June 1999, will
enable the Company to be Year 2000 Compliant in these areas. Finally, the
Company is in the process of evaluating the remaining internally developed
software applications for Year 2000 Compliance and estimates that the
required modifications to those solutions will be completed by September
1999. These internally developed software applications provide functionality
in the areas of inventory returns to vendors, advertising and warehouse
management.
The Company estimates that approximately $1.1 million of additional
costs will be incurred during the remaining nine months of fiscal 1999 and first
five months of fiscal 2000 in order to achieve Year 2000 Compliance for all of
its critical systems. The expenditures are estimated as follows: $0.2 million
for the upgrade to the most recent version of the Lawson Associates, Inc.
financial packaged software solution, which includes general ledger, cost
allocations, budgeting, payroll, and human resources; $0.1 million for the cost
to upgrade to the current packaged software solution for store point-of-sale and
pharmacy systems; $0.2 million for modification of the existing internally
developed warehouse space management, receiving and distribution systems; $0.3
million for the purchase of new point-of-sale and pharmacy system hardware
upgrades at the Company's stores and corporate office; $0.1 million for the
purchase of store radio frequency equipment which is used for the purpose of
price auditing and merchandise ordering, and $0.2 million for the modification
of the remaining internally developed software solutions, as well as for the
purchase of replacement personal computers at the Company's corporate office. In
connection with the modification of the remaining internally developed software
solutions, the Company will develop formal contingency plans to deal with any
failures by its internal processing systems or packaged software solutions which
may not be Year 2000 Compliant. The Company does not anticipate having to defer
any other information technology projects in order to achieve timely resolution
of the Year 2000 dating problem.
The Company relies upon various third parties for merchandise and
services. Interruption of supplier operations, due to their lack of Year 2000
Compliance could significantly affect the Company's operations, particularly if
the Company is unable to acquire merchandise for sale in its stores. The Company
has initiated efforts to evaluate the status of its suppliers efforts toward
achieving Year 2000 Compliance and, if necessary, to define appropriate
contingency plans. The Company expects to have the evaluation of its suppliers'
Year 2000 Compliance completed by approximately June 1999 and the applicable
contingency plans in place by approximately October 1999. Various contingency
plans could include identification of alternate suppliers and accumulation of
inventory to assure merchandise is available for sale in its stores. The
evaluations of suppliers are a means to ensure the continued flow of merchandise
and services to the Company, but cannot eliminate the potential for disruption
due to lack of Year 2000 Compliance by a third party supplier.
The Company's evaluation of Year 2000 Compliance, both of its internal
systems and of its suppliers, is an ongoing process in order to minimize the
risk to the company for a disruption of operations, liquidity, and financial
condition. Due to the uncertainty of Year 2000 Compliance by the Company's third
party suppliers as noted above, the Company is establishing applicable
contingency plans, which it believes will appropriately address Year 2000
Compliance. However, no assurance can be given that such contingency plans
will address all potential Year 2000 Compliance failures.
17
<PAGE>
Item 3. Quantitative and Qualitative Information About Market Risk
Neither the Company nor the Holding Company engages in trading market
risk sensitive instruments or purchases hedging instruments or "other than
trading" instruments that are likely to expose the Company or the Holding
Company to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. Neither the Company nor the Holding
Company has purchased options or entered into swaps or forward or futures
contracts. The ability of the Company and the Holding Company (as guarantor) to
make periodic interest payments on the Senior Notes, at a fixed rate of 10 1/4%,
is not directly affected by fluctuations in the market. The Company's primary
market risk exposure is that of interest rate risk on borrowings under the
Facility, which are subject to interest rates based either on the lender's prime
rate or London Interbank Offered Rate ("LIBOR"), and a change in the applicable
interest rate would affect the rate at which the Company could borrow funds.
18
<PAGE>
PART II -- OTHER INFORMATION
Item 4. Other Information
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule of Community Distributors, Inc.
27.2 Financial Data Schedule of CDI Group, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended October 24, 1998.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
COMMUNITY DISTRIBUTORS, INC.
December 8, 1998 By: /s/ Todd H. Pluymers
-------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)
CDI GROUP, INC.
December 8, 1998 By: /s/ Todd H. Pluymers
-------------------------
Todd H. Pluymers,
Chief Financial Officer
(Authorized Officer and Principal
Finance and Accounting Officer)
20
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