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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 25, 1998
or
/ / TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
Commission File Number: 0-21379
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
(Exact Names of Registrants as Specified in Their Charter)
DELAWARE 22-1833660
22-3349976
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
800 COTTONTAIL LANE, SOMERSET, NJ 08873
(Address of Principal Executive Offices)
Registrant's telephone number, including area code
(732) 748-8900
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Name of each exchange on which
Title of each class registered
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE:
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.
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Yes /X/ No / /
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X 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 number of shares of the Common Stock, par value $.01 per share, of
Community Distributors, Inc., outstanding as of October 15, 1998 was 1,000, and
the number of shares of the Common Stock, par value $.01 per share of CDI Group,
Inc., outstanding as of October 15, 1998 was 442,517.
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CONTENTS
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 12
Item 4. Submission of Matters to Vote of Security Holders.............................................. 12
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.......................... 13
Item 6. Selected Historical Financial Data............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 16
Item 7A. Quantative and Qualitative Disclosures About Market Risk.......................................
Item 8. Financial Statements and Supplementary Data.................................................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........... 58
PART III
Item 10. Directors and Executive Officers of the Registrants............................................ 59
Item 11. Executive Compensation......................................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 63
Item 13. Certain Relationships and Related Transactions................................................. 66
PART IV
Item 14. Exhibits and Financial Statements Schedules.................................................... 68
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PART I.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Community Distributors, Inc. (the "Company") is among the largest regional
drugstore chains in the United States and the only regional chain focused
primarily on the densely populated northern and central New Jersey markets,
although several national and other regional drugstore chains have operations in
this area. CDI Group, Inc. (the "Holding Company") is the owner of all of the
outstanding capital stock of the Company. The Company operates a chain of 47
drug and general merchandise stores under two separate formats, Drug Fair and
Cost Cutters. Of the Company's 47 stores, 23 have been opened since 1989 and all
of the remaining 24 have been refurbished since 1991. The Company was acquired
by the Holding Company on January 30, 1995 (the "Acquisition"), and is referred
to below with respect to periods before such time as the "Predecessor Company."
As used in this Annual Report on Form 10-K (the "Report"), the terms "fiscal
1994," "fiscal 1996," "fiscal 1997," "fiscal 1998" and "fiscal 1999" refer to
the fiscal years ended or ending July 31, 1994, July 28, 1996, July 26, 1997,
July 25, 1998 and July 31, 1999, respectively, of the Predecessor Company, the
Company or the Holding Company, as applicable. All references to the twelve
months ended July 30, 1995 are to the 52 weeks ended July 30, 1995, and all
information presented for this period represents the mathematical addition of
the results of operations of the Company for the six months immediately prior to
the acquisition of the Company by the Holding Company on January 29, 1995 and
the results of operations of the Company for the six months ended July 30, 1995.
DRUG FAIR. Drug Fair is a chain of 30 large-format drugstores with an
average store size of approximately 17,000 square feet. All of the stores
contain a pharmacy in the rear of the store, which is the focal point of the
store layout. In fiscal 1998, the Company's pharmacies (including five at Cost
Cutters locations) filled over 1.6 million prescriptions, an average weekly
volume of approximately 1,000 scripts per pharmacy, and pharmacy sales increased
15.4% over fiscal 1997. Currently, approximately 74.8% of the Company's
prescription sales are made to participants in managed health care plans and
other third-party payer plans ("Third-Party Plans"). Drug Fair's strategy is to
utilize large-format stores to capitalize on the increased customer traffic
associated with its growing pharmacy business to increase sales of higher margin
non-pharmacy merchandise, including health and beauty care items, housewares,
greeting cards, stationery, candy and seasonal items. General merchandise
accounted for approximately 59.3% of Drug Fair revenues in fiscal 1998. Drug
Fair stores are primarily located in neighborhood shopping centers that are
easily accessible and generate significant customer traffic.
COST CUTTERS. Cost Cutters is a 17-store general merchandise chain with an
average store size of approximately 29,000 square feet. Cost Cutters stimulates
customer traffic by offering a non-pharmacy merchandise mix similar to Drug
Fair, a high-impact merchandise presentation and an everyday low price strategy,
with prices generally 10%-15% lower than Drug Fair. Cost Cutters offers a
broader selection of products than Drug Fair while still focusing on health and
beauty care items, housewares, greeting cards, stationery, candy and seasonal
items. Currently, five locations have pharmacies, three within the store and two
as separate Drug Fair storefronts adjacent to the store, and the Company
believes there is an opportunity to open Drug Fair pharmacies at certain
additional Cost Cutters locations. Cost Cutters stores are primarily located
near major highways, drawing customers from a wider area than a typical
drugstore and emphasizing their destination-store orientation.
BUSINESS INFORMATION
The Company's products may be divided generally into two segments: pharmacy
and general merchandise, which includes over-the-counter pharmaceuticals, health
and beauty care items, housewares, stationery and greeting cards, candy, food
and beverage (primarily convenience foods), cosmetics and seasonal and
promotional items. The principal products offered by the Company in these two
industry
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segments and the approximate percentage of revenues attributable to such
segments are described in detail below.
STORE OPERATIONS
The Company's stores are operated under two separate formats, Drug Fair and
Cost Cutters. The Company employs different pricing strategies for Drug Fair and
Cost Cutters, each targeted towards the customers it seeks to attract. Drug Fair
uses a more traditional promotional pricing strategy, with a limited number of
discounted items. In contrast, Cost Cutters relies on an everyday low price
strategy by offering lower prices on most items on a regular basis, which
management believes is consistent with its destination-store orientation.
The following table sets forth the approximate percentage of revenues
attributable to each major product category at Drug Fair and Cost Cutters stores
during fiscal 1998:
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PERCENTAGE OF FISCAL 1998
SALES BY CATEGORY
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DRUG FAIR COST CUTTERS
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Category:
Pharmacy............................................................................... 40.6% 5.9%
Health and Beauty Care................................................................. 12.3 18.8
Other Merchandise...................................................................... 12.0 13.4
Housewares............................................................................. 7.7 17.6
Stationery and Greeting Cards.......................................................... 6.7 12.3
Candy, Food and Beverage............................................................... 6.5 10.8
Seasonal and Promotional............................................................... 6.0 10.9
OTC Pharmaceuticals.................................................................... 4.3 4.4
Cosmetics.............................................................................. 3.9 5.9
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100.0% 100.0%
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Excluding revenue generated by stores that were open less than twelve months
before the beginning of each period, the Company's stores generated net sales of
$225.4 million in fiscal 1997 (from 39 stores), and $237.8 million in fiscal
1998 (from 41 stores), an increase of 5.5%. The Company attributes this growth
to increased pharmacy sales as well as increased sales of non-pharmacy
merchandise generated by increased customer traffic, as well as the successful
implementation of the Company's merchandising strategies.
DRUG FAIR
Drug Fair is a 30-store chain of larger sized traditional drugstores
primarily located in easily accessible neighborhood shopping centers. Drug Fair
has built a base of loyal customers by offering a broader range of non-pharmacy
general merchandise within this larger format, including an expanded selection
of health and beauty care items, housewares, greeting cards, stationery and
seasonal items, in a convenient setting with attractive prices. Drug Fair's
strategy is to emphasize its broad selection of merchandise and offer
competitive prices relative to its competition. In particular, the Company
believes that its broader selection of non-pharmacy general merchandise is a
significant competitive strength that has enabled it to increase non-pharmacy
gross margin from 29.2% in fiscal 1994 to 32.6% in fiscal 1998. The Company's
long-standing philosophy of customer service has made Drug Fair a leader in
local pharmacy services in its markets.
The first Drug Fair store was opened in 1954 in Scotch Plains, New Jersey
and the Company's current Drug Fair locations average approximately 17,000
square feet, ranging between 11,200 and 23,400 square feet. The Company believes
that its store size and locations are important factors to store profitability.
Most Drug Fair stores are contained in neighborhood shopping centers that are
easily accessible and
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generate significant customer traffic. All stores are open seven days a week,
from 9:00 a.m. to 9:30 p.m., Monday through Friday, with slightly reduced hours
on weekends, totaling approximately 83 hours per week.
PHARMACY. In fiscal 1998, the Company's pharmacies filled over 1.6 million
prescriptions, representing an average weekly volume of approximately 1,000
scripts per pharmacy, and pharmacy sales increased 15.4% over fiscal 1997.
Currently, approximately 74.8% of prescription volume results from sales to
Third-Party Plan participants. The Company offers discounts on prescriptions to
senior citizens, who accounted for approximately 12.8% of prescription sales
volume in fiscal 1998.
All Drug Fair stores contain a pharmacy in the rear of the store, each
staffed by two full-time registered pharmacists. The pharmacy is the focal point
of the store layout, which is also designed to promote optimal customer flow and
shopping convenience. New and remodeled stores typically have enhancements such
as pharmacy waiting and consultation areas. In addition, for the past four years
Drug Fair stores have featured free home delivery of prescriptions. The Company
believes that this delivery service represents an attractive alternative to the
drive-through pharmacy service offered by some of its competitors while avoiding
the significant capital expenditures required to remodel stores to accommodate
drive-through services.
GENERAL MERCHANDISE. As a customer-oriented, lower-cost retail drugstore,
Drug Fair strives to compete on the bases of cost and maintaining a high-quality
image with the consumer. General merchandise is an important component of Drug
Fair's revenues, comprising approximately 59.3% of Drug Fair revenues in fiscal
1998. General merchandise products are well stocked and displayed on shelves
within easy reach of consumers. With its convenient merchandise layout and large
selection, Drug Fair retains its small-store atmosphere while offering a variety
of merchandise selections typically seen in larger retail stores. Drug Fair
offers a similar selection of general merchandise as that of its drugstore
competitors but, due to its above average size, is able to expand its selection
of items and offer a wider assortment of higher margin non-pharmacy merchandise.
For example, seasonal items have been a key contributor to Drug Fair's success,
comprising 6.0% of divisional revenues in fiscal 1998. Seasonal items are
prominently displayed along the entrance, providing a varied product mix and
generating impulse buying. With nearly 58,000 non-pharmacy stock keeping units
("SKUs") including seasonal items, Drug Fair also offers expanded greeting card
and household item sections to the consumer.
In addition to its general merchandise offerings, the Company seeks to
attract customers by offering ancillary conveniences and services, such as
lottery tickets, convenience food sections and film processing in many of its
stores, including its own on-site one-hour photofinishing labs in 15 Drug Fair
locations. Management believes that it offers the lowest prices for one-hour
film developing in its markets. The Company intends to continue to experiment
with new products and services designed to increase customer traffic and enhance
convenience.
COST CUTTERS
Cost Cutters is a 17-store general merchandise chain focused on the product
areas of health and beauty care, housewares, greeting cards, stationery, candy
and seasonal items. The stores are self-service oriented, and feature a similar
non-pharmacy merchandise mix to Drug Fair, with more than a 90% overlap in
general merchandise, at prices generally 10%-15% lower than at Drug Fair.
Currently, three Cost Cutters locations house their own pharmacies, and the
Company has added Drug Fair pharmacies adjacent to two of its Cost Cutters
locations. The Company believes there is an opportunity to open Drug Fair
pharmacies in certain additional Cost Cutters locations. Cost Cutters is unique
in its merchandising strategy in its markets and provides a much broader product
variety and deeper discounts than other local stores, while successfully
competing with mass merchandise stores.
The Company opened its first Cost Cutters store in 1983 in Norwood, New
Jersey and the Company's Cost Cutters stores average approximately 29,000 square
feet in size, ranging from 20,000 to 36,000 square
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feet. In expanding to new sites, the Company has opportunistically negotiated
favorable lease terms, typically from grocery stores that are relocating, rather
than paying higher prices for new real estate. Most of the stores are located in
shopping centers, near highways in easily accessible locations for surrounding
communities. By comparison, larger discount department chains, such as WalMart,
Caldor and K-Mart, typically build new stores in excess of 100,000 square feet
and focus more on higher-priced products such as apparel, sporting goods,
electronics and appliances. The Company believes that the accessibility and
manageable size of a Cost Cutters store is attractive to consumers at a time
when larger discount merchandisers continue to open larger and more complex
stores that many customers may find less convenient. All stores are open seven
days a week, from 9:00 a.m. to 9:30 p.m., Monday through Friday, with slightly
reduced hours on weekends, totaling approximately 83 hours per week.
PHARMACY. While pharmacy is not the main focus of the Cost Cutters chain,
three Cost Cutters locations house their own pharmacies and the Company has Drug
Fair pharmacies as separate storefronts adjacent to two of its Cost Cutters
locations with a pass-through between the two stores. The Company believes there
is an opportunity to add Drug Fair pharmacies to certain additional Cost Cutters
stores depending on factors such as lease restrictions, location, store size,
layout and competition. The Company estimates that it costs $75,000 to $100,000
to install a Drug Fair pharmacy next to an existing Cost Cutters location
(assuming construction of a new storefront is required), excluding costs of
staffing and inventory.
GENERAL MERCHANDISE. With over 59,000 non-pharmacy SKUs, including seasonal
items, and substantial overlap in merchandise with Drug Fair, Cost Cutters
distinguishes itself through its merchandise presentation, pricing strategy,
assortment of items targeted to impulse purchases and a strong merchandising
position in greeting cards, stationery, seasonal items and household products.
In addition to traditional retail drugstore general merchandise such as health
and beauty care items, OTC pharmaceuticals, candy and seasonal items, Cost
Cutters also sells luggage, kitchenware and an extended selection of houseware
products and automotive-related goods. One of the Company's merchandising
strategies is a high-impact merchandise presentation based on well-stocked
shelves that are highly visible to the customer, promoting a value superstore
image. Eight Cost Cutters locations contain on-site one-hour photofinishing
labs.
Cost Cutters is less promotional than most other discount stores because it
utilizes an everyday low price strategy. Competitors such as Caldor and Bradlees
generally employ what is known as a "high-low" pricing strategy, in which
everyday prices are generally higher than at Cost Cutters but are reduced below
Cost Cutters' prices during periodic store-wide sales. The Company believes that
Cost Cutters' pricing strategy is more attractive to consumers than alternative
pricing strategies for the majority of its product offerings, including health
and beauty care products that are typically purchased when needed as opposed to
when offered on sale.
ADVERTISING AND PROMOTION
The Company aggressively advertises its Drug Fair and Cost Cutters chains
through extensive use of colorful, high-quality direct mail circulars
distributed to its neighborhood markets. Approximately 22 Drug Fair circular
programs are distributed annually, with each circular typically containing a
selection of approximately 200 specially priced items chosen to build customer
traffic. Cost Cutters distributes approximately 17 circular programs annually,
each containing approximately 200 items, of which 10% to 15% have been reduced
in price. The circulars often contain coupons good for item discounts and
advertise "Special" and "Bonus" buys. "Special" buys are items that are carried
at reduced prices while supplies last. "Bonus" buys are items carried every day
that include an additional amount of the same product or another product for no
extra cost. In some cases the body of the circulars for both chains are
identical, with different outside covers or "wraps," which allows the Company to
save advertising costs. In such cases, the products advertised in the body
generally represent regular everyday low prices for Cost Cutters and discounted
prices for Drug Fair. The Company estimates the average circular program costs
$145,000 to produce and distribute to approximately 760,000 recipients, although
in some cases the cost is partially offset by co-op advertising rebates received
from featured suppliers.
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PURCHASING AND DISTRIBUTION
By operating both Drug Fair and Cost Cutters chains, the Company believes
that it is able to take advantage of economies of scale available to larger
chains in purchasing merchandise and maintaining up-to-date systems and
technology. Although the Company utilizes two separate retail formats, the 47
stores are operated as one company through centralized purchasing and
distribution and use complementary marketing strategies. The Company believes
that its focus on consistent execution of its purchasing, pricing and
merchandising strategies has been instrumental in its success to date.
The Company maintains centralized budgeting, pricing, purchasing,
warehousing and inventory control functions at its corporate offices. Products
are purchased for both store chains by merchandise managers, each of whom is
responsible for a distinct product category (for example, cosmetics or
housewares) and reports to the Company's Vice President of Merchandising.
Approximately 56.0% of all non-prescription purchases are received at the
Company's current central warehouse and distribution center in Somerset, New
Jersey. These products are delivered to the stores by the Company's nine owned
trucks. The balance of general merchandise is shipped directly to the stores by
manufacturers and distributors. All prescription drugs are shipped directly to
the individual stores by wholesale drug distributors on a daily basis. The
Company has a supply agreement with Cardinal Health, Inc. ("Cardinal") that
requires it to purchase at least 90% of its pharmacy products from Cardinal. The
initial term of the Company's supply agreement with Cardinal expires in January
2000. Pursuant to the terms of the Cardinal Agreement, the Company purchases
pharmacy products at a specified discount to Cardinal's Cost (as defined in the
Cardinal Agreement). The Company believes that Cardinal's Cost (as defined in
the Cardinal Agreement) is higher than Cardinal's actual cost for the
pharmaceutical products it supplies because it does not reflect all discounts
that may be available to Cardinal from its suppliers. Neuman Distributors, Inc.
serves as a secondary supplier for products that are not routinely carried by or
are out of stock at Cardinal, and the Company believes that its pharmacy
products are readily available from numerous other wholesale suppliers of
pharmacy products that would be able to supply the Company's requirements on
substantially similar terms in the event that Cardinal and Neuman Distributors,
Inc. were unable to do so. The Cardinal Agreement does not provide for specific
penalties in the event of a breach by either party. Management believes that by
operating both chains it is able to purchase most of its products at competitive
prices by purchasing products in truck-load or container quantities.
The Company buys products from more than 1,600 suppliers and manufacturers
and seeks to purchase its merchandise directly from manufacturers in order to
take advantage of promotional programs offered only to retailers, including
co-op advertising allowances, promotional displays and materials and price
promotions. The Company believes that its relationships with its vendors are
good. The Company often utilizes prompt cash payments to obtain additional
merchandise discounts. None of the Company's suppliers or manufacturers
represented more than 10% of the Company's total non-pharmacy purchases during
fiscal 1998.
MANAGEMENT INFORMATION SYSTEMS
The Company operates an in-house data processing system in connection with
the operation and management control functions of its business. This system
incorporates both proprietary and commercially available software, including E-3
buying systems and Lawson Associates payroll systems, and is designed to
integrate the key retailing functions of merchandise planning, purchase order
management, sales capture, merchandise distribution, receiving, order entry,
inventory control and replenishment. Management believes its systems enable the
Company to maintain a virtually constant "in-stock" position in all key lines of
merchandise. In anticipation of continued growth, the Company purchased a new
comprehensive processing system developed by JDA Software, Inc. Effective June
1, 1998, the Company implemented the Accounts Payable, Sales Audit, and
Point-of-Sale Interface modules of the JDA processing system. In late
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September 1998, the Company implemented the Sales Analysis, Inventory
Management, Electronic Data Interchange and Purchasing modules of the JDA
processing system.
The Company monitors inventories and sales at its 47 stores through a
point-of-sale network, utilizing IBM Chain Drug software and hardware, which
links store terminals to a central computer located at the Company's
headquarters. The Company uses this system to replenish store inventories from
its central warehouses and to provide management with detailed information on
individual store operations on a daily basis.
All sales data is recorded by cashiers, utilizing scanners, in each store at
the time of sale. Sales data is transmitted to the central computer where it is
compiled to produce daily, weekly and monthly management reports. Reports are
organized by line of merchandise, class, item and store, and enable management
to monitor sales and profitability by location. Based upon this information,
management makes merchandising decisions as required, including reorders,
special promotions and changes in buying programs. As a means of further
inventory verification, physical inventories are taken twice a year at all
stores and the warehouses. The Company also employs Telxon and Symbol
Technologies radio frequency equipment in order to constantly monitor and update
inventory, shelf labels and prices.
As a result of the implementation of the Company's new JDA processing system
and utilization of various other packaged software solutions, the Company
believes that the majority of the Company's computer software applications and
systems will not be affected by the "year 2000" dating problems as many of the
proprietary legacy systems have been replaced by this system. Although the
implementation of the JDA processing system was made in anticipation of
continued growth, it is also intended to have the effect of resolving a majority
of the Company's year 2000 dating problems. The cost incurred for the
implementation of the JDA processing system was approximately $1.2 million,
which was paid for out of the Company's operating cash flows during fiscal years
1997 and 1998. The Company estimates that approximately $0.7 million of
additional costs will be incurred during fiscal 1999. These fiscal 1999
expenditures will be for the following: $0.2 million for the upgrade to the most
recent version of the Lawson financial systems, including general ledger, cost
allocations, budgeting, payroll and human resources; $0.2 million for
implementation of a year 2000 compliant space management package for the
Company's warehouse, receiving and distribution; $0.2 million for the purchase
of new point-of-sale and pharmacy system hardware for the stores as well as for
personal computer hardware upgrades at the corporate office; and $0.1 million
for the cost to modify current point-of-sale and various legacy computer systems
at the corporate office. 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. In the event the Company is unable to achieve
complete year 2000 dating problem resolution on a timely basis, management
anticipates that the disruption to the Company's business will be minimal.
However, the Company may be adversely affected if various suppliers do not
achieve complete resolution of the year 2000 dating problem. These adverse
affects may include, but are not limited to: not being able to maintain in-stock
inventory positions in the Company's warehouse and stores, resulting in lost
revenue; not being able to process electronically verified sales (i.e., credit
card, debit card, and Third Party Plan sales) at the pharmacy and front-end,
resulting in lost revenue; and the disruption of management reporting, resulting
in disruption to the Company's cash flows.
All of the Company's stores contain Sensormatic Electronic Article
Surveillance Systems designed to minimize theft. Since its installation four
years ago, this system has contributed to reducing overall shrinkage to
approximately 1.5% of sales, which management believes is below the industry
average.
COMPETITION
The Company competes in its markets with several national, regional and
local drugstore chains, large grocery stores and supermarkets, membership clubs,
deep discount drugstores, combination food and drugstores, discount general
merchandise stores, mass merchandisers, independent drugstores and local
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merchants. Historically, consumers were faced with few alternatives for filling
their prescriptions. Today's customer has a number of options including
independent or chain drugstores, food retailers, mass merchants (including
discounters and deep discounters) and "mail-order" pharmacies, as well as
supermarkets, combination food and drugstores, hospitals and HMOs. The Company's
on-site one-hour photofinishing labs also compete with a variety of mini-lab
photo-processors and photo-specialty shops.
The Company believes that the primary elements of competition in its
industries include pricing, store location and design, product selection,
customer service and convenience. The Company believes that it competes
successfully because of its pricing policies, reputation for reliability,
convenient store locations, superior pharmacy services, broad selection of
merchandise and effective sales techniques. However, the competitive environment
is often affected by factors beyond a particular retailer's control, such as
shifts in consumer preferences, economic conditions and population and traffic
patterns. The Company believes that in the future the ability to compete
effectively will be increasingly dependent on quality merchandising and customer
service, the effectiveness of cost containment measures, especially with respect
to pharmacy services, and advanced information systems.
GOVERNMENT REGULATION
Pharmacies are subject to extensive federal, state and local regulation.
These regulations cover required qualifications, day-to-day operations,
reimbursement and documentation of activities.
LICENSES AND REGULATION. The Company's pharmacists are required to be
licensed by the New Jersey Board of Pharmacy. All stores with pharmacies and the
Company's distribution centers are also registered with the Federal Drug
Enforcement Administration, although no pharmaceuticals are stored in the
distribution centers. Various other federal and state licenses (including state
licenses required to sell cigarettes) are required for the conduct of the
Company's business as presently conducted. The Company seeks to comply with all
such licensing and registration requirements and continues to actively monitor
its compliance with such requirements. By virtue of these licenses and
registration requirements, the Company will be obligated to observe certain
rules and regulations, and a violation of such rules and regulations could
result in a suspension or revocation of one or more licenses or registrations
and/or monetary penalties or fines. The sale of pharmaceutical products at new
stores requires the issuance of additional licenses, with respect to which the
licensing authorities may conduct investigations.
In 1990, the United States Congress enacted the Omnibus Budget
Reconciliation Act of 1990 (OBRA), which required states to implement
pharmaceutical drug use review programs for Medicaid beneficiaries by January 1,
1993. Under OBRA, pharmacists are required to offer counseling, without
additional charge, to customers covered by Medicaid about medication, dosage,
delivery systems, common side effects and other information deemed significant
by the pharmacists. The State of New Jersey enacted broader regulations that
require pharmacists to provide such counseling to all customers, regardless of
whether they are covered by Medicaid. As a result, the Company's pharmacists
must provide counseling to customers and have a duty to warn customers regarding
any potential adverse effects of a prescription drug if the warning could reduce
or negate such effects. In addition, the Company's pharmacists are required to
conduct a prospective drug review before any new prescriptions are dispensed,
and may conduct a similar review prior to refilling any prescriptions if
considered appropriate. Such reviews include screening for potential drug
therapy problems due to (i) therapeutic duplication, (ii) drug-disease
contraindications, (iii) drug-drug interactions, (iv) incorrect drug dosage or
duration of drug treatment, (v) drug-allergy interactions, and (vi) clinical
abuse or misuse. Further, New Jersey closely regulates the dispensing by
pharmacists of over-the-counter controlled dangerous substances, imposing
requirements as to: (i) filling and refilling of prescriptions, (ii) labeling of
prescriptions, and (iii) monitoring the use of Schedule V over-the-counter
controlled dangerous substances to determine, in a pharmacist's professional
judgment, whether the substance has or will be used for unauthorized or illicit
consumption or distribution. The Company believes its series of training
programs for pharmacy personnel and its pharmacy computer
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network are designed to ensure that these requirements are satisfied, but
violations of these regulations could have an adverse impact on the Company.
STATE LAWS AFFECTING ACCESS TO SERVICES. In July 1994, the State of New
Jersey adopted "Freedom of Choice" and "Any Willing Provider" legislation, which
the Company believes results in a "level playing field" in New Jersey for
regional drugstore chains such as the Company. The "Freedom of Choice"
legislation permits Third-Party Plan participants to purchase prescription drugs
from the provider of their choice if the provider meets uniformly established
requirements. In states which have not adopted similar legislation, many
Third-Party Plans align themselves by agreement with particular drugstore chains
under arrangements whereby members of a Third-Party Plan are required to
purchase their drugs at a particular drugstore chain in order for most or all of
the cost to be paid by the Third-Party Plan. As a result, other drugstore chains
and independent drugstores are in effect precluded from selling prescription
drugs to the applicable members. The "Any Willing Provider" legislation requires
that any Third-Party Plan that has entered into an agreement with a prescription
provider must permit any other licensed provider to participate in such
Third-Party Plan as a preferred or contracting provider if it is willing to
accept the terms of such agreement. Such legislation may increase competition
for the Company's pharmacies.
MEDICARE AND MEDICAID. The pharmacy business has long operated under
regulatory and cost containment pressures from state and federal legislation
primarily affecting Medicaid and, to a lesser extent, Medicare.
The Medicaid program is a cooperative federal-state program designed to
enable states to provide medical assistance to aged, blind, or disabled
individuals, or members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
Federal laws and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice, such as the OBRA counseling and drug utilization
review requirements described above. Third, federal regulations impose certain
requirements relating to the reimbursement for prescription drugs furnished to
Medicaid recipients. Among other things, federal regulations establish "upper
limits" on payment levels. In addition to requirements imposed by federal law,
states have substantial discretion to determine administrative, coverage,
eligibility and payment policies under their state Medicaid programs which may
affect the Company's operations.
The Medicare program is a federally funded and administered health insurance
program for individuals age 65 and older or who are disabled. Medicare covers a
limited number of specifically designated prescription drugs. As a result of the
Balanced Budget Act of 1997, reimbursement for these products is generally
limited to 95% of the published average wholesale price for such products. Over
the last several years, an increasing number of Medicare beneficiaries have been
served through health maintenance organizations. In addition to the limited
Medicare coverage for specified products described above, some of these health
maintenance organizations providing health care benefits to Medicare
beneficiaries may offer expanded drug coverage.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings
and freezes and funding restrictions, all of which may adversely affect the
Company's business. There can be no assurance that payments for pharmaceutical
supplies and services under governmental reimbursement programs will continue to
be based on the current methodology or remain comparable to present levels. In
this regard, the Company may be subject to rate reductions as a result of
federal budgetary legislation related to the Medicare and Medicaid programs. In
addition, various Medicaid programs periodically experience budgetary shortfalls
which may result in Medicaid payment delays.
8
<PAGE>
FRAUD AND ABUSE. The Company is subject to federal and state laws
prohibiting the submission of false or fraudulent claims and governing its
billing relationships and financial and other arrangements among health care
providers and vendors. These laws include the federal anti-kickback statute,
which prohibits, among other things, (i) knowingly and willfully soliciting,
receiving, offering or paying any remuneration directly or indirectly to induce
or in return for the referral of an individual to a person for the furnishing of
any item or service for which payment may be made in whole or in part under
federal health care programs, or (ii) purchasing, ordering or recommending, or
arranging for purchasing or ordering such covered items or services. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by federal health care programs. New Jersey,
for example, enacted the "Healthcare Cost Reduction Act" in 1991. Federal and
state courts have interpreted these laws broadly. Violations of these laws may
result in fines, imprisonment, civil money penalties and exclusion from the
federal and state funded health care programs.
The Department of Health and Human Services Office of Inspector General has
issued a "Special Fraud Alert" concerning prescription drug marketing practices
that could potentially violate the federal anti-kickback statute. According to
the Special Fraud Alert, examples of practices that may violate the statute
include certain arrangements under which remuneration is made to pharmacists to
recommend the use of a particular pharmaceutical product.
In addition, a number of states have undertaken enforcement actions against
pharmaceutical manufacturers involving pharmaceutical marketing programs,
including programs containing incentives to pharmacists to dispense one
particular product rather than another. These enforcement actions arose under
state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like. Other proposed action by state pharmacy
boards or federal regulators could reduce or eliminate the reimbursement
pharmacies receive to conduct therapeutic interchange or compliance programs on
behalf of health plans or other pharmacy benefit managers.
The Company seeks to maintain its contract arrangements with other health
care providers, its pharmaceutical suppliers and its pharmacy practices in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
HEALTH CARE LEGISLATION. Prescription drug sales have represented a
significant portion of the Company's revenues. These revenues may be affected by
changes within the health care industry, including changes in programs providing
for reimbursement of the cost of prescription drugs by Third-Party Plans,
regulatory changes relating to the approval process for prescription drugs and
proposals to reduce significantly projected increases in federal spending on
Medicare, Medicaid and other governmental programs.
In recent years, a number of legislative proposals have been introduced in
Congress to reform the health care system, including proposals in the context of
federal budget legislation. In addition, a number of states have enacted and are
considering various health care reforms. For example, several state Medicaid
programs have established mandatory statewide managed care programs for Medicaid
beneficiaries to control costs through negotiated or capitated rates, as opposed
to traditional cost based reimbursement for Medicaid services, and proposed to
use savings achieved through these programs to expand coverage to those not
previously eligible for Medicaid. Also, a provision of the FDA Modernization
Act, which becomes effective November 21, 1998, expressly permits pharmacy drug
compounding under certain conditions for individual patients. This maintains and
could increase the range of services provided by the Company. The Company cannot
predict whether or in what form health care legislation may be adopted in the
future, at the federal or state level, or the impact of any such legislation on
the Company's financial position or results of operations. However, to the
extent health care legislation expands the number of persons receiving health
care benefits covering the purchase of prescription drugs (such as through
government-sponsored managed care initiatives), it could result in increased
purchases of such
9
<PAGE>
drugs and could thereby have a favorable impact on both the Company and the
retail drug industry in general. Nevertheless, there can be no assurance that
any such legislation will be enacted or, if enacted, that such legislation will
not have an adverse effect on the Company.
LABOR LAWS. The Company is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime and working conditions.
An increase in the minimum wage rate, employee benefit costs or other costs
associated with employees could adversely affect the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses various trade names, service marks and trademarks,
including "Drug Fair" and "Cost Cutters," in the conduct of its business.
Historically, the Company has relied on common law protection of its trade
names, service marks and trademarks. Common law provides the Company with
limited protection for its trade names, service marks and trademarks within its
product lines and in its geographic market areas. Although the Company has filed
a federal service mark registration application for the service mark "Drug
Fair," a third party which does not currently operate in the Company's
geographic markets owns an issued federal service mark registration for the name
"Cost Cutters."
EMPLOYEES
As of August 25, 1998, the Company had approximately 1,700 employees of
which approximately 43% were full-time and 57% were part-time. None of such
employees are covered by collective bargaining agreements or represented by
unions. The Company has not experienced any material business interruption as a
result of labor disputes and the Company considers its employee relations to be
good.
ITEM 2. PROPERTIES
The Company's stores by location, fiscal year opened, fiscal year
refurbished and size were as follows on September 30, 1998:
DRUG FAIR
<TABLE>
<CAPTION>
FISCAL YEAR SQUARE
LOCATION OPENED/REFURBISHED FOOTAGE
- ---------------------------------------------------------------- ------------------ ---------
<S> <C> <C>
South Plainfield................................................ 1959/1994 21,250
Manville........................................................ 1965/1991 20,000
Old Bridge...................................................... 1969/1992 16,527
Edison.......................................................... 1970/1992 15,000
Freehold........................................................ 1970/1994 16,000
Westfield....................................................... 1972/1991 23,424
Aberdeen........................................................ 1974/1993 11,620
Fairfield....................................................... 1976/1991 19,600
Hazlet.......................................................... 1976/1991 12,000
Berkeley Heights................................................ 1977/1993 16,800
Milburn......................................................... 1977/1992 21,112
Warren.......................................................... 1978/1991 15,000
Wyckoff......................................................... 1981/1995 15,960
Rahway.......................................................... 1983/1993 13,900
Isellin......................................................... 1985/1993 16,265
Englewood....................................................... 1988/1992 13,440
Cranford........................................................ 1989/-- 13,661
Oakland......................................................... 1989/-- 20,205
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR SQUARE
LOCATION OPENED/REFURBISHED FOOTAGE
- ---------------------------------------------------------------- ------------------ ---------
<S> <C> <C>
Middlesex....................................................... 1991/-- 23,000
Stirling........................................................ 1993/-- 15,777
Verona.......................................................... 1995/-- 17,200
Clifton......................................................... 1996/-- 11,200
Ramsey.......................................................... 1996/-- 17,000
Somerset........................................................ 1996/-- 18,050
Plainfield...................................................... 1997/-- 18,000
Hillside........................................................ 1998/-- 17,600
Florham Park.................................................... 1998/-- 12,750
North Arlington................................................. 1999/-- 15,500
Fairview........................................................ 1999/-- 14,225
Port Monmouth................................................... 1999/-- 16,450
COST CUTTERS
Norwood......................................................... 1983/1992 24,630
Bricktown....................................................... 1984/1993 26,878
Manalapan....................................................... 1984/1992 24,450
Middletown...................................................... 1984/1993 27,988
Hamilton........................................................ 1985/1993 33,300
Union........................................................... 1985/1994 35,217
West Long Branch................................................ 1986/1996 27,113
Wall............................................................ 1987/1993 30,000
Hillsborough.................................................... 1990/1994 20,600
Parsippany...................................................... 1991/-- 29,575
Lacey........................................................... 1992/-- 34,000
Wayne........................................................... 1992/-- 29,000
Ocean........................................................... 1993/-- 36,890
Toms River...................................................... 1994/-- 34,000
Chatham......................................................... 1995/-- 20,800
Elizabeth....................................................... 1995/-- 25,000
Lincoln Park.................................................... 1995/-- 30,100
</TABLE>
All the Company's stores are leased pursuant to long-term leases containing
generally favorable terms. The current leases expire between November 30, 1999
and April 30, 2039 (assuming renewal options are exercised), with an average of
18 years remaining on lease terms. Six of these leases will expire by the end of
2000, 20 leases will expire between 2001-2015 and 21 leases will expire after
2015.
On May 21, 1998, the Company entered into a lease for new warehouse and
office facilities in Somerset, New Jersey. This lease, which expires on March
21, 2004, provides for the lease of approximately 201,000 square feet of
warehouse and office space. The Company commenced occupation of the new facility
in September 1998, and is vacating its prior corporate offices and two warehouse
facilities. The Company's monthly payments under the lease for the new facility
are approximately $67,000, and will result in increased net annual facility
expenditures of approximately $450,000. The Company believes this new facility
will improve operating efficiencies in several areas, particularly distribution
and inventory control.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no current pending
litigation to which it is a party will, individually or in the aggregate, have a
material adverse effect on its financial position or results of operations or
cash flows. The Company has not been required to expend in the past, and does
not expect to be required to expend in the future, any significant amounts for
investigation of environmental conditions, remediation of environmental
conditions or other similar matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Registrants is not publicly traded.
On October 16, 1997, the Holding Company issued an aggregate of 24,237
shares of its Common Stock to 12 of its shareholders, all of whom were officers,
directors or other members of the Company's management, pursuant to the exercise
of stock options previously granted to such persons. These sales of Common Stock
were made by the Holding Company in reliance of the exemption from registration
provided by Rule 701 under the Securities Act of 1933, as amended (the
"Securities Act").
On October 16, 1997, the Company issued $80,000,000 aggregate principal
amount of its 10 1/4% Senior Notes due 2004 (the "Original Notes") to Donaldson,
Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co., Inc. (the
"Initial Purchasers") in a transaction exempt under Regulation D under the
Securities Act. The Initial Purchasers resold the Original Notes to certain
qualified institutional buyers in reliance upon, and subject to the restrictions
imposed pursuant to, Rule 144A under the Securities Act.
On October 16, 1997, the Holding Company issued amended and restated
Subordinated Notes in the same principal amounts to the original holders thereof
in connection with the issuance of the Original Notes and the Holding Company's
Guarantee of such Notes. These amended and restated Notes were issued in
reference on the exemption from registration under the Securities Act provided
by Section 4(a) thereof.
On February 13, 1998, the Company commenced an offer to exchange $80,000,000
in aggregate principal amount of its 10 1/4% Senior Notes due 2004, Series B
(the "Exchange Notes") that had been registered under the Securities Act for a
like principal amount of the Original Notes. This exchange was commenced
pursuant to the terms of the Registration Rights Agreement, dated as of October
16, 1997, between the Company and the Initial Purchasers. Each of the Exchange
Notes and the Original Notes has been guaranteed by the Holding Company.
$80,000,000 in the aggregate principal amount of Exchange Notes were issued in
exchange for the Original Notes on March 20, 1998, and the Original Notes were
retired. The Exchange Notes are referred to hereinafter interchangeably with the
Original Notes as the "Senior Notes."
On September 16, 1998, the Board of Directors of the Company authorized the
repurchase by the Company of up to $6.0 million principal amount of Senior Notes
on the open market. On October 6, 1998, the Company repurchased an aggregate of
$5.0 million 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 $1.0 million 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 15, 1998, $74.0
million aggregate principal amount of Senior Notes remained outstanding.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
SELECTED FINANCIAL DATA OF THE COMPANY
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of and for each of the periods in
the five-year period ended July 25, 1998, are derived from the audited financial
statements of the Company and the Predecessor Company. The financial statements
of the Predecessor Company for fiscal 1994 and the six months ended January 29,
1995 have been audited by Arthur Andersen LLP, and the financial statements for
the six months ended July 30, 1995, fiscal 1996, fiscal 1997 and fiscal 1998
have been audited by PricewaterhouseCoopers, LLP. The Company was acquired by
the Holding Company on January 30, 1995, and is referred to below with respect
to periods prior to that date as the "Predecessor Company" and with respect to
periods after that date as the "Company." The selected financial and other data
presented below under the caption "Other Data" as of and for all of the periods
presented, are unaudited. The unaudited financial data reflects all adjustments
(consisting of normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for and as of the end of the
periods presented.
13
<PAGE>
The selected financial data presented below should be read in conjunction
with the audited financial statements and the related notes thereto of the
Company for fiscal 1996, fiscal 1997 and fiscal 1998 appearing elsewhere in this
Report. For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY
--------------------------- -------------------------------------------------------
TWELVE TWELVE TWELVE TWELVE
MONTHS SIX SIX MONTHS MONTHS MONTHS
ENDED MONTHS MONTHS ENDED ENDED ENDED
JULY 31, ENDED ENDED JULY 28, JULY 26, JULY 25,
1994 JAN. 19, 1995 JULY 30, 1995 1996 1997 1998
------------ ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Statement of Operations Data:
Net sales....................... $ 180,206 $ 101,687 $ 96,171 $ 215,731 $ 231,033 $ 248,242
Cost of sales................... 129,856 72,469 67,686 152,645 163,157 173,648
------------ ------------- ------------- ------------ ------------ ------------
Gross profit.................... 50,350 29,218 28,485 63,086 67,876 74,594
Selling, general and
administrative expense........ 38,494 21,468 21,635 47,487 50,831 56,074
Other income, net............... 803 595 205 353 401 579
Administrative fees............. 0 0 125 250 250 250
Depreciation and
Amortization(1)............... 1,674 884 1,980 4,341 4,399 5,386
------------ ------------- ------------- ------------ ------------ ------------
Operating income................ 10,985 7,461 4,950 11,361 12,797 13,463
Interest expense, net........... 0 0 2,284 3,998 3,018 6,748
------------ ------------- ------------- ------------ ------------ ------------
Income before income taxes...... 10,985 7,461 2,666 7,363 9,779 6,715
Provision for income taxes(2)... 474 186 1,598 3,659 5,216 3,678
------------ ------------- ------------- ------------ ------------ ------------
Net income...................... $ 10,511 $ 7,275 $ 1,068 $ 3,704 $ 4,563 $ 3,037
------------ ------------- ------------- ------------ ------------ ------------
------------ ------------- ------------- ------------ ------------ ------------
Balance Sheet Data (End of
Period):
Working capital (unaudited)..... $ 25,950 $ 29,457 $ 10,645 $ 11,196 $ 9,875 $ 21,768
Total assets.................... 52,163 53,176 86,079 84,931 81,256 90,081
Total debt...................... 0 0 45,000 39,360 29,467 80,418
Stockholder's equity
(deficit)..................... 33,645 36,033 19,068 22,772 27,335 (14,386)
Other Data (unaudited):
Ratio of earnings to fixed
charges(3).................... 6.7x 8.1x 1.7x 2.1x 2.7x 1.7x
Adjusted EBITDA (4)............. $ 11,536 $ 9,682 $ 7,714 $ 16,913 $ 18,695 18,566
Gross margin.................... 27.9% 28.7% 29.6% 29.2% 29.4% 30.1%
Adjusted EBITDA margin(5)....... 6.4% 9.5% 8.0% 7.8% 8.1% 7.5%
Capital expenditures............ $ 2,308 $ 1,313 $ 1,070 $ 2,887 $ 1,287 $ 3,525
Pharmacy sales growth........... 8.7% 7.8% 10.1% 10.8% 16.3% 15.4%
Pharmacy sales as a % of
total......................... 22.0 19.6 22.6 22.1 24.1 25.8%
Other Data (unaudited)
Third-Party Plan sales as a % of
pharmacy sales................ 40.6% 47.2% 50.9% 61.5% 70.1% 74.8%
Store data:
Number of stores at end of
period:
Drug Fair..................... 21 22 22 25 26 28
Cost Cutters.................. 14 15 16 17 17 17
------------ ------------- ------------- ------------ ------------ ------------
Total......................... 35 37 38 42 43 45
------------ ------------- ------------- ------------ ------------ ------------
------------ ------------- ------------- ------------ ------------ ------------
Same-store sales growth
(unaudited) (6):
Drug Fair..................... 5.7% 4.0% 6.6% 3.5% 6.7% 6.9%
Cost Cutters.................. 1.1 4.0 4.3 0.9 2.7 3.9%
------------ ------------- ------------- ------------ ------------ ------------
Total......................... 3.7% 4.0% 5.6% 2.4% 4.8% 5.5%
------------ ------------- ------------- ------------ ------------ ------------
------------ ------------- ------------- ------------ ------------ ------------
</TABLE>
- ------------------------------
(1) Amortization amounts for the periods set forth include amortization of
goodwill, beneficial leasehold intangibles and deferred financing costs
incurred.
(2) Prior to its acquisition by the Holding Company on January 30, 1995, the
Predecessor Company was treated as a Subchapter S corporation for both
federal and state income tax purposes. Accordingly, the provision for income
taxes for the six months ended
14
<PAGE>
January 29, 1995 and all prior periods is substantially less than that
recorded for the Company for the six months ended July 30, 1995 and each
subsequent period. If the Predecessor Company had been treated as a C
corporation for federal and state income tax purposes for the twelve months
ended July 31, 1994 and for the six month period ended January 29, 1995, the
Predecessor Company's provision for income taxes for such periods would have
been approximately $4,426 and $3,000, respectively, and its net income for
such periods would have been approximately $6,559 and $4,461, respectively.
(3) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and one-third of rental expenses, which the Company believes is
representative of that portion of rental expenses attributable to interest)
to income before income taxes and dividing that sum by the sum of the fixed
charges.
(4) Adjusted EBITDA represents net income plus depreciation and amortization,
income taxes, net interest expense, non-cash LIFO reserves against inventory
and non-cash rental expense. Changes in LIFO inventory reserves and non-cash
rental expense are included in Adjusted EBITDA because they reflect non-cash
expense that do not directly impact the ability of the Company to service
its debt obligations, including under the Notes. Changes in LIFO inventory
reserves and non-cash rental expense aggregated $(1,123), $1,337, $784,
$1,211, $1,500 and $(283) during fiscal 1994, the six months ended on each
of January 29, 1995 and July 30, 1995, fiscal 1996, fiscal 1997, and fiscal
1998, respectively. While Adjusted EBITDA should not be construed as a
substitute for income from operations, net income or cash flows from
operating activities (as defined by generally accepted accounting
principles), or other measurements determined by generally accepted
accounting principles, in analyzing the Company's operating performance,
financial position or cash flows, the Company has included Adjusted EBITDA
because management understands that it is commonly used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability to
service debt. Unlike net income or EBITDA, Adjusted EBITDA may not be a
measure of the ultimate profitability of a company, and may not be as
meaningful to other investors or analysts. In addition, the method of
calculating Adjusted EBITDA set forth above may be different from
calculations of Adjusted EBITDA employed by other companies and,
accordingly, may not be directly comparable to such other calculations.
The Adjusted EBITDA calculations for the periods presented are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------
TWELVE MONTHS SIX MONTHS
ENDED ENDED
JULY 31, 1994 JANUARY 29, 1995
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Income................................................... $ 10,511 $ 7,275
Provision for income taxes................................. 474 186
Interest expense, net...................................... 0 0
Depreciation & amortization................................ 1,674 884
Non-cash rent expense...................................... 0 0
Change in LIFO reserve..................................... (1,123) 1,337
------- ------
Adjusted EBITDA.............................................. $ 11,536 $ 9,682
------- ------
------- ------
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------
SIX
MONTHS TWELVE MONTHS ENDED
ENDED -------------------------------
JULY 30, JULY 28, JULY 26, JULY 25,
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Income......................................... $ 1,068 $ 3,704 $ 4,563 $ 3,037
Provision for income taxes....................... 1,598 3,659 5,216 3,678
Interest expense, net............................ 2,284 3,998 3,018 6,748
Depreciation & amortization...................... 1,980 4,341 4,399 5,386
Non-cash rent expense............................ 217 552 413 523
Change in LIFO reserve........................... 567 659 1,086 (806)
--------- --------- --------- ---------
Adjusted EBITDA.................................... $ 7,714 $ 16,913 $ 18,695 $ 18,566
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(5) Adjusted EBITDA margin is calculated as the amount of Adjusted EBITDA for a
period divided by net sales for such period. While Adjusted EBITDA margin
should not be construed as a substitute for gross margin (as defined by
generally accepted accounting principles), or other measurements determined
by generally accepted accounting principles, in analyzing the Company's
operating
15
<PAGE>
performance, financial position or cash flows, the Company has included
presentation of Adjusted EBITDA margin because management believes it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity and
to determine a company's ability to service debt. Management believes that
Adjusted EBITDA margin is a meaningful supplement to gross margin because it
measures the Company's profitability on a cash flow basis, which is material
to a determination of the Company's ability to service its debt.
(6) Same-store sales growth is calculated based on net sales for stores open for
the whole of the indicated and the previous period.
SELECTED FINANCIAL DATA OF THE HOLDING COMPANY
CDI GROUP, INC.
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR COMPANY ------------------------------------------------------
------------------------------------ SIX
TWELVE SIX MONTHS TWELVE MONTHS ENDED
MONTHS MONTHS ENDED ----------------------------------------
ENDED ENDED JULY 30, JULY 28, JULY 26, JULY 25,
JULY 31, 1994 JAN. 29, 1995 1995 1996 1997 1998
----------------- ----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Statement of Operations Data:
Net sales............................ $ 0 $ 0 $ 96,171 $ 215,731 $ 231,033 $ 248,242
Cost of sales........................ 0 0 67,686 152,645 163,157 173,648
-- --
------------ ------------ ------------ ------------
Gross profit......................... 0 0 28,485 63,086 67,876 74,594
Selling, general and administrative
expense............................ 0 0 21,635 47,487 50,831 56,074
Other income, net.................... 0 0 205 353 401 579
Administrative fees.................. 0 0 125 250 250 250
Depreciation and Amortization........ 0 0 1,980 4,341 4,399 5,386
-- --
------------ ------------ ------------ ------------
Operating income..................... 0 0 4,950 11,361 12,797 13,463
Interest expense, net................ 0 0 2,946 5,326 4,586 8,423
-- --
------------ ------------ ------------ ------------
Income before income taxes........... 0 0 2,004 6,035 8,211 5,040
Provision for income taxes........... 0 0 1,366 3,442 4,433 3,109
-- --
------------ ------------ ------------ ------------
Net Income........................... $ 0 $ 0 $ 638 $ 2,593 $ 3,778 $ 1,931
-- --
-- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Balance Sheet Data (End of Period)
Working capital (unaudited).......... $ 0 $ 0 $ 10,877 $ 11,656 $ 10,363 $ 22,356
Total assets......................... 0 0 86,105 84,950 81,332 90,669
Total debt........................... 0 0 58,912 54,782 46,301 98,935
Stockholders' equity (deficit)....... 0 0 5,388 7,077 10,855 (32,214)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE
This Report 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
16
<PAGE>
Plans as a percentage of total pharmacy sales, and its impact on profitability;
(ii) the impact on 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, Inc.; and (vi) certain other
statements identified or qualified by word 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. 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 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 relative to 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 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 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 and 17 general merchandise
stores operating under the "Cost Cutters" name.
Since 1990, the Company expanded its store base by 15 stores, with revenues
increasing from $180.2 million in fiscal 1994 to $248.2 million in fiscal 1998,
and Adjusted EBITDA and income before taxes changing from $11.5 million and
$11.0 million in fiscal 1994 to $18.6 million and $6.7 million, respectively, in
fiscal 1998. Net income decreased from $10.5 million in fiscal 1994 to $3.0
million in fiscal 1998. During this period, the Company also increased its
Adjusted EBITDA margin from 6.4% to 7.5% of sales. Adjusted EBITDA is calculated
as net income plus depreciation and amortization, income taxes, net interest
expense, changes in LIFO inventory reserves and non-cash rental expense. The
calculation of Adjusted EBITDA in a given fiscal period differs from the
calculation of income before income taxes for such fiscal period in that it adds
back to net income certain expenses that do not, in the given year, impact the
Company's cash flows. The Company believes that, while Adjusted EBITDA should
not be used as a
17
<PAGE>
substitute for other measures of financial performance determined under
generally accepted accounting principles, the presentation of Adjusted EBITDA is
meaningful to investors because EBITDA is commonly used by certain investors and
analysts to analyze and compare companies on the basis of operating performance,
leverage and liquidity and to determine a company's ability to service debt.
This improved operating performance and growth have resulted primarily from
rationalization and expansion of the store base, improved centralized controls
over purchasing, effective merchandising, pricing and loss-prevention
strategies, increased pharmacy business with Third-Party Plan participants and
cost control measures.
The Company was acquired in January 1995 by the Holding Company, whose
shareholders include a group of investors led by BancBoston Ventures Inc.
("BancBoston"), Harvest Technology Partners, L.P. ("Harvest") and management.
Since the Acquisition, the Company has placed emphasis on growing its pharmacy
sales to Third-Party Plan participants and, as a result, has grown its pharmacy
sales by 62.0% from fiscal 1994 to fiscal 1998. During the same period, the
Company's net income decreased from $10.5 million to $3.0 million, primarily as
a result of debt-related expense and goodwill amortization incurred by the
Company in connection with the Acquisition. Similarly, improved non-pharmacy
merchandising and pricing strategies, combined with increased customer traffic
resulting from higher pharmacy sales, have enabled the Company to increase its
gross margin from 27.9% in fiscal 1994 to 30.1% in fiscal 1998. This increase
occurred despite pharmacy margin erosion resulting from increased sales to
Third-Party Plan participants.
Since fiscal 1994, the Company's pharmacy sales have increased by 62.0%,
primarily as a result of the growth in prescription sales to Third-Party Plan
participants. In fiscal 1998, the Company's pharmacies filled over 1.6 million
prescriptions (an average weekly volume of approximately 1,000 scripts per
pharmacy), and pharmacy sales increased 15.4% over fiscal 1997. Currently,
approximately 74.8% of prescription sales results from sales to Third-Party Plan
participants. Although pharmacy sales to Third-Party Plan participants typically
have lower margins than cash pharmacy sales, resulting in a decline in the
Company's pharmacy gross margins, the higher pharmacy sales volume has resulted
in an overall increase in gross profit. Although management expects that
Third-Party Plan sales as a percentage of total pharmacy sales will continue to
increase, management believes that as this rate of increase slows, margins will
stabilize, resulting in pharmacy gross profit growth more closely approximating
pharmacy sales growth rates. Additionally, the Company believes that this margin
pressure has had less of an impact on its overall margin than on margins of
retailers for which prescriptions represent a higher percentage of total sales.
To compensate for declining pharmacy gross margins and to capitalize on the
increased customer traffic resulting from the growth in Third-Party Plan sales,
the Company has aggressively managed its non-pharmacy operations through
effective merchandising and purchasing strategies. As a result of these
initiatives, the Company has raised its non-pharmacy gross margins from 27.8% in
fiscal 1994 to 33.4% in fiscal 1998. There can be no assurance that the Company
will be able to continue to offset declines in pharmacy gross margins resulting
from Third-Party Plan sales.
The Company has expanded its store base by 15 stores since 1990, with no
stores, three stores, four stores, one store and two stores having been opened
in fiscal 1994, the twelve months ended July 30, 1995, fiscal 1996, fiscal 1997
and fiscal 1998, respectively. The Company has purchased prescription customer
files from existing independent drugstores, at an average cost of $155,000 per
store, for two of the locations opened in fiscal 1998. This strategy, which the
Company had not employed in connection with prior store openings, is intended to
reduce the amount of time before a new store becomes profitable. The Company
intends to continue to opportunistically expand its store base, primarily
focused on Drug Fair stores, as favorable market locations become available.
While pharmacy is not the main focus of the Cost Cutters chain, three Cost
Cutters locations contain their own pharmacies and the Company has Drug Fair
pharmacies adjacent to two of its Cost Cutters locations. The Company believes
there is an opportunity to add Drug Fair pharmacies to certain additional Cost
Cutters stores depending on factors such as location, lease restrictions, store
size, layout and competition. Four of the six stores opened between fiscal 1996
and fiscal 1998 do not currently contribute to the Company's operating profit.
18
<PAGE>
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
financial statements and the related notes thereto of the Company for fiscal
1996, fiscal 1997 and fiscal 1998 included elsewhere in this Report. The
following table sets forth the Company's operating results for the periods
indicated expressed as a percentage of sales and the net number of new stores
opened during the periods indicated.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
------------------------
JULY 28, JULY 26, JULY 25,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Net sales...................................................... 100.0% 100.0% 100.0%
Gross profit................................................... 29.2 29.4 30.0
Selling, general and administrative expense.................... 22.0 22.0 22.6
Administrative fees............................................ 0.1 0.1 0.1
Depreciation and amortization.................................. 2.0 1.9 2.1
Other income, net.............................................. 0.2 0.2 0.2
----- ----- -----
Operating income............................................... 5.3 5.6 5.4
Interest expense, net.......................................... 1.9 1.3 2.7
----- ----- -----
Income before income taxes..................................... 3.4 4.3 2.7
Provision for income taxes..................................... 1.7 2.3 1.5
----- ----- -----
Net income..................................................... 1.7 2.0 1.2
----- ----- -----
----- ----- -----
Other Data (unaudited):
Adjusted EBITDA................................................ 7.8% 8.1% 7.5%
Number of new stores (net)....................................... 4 1 2
</TABLE>
COMPARISON OF FISCAL 1998 WITH FISCAL 1997.
Net sales for fiscal 1998 was $248.2 million as compared to $231.0 million
for fiscal 1997, an increase of $17.2 million, or 7.4%. This increase, which
includes a 5.5% increase in same-store sales, was primarily due to a 4.9%
increase in sales of non-pharmacy products from $175.5 million for fiscal 1997
to $184.1 million for fiscal 1998 and a 15.4% increase in pharmacy sales from
$55.6 million in fiscal 1997 to $64.1 million in fiscal 1997 to $48.6 million in
fiscal 1998, including a 23.4% increase in pharmacy sales to Third Party Plans
from $39.4 million in fiscal 1997 to $48.6 million in fiscal 1998. The Company
attributes the increase in net sales of non-pharmacy products to the opening of
two new stores locations and the acquisition of inventory and customer lists of
two independent pharmacies during fiscal 1998 as compared to one new store
opening in fiscal 1997, as well as increased customer traffic in the Company's
stores associated with the increase in total pharmacy sales. The Company also
closed one store during fiscal 1998 after closing no stores during fiscal 1997.
The number of prescriptions filled (including prescriptions filled for Third
Party Plans) was approximately 1,633,000 million for fiscal 1998 as compared to
approximately 1,579,000 for fiscal 1997, an increase of approximately 54,000
prescriptions, or 3.4%. The number of prescriptions filled for Third Party Plan
customers increased to approximately 1,240,000 prescriptions for fiscal 1998, as
compared to 1,084,000 prescriptions for fiscal 1997, an increase of 14.4%, as
compared to the 23.4% increase in pharmacy sales to Third Party Plans during the
year. Pharmacy sales to non-Third Party Plan customers was $15.5 million in
fiscal 1998 and $16.2 million in fiscal 1997, a decrease of $0.7 million,
primarily as the result of increased participation of the Company's customers in
Third Party Plans and by a decrease in the volume of pharmacy products sold to
non-Third Party Plan customers as prescriptions filled for such customers
decreased from approximately 475,000 in fiscal 1997 to approximately 399,000 in
fiscal 1998.
19
<PAGE>
Gross profit was $74.6 million for fiscal 1998, as compared to $67.9 million
for fiscal 1997, an increase of 9.9%. Gross profit as a percentage of net sales
was 30.1% for fiscal 1998 as compared to 29.4% for fiscal 1997. This 0.7%
increase was due primarily to the reduction in the Company's LIFO reserves and
reduction in the Company's actual shrink incurred during the year, offset by a
reduction in the Company's gross margin on pharmacy sales. Although management
expects that Third Party Plan 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 more closely
approximating 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, although
management believes there will always be some pharmacy customers who do not
enroll in Third Party Plans. 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
the increases in non-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 $13.2 million for fiscal 1998 as compared to $12.8 million for fiscal 1997,
an increase of 3.1%, which was primarily the result of the increase in sales on
a same store basis combined with the maturing of new stores opened in fiscal
1998 and fiscal 1997. Gross profit on sales to Third Party Plans was $7.4
million for fiscal 1998 as compared to $7.0 million for fiscal 1997, an increase
of 5.7% which was primarily the result of the increase in the sales of
prescriptions to third Party Plan customers as a percent of total sales of
prescriptions. Gross profit on sales of pharmacy products to non-Third Party
Plan customers was $5.6 million for fiscal 1998 and was $5.8 million for fiscal
1997, a decrease of 3.4%, primarily as a result of the lower volume of sales to
non-Third Party Plan customers partially offset by an increase in the gross
margin on sales to non-Third Party Plan customers.
Gross profit on non-pharmacy sales was $61.4 million for fiscal 1998, as
compared to $55.1 million for fiscal 1997, an increase of 11.4%. Gross profit as
a percentage of non-pharmacy sales was 33.4% for fiscal 1998 as compared to
31.4% for fiscal 1997, an increase of 2.0%. Gross profit on non-pharmacy sales
increase primarily due to the reduction in the Company's LIFO reserves and
reduction in actual shrink, offset by higher levels of sales in lower gross
profit categories, including convenience foods.
Selling, general and administrative expense as a percentage of net sales was
22.6 % for fiscal 1998, as compared to 22.0% in fiscal 1997, an increase of
0.6%. Excluding the one-time performance related bonuses paid to Mr. Marfino and
Mr. Pluymers in the amount of $1.4 million in fiscal 1998 selling, general and
administrative expense as a percentage of net sales was 22.0%, the same as
fiscal 1997. This percentage remained stable with no significant fluctuations in
any of the categories of selling, general and administrative expenses from
fiscal 1997 to fiscal 1998.
Interest expense was $6.7 million in fiscal 1998 as compared to $3.0 million
in fiscal 1997, an increase of $3.7 million resulting from the higher level of
outstanding debt incurred in connection with the issuance of the Senior Notes in
October 1997.
Depreciation and amortization expense for fiscal 1998 was $5.4 million as
compared to $4.4 million for fiscal 1997, an increase of 22.7%. This increase
was primarily due to the increased amortization of deferred financing costs.
Amortization of deferred financing costs increased as a result of the $0.4
million one-time write-off of unamortized deferred financing cost under the old
credit facility and as a result of higher amortization under the Senior Notes
due to the higher amount of fees paid for the issuance of the Senior Notes.
Depreciation expense was $2.1 million during fiscal 1998 as compared to $1.8
million during
20
<PAGE>
fiscal 1997, an increase of $0.3 million or 16.7%. This increase was the result
of the opening of two new store locations during fiscal 1998.
Net income for the Company for fiscal 1998 was $3.0 million as compared to
$4.6 million for fiscal 1997, a decrease of $1.6 million or 34.8%, as a result
of improved operating performance offset by higher levels of interest expense
and depreciation and amortization expense. Net income for the Holding Company
for fiscal 1998 was $1.9 million as compared to $3.8 for fiscal 1997, a decrease
of 50.0%, principally as a result of the factor's described above.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net sales for fiscal 1997 were $231.0 million as compared to $215.7 million
for fiscal 1996, an increase of $15.3 million or 7.1%. This increase was due
primarily to a 4.8% increase in same-store sales, driven by a 16.3% increase in
total pharmacy sales (including sales to Third Party Plans), from $47.8 million
to $55.6 million, and a 34.5% increase in pharmacy sales to Third-Party Plans
from $29.3 million to $39.4 million. The Company believes that the increase in
pharmacy sales to Third Party Plans during this period was primarily driven by
the increase in the volume of pharmacy products sold to Third Party Plan
customers and pricing increases on such products. The number of prescriptions
filled for Third Party Plan customers increased to approximately 1.1 million
prescriptions for fiscal 1997, as compared to approximately 840,000
prescriptions in fiscal 1996, an increase of approximately 31.0%, as compared to
the 34.5% increase in pharmacy sales to Third Party Plans over the same period.
The Company believes that pricing increases on pharmacy products of between 4%
and 6% annually have been common during the past several years and is the
primary reason for the higher rate of increase in pharmacy sales to Third Party
Plans as compared to the rate of increase in prescriptions filled for Third
Party Plan customers. Gross profit on pharmacy sales to Third Party Plan
customers increased from approximately $5.7 million in fiscal 1996 to
approximately $7.0 million in fiscal 1997, primarily as a result of the increase
in volume. Pharmacy sales to non-Third Party Plan customers decreased from $18.4
million in fiscal 1996 to $16.2 million in fiscal 1997, primarily as a result of
the increased participation of the Company's customers in Third Party Plans and
a decrease in the volume of pharmacy products sold to non-Third Party Plan
customers as prescriptions filled for such customers decreased from
approximately 560,000 in fiscal 1996 to approximately 472,000 in fiscal 1997.
Gross profit on sales of pharmacy products to non-Third Party Plan customers
decreased from approximately $6.0 million in fiscal 1996 to approximately $5.8
million in fiscal 1997, primarily as a result of the volume decrease described
above.
Gross profit was $67.9 million for fiscal 1997, as compared to $63.1 million
for fiscal 1996, an increase of 7.6%. Gross profit as a percentage of net sales
was 29.4% for fiscal 1997 as compared to 29.2% for fiscal 1996. This 0.2%
increase was due primarily to the increase in the gross margin on general
merchandise sales, particularly at Cost Cutters, and the increase in the amount
of cash advances from certain of the Company's suppliers recognized during
fiscal 1997. These cash advances ("Supplier Advances") are made by a supplier at
the beginning of a supply contract and are recognized by the Company, on a pro
rata basis, as a reduction of cost of goods sold over the term of the contract
as the Company attains certain purchase levels of the supplier's products or
satisfies other criteria provided in the agreement. The increase in gross margin
on general merchandise sales and the recognition of Supplier Advances was
partially offset by a decrease in the overall gross margin on pharmacy sales
caused by an increase in Third-Party Plan prescription sales as a percentage of
total pharmacy sales.
Gross profit on total pharmacy sales (including sales to Third Party Plans)
was approximately $12.8 million for fiscal 1997, as compared to $11.8 million
for fiscal 1996, an increase of 8.5%. Gross profit on pharmacy sales to Third
Party Plans was approximately $7.0 million for fiscal 1997, as compared to $5.7
million for fiscal 1996, an increase of 22.8%. The Company attributes the
increases in gross profit on total pharmacy sales and pharmacy sales to Third
Party Plans to the overall increases in the total volume of pharmacy sales and
pharmacy sales to Third Party Plans.
21
<PAGE>
Net sales of non-pharmacy products were $175.5 million in fiscal 1997, as
compared to $168.0 million in fiscal 1996, an increase of 4.5%. Gross profit on
non-pharmacy sales was $55.1 million for fiscal 1997, as compared to $51.3
million for fiscal 1996, an increase of 7.4%. The Company attributes these
increases in net sales of non-pharmacy products and gross profit on non-pharmacy
sales to increased customer traffic in the Company's stores associated with an
increase in total pharmacy sales, as well as the implementation of the Company's
merchandising and purchasing strategies.
Selling, general and administrative expense as a percentage of net sales was
22.0% in each of fiscal 1996 and fiscal 1997. This percentage remained stable as
an increase in advertising expenses as a percentage of sales from 0.8% in fiscal
1996 to 1.1% in fiscal 1997, which resulted from an upgrade by the Company of
the quality of its direct mail circulars in order to increase sales and a lower
amount of co-op advertising rebates from its suppliers during fiscal 1997, was
offset by increased sales volume.
Net income for the Company for fiscal 1997 was $4.6 million as compared to
$3.7 million for fiscal 1996, an increase of 24.3%, as a result of the factors
described above. Net income for the Holding Company for fiscal 1997 was $3.8
million as compared to $2.6 million for fiscal 1996, an increase of 46.2%,
principally as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
THE COMPANY
During fiscal 1998, cash provided by operations was $10.3 million as
compared to cash provided by operations of $9.4 million for fiscal 1997. This
increase is the result of the factoring of the Company's Third Party Plan
prescription receivables during fiscal 1998, the lower level of income tax
payments during the fiscal 1998 as a result of the lower net income before taxes
which results from the higher level of interest expense on the Senior Notes, and
by a reduction of inventory at the Company's warehouse and in the stores. Cash
used in investing activities was $3.6 million during fiscal 1998 as compared to
$1.3 million during fiscal 1997, an increase of $2.3 million. This increase is
the result of the opening of two new stores, the purchase of certain assets of
two independent pharmacies, and to costs related to the implementation of the
JDA processing system during fiscal 1998 as compared to opening of only one new
store during fiscal 1997. Cash provided by financing activities was $2.2 million
for fiscal 1998 as compared to a use of cash of $9.9 million during fiscal 1997.
The cash provided during fiscal 1998 was the result of the net proceeds from the
issuance of the Senior Notes while the use of cash in fiscal 1997 was the result
of regularly scheduled and additional principal payments made under the
Company's previous credit facility.
During fiscal 1997, cash provided from operations was $9.4 million, as
compared to $10.5 million for fiscal 1996. This decrease of $1.1 million was
primarily the result of an increase in deferred tax liability and income taxes
payable resulting from larger estimated tax payments during fiscal 1997, which
was partially offset by higher net income. Cash used in investing activities was
$1.3 million for fiscal 1997, as compared to $2.9 million for fiscal 1996. This
$1.6 million decrease was due to decreased capital expenditures in the
subsequent period as a result of a decrease in store openings. Cash used in
financing activities was $9.9 million for fiscal 1997, as compared to $5.8
million for fiscal 1996. This $4.1 million increase was due to increased
principal payments made on the Company's previous credit facility.
Historically, cash flows from operations, augmented when necessary by
borrowings under the Company's commercial loan facilities, have been sufficient
to fund working capital needs, investing activities (consisting primarily of
capital expenditures) and financing activities (normal debt service consisting
of interest payments and repayments of term and revolving loans outstanding).
Working capital was $22.0 million, $9.8 million, $11.2 million and $10.6 million
on July 25, 1998, July 26, 1997, July 28, 1996 and July 30, 1995, respectively.
22
<PAGE>
In the last few years, the Company's capital requirements primarily resulted
from opening and stocking new stores, remodeling and refurbishing existing
stores and continuing development of new management information systems. The
Company has opened 15 new stores since 1990. The Company estimates that the
average initial new store investment is between $0.3 million and $0.6 million,
not including inventory costs which may range from $0.4 million to $0.5 million.
Such costs may be slightly higher in the event that the Company elects to
purchase prescription customer files from existing drugstores in the area in
which such stores are opened. Depending on the availability of suitable
locations, the Company intends to open an average of three to four new Drug Fair
stores annually over the next several years, and may open additional Drug Fair
storefronts at Cost Cutters locations. In the event that the Company is
successful in opening four new stores in each of the next several years, the
Company could incur opening expenses of between approximately $2.8 million and
approximately $4.4 million (including inventory costs). Since fiscal 1993, new
Drug Fair stores have not been profitable on an operating basis (that is, prior
to the allocation of corporate overhead) until 32 months after opening, on
average.
Of the Company's 47 stores, 23 have been opened since 1989 and all of the
remaining 24 stores have been refurbished since 1991. The total cost of this
refurbishment program was approximately $3.0 million or approximately $125,000
per store. The Company anticipates that over the next few years it will remodel
and refurbish approximately four stores per year at a cost of approximately $0.4
million per year. The Company also spends approximately $0.5 million annually to
update its POS network and other management information systems and, as part of
this effort, the Company completed the installation of the remaining modules of
a comprehensive processing system from JDA Software, Inc. in late September
1998.
The Company paid one-time performance-related bonuses to Mr. Frank Marfino,
its President and Chief Executive Officer, and Mr. Todd Pluymers, its Chief
Financial Officer in the aggregate amount of approximately $1.4 million, in
February and July 1998.
On May 21, 1998, the Company entered into a lease for new warehouse and
office facilities in Somerset, New Jersey. This lease, which expires on March
21, 2004, provides for the lease of approximately 201,000 square feet of
warehouse and office space. The Company occupied this new facility in September
1998 and is vacating its existing corporate offices and two warehouse
facilities. The Company's monthly payments under the lease for the new facility
are approximately $67,000, and will result in increased net annual facility
expenditures of approximately $450,000. The Company's two existing warehouse
leases (one of which includes the Company's former corporate headquarters),
provide for the payment of approximately $30,000 per month in rent in the
aggregate. The Company's remaining obligations under these existing leases will
total approximately $150,000 for fiscal 1999.
In November 1997, the Company entered into a Receivables Purchase Agreement
with The Pharmacy Fund, Inc. (the "Pharmacy Fund") pursuant to which the Company
agreed to factor all of its Third Party Plan prescription receivables. Under the
terms of this agreement, the Company accelerated its collection of these
receivables by selling them to the Pharmacy Fund two days after they were
created, rather than waiting to collect them in the ordinary course.
Subsequent to the end of fiscal 1998, on September 9, 1998, the Pharmacy
Fund filed for bankruptcy protection under Chapter 11 of the Federal bankruptcy
code. In connection therewith, the Company has an exposure in the amount of
approximately $444,000 of Third Party Plan prescription receivables that were
purchased by the Pharmacy Fund but not paid for. On September 15, 1998, the
Company entered into a court approved Settlement Agreement with the Pharmacy
Fund pursuant to which the Third Party Plan payors whose receivables were
assigned by the Company to the Pharmacy Fund are instructed to remit all funds
related to these receivables directly to the Company and not to the Pharmacy
Fund. As a result, the Company expects that it will collect a majority, if not
all, of these uncollected Third Party Plan receivables. In the event the Company
is unable to collect any of these Third Party Plan receivables, the Company will
be required to incur a write-off of the uncollected amount in its fiscal 1999
operating results. In addition, the Company incurred a short-term negative cash
flow due to the delay in collecting the Third
23
<PAGE>
Party Plan receivables from two days under the Agreement with the Pharmacy Fund.
to the normal payment cycle with the Third Party Payors of approximately 30
days. The Pharmacy Fund is no longer purchasing receivables from the Company.
The Company has no current long-term debt outstanding other than the Senior
Notes. On October 6, 1998, the Company repurchased an aggregate of $5.0 million
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 $1.0 million 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 15, 1998, $74.0 million
aggregate principal amount of Senior Notes remained outstanding. The Company's
interest obligations under the Senior Notes will aggregate $7.7 million in
fiscal 1999 and $7.6 million in each fiscal year thereafter until maturity of
the Senior Notes. The repurchases described above were made pursuant to a
resolution adopted by the Board of Directors of the Company on September 16,
1998 that authorized the repurchase of up to $6.0 million aggregate principal
amount of Senior Notes. The Company may repurchase additional Senior Notes from
time to time as authorized by its Board of Directors.
After the issuance of the Senior Notes on October 25, 1997, the Company's
total debt increased from approximately $29.5 million to approximately $80.2
million, resulting in a corresponding increase in the Company's interest expense
obligations. Because $45.0 million of the proceeds of the sale of the Senior
Notes was paid to the Holding Company on October 16, 1997 in the form of a
dividend (the "Holding Company Dividend"), and most of the rest of the proceeds
from such sale were used to repay the amount outstanding under the Company's
previous revolving credit facility ($29.3 million), and pay transaction fees and
expenses ($3.8 million), only $1.9 million of the proceeds are available to pay
interest on the Senior Notes and the Company's other indebtedness or for other
corporate purposes. Accordingly, the Company expects to use cash from operations
and borrowings under its credit facility to meet most of its cash requirements.
Prior to the payment of the Holding Company Dividend on October 16, 1997, the
Company had paid no dividends on its capital stock although the Predecessor
Company, which was treated as a Subchapter S corporation for federal and state
income tax purposes, made payments to its shareholders from time to time to
cover tax liabilities. The Holding Company has paid no dividends other than the
Dividend since its organization.
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 fiscal 1999. 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 its credit facility are intended to
cover the Company's debt service obligations and working capital requirements
over the near term, the Company's current credit 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 current credit
facility will bear interest at floating rates; therefore, the Company's
financial condition will be affected by any changes in prevailing interest
rates. Because (i) the Company has not guaranteed the obligations of the Holding
Company under its outstanding Subordinated Notes, (ii) no interest is payable on
the Subordinated Notes until their maturity, and (iii) the maturity date of the
Subordinated Notes is subsequent to the maturity date of the Senior Notes, the
Company does not believe that its liquidity will be materially affected by the
Holding Company's obligations under the Subordinated Notes, during the term of
the Senior Notes.
The Company entered into its current $20.0 million credit facility
simultaneously with the consummation of the sale of the Existing Notes. As of
July 25, 1998, the Company had no outstanding borrowings
24
<PAGE>
under the credit facility. In addition, the Company believes that as of July 25,
1998, the Company's borrowing base (as defined under the credit facility) was
sufficient to support borrowings of up to $18.5 million under such facility. The
credit facility will be used primarily for working capital purposes.
THE HOLDING COMPANY
Although the Holding Company does not conduct operations separate from the
Company, the Holding Company has issued $13.25 million (not including accrued
interest) in Senior Subordinated Notes due 2005 (the "Subordinated Notes").
Interest on these Subordinated Notes is not currently payable, but accrues at a
rate of 10% per annum. In addition, the Holding Company has issued a Guarantee
of the Senior Notes. Because the Holding Company does not conduct operations
separate from the Company, it is dependent entirely on cash flow generated, and
borrowings made, by the Company. Furthermore, the Holding Company has nominal,
if any, liquid assets. The Company's ability to make distributions of funds to
the Holding Company is limited by the terms of the Indenture governing the
Senior Notes (the "Indenture") and the Company's credit facility. Under the
terms of the Indenture, any payments by the Company to the Holding Company
(other than payments specifically made to satisfy tax obligations of the Holding
Company, payments made to satisfy the Holding Company's obligations under the
management fee agreements currently in place with BancBoston and Harvest,
payments of up to $250,000 per year to provide for the operating expenses of the
Holding Company and certain payments not to exceed $500,000 in any fiscal year
for the repurchase of equity from departing or deceased directors, officers or
employees), must satisfy the conditions set forth in the covenant in the
Indenture titled "Limitation on Restricted Payments", including conditions that
the Company be able to incur at least $1.00 of additional indebtedness under the
debt incurrence ratio described in the Indenture and that the aggregate amount
of all such restricted payments not exceed an amount equal to 50% of the
aggregate Consolidated Net Income (as defined) of the Company after the issue
date of the Senior Notes (minus 100% of any loss for such period). Under the
terms of the Company's credit facility, the Company is prohibited from paying
dividends to the Holding Company in excess of (i) paymets to the Holding Company
in an amount, not to exceed $250,000 in the aggregate per fiscal year,
sufficient to pay reasonable and necessary operating expenses and other general
corporate expenses, and (ii) cash dividends to the Holding Company to the extent
necessary to permit the Holding Company to repurchase equity securities of the
Holding Company held by departing or deceased directors, officers or employees
of the Holding Company or the Company, subject to a maximum on such repurchases
of $500,000 in the aggregate in any fiscal year and a maximum of $2,000,000 in
the aggregate during the period from the date of the credit facility through
October 16, 2002.
The only financial results reported by the Company or the Holding Company
that have included periods after the original issue date of the Senior Notes
(the results for the three months ended each of October 25, 1997, January 31,
1998 and April 25, 1998) have included net losses for both the Company and the
Holding Company for each of such fiscal periods. The Holding Company believes
that, based on anticipated levels of operations of the Company, distributions
from the Company will be sufficient to permit the Holding Company to meet its
obligations under the Subordinated Notes and its Guarantee of the Senior Notes
when and if they become due. Because the Company will be restricted in making
distributions to the Holding Company in the event that it is unable to fulfill
its obligations under the Senior Notes, in the event of such a default it is
unlikely that the Holding Company will be able to fulfill its obligations under
its Guarantee of the Senior Notes. The Holding Company's ability to make
scheduled payments of principal and interest on, or to refinance the
Subordinated Notes, will depend on the future operating performance and cash
flow of the Company, which are subject to prevailing economic conditions,
prevailing interest rates and financial, competitive, business and other factors
beyond the control of the Company and the Holding Company.
25
<PAGE>
SEASONALITY
The business of the Company is seasonal in nature. Historically, the
Company's revenues and income are highest during its second and fourth fiscal
quarters, with the second quarter being the highest due to the holiday season.
INFLATION
The Company believes that inflation has not had a material impact on results
of operations for the Company during the three year period ended July 25, 1998.
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. As a result of the implementation of the Company's new JDA processing
system and utilization of various other packaged software solutions, the Company
believes that the majority of the Company's computer software applications and
systems will not be affected by the year 2000 dating problems as many of the
proprietary legacy systems have been replaced by this system. Although the
implementation of the JDA processing system was made in anticipation of
continued growth, it is also intended to have the effect of resolving a majority
of the Company's year 2000 dating problems. The cost incurred for the
implementation of the JDA processing system was approximately $1.2 million,
which was paid for out of the Company's operating cash flows during fiscal 1997
and fiscal 1998. The Company estimates that approximately $0.7 million of
additional costs will be incurred during fiscal 1999 in order to resolve
additional year 2000 dating problems and that these funds will be paid for out
of the Company's operating cash flows as part of its capital expenditures
budget. These fiscal 1999 expenditures will be for the following: $0.2 million
for the upgrade to the most recent version of the Lawson financial systems,
including general ledger, cost allocations, budgeting, payroll and human
resources; $0.2 million for implementation of a year 2000 compliant space
management package for the Company's warehouse, receiving and distribution; $0.2
million for the purchase of new point-of-sale and pharmacy system hardware for
the stores as well as for personal computer hardware upgrades at the corporate
office; and $0.1 million for the cost to modify current point-of-sale and
various legacy computer systems at the corporate office. 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. In the event the
Company is unable to achieve complete year 2000 dating problem resolution on a
timely basis, management anticipates that the disruption to the Company's
business will be minimal. However, the Company may be adversely affected if
various suppliers do not achieve complete resolution of the year 2000 dating
problem. These adverse affects may include, but are not limited to: not being
able to maintain in-stock inventory positions in the Company's warehouse and
stores, resulting in lost revenue; not being able to process electronically
verified sales (i.e., credit card, debit card, and Third Party Plan sales) at
the pharmacy and front-end, resulting in lost revenue; and the disruption of
management reporting, resulting in disruption to the Company's cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMMUNITY DISTRIBUTORS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants......................................................................... 28
Balance sheets at July 26, 1997, and July 25, 1998........................................................ 29
Statements of income for the years ended July 28, 1996, July 26, 1997 and July 25, 1998................... 30
Statements of cash flows for the years ended July 28, 1996, July 26, 1997, and July 25, 1998.............. 31
Statements of stockholder's equity (deficit) for the years ended July 28, 1996, July 26, 1997, and July
25, 1998................................................................................................ 32
Notes to financial statements............................................................................. 33-41
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Community Distributors, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholder's equity (deficit)
present fairly, in all material respects, the financial position of Community
Distributors, Inc. at July 25, 1998 and July 26, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
July 25, 1998, 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
Florham Park, New Jersey
September 28, 1998
28
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT
AT JULY 25,
JULY 26, 1997 1998
------------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents........................................................... $ 1,870 $ 10,770
Accounts receivable................................................................. 2,614 1,079
Inventories......................................................................... 30,233 29,246
Prepaid expenses and other current assets........................................... 1,085 1,013
------------- ------------
Total current assets............................................................ 35,802 42,108
Property and Equipment:
Leasehold improvements.............................................................. 5,217 6,177
Furniture, fixtures and equipment................................................... 7,195 9,628
Automobiles and trucks.............................................................. 551 739
------------- ------------
12,963 16,544
Less: Accumulated depreciation and amortization....................................... (4,314) (6,464)
------------- ------------
Property and equipment, net........................................................... 8,649 10,080
Beneficial leaseholds, net............................................................ 2,127 1,551
Other assets.......................................................................... 91 567
Deferred financing costs, net......................................................... 356 3,426
Deferred tax assets................................................................... 712 746
Goodwill, net......................................................................... 33,519 31,603
------------- ------------
Total assets.................................................................... $ 81,256 $ 90,081
------------- ------------
------------- ------------
LIABILITIES:
Current Liabilities:
Current portion of long-term debt................................................... $ 4,750 $ --
Accounts payable.................................................................... 14,796 11,035
Accrued liabilities................................................................. 3,587 6,120
Deferred tax liabilities............................................................ 391 2,117
Current portion of supplier advances................................................ 1,900 1,068
Income taxes payable................................................................ 503 --
------------- ------------
Total current liabilities....................................................... 25,927 20,340
Long-term debt........................................................................ 24,519 80,000
Supplier advances, net of current portion............................................. 1,353 629
Other liabilities..................................................................... 1,402 2,118
Due to parent......................................................................... 720 1,380
------------- ------------
Total liabilities............................................................... 53,921 104,467
------------- ------------
Commitments and contingencies
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding......... -- --
Additional paid-in capital............................................................ 18,000 --
Retained earnings..................................................................... 9,335 3,156
Distribution in excess of capital..................................................... -- (17,542)
------------- ------------
Total stockholder's equity (deficit)............................................ 27,335 (14,386)
------------- ------------
Total liabilities and stockholder's equity...................................... $ 81,256 $ 90,081
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, JULY 28, JULY 25,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................................................. $ 215,731 $ 231,033 $ 248,242
Cost of sales.......................................................... 152,645 163,157 173,648
------------ ------------ ------------
Gross profit..................................................... 63,086 67,876 74,594
Selling, general and administrative expenses........................... 47,487 50,831 56,074
Administrative fees.................................................... 250 250 250
Depreciation and amortization.......................................... 4,341 4,399 5,386
Other income, net...................................................... 353 401 579
------------ ------------ ------------
Operating income................................................. 11,361 12,797 13,463
Interest expense, net.................................................. 3,998 3,018 6,748
------------ ------------ ------------
Income before income taxes....................................... 7,363 9,779 6,715
Provision for income taxes............................................. 3,659 5,216 3,678
------------ ------------ ------------
Net income....................................................... $ 3,704 $ 4,563 $ 3,037
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, JULY 26, JULY 25,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 3,704 $ 4,563 $ 3,037
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 4,233 4,443 4,586
Amortization of deferred financing costs........................... 108 108 800
Deferred rent liabilities.......................................... 552 414 523
LIFO provision..................................................... 659 1,086 (806)
Gain on sale of property and equipment............................. -- 7 --
Changes in operating assets and liabilities:
Accounts receivable.............................................. (865) 656 1,535
Inventories...................................................... (1,792) (3,123) 1,793
Prepaid expenses and other current assets........................ 1,002 (345) 72
Other assets..................................................... -- (28) (476)
Deferred tax assets.............................................. 134 392 (34)
Due to parent.................................................... 34 686 549
Deferred tax liabilities......................................... (134) (1,355) 1,726
Accounts payable and accrued liabilities......................... 56 3,122 (1,228)
Income taxes payable............................................. 3,740 (1,108) (503)
Supplier advances................................................ (915) (52) (1,556)
Other liabilities................................................ 1 (48) 193
------------ ------------ ------------
Net cash provided by operating activities.......................... 10,517 9,418 10,211
Cash flows used in investing activities:
Capital expenditures................................................. (2,887) (1,287) (3,525)
Proceeds from sale of fixed assets................................... 20 12 --
------------ ------------ ------------
Net cash used in investing activities.............................. (2,867) (1,275) (3,525)
Cash flows (used in) provided by financing activities:
Proceeds from issuance of Senior Notes............................... -- -- 80,000
Distribution to parent............................................... -- -- (45,000)
Debt issuance costs paid............................................. -- -- (3,870)
Proceeds from revolver borrowings.................................... 4,700 7,550 900
Payments made on revolver borrowings................................. (4,700) (7,550) (900)
Payments made on long-term debt...................................... (5,835) (9,896) (29,269)
Capital received from parent......................................... -- -- 353
------------ ------------ ------------
Net cash (used in) provided by financing activities................ (5,835) (9,896) 2,214
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............... 1,815 (1,753) 8,900
Cash and cash equivalents beginning of period.......................... 1,808 3,623 1,870
------------ ------------ ------------
Cash and cash equivalents end of period................................ $ 3,623 $ 1,870 $ 10,770
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash information:
Cash paid during the period:
Income taxes....................................................... $ 2,255 $ 6,606 $ 2,047
------------ ------------ ------------
------------ ------------ ------------
Interest........................................................... $ 4,088 $ 3,160 $ 4,875
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
DISTRIBUTION STOCKHOLDERS'
PAID-IN RETAINED IN EXCESS EQUITY
SHARES AMOUNT CAPITAL EARNINGS OF CAPITAL (DEFICIT)
--------- ----------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 30, 1995................... 1,000 $ -- $ 18,000 $ 1,068 -- $ 19,068
Net income............................... -- -- -- 3,704 -- 3,704
--------- ----- --------- ---------- ----------- --------------
Balance, July 28, 1996................... 1,000 -- 18,000 4,772 -- 22,772
Net income............................... -- -- -- 4,563 -- 4,563
--------- ----- --------- ---------- ----------- --------------
Balance, July 26, 1997................... 1,000 -- 18,000 9,335 -- 27,335
Net loss for three months ended October
25, 1997............................... -- -- -- (119) -- --
Capital contribution from parent......... -- -- 242 -- -- 242
Distribution to parent................... -- -- (18,242) (9,216) (17,542) (45,000)
Net income for the nine month period from
October 26, 1997 to July 25, 1998...... -- -- -- 3,156 -- 3,156
--------- ----- --------- ---------- ----------- --------------
Balance, July 25, 1998................... 1,000 $ -- $ -- $ 3,156 (17,542) $ (14,386)
--------- ----- --------- ---------- ----------- --------------
--------- ----- --------- ---------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION:
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Community Distributors Inc. (the "Company") owns and operates in the State
of New Jersey a chain of drug stores under the name "Drug Fair" and a chain of
general merchandise stores under the name "Cost Cutters". Community
Distributors, Inc. is a wholly-owned subsidiary of CDI Group, Inc. (the
"Parent") and under the principles of consolidation would be considered part of
the consolidated results of the Parent. These separate Company financial
statements and notes to financial statements solely represent the financial
position and results of operations of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING YEAR
The Company maintained its accounts on a 52-53 week fiscal year ending with
the last Sunday in July through fiscal year 1996 and the last Saturday in July
for fiscal 1997 and for fiscal 1998. The years ended July 28, 1996, July 26,
1997 and July 25, 1998 each contained 52 weeks, respectively.
REVENUE RECOGNITION
Sales are net of returns and exclude sales tax. Revenues include sales from
all stores operating during the period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are considered by the Company to be financial
instruments with maturities, when purchased, of three months or less, and are
presented at cost which approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost, using the dollar-value, double
extension last-in, first-out method (LIFO), or market. If the first-in,
first-out (FIFO) method of inventory accounting had been used, inventories would
have been approximately $2,382 and $1,577 higher than reported at July 26, 1997
and July 25, 1998, respectively. The reduction of the LIFO reserve during the
year ended July 25, 1998 resulted in an increase to gross profit of $806.
Management believes that inventories accounted for on a FIFO basis approximates
current replacement costs. Inventories are reflected net of reserves for
excess/obsolete/ damaged inventories in the amounts of $113 and $51 at July 26,
1997 and July 25, 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including computer software costs, are recorded at
cost and are depreciated on a straight-line basis over the estimated useful
lives of the assets which range from three to seven years. Leasehold
improvements are amortized over the expected useful life of the improvement or
the life of the lease, whichever is shorter. Depreciation expense recorded for
the fiscal years ended July 28, 1996, July 26, 1997 and July 25, 1998 was
$1,743, $1,952 and $2,094, respectively. The cost and related accumulated
depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
33
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
BENEFICIAL LEASEHOLDS
Beneficial lease rights have been recorded on purchased leases based on
differences between contractual rents under the respective lease agreements and
prevailing market rents at the date of the acquisition of the Company.
Beneficial lease rights are amortized over the lease terms using the straight-
line method. Accumulated amortization at July 26, 1997 and July 25, 1998 was
$1,441 and $2,017, respectively.
GOODWILL
Goodwill, which represents the excess of the Parent's purchase price of
acquired assets over the fair market value of net assets of the Company acquired
on January 30, 1995, is being amortized using the straight-line method over
twenty years. The Company evaluates the recoverability of goodwill on an annual
basis, or earlier, if circumstances indicate that such an evaluation is
necessary. The Company's assessment of recoverability considers current and
future profitability, estimated undiscounted future cash flows from operations,
and any other events or changes in circumstances which indicate that the
carrying amount of goodwill may not be recoverable. In the event an impairment
of goodwill, or related asset, is indicated to have occurred, the Company's
policy is to allocate goodwill to long lived assets on a pro rata basis using
the relative fair value of those assets at the date the goodwill arose for
purposes of determining the recoverability of long-lived assets. The Company has
incurred no impairment of goodwill, or related assets, since its inception.
Accumulated amortization as of July 26, 1997 and July 25, 1998 was $4,793 and
$6,709, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the respective
borrowings, which is approximately 7 years.
SUPPLIER ADVANCES
Included in the accompanying consolidated balance sheets are $3,253 and
$1,697 of advances received related to various inventory supply agreements at
July 26, 1997 and July 25, 1998, respectively. Such amounts are being recorded
as a reduction of cost of sales as the Company's supply agreement obligations
are fulfilled, generally ranging from three to five years from the point that
the supplier advance is received. The Company's obligations under the supply
agreements are fulfilled through the passage of time for those supply agreements
that are for a specific period of time and by the purchasing of inventory for
those supply agreements that stipulate the purchasing of a specific amount of
inventory. The Company is currently committed to approximately $17,384 of
additional purchases under the inventory supply agreements at July 25, 1998. In
the event the Company does not fulfill its obligations under the inventory
supply agreements, a pro rata portion of the advance will be required to be
repaid, approximating the amounts presented in the financial statements as
Supplier Advances at July 26, 1997. The amount presented as the current portion
of the supplier advances is estimated by the Company as the amount related to
the passage of time and the estimated inventory purchases to be made during the
twelve months following July 25, 1998, as applicable to the specific inventory
supply agreements.
34
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PREOPENING AND ADVERTISING COSTS
Costs associated with new stores prior to opening and advertising costs are
expensed as incurred. Advertising expense of $1,638, $1,941 and $1,703 for the
years ended July 28, 1996, July 26, 1997 and July 25, 1998, respectively is net
of co-op advertising rebates received from vendors in the amount of $4,153,
$3,523 and $4,430 for the years ended July 28, 1996, July 26, 1997 and July 25,
1998, respectively.
INTEREST EXPENSE (NET)
Interest expense for the fiscal years ended July 28, 1996, July 26, 1997 and
July 25, 1998 which has been recorded net of interest income was:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Interest expense................................... $ 4,061 $ 3,160 $ 7,007
Interest income.................................... (63) (142) (259)
------ ------ ------
Interest expense (net)............................. $ 3,998 $ 3,018 $ 6,748
------ ------ ------
------ ------ ------
</TABLE>
INCOME TAXES
Deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined on the
basis of the differences between the financial statement and tax bases of assets
and liabilities ("temporary differences") at enacted tax rates in effect for the
years in which the temporary differences are expected to reverse.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
primarily held in a single major commercial bank. The Company holds no
collateral for these financial instruments, and such amounts may, at times,
exceed insurable limits.
All of the Company's stores are located in northern and central New Jersey.
As a result, the Company is sensitive to economic, competitive, and regulatory
conditions in that region. The success of the Company's future operations will
be substantially affected by its ability to compete effectively in New Jersey,
and no prediction can be made as to economic conditions in that region.
The Company is party to a supply agreement with Cardinal Health, Inc.
("Cardinal") pursuant to which the Company is required to purchase at least 90%
of its pharmacy products from such supplier. The Company believes that its
pharmacy products are readily available from numerous other wholesale suppliers,
and could be obtained on substantially similar terms in the event that Cardinal
were unable to supply pharmacy products.
35
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable, as reflected in the accompanying balance sheets approximate
their fair value because their maturities are generally less than one year in
duration. The Company estimates that the carrying amount of its long-term fixed
rate debt and amounts reflected as long-term liabilities approximate their fair
value. Management is not aware of any factors that would significantly affect
the value of these amounts.
USE OF 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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF" ("SFAS No. 121"). SFAS No. 121 prescribes the accounting for the
impairment of long-lived assets, such as property, plant and equipment and
intangible assets, as well as the accounting for long-lived assets that are held
for disposal. The statement requires that such assets be reviewed when events or
circumstances indicate that an impairment might exist. The Company has concluded
that no impairment of long-lived assets existed at July 26, 1997 and July 25,
1998.
STOCK OPTIONS
The Company has adopted Statement of Financial Accounting Standards No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION" ("SFAS No. 123"). SFAS No. 123
prescribes the accounting for stock options and requires that options be valued
at their fair market value, as defined in the statement, on the date of grant.
SFAS No. 123 allows companies to either fully adopt its requirements or to elect
to only disclose the impact that the requirements would have. The Company has
adopted SFAS No. 123 for disclosure purposes only and will account for stock
options, in the event issued, under APB Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES."
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
In fiscal 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME" ("SFAS 130"). SFAS 130 is effective for all fiscal years beginning after
December 15, 1997 (July 26, 1998 for the Company). SFAS 130 will require the
Company to report and display comprehensive income. The Company has determined
that SFAS 130 will not have a significant effect on its disclosures.
In fiscal 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("SFAS 131"). SFAS 131 is effective for all fiscal years beginning after
December 15, 1997 (July 26, 1998 for the Company). SFAS 131 established
standards
36
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
for the ways public companies report information about operating segments in
both interim and annual financial statements, including related disclosures
about products and services, geographic areas, and major customers. The Company
has not determined what, if any, impact SFAS 131 will have on the reported
operating segments and the related disclosures during fiscal 1999.
In fiscal 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
133"). SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (August 1, 1999 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company anticipates that, due to the limited use of
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
3. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AT AT
JULY 26, JULY 25,
1997 1998
------------ ------------
<S> <C> <C>
Senior Notes-due October 15, 2004 interest at 10 1/4% payable semi-annually on April
15 and October 15................................................................... $ -- $ 80,000
Term loan A--due last business day in January, 2000 principal and interest payable in
quarterly installments.............................................................. 11,003 --
Term loan B--due last business day in October, 2001, principal and interest payable in
quarterly installments.............................................................. 18,266 --
------------ ------------
29,269 80,000
Less, current portion due within one year..................................... 4,750 --
------------ ------------
Long-term portion..................................................................... $ 24,519 $ 80,000
------------ ------------
------------ ------------
</TABLE>
On October 16, 1997, the Company issued $80,000 of 10 1/4% senior notes due
in 2004 which are guaranteed by the Parent. The net proceeds of such issuance
was $76,130. The Company used $29,269 of such net proceeds to refinance
substantially all of its then existing indebtedness and $45,000 of the net
proceeds was used to pay a dividend to the Parent which then paid a dividend of
the same amount to the stockholders of the Parent. The terms of the senior notes
include certain restrictive covenants regarding the payment of dividends, the
incurrence of debt, the use of proceeds resulting from disposition of assets and
certain other defined activities. Under the relevant debt agreements, in the
event of a change in control, as defined, the Company is required to repurchase
all such outstanding notes.
On October 16, 1997, the Company also replaced its then existing credit
facility ("Old Credit Facility") with a $20,000 five year revolving credit
facility concurrent with the issuance of the $80,000 of senior notes. This
facility bears interest at either prime rate or London Interbank Offered Rate
("LIBOR") plus 1.75% and is collateralized by the Company's eligible accounts
receivable and inventory balances, as defined. Included in the $20,000 five year
revolving credit facility is a $5,000 letter of credit facility. The new
facility contains certain financial and operating covenants, including a minimum
fixed
37
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT: (CONTINUED)
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. The Company must pay a commitment fee of 1/4 of 1.00% per annum
on the daily average unutilized revolving credit facility commitment. For the
year ended July 25, 1998, the Company incurred approximately $47 of commitment
fees and letter of credit fees under this facility.
At July 26, 1997, the Company's Term A and Term B loans had interest rates
of 7.69% and 8.65%, respectively.
On February 16, 1995, the Company entered into an interest rate cap
agreement with a bank. This agreement related to a $22,500 notional amount of
debt and provided for payments to be received by the Company based exclusively
on the three month LIBOR rate with a cap of 9%. The purchase price of the cap
had been capitalized and is amortized over the term of the Old Credit Agreement.
The cap was purchased for approximately $50 and expired February 16, 1997.
4. COMMITMENTS:
LEASES
The Company conducts all of its warehousing and retailing operations from
leased facilities. Annual store rent is composed of a fixed minimum amount, and
for certain stores, contingent rent which is based upon a percentage of sales
exceeding a stipulated amount. These leases, which may be renewed for periods
ranging from five to thirty years, generally provide that the Company pay
insurance, maintenance costs and property taxes. These additional charges are
subject to escalation for increases in the related costs. Minimum rental
commitments under long-term noncancelable operating leases are as follows at
July 25, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JULY
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 9,852
2000.............................................................................. 9,570
2001.............................................................................. 8,168
2002.............................................................................. 7,709
2003.............................................................................. 7,392
Thereafter........................................................................ 54,557
-----------
$ 97,248
-----------
-----------
</TABLE>
38
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. COMMITMENTS: (CONTINUED)
Annual rent expense is comprised of a fixed minimum amount, plus contingent
rent based on a percentage of sales exceeding a stipulated amount. For the year
ended July 28, 1996, July 26, 1997, and July 25, 1998, respectively, total rent
expense included:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Fixed minimum rent................................. $ 7,696 $ 8,261 $ 9,045
Contingent rent.................................... 178 180 219
------ ------ ------
Rent expense....................................... $ 7,874 $ 8,441 $ 9,264
------ ------ ------
------ ------ ------
</TABLE>
The Company recognizes rental expense from leases with scheduled rent
increases on the straight-line basis. During the years ended July 28, 1996, July
26, 1997, July 25, 1998, the Company recognized rent expense in excess of
amounts paid of approximately $552, $414, and $523, respectively.
LETTERS OF CREDIT
Outstanding letters of credit, guaranteeing certain contingent purchases
which are not reflected in the accompanying financial statements, aggregate
approximately $1,135 and $1,666 at July 26, 1997 and July 25, 1998.
5. INCOME TAXES:
The provision for income taxes for the years ended July 28, 1996, July 26,
1997 and July 25, 1998, respectively, consist of the following:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR YEAR YEAR
ENDED ENDED ENDED
JULY 28, JULY 26, JULY 25,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current.......................................................... $ 3,659 $ 6,179 $ 1,987
Deferred......................................................... -- (963) 1,691
--------- --------- ---------
$ 3,659 $ 5,216 $ 3,678
--------- --------- ---------
--------- --------- ---------
</TABLE>
39
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES: (CONTINUED)
The component of deferred taxes at July 26, 1997 and July 25, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
AT AT
JULY 26, JULY 25,
1997 1998
----------- -----------
<S> <C> <C>
Supplier advances, current................................................. $ 620 $ 329
Inventory.................................................................. 169 194
Accruals and reserves...................................................... 658 624
Inventory (LIFO reserve)................................................... (2,094) (3,424)
Depreciation............................................................... 256 160
----------- -----------
Net deferred tax liability--current........................................ (391) (2,117)
----------- -----------
Accruals and reserves...................................................... 482 728
Supplier advances, non-current............................................. 230 18
----------- -----------
Net deferred tax asset--long-term.......................................... $ 712 $ 746
----------- -----------
----------- -----------
</TABLE>
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income before provision for income taxes:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal statutory tax rate............... 34% 34% 34%
State and local income taxes,
net of federal tax benefit............... 6% 8% 6%
Goodwill amortization.................... 12% 9% 13%
Other.................................... (2)% 2% 2%
--- --- ---
50% 53% 55%
--- --- ---
--- --- ---
</TABLE>
6. RELATED PARTY TRANSACTIONS:
Included in the Company's statements of income for the years ended July 28,
1996, July 26, 1997 and July 25, 1998 are administrative fees of $250, for each
of the years, respectively. The Company has entered into administrative fee
agreements with certain shareholders of CDI Group, Inc., whereby these
shareholders will provide, advisory and consulting services to the Board of
Directors. These administrative fee agreements require the Company to pay $250
of administrative fees annually.
Under a lease dated September 30, 1983, the former majority stockholders of
the Company lease the building housing the Company's Westfield Drug Fair store
to the Company. Under this lease, which has a term of 15 years and expires on
September 30, 1998, the Company pays $17 per month in rent. This lease was
renewed for a term of fifteen years expiring on September 30, 2013. Under the
renewed lease, the Company pays $31 per month in rent with annual increases of
3% beginning each anniversary date.
40
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS: (CONTINUED)
Under a letter agreement dated January 30, 1995 (the "Letter Agreement")
between the Company and a corporation owned by the former majority stockholders
of the Company, the corporation paid to the Company $3 per month in rent for the
use of approximately 6,000 sq. feet of storage space at the Company's
Somerville, NJ warehouse. This Letter Agreement was terminated in July 1996.
7. LITIGATION:
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.
8. EMPLOYEE BENEFIT PLAN:
On July 1, 1995, the Company implemented a 401(k) salary deferral plan (the
"Plan") which is available to eligible employees, as defined. The Plan provides
for the Company to make discretionary contributions, however, the Company
elected not to make contributions for all periods through July 25, 1998.
9. STOCKHOLDER'S EQUITY
On October 16, 1997 the Company paid a dividend to the Parent in the amount
of $45,000. The Parent then declared and paid a dividend of $45,000 to its
stockholders. The Company's dividend of $45,000 was funded by the proceeds of
its offering of $80,000 of senior notes completed in October 1997.
The $45,000 dividend has been reflected in these financial statements as a
return of earnings and capital existing as of the dividend date. The remaining
excess of the dividend, $17,542, has been recorded as a distribution in excess
of capital.
10. SUBSEQUENT EVENTS:
In November 1997, the Company entered into a Receivables Purchase Agreement
with the Pharmacy Fund, Inc. pursuant to which the Company has agreed to factor
all of its third party plan prescription receivables. Under the terms of the
aforementioned agreement, the Company accelerates its collection of these
receivables by selling them to The Pharmacy Fund, Inc. on a daily basis and
receiving payment two days after they are created, rather than waiting to
collect them in the ordinary course. In addition, the Company avoided
uncollectibility as these receivables were sold without recourse.
On September 9, 1998, The Pharmacy Fund, Inc. filed for bankruptcy under
Chapter 11 of the Federal bankruptcy regulations. In connection therewith, the
Company is pursuing collection of approximately $455,000 of Third Party Plan
prescription receivables that were purchased by The Pharmacy Fund, Inc. These
receivables arose subsequent to July 25, 1998.
41
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants....................................................................... 43
Consolidated balance sheets at July 26, 1997 and July 25, 1998.......................................... 44
Consolidated statements of income for the years ended July 28, 1996, July 26, 1997, and July 25, 1998... 45
Consolidated statements of cash flows for the years ended July 28, 1996, and July 26, 1997 and July 25,
1998.................................................................................................. 46
Consolidated statements of stockholders' equity (deficit) for the years ended July 26, 1997 and July 25,
1998.................................................................................................. 47
Notes to consolidated financial statements.............................................................. 48-58
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
CDI Group, Inc. and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity (deficit)
present fairly, in all material respects, the financial position of CDI Group,
Inc. and Subsidiary at July 25, 1998 and July 26, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
July 25, 1998, in conformity with generally accepted accounting principles.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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
Florham Park, New Jersey
September 28, 1998
43
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT
AT JULY 25,
JULY 26, 1997 1998
------------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents........................................................... $ 1,870 $ 10,770
Accounts receivable................................................................. 2,644 1,098
Inventories......................................................................... 30,233 29,246
Prepaid expenses and other current assets........................................... 1,131 1,582
------------- ------------
Total current assets.............................................................. 35,878 42,696
------------- ------------
Property and Equipment:
Leasehold improvements.............................................................. 5,217 6,177
Furniture, fixtures and equipment................................................... 7,195 9,628
Automobiles and trucks.............................................................. 551 739
------------- ------------
12,963 16,544
Less: Accumulated depreciation and amortization....................................... (4,314) (6,464)
------------- ------------
Property and equipment, net........................................................... 8,649 10,080
Beneficial leaseholds, net............................................................ 2,127 1,551
Other assets.......................................................................... 91 567
Deferred financing costs, net......................................................... 356 3,426
Deferred tax assets................................................................... 712 746
Goodwill, net......................................................................... 33,519 31,603
------------- ------------
Total assets...................................................................... $ 81,332 $ 90,669
------------- ------------
------------- ------------
LIABILITIES:
Current Liabilities:
Current portion of long-term debt................................................... $ 4,836 $ 0
Accounts payable.................................................................... 14,796 11,035
Accrued liabilities................................................................. 3,592 6,120
Deferred tax liabilities............................................................ 391 2,117
Current portion of supplier advances................................................ 1,900 1,068
------------- ------------
Total current liabilities......................................................... 25,515 20,340
Long-term debt........................................................................ 24,519 80,000
Subordinated debt..................................................................... 16,834 18,517
Supplier advances, net of current portion............................................. 1,353 629
Other liabilities..................................................................... 1,402 2,118
------------- ------------
Total liabilities................................................................. 69,623 121,604
------------- ------------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value, 7,862 authorized, issued and outstanding
at
July 26, 1997, and July 25, 1998 at net redemption value of $100 per share.......... 726 786
Redeemable share of Class A voting common stock, 33,726 and 57,963 shares issued and
outstanding at July 26, 1997 and July 25, 1998, respectively, at net redemption
value............................................................................... 128 493
STOCKHOLDERS' EQUITY (DEFICIT):
Class A voting common stock, $.00001 par value, authorized 600,000 shares, 196,632
issued and outstanding at July 26, 1997 and July 25, 1998........................... -- --
Class B non-voting common stock, $.00001 par value, authorized 600,000 shares, 187,922
issued and outstanding at July 26, 1997 and July 25, 1998........................... -- --
Additional paid-in capital............................................................ 3,846 --
Retained earnings..................................................................... 7,009 2,390
Distribution in excess of capital..................................................... -- (34,604)
------------- ------------
Total stockholders' equity (deficit).............................................. 10,855 (32,214)
------------- ------------
Total liabilities and stockholders' equity (deficit).............................. $ 81,332 $ 90,669
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, JULY 26, JULY 25,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................................................. $ 215,731 $ 231,033 $ 248,242
Cost of sales.......................................................... 152,645 163,157 173,648
------------ ------------ ------------
Gross profit....................................................... 63,086 67,876 74,594
Selling, general and administrative expenses........................... 47,487 50,831 56,074
Administrative fees.................................................... 250 250 250
Depreciation and amortization.......................................... 4,341 4,399 5,386
Other income, net...................................................... 353 401 579
------------ ------------ ------------
Operating income................................................... 11,361 12,797 13,463
Interest expense, net.................................................. 5,326 4,586 8,423
------------ ------------ ------------
Income before income taxes......................................... 6,035 8,211 5,040
Provision for income taxes............................................. 3,442 4,433 3,109
------------ ------------ ------------
Net income......................................................... $ 2,593 $ 3,778 $ 1,931
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE YEAR ENDED
YEAR ENDED YEAR ENDED JULY 25,
JULY 28, 1996 JULY 26, 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................................... $ 2,593 $ 3,778 $ 1,931
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 4,233 4,443 4,586
Amortization of deferred financing costs........................... 108 108.00 800
Deferred rent liabilities.......................................... 552 414 523
Non-cash interest expense.......................................... 1,347 1,585 1,683
LIFO provision..................................................... 659 1,086 (806)
Gain on sale of property and equipment............................. -- 7 --
Changes in operating assets and liabilities
Accounts receivable.............................................. (884) 645 1,546
Inventories...................................................... (1,792) (3,123) 1,793
Prepaid expenses and other current assets........................ 1,028 (391) (451)
Other assets..................................................... 2,351 (28) (476)
Deferred tax assets.............................................. 134 392 (34)
Deferred tax liabilities......................................... (134) (1,355) 1,726
Accounts payable and accrued liabilities......................... (175) 3,116 (1,233)
Income taxes payable............................................. 1.159 (1.159) --
Supplier advances................................................ (915) (52) (1,556)
Other liabilities................................................ 227 (48) 194
------ ------------- ------------
Net cash provided by operating activities...................... 10,491 9,418 10,226
------ ------------- ------------
Cash flows used in investing activities:
Capital expenditures................................................. (2,887) (1,287) (3,525)
Proceeds from sale of fixed assets................................... 20 12
------ ------------- ------------
Net cash used in investing activities.......................... (2,867) (1,275) (3,525)
------ ------------- ------------
Cash flows (used in) provided by financing activities:
Proceeds from issuance of senior notes............................... -- -- 80,000
Distribution paid.................................................... -- -- (45,000)
Senior notes issuance fees paid...................................... -- -- (3,870)
Proceeds from issuance of common stock............................... 226 -- --
Payments for the redemption of common stock.......................... (300) -- --
Proceeds from issuance of preferred stock............................ 564 -- --
Payments for the redemption of preferred stock....................... (714) -- --
Proceeds from repayment of loans to Directors and officers........... 87 87 182
Proceeds from exercise of common stock options....................... -- -- 243
Proceeds from issuance of senior subordinated notes.................. 163 -- --
Proceeds from revolver borrowings.................................... 4,700 7,550 900
Payments made on revolver borrowings................................. (4,700) (7,550) (900)
Payments made on long-term debt...................................... (5,835) (9,896) (29,269)
Payments on subordinated debt........................................ -- (87) (87)
------ ------------- ------------
Net cash (used in) provided by financing activities............ (5,809) (9,896) 2,199
------ ------------- ------------
Net increase (decrease) in cash and cash equivalents........... 1,815 (1,753) 8,900
------ ------------- ------------
Cash and cash equivalents beginning of period.......................... 1,808 3,623 1,870
------ ------------- ------------
Cash and cash equivalents end of period................................ $ 3,623 $ 1,870 $ 10,770
------ ------------- ------------
------ ------------- ------------
Supplemental disclosures of cash information:
Cash paid during the period:
Income taxes....................................................... $ 2,255 $ 6,605 $ 2,047
------ ------------- ------------
------ ------------- ------------
Interest........................................................... $ 4,088 $ 3,160 $ 4,875
------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- ADDITIONAL DISTRIBUTION
CLASS A CLASS B PAID-IN RETAINED IN EXCESS OF
SHARES SHARES AMOUNT CAPITAL EARNINGS CAPITAL
----------- ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 30, 1995................... 212,078 187,922 $ -- $ 4000 $ 638 --
Repurchase of shares by investors........ (30,016) -- (300)
Sale of shares to management............. 14,570 -- 146
Net income............................... 2,593 --
----------- ----------- ----------- ----------- --------- ------------
Balance, July 28, 1996................... 196,632 187,922 $ -- $ 3,846 $ 3,231 --
Net income............................... 3,778 --
----------- ----------- ----------- ----------- --------- ------------
Balance, July 26, 1997................... 196,632 187,922 $ -- $ 3,846 $ 7,009 --
Net loss for the three month period ended
October 25, 1997....................... -- -- -- -- (459) --
Distribution paid........................ (3,846) (6,550) (34,604)
Net income for the period from October
26, 1997 to July 25, 1998.............. -- -- -- -- 2,390 --
----------- ----------- ----------- ----------- --------- ------------
Balance, July 25, 1998................... 196,632 187,922 $ -- $ -- $ 2,390 $ (34,604)
----------- ----------- ----------- ----------- --------- ------------
----------- ----------- ----------- ----------- --------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
--------------
<S> <C>
Balance, July 30, 1995................... $ 4,638
Repurchase of shares by investors........ (300)
Sale of shares to management............. 146
Net income............................... 2,593
--------------
Balance, July 28, 1996................... 7,077
Net income............................... 3,778
--------------
Balance, July 26, 1997................... $ 10,855
Net loss for the three month period ended
October 25, 1997....................... (459)
Distribution paid........................ (45,000)
Net income for the period from October
26, 1997 to July 25, 1998.............. 2,390
--------------
Balance, July 25, 1998................... $ (32,214)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
CDI Group, Inc. (the "Parent") and Subsidiary (the "Company") owns and
operates in the State of New Jersey a chain of drug stores under the name "Drug
Fair" and general merchandise stores under the name "Cost Cutters".
The accompanying consolidated financial statements include the accounts of
the Parent and its wholly-owned subsidiary, Community Distributors, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING YEAR
The Company maintains its accounts on a 52-53 week year ending with the last
Saturday in July through fiscal 1996 and the last Saturday in July for fiscal
1997 and fiscal 1998. The fiscal years ended July 28, 1996, July 26, 1997, and
July 25, 1998 each contained 52 weeks, respectively.
REVENUE RECOGNITION
Sales are net of returns and exclude sales tax. Revenues include sales from
all stores operating during the period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are considered by the Company to be financial
instruments with maturities, when purchased, of three months or less, and are
presented at cost which approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost or market, using the
dollar-value, double extension last-in, first-out (LIFO) method. If the
first-in, first-out (FIFO) method of inventory accounting had been used,
inventories would have been approximately $2,382 and $1,577 higher than reported
at July 26, 1997 and July 25, 1998, respectively. The reduction of the LIFO
reserve during the year ended July 25, 1998 resulted in an increase to gross
profit of $806. Management believes that inventories accounted for on a FIFO
basis approximates current replacement costs. Inventories are reflected net of
reserves for excess/obsolete/ damaged inventories in the amounts of $113 and $51
at July 26, 1997 and July 25, 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including computer software costs, are recorded at
cost and are depreciated on a straight-line basis over the estimated useful
lives of the assets, which range from three to seven years. Leasehold
improvements are amortized over the expected useful life of the improvement or
the life of the lease, whichever is shorter. Depreciation expense recorded for
the fiscal years ended July 28, 1996, July 26, 1997, and July 25, 1998 was
$1,743, $1,952 and $2,094, respectively. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts
and any gain or loss is recognized in operations.
BENEFICIAL LEASEHOLDS
Beneficial leasehold rights existing at the acquisition date have been
recorded for acquired leases based on differences between contractual rents
under the respective lease agreements and prevailing market rents on the
acquisition date. Beneficial leaseholds are amortized over the lease terms using
the
48
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
straight-line method. Accumulated amortization at July 26, 1997 and July 25,
1998 was $1,441 and $2,017, respectively.
GOODWILL
Goodwill, which represents the excess of the Parent's purchase price of
acquired assets over the fair market value of net assets of the Subsidiary
acquired on January 30, 1995, is being amortized using the straight-line method
over twenty years. The Company evaluates the recoverability of goodwill on an
annual basis or earlier, if circumstances indicate that such an evaluation is
necessary. The Company's assessment of recoverability considers current and
future profitability, estimated undiscounted future cash flows from operations,
and any other events or changes in circumstances which indicate that the
carrying amount of goodwill may not be recoverable. In the event an impairment
of goodwill, or related asset, is indicated to have occurred, the Company's
policy is to allocate goodwill to long lived assets on a pro rata basis using
the relative fair value of those assets, at the date the goodwill arose for
purposes of assessing the recoverability of long-lived assets. The Company has
incurred no impairment of goodwill, or related assets, since its inception.
Accumulated amortization as of July 26, 1997 and July 25, 1998 was $4,793 and
$6,709, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the respective
borrowings, which is approximately 7 years.
SUPPLIER ADVANCES
Included in the accompanying balance sheets are $3,253 and $1,697 of
advances received related to various inventory supply agreements at July 26,
1997 and July 25, 1998, respectively. Such amounts are being recorded as a
reduction of cost of sales as the Company's supply agreement obligations are
fulfilled, generally ranging from three to five years from the point that the
supplier advance is received. The Company's obligations under the supply
agreements are fulfilled through the passage of time for those supply agreements
that are for a specific period of time and by the purchasing of inventory for
those supply agreements that stipulate the purchasing of a specific amount of
inventory. The Company is currently committed to approximately $17,384 of
additional purchases under the inventory supply agreements at July 25, 1998. In
the event the Company does not fulfill its obligations under the inventory
supply agreements, a pro rata portion of the advance will be required to be
repaid, approximating the amounts presented in the financial statements as
Supplier Advances at July 25, 1998. The amount presented as the current portion
of the supplier advances is estimated by the Company as the amount related to
the passage of time and the estimated inventory purchases to be made during the
twelve months following July 25, 1998, as applicable to the specific inventory
supply agreements.
PRE-OPENING AND ADVERTISING COSTS
Costs associated with new stores prior to opening and advertising costs are
expensed as incurred. Net Advertising expense of $1,638, $1,941 and $1,703 for
the years ended July 28, 1996, July 26, 1997 and July 25, 1998, respectively is
net of co-op advertising rebates received from vendors in the amount of $4,153,
$3,523 and $4,430 for the years ended July 28, 1996, July 26, 1997 and July 25,
1998, respectively.
49
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTEREST EXPENSE (NET)
Interest expense recorded for the fiscal years ended July 26, 1996, July 26,
1997 and July 25, 1998, respectively, net of interest income was:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED JULY 28, ENDED JULY 26, ENDED JULY 25,
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest expense.............................. $ 5,389 $ 4,755 $ 8,692
Interest income............................... (63) (169) (269)
------ ------ ------
Interest expense (net)........................ $ 5,326 $ 4,586 $ 8,423
------ ------ ------
------ ------ ------
</TABLE>
INCOME TAXES
Deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined on the
basis of the differences between the financial statement and tax bases of assets
and liabilities ("temporary differences") at enacted tax rates in effect for the
years in which the temporary differences are expected to reverse.
CONCENTRATIONS OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
primarily held in a single major commercial bank. The Company holds no
collateral for these financial instruments, and such amounts may, at times,
exceed insurable limits.
All of the Company's stores are located in northern and central New Jersey.
As a result, the Company is sensitive to economic, competitive, and regulatory
conditions in that region. The success of the Company's future operations will
be substantially affected by its ability to compete effectively in New Jersey,
and no prediction can be made as to economic conditions in that region.
The Company is party to a supply agreement with Cardinal Health, Inc.
("Cardinal") pursuant to which the Company is required to purchase at least 90%
of its pharmacy products from such supplier. The Company believes that its
pharmacy products are readily available from numerous other wholesale suppliers,
and could be obtained on substantially similar terms in the event that Cardinal
were unable to supply pharmacy products.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable, as reflected in the accompanying consolidated balance sheets
approximate their fair value because their maturities are generally less than
one year in duration. The Company estimates that the carrying amount of its
long-term fixed rate debt and amounts reflected as long-term liabilities
approximate their fair value. Management is not aware of any factors that would
significantly affect the value of these amounts.
USE OF 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
50
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK OPTIONS
The Company has adopted Statement of Financial Accounting Standards No. 123
"ACCOUNTING FOR STOCK BASED COMPENSATION" ("SFAS No. 123"). SFAS No. 123
prescribes the accounting for stock options and requires that options be valued
at their fair market value, as defined in the statement, on the date of grant.
SFAS No. 123 allows companies to either fully adopt its requirements or to elect
to only disclose the impact that the requirements would have. The Company has
adopted SFAS No. 123 for disclosure purposes only, to the extent material, and
will continue to account for its stock options under APB Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF" ("SFAS No. 121"). SFAS No. 121 prescribes the accounting for the
impairment of long-lived assets, such as property, plant and equipment and
intangible assets, as well as the accounting for long-lived assets that are held
for disposal. The statement requires that the carrying value of such assets be
reviewed when events or circumstances indicate that an impairment might exist.
The Company has concluded that no impairment of long-lived assets existed at
July 26, 1997 and July 25, 1998.
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
In fiscal 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME" ("SFAS 130"). SFAS 130 is effective for all fiscal years beginning after
December 15, 1997 (July 26, 1998 for the Company). SFAS 130 will require the
Company to report and display comprehensive income. The Company has determined
that SFAS 130 will not have a significant effect on its disclosures.
In fiscal 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("SFAS 131"). SFAS 131 is effective for all fiscal years beginning after
December 15, 1997 (July 26, 1998 for the Company). SFAS 131 established
standards for the ways public companies report information about operating
segments in both interim and annual financial statements, including related
disclosures about products and services, geographic areas, and major customers.
The Company has not determined what, if any, impact SFAS 131 will have on the
reported operating segments and the related disclosures during fiscal 1999.
In fiscal 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
133"). SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (August 1, 1999 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company anticipates that, due to the limited use of
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
51
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. LONG-TERM DEBT:
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
AT AT
JULY 26, JULY 25,
1997 1998
------------ ------------
<S> <C> <C>
Senior notes--due October 15, 2004 interest at 10 1/4% payable semi-annually on April
15 and October 15................................................................... $ -- $ 80,000
Term loan A--due last business day in January, 2000, principal and interest payable in
quarterly installments.............................................................. 11,003 --
Term loan B--due last business day in January, 2002, principal and interest payable in
quarterly installments.............................................................. 18,266 --
Senior subordinated notes and accrued interest--due January 31, 2005, principal plus
interest at a rate of 10% per annum, are payable upon maturity...................... 16,834 18,517
Subordinated notes--due December 31, 1997 principal plus interest at a rate of 8% per
annum, are payable upon maturity.................................................... 86 --
------------ ------------
Total............................................................................. 46,189 98,517
Less, current portion due within one year........................................... 4,836
------------ ------------
Long-term portion..................................................................... $ 41,353 $ 98,517
------------ ------------
------------ ------------
</TABLE>
On January 30, 1995, the Parent issued $13,250 in senior subordinated notes
which are due January 31, 2005. Principal on the notes is payable upon maturity
plus interest at a rate of 10% per annum. Payment of principal and interest on
the notes is subordinated to the prior payment in full of all of the Company's
obligations under the Old Credit Agreement.
On January 30, 1995, the Parent issued $260 in subordinated notes which were
due December 31, 1997. Principal on the notes was payable upon maturity plus
interest at a rate of 8% per annum.
On October 16, 1997, the Subsidiary issued $80,000 of 10 1/4% senior notes
due 2004 which are guaranteed by the Parent. The net proceeds of such issuance
was $76,130. The Subsidiary used $29,269 of such net proceeds to refinance
substantially all of its then existing indebtedness and $45,000 of the net
proceeds was used to pay a dividend to the Parent which then paid a dividend of
the same amount to the stockholders of the Parent. The terms of the senior notes
include certain restrictive covenants regarding the payment of dividends, the
incurrance of debt, the use of proceeds resulting from disposition of assets and
certain other defined activities. Under the relevant debt agreements in the
event of a change in control, as defined, the Company is required to repurchase
all such outstanding notes.
On October 16, 1997, the Subsidiary also replaced its then existing credit
facility ("Old Credit Facility") with a $20,000 five year revolving credit
facility concurrent with the issuance of the $80,000 of senior notes. This
facility bears interest at either prime rate or London Interbank Offered Rate
("LIBOR") plus 1.75% and is collateralized by the Company's eligible accounts
receivable and inventory balances, as defined. Included in the $20,000 five year
revolving credit facility is a $5,000 letter of credit facility. The new
facility contains certain financial and operating convenants, 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. The Subsidiary is required to pay a commitment fee of
1/4 of 1.00% per annum on the daily average unutilized revolving credit facility
52
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. LONG-TERM DEBT: (CONTINUED)
commitment. For the year ended July 25, 1998, the Subsidiary incurred
approximately $47 of commitment fees and letter of credit fees under this
facility.
At July 26, 1997, the Subsidiary's Term A and Term B loans had interest
rates of 7.69% and 8.65%, respectively.
On February 16, 1995, the Subsidiary entered into an interest rate cap
agreement with a bank. This agreement related to a $22,500 notional amount of
debt and provided for payments to be received by the Subsidiary based
exclusively on the three month LIBOR rate with a cap of 9%. The purchase price
of the cap had been capitalized and amortized over the term of the Old Credit
Agreement. The cap was purchased for approximately $50 and expired February 16,
1997.
4. COMMITMENTS:
LEASES
The Company conducts all of its warehousing and retailing operations from
leased facilities. Annual store rent is composed of a fixed minimum amount, and
for certain stores, contingent rent which is based upon a percentage of sales,
exceeding a stipulated amount. The leases, which may be renewed for periods
ranging from five to thirty years, generally provide that the Company pay
insurance, maintenance costs and property taxes. These additional charges are
subject to escalation for increases in the related costs. Minimum rental
commitments under long-term noncancelable operating leases are as follows at
July 25, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 9,852
2000............................................................................ 9,570
2001............................................................................ 8,168
2002............................................................................ 7,709
2003............................................................................ 7,392
Thereafter...................................................................... 54,557
------------
$ 97,248
------------
------------
</TABLE>
Annual rent expense is comprised of a fixed minimum amount, plus contingent
rent based on a percentage of sales exceeding a stipulated amount. For the years
ended July 28, 1996, July 26, 1997, and July 25, 1998, respectively, total rent
expense included:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Fixed minimum rent................................. $ 7,696 $ 8,261 $ 9,045
Contingent rent.................................... 178 180 219
------ ------ ------
Rent expense....................................... $ 7,874 $ 8,441 $ 9,264
------ ------ ------
------ ------ ------
</TABLE>
The Company recognizes rental expense for leases with scheduled rent increases
on the straight-line basis. During the years ended July 28, 1996, July 26, 1997
and July 25, 1998, the Company recognized rent expense in excess of amounts paid
of $552, $414 and $523, respectively.
53
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. COMMITMENTS: (CONTINUED)
LETTERS OF CREDIT
Outstanding letters of credit, guaranteeing certain contingent purchases
commitments, which are not reflected in the accompanying financial statements,
aggregate approximately $1,135 and $1,666 at July 26, 1997 and July 25, 1998.
5. INCOME TAXES:
The provision for income taxes for the years ended July 28, 1996, July 26,
1997, and July 25, 1998, respectively, consist of the following:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current............................................ $ 3,442 $ 5,396 $ 1,417
------ ------ ------
Deferred........................................... (963) 1,692
------ ------ ------
$ 3,442 $ 4,433 $ 3,109
------ ------ ------
------ ------ ------
</TABLE>
The components of deferred taxes at July 26, 1997 and July 25, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
AT JULY 26, AT JULY 25,
1997 1998
----------- -----------
<S> <C> <C>
Supplier advances, current............................................ $ 620 $ 329
Inventory............................................................. 169 194
Accruals and reserves................................................. 658 624
Inventory (LIFO reserve).............................................. (2,094) (3,424)
Depreciation.......................................................... 256 160
----------- -----------
Net deferred tax liability--current............................... $ (391) $ (2,117)
----------- -----------
Accruals and reserves................................................. 482 728
Supplier advances, non-current........................................ 230 18
----------- -----------
Net deferred tax asset--long-term................................. $ 712 $ 746
----------- -----------
----------- -----------
</TABLE>
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income before income taxes:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, JULY 26, JULY 25,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory tax rate............................... 34% 34% 34%
State and local income taxes, net of federal tax
benefit................................................ 6% 6% 6%
Goodwill amortization.................................... 15% 12% 20%
Other.................................................... 2% 2% 2%
--- --- ---
57% 54% 62%
--- --- ---
--- --- ---
</TABLE>
54
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. RELATED PARTY TRANSACTIONS:
Included in the Company's consolidated statements of income for the years
ended July 28, 1996, July 26, 1997, and July 25, 1998 are administrative fees of
$250, for each of the years, respectively. The Company has entered into
administrative fee agreements with certain shareholders of CDI Group, Inc.,
whereby these shareholders will provide advisory and consulting services to the
Board of Directors. These administrative fee agreements require the Company to
pay $250 of administrative fees annually.
Under a lease dated May 1, 1983, the former majority stockholders of the
Company leased to the Company the building housing the Company's warehouse and
office. Under this lease, which expires on December 31, 1998, the Company pays
$17 per month in rent. Under a lease dated September 30, 1983, the former
majority stockholders of the Company leased to the Company the building housing
the Company's Westfield Drug Fair store. Under this lease, which expires on
September 30, 1998, the Company pays $16 per month in rent. This lease was
renewed for a term of fifteen years expiring on September 30, 2013. Under the
renewed lease, the Company pays $31 per month in rent with annual increases of
3% beginning each anniversary date.
Under a letter agreement dated January 30, 1995 (the "Letter Agreement")
between the Company and a corporation owned by the former majority stockholders
of the Company, the corporation paid to the Company $3 per month in rent for the
use of approximately 6,000 square feet of storage space at the Company's
Somerville, NJ warehouse. This Letter Agreement was terminated in July 1996.
7. REDEEMABLE STOCK:
REDEEMABLE PREFERRED
On January 30, 1995, 7,500 shares of $1.00 par value Preferred Stock were
issued for $100 per share, for an aggregate consideration of $750. On October
31, 1995, 7,143 shares of $1.00 par value Preferred Stock were redeemed by the
Company from stockholders and were sold to certain members of management of the
Company at the redemption price of $100 per share. At the same time, the
management of the Company purchased an additional 362 of the $1.00 par value
Preferred Stock shares at the same price as the initial consideration paid on
January 30, 1995. The Company's Preferred Stock is redeemable at the option of
the Company at any time, unless prohibited by the terms of any credit or other
financing agreement with any lender to the Company, at a price equal to $100 per
share, subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting the
Preferred Stock ("Liquidation Value"). On January 31, 2005, unless prohibited by
the terms of any credit or other financing agreement with any lender to the
Company, the Company will redeem all of the Preferred Stock outstanding at a
price per share equal to the Liquidation Value. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Preferred Stock shall be entitled to be paid the Liquidation Value of the
Preferred Stock before any payments could be made to holders of Common Stock.
REDEEMABLE COMMON
Under certain circumstances defined in the respective stock purchase
agreements, up to 57,983 shares of Class A Common Stock can be put back to the
Company with a redemption price to be determined under the stock purchase
agreement. Such redemption price cannot exceed the original issue price which
was ten dollars per share.
55
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. REDEEMABLE STOCK: (CONTINUED)
During fiscal 1998 certain executives of the management group of the Company
exercised options to purchase 24,237 shares of Class A Common Stock at an
aggregate purchase price of approximately $242,000.
LOANS TO OFFICERS AND DIRECTORS
On October 31, 1995, the Company issued 33,726 shares of Class A Common
Stock and 3,643 of Preferred Stock to certain directors and officers of the
Company in consideration for a note signed by each director and officer. These
notes bear interest at 8.0% and are due on various dates through January 31,
2005. All such shares are pledged as collateral toward these notes.
The outstanding balance of the notes due from certain directors and officers
at July 26, 1997 and July 25, 1998 of $269, and $87 respectively, has been
reflected as a reduction of the redemption value of the related redeemable
Preferred and Common Stock.
8. STOCKHOLDERS' EQUITY:
COMMON STOCK
On January 30, 1995, 212,078 shares of Class A Common Stock and 187,922
shares of Class B Common Stock were issued for consideration of $4,000 (average
of $10.00 per share). Class A Common Stock ("Class A") and Class B Common Stock
("Class B") stockholders have the same rights and privileges with the exception
that each holder of record of Class A stock is entitled to one vote per share so
held, while Class B stockholders have no voting rights. Class A and Class B
stockholders are entitled to convert any or all such shares into an equivalent
number of Class B and Class A shares, respectively, except in the event that the
holder of Class B is a bank holding company or subsidiary thereof and such
holder is restricted by applicable banking laws from holding any (or any
additional) shares with voting rights. The conversion feature of the Class A and
Class B shares only affects the voting status of such shareholders, and the
exercise of such feature by all of the holders of the Class B shares would not
trigger a change in control event as defined in the Company's debt agreements.
On October 31, 1995, 30,016 shares of Class A Common Stock were redeemed by
the Company from the stockholders and 14,570 shares of Class A Common Stock were
sold to management at the repurchase price of $10 per share, which approximated
fair market value at the original issue date of January 30, 1995 and at the
repurchase date of October 31, 1995.
STOCK OPTIONS AND WARRANTS
On January 30, 1995, the Board of Directors approved the 1995 Stock Option
Plan (the "Plan"), which provides for the issuance of up to 65,882 shares of
Class A Voting Common Stock to employees and consultants of the Company and its
affiliates. The Plan is intended to be an incentive stock option plan within the
meaning of Section 422 of the Internal Revenue Service Code of 1986. The option
exercise price under each incentive option shall be not less than 100% of the
fair market value of the stock on the grant date, as determined by the Board of
Directors. On January 30, 1995, the Company issued options to purchase 37,649
shares of Class A Common Stock, at a price of $10 per share, to a senior
executive of the Company pursuant to the Plan. The options expire on January 31,
2005 and expiration may be accelerated
56
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
due to termination of employment of the senior executive as well as various
other reasons as stipulated in the Option Agreement. These options vest as
follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS VESTING DATE VESTED
- ------------------------------------------------------------------------- -------------------
<S> <C>
10,667................................................................... January 30, 1996
10,667................................................................... January 30, 1997
10,667................................................................... January 30, 1998
2,824.................................................................... January 30, 1999
2,824.................................................................... January 30, 2000
</TABLE>
On January 30, 1995, non-Plan options to acquire 4,706 shares of Class A
Common Stock at $10 per share were issued to a senior executive of the Company.
These options are exercisable immediately after any disposition event as defined
by the Option Agreement.
On January 30, 1995, the Company issued a warrant to purchase 16,667 shares
of Class A Common stock, at a price of $.001 per share, to its' principal bank.
The holder of the warrant may exercise the rights represented by the warrant in
whole or in part at any time through January 30, 2005.
On March 18, 1998, the Company issued 1,500 options to an executive of the
Company at an exercise price equaling the current fair market value of $31 per
share.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 28, 1996 JULY 26, 1997 JULY 25, 1998
------------- ------------- --------------------------
<S> <C> <C> <C>
Options outstanding at beginning of period............... 67,473 67,079 67,079
Options granted.......................................... 1,500
Options exercised........................................ 24,237
Options canceled......................................... (394)
Options outstanding at end of period..................... 67,079 67,079 30,455
Options available for grant at end of period............. 3,115 3,115 1,615
Options vested and outstanding at end of period.......... 15,299 30,989 22,668
Option price per share for outstanding options........... $ 10 $ 10 28,955 shares at $ 10.00
1,500 shares at $ 31.00
</TABLE>
On October 16, 1997 the Subsidiary paid a dividend to the Parent in the
amount of $45,000. The Parent then declared and paid a dividend of $45,000 to
its stockholders. The Subsidiary's dividend of $45,000 was funded by the
proceeds of its offering of $80,000 of senior notes completed in October 1997.
The $45,000 dividend has been reflected in these consolidated financial
statements as a return of earnings and capital existing as of the dividend date.
The remaining excess of the dividend, $34,604, has been recorded as a
distribution in excess of capital.
9. LITIGATION:
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.
57
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EMPLOYEE BENEFIT PLAN:
On July 1, 1995, the Company implemented a 401(k) salary deferral plan (the
"Plan") which is available to eligible employees, as defined. The Plan provides
for the Company to make discretionary contributions, however, the Company
elected not to make contributions for all periods through July 25, 1998.
11. SUBSEQUENT EVENTS:
In November 1997, the Company entered into a Receivables Purchase Agreement
with The Pharmacy Fund, Inc. pursuant to which the Company has agreed to factor
all of its third party plan prescription receivables. Under the terms of the
aforementioned agreement, the Company accelerates its collection of these
receivables by selling them to The Pharmacy Fund, Inc. on a daily basis and
receiving payment two days after they are created, rather then waiting to
collect them in the ordinary course. In addition, the Company avoided
uncollectability as these receivables were sold without recourse.
On September 9, 1998, The Pharmacy Fund, Inc. filed for bankruptcy under
Chapter 11 of the Federal bankruptcy regulations. In connection therewith, the
Company is pursuing collection of approximately $445,000 of Third Party Plan
prescription receivables that were purchased by The Pharmacy Fund, Inc. These
receivables arose subsequent to July 25, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
58
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The following table sets forth certain information with respect to the
directors, executive officers and key employees of the Holding Company and the
Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------------- ----------- ----------------------------------------------------------------
<S> <C> <C>
Frank Marfino.......................... 55 President, Chief Executive Officer and Director of the Holding
Company and the Company
Lynn L. Shallcross..................... 57 President--Cost Cutters Division of the Company
Todd H. Pluymers....................... 34 Chief Financial Officer of the Holding Company and the Company
Barrie Levine.......................... 53 Vice President--Pharmacy Operations of the Company
William F. Gilligan.................... 56 Vice President--Distribution of the Company
Michael P. Quinn....................... 45 Vice President--Merchandising
Kevin Marron........................... 41 Director--MIS of the Company
Alan J. Kirschner...................... 44 Director--Loss Prevention of the Company
Mark H. DeBlois........................ 42 Director of the Holding Company and the Company
Harvey P. Mallement.................... 58 Director of the Holding Company and the Company
</TABLE>
MR. MARFINO has been a Director and the President and Chief Executive
Officer of the Holding Company and the Company since February 1995. Prior to
February 1995, Mr. Marfino had served as the Chief Operating Officer of the
Company beginning in 1990 after having served as Vice President in charge of
Operations and Merchandising. Prior to joining the Company in 1982, Mr. Marfino
held senior positions, including Regional Manager and Director of Administrative
Operations with Two Guys Discount Stores/Vorando, Inc. over a 19 year period.
MR. SHALLCROSS has been President of the Cost Cutters division since 1984.
Mr. Shallcross joined the Company in 1971 and has held numerous positions in
management including pharmacist, pharmacist-manager, and district manager. Mr.
Shallcross is a graduate of Rutgers College of Pharmacy and has been a licensed
pharmacist since 1964.
MR. PLUYMERS joined the Company in April 1991 as Chief Financial Officer and
was appointed Chief Financial Officer of the Holding Company in January 1995.
Prior to joining the Company, Mr. Pluymers was employed by Arthur Andersen & Co.
from 1986 through 1991, most recently as an Audit Manager. Mr. Pluymers is a
graduate of Westminster College with a degree in Business
Administration/Accounting and is a Certified Public Accountant.
MR. LEVINE joined the Company as Vice President--Pharmacy Operations in
1993. Prior to joining the Company, Mr. Levine was employed by Supermarkets
General (Pathmark) since 1971. At Pathmark, Mr. Levine held various positions,
including Regional Pharmacy and Regional Front-End Supervisor, Regional Non-Food
Product Manager, and Manager of Pharmacy Services. Mr. Levine is a graduate of
Brooklyn College of Pharmacy and a licensed pharmacist in several states.
MR. GILLIGAN has been Vice President--Distribution since 1985 after serving
as General Manager for 11 years with Atlantic Distribution Center in Jersey
City, New Jersey and 11 years with Wakefern Food Corporation, parent company of
Shop-Rite supermarkets. Trained in distribution management at Ohio State
University and Rutgers University, Mr. Gilligan is responsible for the daily
management of the distribution center, transportation logistics, property
management and the administrative staff. Mr. Gilligan has over 30 years of
experience in Distribution-Warehouse Management.
MR. QUINN joined the Company as Vice President--Merchandising on March 16,
1998. Prior to joining the Company, Mr. Quinn held the position of Vice
President--General Manager of Alpine Distribution,
59
<PAGE>
Inc., the non-food division of Twin County Grocers, from 1994 to 1998. From 1992
to 1994, Mr. Quinn was employed as a Divisional Merchandise Manager at the Rx
Place, a Division of Woolworth Corp.
MR. MARRON has been Director--Management Information Systems for the Company
since 1986. Mr. Marron's work experience includes six years with Arthur's
Catalog Showroom and six years with MIS Software Corporation prior to joining
the Company. Mr. Marron has been instrumental in the creation of several
proprietary software applications for the Company, including inventory
management, sales, marketing, distribution, warehouse management, shelf labeling
and point-of-sale in store applications.
MR. KIRSCHNER joined the Company as Director--Loss Prevention in 1991. Prior
to 1991, Mr. Kirschner held a similar position with NBO Menswear and Rickel Home
Centers, Inc. Mr. Kirschner is a graduate of Jersey City State College.
MR. DEBLOIS has been a Director of the Holding Company and the Company since
1995. Since 1990, Mr. DeBlois has been employed as an officer, most recently as
a Managing Director, of BancBoston Ventures Inc., a private equity investment
firm with committed capital in excess of $750 million that provides private
equity and mezzanine financing to middle market companies for management-led
buyouts, acquisitions and growth capital. Mr. DeBlois is a graduate of Boston
College.
MR. MALLEMENT has been a Director of the Holding Company and the Company
since 1995. Since 1981, Mr. Mallement has been Managing General Partner of
Harvest Partners, Inc., a private equity investment and growth financing firm
with committed capital in excess of $250 million that provides equity investment
financing that focuses on the acquisition of medium sized companies and
financing of growth businesses. Mr. Mallement is also a director of Symbol
Technologies, Inc. and is a graduate of the City College of New York with a
masters degree in Business Administration.
Pursuant to a Stockholder Agreement entered into as of January 30, 1995, as
amended, the holders of a substantial majority of the outstanding common stock
of the Holding Company (the "Common Stock"), including BancBoston and Harvest,
and their affiliates, as well as the Holding Company, Banque Paribas, Paribas
Principal, Inc., TA Holding, Inc., Jon Tietbohl and Frank Marfino, have agreed
that each of the Holding Company and the Company will have a Board of Directors
comprised of up to five members. The stockholders party to the Stockholder
Agreement have agreed to vote for the following persons as directors: (i) up to
two individuals designated by the holders of a majority of the outstanding
shares of Common Stock purchased by BancBoston in 1995 (the "BBV Stock"); (ii)
up to two individuals designated by the holders of a majority of the outstanding
shares of Common Stock purchased by Harvest and its affiliates in 1995 (the
"Harvest Stock"); and (iii) Frank Marfino, so long as he continues to be
employed by the Holding Company as President and Chief Executive Officer, and
thereafter, his successor as President and Chief Executive Officer. Mr. DeBlois
has been designated for election to the Board of Directors of the Holding
Company and the Company by the holders of a majority of the BBV Stock, and Mr.
Mallement has been designated for election to the Board of Directors of the
Holding Company and the Company by the holders of a majority of the Harvest
Stock.
Executive officers of the Holding Company and the Company are appointed by
their respective Boards of Directors on an annual basis and serve until their
successors have been duly elected and qualified. There are no family
relationships among any of the executive officers and directors of the Holding
Company and the Company.
COMPENSATION OF DIRECTORS
Directors of the Holding Company and the Company do not receive compensation
from the Holding Company or the Company for their service in such capacities.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Not applicable.
60
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid by the
Company for services rendered during fiscal 1996, fiscal 1997, and fiscal 1998
to the Company's Chief Executive Officer and four other most highly-compensated
executive officers for fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
<S> <C> <C> <C> <C>
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION
- ---------------------------------------------------------------- ----------- ---------- ------------ -------------
Frank Marfino................................................... 1996 $ 400,307 $ 200,000 $ 4,536(2)
President and Chief Executive Officer 1997 $ 431,692 $ 228,680 $ 3,748(2)
1998 $ 460,384 $ 1,447,702 $ 3,534(2)
Lynn L. Shallcross.............................................. 1996 $ 162,230 $ 30,000 $ 2,080(3)
President--Cost Cutters Division 1997 $ 167,135 $ 50,000 $ 2,586(3)
1998 $ 171,231 $ 50,000 $ 3,126(3)
Todd H. Pluymers................................................ 1996 $ 127,500 $ 37,500 $ 723(4)
Chief Financial Officer 1997 $ 133,606 $ 26,000 $ 741(4)
1998 $ 140,674 $ 227,500 $ 747(4)
Barrie Levine................................................... 1996 $ 120,729 $ 18,000 $ 1,568(5)
Vice President--Pharmacy Operations 1997 $ 124,423 $ 12,200 $ 1,620(5)
1998 $ 129,038 $ 22,500 $ 1,697(5)
William F. Gilligan............................................. 1996 $ 101,230 $ 10,000 $ 1,395(6)
Vice President--Distribution 1997 $ 107,231 $ 17,5000 $ 1,738(6)
1998 $ 111,231 $ 20,520 $ 2,046(6)
</TABLE>
- ------------------------
(1) Reflects bonuses paid during the fiscal year with respect to achievement of
certain performance goals relating to the prior fiscal year. The amounts of
annual bonuses that may be paid to the named executive officers for fiscal
1998 have not yet been determined. See "Certain Relationships and Related
Transactions."
(2) Amounts include the values of the personal use of a company car equal to
$1,300, $1,300 and $1,275 for fiscal 1996, 1997 and 1998, respectively, as
well as the incremental cost of additional life insurance premiums in the
amounts of $3,236, $2,448 and $2,259 for fiscal 1996, 1997 and 1998,
respectively.
(3) Amounts include the values of the personal use of a company car equal to
$520, $520 and $520 for fiscal 1996, 1997 and 1998, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$1,560, $2,066, and $2,606 for fiscal 1996, 1997, and 1998, respectively.
(4) Amounts include the values of the personal use of a company car equal to
$530, $520 and $520 for fiscal 1996, 1997 and 1998, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$193, $221, and $227 for fiscal 1996, 1997, and 1998, respectively.
(5) Amounts include the values of the personal use of a company car equal to
$520, $520 and $520 for fiscal 1996, 1997 and 1998, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$1,048, $1,100, and $1,177 for fiscal 1996, 1997, and 1998, respectively.
(6) Amounts include the values of the personal use of a company car equal to
$510, $520 and $520 for fiscal 1996, 1997 and 1998, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$885, $1,218, and $1,526 for fiscal 1996, 1997, and 1998, respectively.
61
<PAGE>
STOCK OPTIONS TABLE
The following table sets forth the number of options to purchase Common
Stock held by the Company's Chief Executive Officer as of the end of fiscal
1998. None of the Company's four other most highly-compensated executive
officers held any options to purchase Common Stock as of the end of fiscal 1998,
and there were no options to purchase Common Stock granted during fiscal 1998.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
END (#) AT FISCAL YEAR-END ($)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
----------------------- -------------------------------
<S> <C> <C>
Frank Marfino................................................ 12,001/10,354 $ 0
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options (each of which was granted in
January 1995) is calculated by determining the difference between the book
value of the Common Stock underlying the options at the end of fiscal 1998,
which was negative, and the option exercise price. The Common Stock was not
publicly traded at the end of fiscal 1998.
EMPLOYMENT AGREEMENTS
In connection with the acquisition of the Company by the Holding Company in
1995, the Company entered into Employment Agreements with each of Messrs.
Marfino, Shallcross, Pluymers, Levine and Gilligan. Each of these Employment
Agreements contains customary confidential information and inventions assignment
provisions and provides for a one-year non-competition period upon termination.
Mr. Marfino's Employment Agreement, which expires in January 2001, provides
for Mr. Marfino to receive an annual base salary of $450,000 (subject to annual
increases based on a consumer price index), and an incentive bonus based on the
financial performance of the Company. Mr. Marfino is not entitled to receive a
bonus for any fiscal year in which the Company's Actual EBITDA (as defined in
the Employment Agreement) is less than 90% of a forecasted EBITDA. In the event
that Actual EBITDA is more than 90% of forecasted EBITDA, Mr. Marfino will
receive a bonus calculated with respect to the amount by which Actual EBITDA
exceeds forecasted EBITDA, of which $50,000 is guaranteed. In the event that Mr.
Marfino's employment is terminated by the Company prior to the end of the term
of the Employment Agreement or any extension thereof, or he resigns under
circumstances in which he is deemed to have terminated his employment for Good
Reason (as defined therein), Mr. Marfino is entitled to receive his base salary
through the end of the initial term of his Employment Agreement or any extension
term and a pro rated minimum bonus and incentive bonus. In the event that Mr.
Marfino's employment is terminated as a result of death or disability, Mr.
Marfino or his estate is entitled to severance pay of one year of base salary
and a pro rated minimum bonus and incentive bonus. In the event that Mr.
Marfino's employment is terminated upon the expiration of the term of the
Employment Agreement or any extension term, Mr. Marfino shall be entitled only
to receive a pro rated minimum bonus and incentive bonus.
The Employment Agreements for Messrs. Shallcross, Pluymers, Levine and
Gilligan, each of which expires in January 2001, currently provide for base
salaries of $172,000, $144,375, $130,000 and $112,000, respectively. The
Employment Agreement for Mr. Quinn, which expires in March 2001, currently
provides for a base salary of $125,000. In the event that the employment of any
of these officers is terminated during the respective terms of their Employment
Agreements for death, disability, resignation or termination by the Company
other than for "cause," the relevant officer will receive severance pay of his
base salary for one year after termination. No severance pay is payable under
any of the Employment Agreements in the event of termination for "cause."
62
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither the Board of Directors of the Company, nor the Board of Directors of
the Holding Company, has ever maintained a compensation committee. Executive
compensation decisions are considered and decided by all of the directors of the
Company. All executive compensation decisions relating to fiscal 1998, including
decisions relating to the compensation of Frank Marfino, the President and Chief
Executive Officer of the Company, were decided by Mark DeBlois, Harvey Mallement
and Frank Marfino, each of whom was a director of the Company during all of
fiscal 1998. No officers or employees of the Company or the Holding Company
other than Mr. Marfino participated in any discussions of the Board of Directors
of either company regarding executive compensation.
INDEBTEDNESS OF MANAGEMENT
During fiscal 1998, Mr. Frank Marfino, the President and Chief Executive
Officer of the Holding Company and the Company, and a director of the Holding
Company and the Company, had an outstanding loan from the Company which was
incurred by Mr. Marfino in connection with his purchase of shares of capital
stock of the Company concurrently with the acquisition of the Company by the
Holding Company in January 1995. In connection with this loan, Mr. Marfino
executed a full-recourse promissory note to the Company which required Mr.
Marfino to pay cash interest at a rate of 8% per annum. The largest amount of
this loan that was outstanding during fiscal 1998 was $87,000, and this loan was
repaid in October 1997. See "Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The Holding Company is the beneficial owner, with sole voting power and
investment power, of 100% of the outstanding capital stock of the Company.
The following table sets forth certain information regarding beneficial
ownership of the Common Stock(1) and Preferred Stock(2) of the Holding Company
(i) by each person known to the Company to own beneficially more than 5% of each
class of outstanding voting capital stock of the Holding Company, (ii) by each
director of the Company and the Holding Company, (iii) by each of the executive
officers of the
63
<PAGE>
Company and the Holding Company named in the "Summary Compensation Table," and
(iv) by all directors and executive officers of the Company and the Holding
Company as a group, as of July 25, 1998.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK PREFERRED STOCK
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
AMOUNT OF NATURE OF
BENEFICIAL PERCENT OF AMOUNT OF NATURE OF PERCENT OF
NAME AND ADDRESS OWNERSHIP(3) CLASS BENEFICIAL OWNERSHIP(3) CLASS
- ------------------------------------------ ---------------------- ----------- ----------------------- -----------
BancBoston Ventures Inc. ................. 159,389(4) 43.2% -- --
175 Federal St.
Boston, MA 02110
Mark H. DeBlois .......................... 159,389(5) 43.2% -- --
c/o BancBoston Ventures Inc.
175 Federal St.
Boston, MA 02110
Harvest Partners International, L.P. ..... 51,851(6) 20.4% -- --
c/o Harvest Partners, Inc.
767 Third Avenue
New York, NY 10017
Harvey P. Mallement....................... 83,816(7) 32.9% -- --
c/o Harvest Partners, L.P.
767 Third Avenue
New York, NY 10017
Paribas Principal, Inc. .................. 40,000(8) 15.7% -- --
787 Seventh Avenue
New York, NY 10017
DBG Auslands-Holding GmbH................. 73,525(9) 28.9% -- --
Emil-von-Behring-Strasse 2
D-60439 Frankfurt-am-Main
Germany
Harvest Technology Partners, L.P. ........ 17,901(6) 7.0% -- --
c/o Harvest Partners, Inc.
767 Third Avenue
New York, NY 10017
Banque Paribas............................ 16,667(8) 6.1% -- --
787 Seventh Avenue
New York, NY 10019
European Development Capital 14,064(6) 5.5% -- --
Corporation N.V. .......................
c/o Harvest Partners, Inc.
767 Third Avenue
New York, NY 10017
Frank Marfino............................. 37,333(10) 14.6% 4,000 50.9%
Lynn L. Shallcross........................ 8,211(11) 3.2% 1,073 13.6%
Todd H. Pluymers.......................... 6,781(11) 2.7% 715 9.1%
William F. Gilligan....................... 6,781(11) 2.7% 715 9.1%
Barrie Levine............................. 2,927(11) 1.1% 143 1.8%
All Directors and Executive Officers as a
Group (7 persons)....................... 305,238(12) 82.4% 6,646 84.5%
</TABLE>
64
<PAGE>
- ------------------------
(1) The Common Stock is comprised of Class A Voting Common Stock, $.00001 par
value per share ("Class A Common Stock"), and Class B Non-Voting Common
Stock, $.00001 par value per share ("Class B Common Stock"), each having the
same rights and privileges, other than with respect to voting rights and
powers. Holders of shares of Class A Common Stock have full voting rights
and powers as to all matters submitted to the stockholders of the Holding
Company for vote, consent or approval. Shares of Class A Common Stock are
convertible into shares of Class B Common Stock. Shares of Class B Common
Stock are convertible into shares of Class A Common Stock, except in the
event that the holder is a bank holding company or subsidiary thereof and
such holder is restricted by applicable banking laws from holding any (or
any additional) shares with voting rights.
(2) The Preferred Stock of the Holding Company, $1.00 par value per share (the
"Preferred Stock"), has a liquidation value of $100 per share and is
mandatorily redeemable by the Holding Company on January 31, 2005, or
optionally redeemable by the Holding Company at any time, in either case at
the liquidation value thereof. Holders of Preferred Stock have no voting
rights with respect to such shares.
(3) As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting of a security, or the sole or shared investment
power with respect to a security. A person is deemed as of any date to have
"beneficial ownership" of any security that such person has the right to
acquire within 60 days after such date. For purposes of computing the
percentage of outstanding shares held by each person named above, any
security that such person has the right to acquire within 60 days of the
date of calculation is deemed to be outstanding, but is not deemed to be
outstanding for purposes of computing the percentage ownership of any other
person.
(4) Includes 114,397 shares of Class B Common Stock.
(5) The shares shown as beneficially owned by Mr. DeBlois represent 159,389
shares owned of record by BancBoston. Mr. DeBlois is a Managing Director of
BancBoston and may be deemed to control BancBoston, and accordingly may be
deemed to control the voting and disposition of the shares of Class A Common
Stock owned by BancBoston. As such, Mr. DeBlois may be deemed to have shared
voting and investment power with respect to all shares held by BancBoston.
However, Mr. DeBlois disclaims beneficial ownership of the securities held
by BancBoston.
(6) Harvest Partners International, L.P. ("Harvest Partners") is affiliated with
Harvest Technology Partners, L.P. ("Harvest") and European Development
Capital Corporation N.V. ("European Development"). In the aggregate, Harvest
Partners, Harvest and European Development hold 83,816 shares of Class A
Common Stock, representing 32.9% of the shares outstanding. Harvest
Partners, Harvest and European each disclaim beneficial ownership of all
shares held by the others.
(7) The shares shown as beneficially owned by Mr. Mallement represent 51,851
shares owned of record by Harvest Partners, 17,901 shares owned of record by
Harvest and 14,064 shares owned of record by European Development. Mr.
Mallement either directly (whether through ownership interest or position)
or through one or more intermediaries, may be deemed to control the voting
and disposition of the Class A Common Stock owned by each of Harvest
Partners, Harvest and European Development, and accordingly may be deemed to
have shared voting and investment power with respect to all shares held by
each of Harvest Partners, Harvest and European Development. However, Mr.
Mallement disclaims beneficial ownership of the securities held by each of
Harvest Partners, Harvest and European Development except to the extent of
his pecuniary interests therein.
(8) Paribas Principal, Inc. is affiliated with Banque Paribas, which holds a
presently exercisable warrant to purchase 16,667 shares of Class A Common
Stock, representing 6.1% of the shares of Class A Common Stock outstanding
on a fully diluted basis. In the aggregate, on a fully diluted basis,
Paribas Principal and Banque Paribas would hold, upon exercise of all such
warrants, 56,667 shares of Class A
65
<PAGE>
Common Stock, representing 20.9% of the shares outstanding. Paribas
Principal and Banque Paribas each disclaim beneficial ownership of all
shares held by the other.
(9) Includes 73,525 shares of Class B Common Stock.
(10) Includes 1,334 shares subject to exercisable options. In addition, all of
such shares are subject to repurchase by the Holding Company upon
termination of employment under certain circumstances.
(11) All of such shares are subject to repurchase by the Holding Company upon
termination of employment under certain circumstances.
(12) Includes 1,334 shares subject to exercisable options. In addition, 60,699
shares are subject to repurchase by the Holding Company upon termination of
employment under certain circumstances. Except as noted above, the Company
believes that the beneficial holders listed in the table above have sole
voting power and investment power over the shares described as being
beneficially owned by them.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the acquisition of the Company by the Holding Company,
the Company entered into Employment Agreements with each of Mr. Frank Marfino,
the President and Chief Executive Officer of the Company, Mr. Todd Pluymers, the
Chief Financial Officer of the Company, Mr. Lynn Shallcross, the President of
the Cost Cutters division of the Company, Mr. William Gilligan, the Vice
President-- Distribution of the Company and Mr. Barrie Levine, the Vice
President--Pharmacy Operations of the Company. In March 1998, the Company
entered into an Employment Agreement with Mr. Michael Quinn, Vice
President--Merchandising of the Company. See "Executive Compensation--Employment
Agreements."
The holders of a substantial majority of the outstanding Common Stock have
also entered into a Stockholder Agreement pursuant to which such stockholders
agreed (i) to vote their shares of Common Stock in favor of a specified size and
composition of the respective Boards of Directors of the Holding Company and the
Company, (ii) not to transfer shares of Common Stock in violation of such
Stockholder Agreement, (iii) to consent to and participate in certain sales of
the Holding Company approved by the Board of Directors of the Holding Company
and holders of a majority of the Common Stock held by each of BancBoston and
Harvest and certain transferees and (iv) not to vote in favor of, or permit the
Board of Directors of the Holding Company to vote in favor of, certain actions
relating to corporate governance, including the borrowing of money, the payment
of dividends and the making of any guarantees of obligations of other persons,
not approved by BancBoston and Harvest. See "Directors and Executive Officers."
The Company is also bound by Management Fee Agreements each dated as of
January 30, 1995 (as amended, the "Management Fee Agreements"), pursuant to
which the Company is required to pay an annual fee of $125,000 to each of
BancBoston and Harvest Partners, Inc., an affiliate of Harvest, in consideration
for certain management services provided by such entities in connection with the
administration of the Company's business. These services include providing
advice and administrative oversight with respect to the Company's business
direction and policy in the promotion, development and operation of the
Company's business. The Company's obligations under the respective Management
Fee Agreements shall continue so long as BancBoston or Harvest, as the case may
be, owns any shares of capital stock of the Holding Company. Payments under the
Management Agreements will constitute "Permitted Payments" under the Indenture.
Banque Paribas, the agent for the Company's previous credit facility, holds
a presently exercisable warrant (the "Paribas Warrant") to purchase 16,667
shares of Common Stock and Paribas Principal, Inc. ("Paribas Principal"), an
affiliate of Banque Paribas, holds 40,000 shares of Common Stock. The Company
repaid all amounts outstanding under its previous credit facility with a portion
of the proceeds of the
66
<PAGE>
Offering and terminated this credit facility simultaneously with the closing of
the sale of the Senior Notes. After the consummation of the sale of the Senior
Notes, Paribas Principal continued to hold 40,000 shares of Common Stock, and
the Paribas Warrant remains outstanding. In connection with the payment of the
Dividend, Banque Paribas and Paribas Principal received approximately $1.66
million and $4.0 million, respectively.
The Holding Company, BancBoston, Harvest, Banque Paribas, Paribas Principal,
Harvest Technology Partners, L.P., European Development Capital Corporation
N.V., Deutsche Beteiligungsgesellschaft mbH, Frank Marfino and certain other
stockholders of the Holding Company are party to a Registration Rights
Agreement, dated as of January 30, 1995, pursuant to which the Holding Company
granted the other parties thereto piggy-back registration rights with respect to
their shares of Common Stock subject to certain limitations in the event of an
underwritten offering, and certain demand registration rights which are
exercisable during certain periods after the initial public offering of the
Common Stock. In addition, if the Holding Company has not completed an initial
public offering of its Common Stock prior to January 30, 2003, the holders of a
majority of the securities initially issued to Banque Paribas and Paribas
Principal are permitted to cause the Holding Company to effect such an initial
public offering pursuant to the terms of the Registration Rights Agreement.
The Company paid a dividend of approximately $45.0 million to the Holding
Company out of the proceeds of the sale of the Senior Notes. The Holding Company
paid the Dividend to its shareholders, including management and certain
employees of the Company, BancBoston and Harvest. Messrs. Marfino, Shallcross,
Pluymers, Gilligan and Levine received approximately $3.6 million, $578,000,
$442,000, $436,000 and $142,000, respectively, and BancBoston, Harvest, Harvest
Technology Partners, L.P. and European Development Capital Corporation N.V.
received approximately $15.9 million, $5.2 million, $1.8 million and $1.4
million, respectively, from the Dividend.
The Company paid one-time performance-related bonuses of approximately $1.2
million and $200,000 to Mr. Marfino and Mr. Pluymers, respectively, in fiscal
1998. These bonuses were paid pursuant to a commitment made by the Board of
Directors of the Company in October 1997 to grant bonuses to these officers in
such amounts in consideration of the contributions made by such officers to the
growth and success of the Company over the period since its acquisition in
January 1995.
On October 16, 1997, the Holding Company issued amended and restated
Subordinated Notes in the same principal amounts to the original holders thereof
in connection with the issuance of the Original Notes and the Holding Company's
Guarantee of such Notes. These Subordinated Notes were reissued in order to
expressly provide for the subordination of the Holding Company's obligations
thereunder to the obligations of the Holding Company under the Indenture,
including its guarantee of the Senior Notes. No officers or directors of the
Company or the Holding Company hold any Subordinated Notes, although the
following 5% or greater shareholders of the Holding Company hold Subordinated
Notes in the following original principal amounts:
<TABLE>
<CAPTION>
NOTEHOLDER: PRINCIPAL AMOUNT:
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
BancBoston..................................................................................... $ 5,753,890
Harvest........................................................................................ 1,889,970
Harvest Technology Partners, L.P. ............................................................. 643,210
European Development Capital Corporation, N.V. ................................................ 505,286
DBG Auslands-Holding GmbH...................................................................... 2,641,821
Paribas Principal.............................................................................. 1,400,000
</TABLE>
67
<PAGE>
PART IV.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation, as amended, of CDI Group, Inc. (the "Holding Company").*
3.2 By-laws of the Holding Company.*
3.3 Certificate of Incorporation, as amended, of Community Distributors, Inc. (the "Company").*
3.4 Amended and Restated By-laws of the Company.*
4.1 Indenture, dated as of October 16, 1997, by and among the Company, the Holding Company and the Bank of
New York, as Trustee.*
4.2 Form of the Company's 10 1/4% Senior Notes due 2004.*
10.1 Investor Securities Purchase Agreement, dated as of January 30, 1995, by and among the Holding Company,
BancBoston Ventures Inc. ("BBV"), Harvest Partners International, LP ("HPI"), Harvest Technology
Partners, LP ("HPT"), European Development Capital Corporation N.V. ("EDCC") and Deutsche
Beteiligungsgesellschaft mbH ("DBMBH", and together with BBV, HPI, HTP, EDCC and DBMBH, the
"Investors"), as amended by that certain First Amendment to Securities Purchase Agreement, dated as of
October 16, 1997, by and among the Holding Company and the Investors.*
10.2 Purchase Agreement, dated as of October 10, 1997, by and among the Company, the Holding Company, DLJ and
BSC.*
10.3 Form of Holding Company's Amended and Restated Senior Subordinated Note due 2005.*
10.4 Exchange Agency Agreement, dated as of February 13, 1998, among the Exchange Agent, the Holding Company
and the Company.*
10.5 Stockholder Agreement, dated as of January 30, 1995, by and among the Holding Company, the Investors,
PPI, TAH, Tietbohl, Frank Marfino and any other officer, employee or director of the Holding Company who
becomes a party thereto by executing an Instrument of Accession in the form of Schedule thereto and each
other Person who becomes a part thereto by executing an Instrument of Accession (collectively, the
"Stockholders"), as amended by that certain First Amendment to Stockholder Agreement, dated as of
October 16, 1997, by and among the Holding Company with the Stockholders.*
10.7 Company Stock Purchase Warrant, dated as of January 30, 1995, issued by the Holding Company to the Bank,
as amended by that certain Amendment of Common Stock Purchase Warrant, Acknowledgment and Waiver, dated
as of September 30, 1997, by and between the Company and the Bank.*
10.8 Loan and Security Agreement, dated as of October 16, 1997, by and between PNC Bank, National Association
and the Company.*
10.9 The Company's $20,000,000 Revolving Loan Note, dated as of October 16, 1997.*
10.10 Lease Agreement, dated as of May 15, 1995, by and between 105 Sylvania Place, L.L.C. and the Company
(South Plainfield, New Jersey).*
10.11 Lease Agreement, dated as of May 5, 1998, by and between JAM Realty Company and the Company (Branchburg
Township (Somerville), New Jersey).*
10.12 Sublease Agreement, dated as of May 20, 1998, between Mitsubishi Electronics America, Inc. and Community
Distributors, Inc. (Somerset, New Jersey).
10.13 Letter Agreement, dated as of October 16, 1997, by and between the Company and Frank Marfino regarding
bonus payment.*
10.15 Letter Agreement, dated as of October 16, 1997, by and between the Company and Todd H. Pluymers
regarding bonus payment.*
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges for the Company.
12.2 Statement re: Computation of Ratio of Earnings to Fixed Charges for the Holding Company.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
21.1 List of Subsidiaries of CDI Group, Inc.*
23.1 Consent of PricewaterhouseCoopers, LLP with respect to the financial statements of the Company
23.2 Consent of PricewaterhouseCoopers, LLP with respect to the financial statements of the Holding Company
24.1 Power of Attorney (included in signature page to Form 10-K).
27.1 Financial Data Schedule.
II.1 Community Distributors, Inc. Summary of Valuation and Qualifying Accounts
II.2 CDI Group, Inc. Summary of Valuation and Qualifying Accounts
</TABLE>
- ------------------------
* Incorporated by reference to the same numbered exhibit to the Registrants'
Registration Statement No. 333-41281, on Form S-4, filed by the Registrants
with respect to $80,000,000 aggregate principal amount of the Company's
10 1/4% Senior Notes due 2004, Series B.
(b) All schedules other than Schedule 27, the Financial Data Schedule, and
Schedule II, Summary of Valuation and Qualifying Accounts, have been omitted
because either they are not required, are not applicable, or the information
is otherwise set forth in the Consolidated Financial Statements and notes
thereto.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the Registrants has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized as of October
23, 1998.
<TABLE>
<S> <C> <C>
COMMUNITY DISTRIBUTORS, INC.
By: /s/ FRANK MARFINO
-----------------------------------------
Frank Marfino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CDI GROUP, INC.
By: /s/ FRANK MARFINO
-----------------------------------------
Frank Marfino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
S-1
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Frank Marfino and
Todd H. Pluymers, and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with the authority to execute in the
name of each such person, including exhibits thereto and other documents
therewith, any and all amendments to this Annual Report on Form 10-K necessary
or advisable to enable the Report to comply with the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof which
amendments may make such other changes in the Report as the aforesaid
attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ FRANK MARFINO Officer and Director of
- ------------------------------ Community Distributors, October 23, 1998
Frank Marfino Inc. and CDI Group, Inc.
/s/ MARK H. DEBLOIS Director of Community
- ------------------------------ Distributors, Inc. and October 20, 1998
Mark H. DeBlois CDI Group, Inc.
/s/ HARVEY P. MALLEMENT Director of Community
- ------------------------------ Distributors, Inc. and October 23, 1998
Harvey P. Mallement CDI Group, Inc.
Chief Financial Officer of
Community Distributors,
/s/ TODD H. PLUYMERS Inc. and CDI Group, Inc.
- ------------------------------ (principal financial and October 19, 1998
Todd H. Pluymers accounting officer of
each entity)
</TABLE>
S-2
<PAGE>
EXHIBIT 10.12
EXHIBIT A
SUBLEASE AGREEMENT
This Sublease Agreement is made as of the 20th day of May 1998 by and
between Mitsubishi Electronics America, Inc., a Delaware corporation located at
5665 Plaza Drive, Cypress, California 90630 (the "Sublessor"), and Community
Distributors, Inc., a Delaware corporation located at 251 Industrial Parkway,
Somerville, NJ 08876 (the "Sublessee").
WHEREAS, Sublessor is the tenant under a lease dated as of December 20, 1988
(the "Prime Lease"), made between Shuwa Investments Corporation as landlord and
Mitsubishi Electric Sales America, Inc., Sublessor's predecessor (Sublessor
absorbed its predecessor sister company by merger), as assigned by such landlord
to FWD Property Investors L.P. ("Overlandlord"), leasing office and warehouse
facilities located at 800 Cottontail Lane, Somerset, NJ 08873 (the "Premises");
and
WHEREAS, Sublessor and Sublessee have agreed that Sublessor shall sublet the
Premises to Sublessee;
NOW, THEREFORE, the parties to this Sublease hereby agree as follows:
1. Premises.
(a) Sublessor hereby leases to Sublessee, and Sublessee hereby leases
from Sublessor, the Premises upon all the terms and conditions set forth in
this Sublease, subject to Overlandlord's consent thereto and written
confirmation that Sublessor is not in breach under the Prime Lease.
(b) The Premises situated in Franklin Township, New Jersey, consist of
the real property described or Exhibit A hereto and the building and
improvements located thereon, including 200,723 square feet of industrial
warehouse space and office space on some 22 acres of land.
(c) Sublessee has made its independent investigation of the Premises.
Sublessee acknowledges that Sublessor has not made any representations
regarding the condition of the Premises (including, but not limited to, the
zoning thereof, the appurtenances thereto or the furniture, fixtures and
equipment therein) and that Sublessor expressly disclaims all warranties,
including but not limited to habitability, merchantability and fitness for
particular purpose. Subject to the provisions of Subsection 3(a) hereof,
Sublessee hereby accepts the Premises in their "as is" condition as of the
date Sublessor makes the Premises available to Sublessee to commence
Sublessee's improvements and waives any and all claims against Sublessor for
latent and patent defects in the Premises or any part thereof. Sublessee
shall not make any alteration, addition or improvement to the Premises
without Sublessor's prior written consent in each instance, and when and as
required under the Prime Lease, the Overlandlord's consent Sublessor's prior
written consent shall not be unreasonably withheld.
(d) Sublessor's represents to Sublessee that, to the best of Sublessor's
knowledge, information and belief, there are no current code violations on
the Premises and improvements thereon.
2. Term.
(a) The Sublease shall commence on the date Sublessor makes the Premises
available to Sublessee to commence its improvements on the Premises, but in
no event later than ninety (90) days after execution of this Sublease
Agreement (the "Sublease Commencement Date"). Once determined, the Sublease
Commencement Date shall be confirmed in writing between the parties and
attached to this Sublease as Exhibit B. The Sublease Commencement Date may
be in accordance with a mutually agreed upon schedule gradually releasing
portions of the Premises to Sublessee. In any event, the Sublease
Commencement Date shall be subject to approval by Overlandlord and both
parties.
<PAGE>
(b) The term of this Sublease shall commence on the Sublease
Commencement Date and shall end on March 31, 2004, unless sooner terminated
in accordance with this Sublease.
3. Rent.
(a) Throughout the term of this Sublease, Sublessee shall pay to
Sublessor as "Base Rent" for the Premise; monthly payments as shown on the
Rent Schedule attached as Exhibit C hereto. The Base Rent shall be due and
payable without any offset or deduction, in advance, on the first day of
each calendar month.
(b) The Base Rent shall be on a triple net basis and shall not include
any costs and expenses associated with the Premises and the operation of the
building and improvements thereon (the "Operations Expenses"). All
Operations Expenses shall be the sole responsibility of Sublessee.
(c) In addition to the Base Rent and the Operation Expenses, Sublessee
shall pay all personal property and real estate taxes, assessments, fees and
other charges that are levied and assessed against Sublessee's property
and/or the Premises on a timely basis directly to the taxing authority and
shall furnish Sublessor (and Overlandlord as may be required under the Prime
Lease) with satisfactory evidence of such payments. Sublessee shall
indemnify and hold Sublessor and Overlandlord harmless from and against any
costs, expenses, penalties and fees (including reasonable attorneys' fees)
arising out of or in connection with Sublessee's failure to make such
payments.
(d) Should any rental period during the term of this Sublease not
consist of a full month, rent shall be prorated. All rent shall be payable
to Sublessor at its address stated in this Sublease or as Sublessor may
otherwise direct in writing.
4. First Month Rent. No later than ten (10) days after the execution of this
Sublease, Sublessee shall pay to Sublessor, the first month Base Rent as a
deposit to be applied by Sublessor as such when due without any interest
accruing or payable to Sublessee. Such deposit shall be nonrefundable unless
Sublessor fails to deliver to Sublessee Overlandlord's consent to this Sublease
and Overlandlord's written confirmation that Sublessor is not in breach of the
Prime Lease.
5. Sublessee's Interior Improvements.
(a) When Sublessor vacates the Premises, it shall clean up the Premises
from its occupancy. At that time Sublessor will leave within the Premises
such portion of its existing work stations, partitions, furnishings,
furniture and other personal property as shall be set forth in Exhibit "E"
attached hereto. All such leftover property shall be available for use by
Sublessee throughout the term of this Sublease on an "as is" basis and
Sublessee shall leave them on the Premises at the termination or expiration
of this Sublease in the same condition as it was at the inception of this
Sublease, reasonable wear and tear excepted. The Premises shall be made
available to Sublessee to commence Sublessee's improvements at the earliest
practicable date convenient to Sublessor.
(b) Subject to Sublessor's approval which shall not be unreasonably
withheld and, when and if required under the Prime Lease, the approval of
the Overlandlord, Sublessee may remove interior building improvements
presently in place at the Premises. Such removal shall be performed at
Sublessee's sole expense.
(c) Sublessee shall submit to Sublessor its plan for improvements of the
Premises no later than thirty (30) days after the Sublease Commencement
Date. In such plan, Sublease shall designate the improvements which it
intends to become permanent. Such plan shall be subject to Sublessor's and,
when and as required by the Prime Lease, Overlandlord's review and approval.
Sublessor's approval shall not be unreasonably withheld. All costs
associated with Sublessee's improvements shall be borne by Sublessee.
Sublessee shall be responsible for any damage and/or loss to or within the
Building, including the Premises, and for any personal injury, death or
other property damage resulting from or incurred in connection with
Sublessee's improvements and shall indemnify, defend and hold harmless
Sublessor and Overlandlord from and against all losses, costs, damages and
expense incurred.
<PAGE>
(d) Upon expiration or termination of this Sublease, Sublessee's
improvements which were intended to become permanent shall remain installed
at the Premises and become the property of Sublessor or Overlandlord, as
applicable. Sublessee may remove its other improvements; provided that it
restores the Premises to their prior condition upon such removal.
(e) Sublessor shall allow Sublessee to utilize the existing telephone
system on the Premises on an "as is" basis. Sublessee shall leave it on the
Premises at the expiration or termination of this Sublease in at least as
good a condition as it was at the inception of this Sublease, reasonable
wear and tear excepted.
6. Possession and Use.
(a) Sublessee shall use and occupy the Premises only for such purposes
as are permitted under the Prime Lease and for no other purpose.
(b) Sublessee shall not commence operation of its business on the
Premises unless and until Sublessee has complied with all applicable
building codes, health and safety codes, regulations and ordinances
applicable to Sublessee's use and occupancy of the Premises or Sublessee's
business. Nor shall Sublessee use or suffer or permit any person to use the
Premises or any part thereof in violation of any law or regulation of any
governmental authority having jurisdiction over the Premises, and Sublessee
shall at all times occupy and use the Premises solely for their intended
purposes. Sublessee shall indemnify, defend and hold harmless Sublessor.
Overlandlord, their corporate affiliates and their officers, directors,
shareholders, agents, representatives, contractors and employees from and
against the consequences of any violation of such laws, regulations, codes,
ordinances or of any provision of this section.
(c) Sublessee shall keep and maintain the Premises in a clean and
sanitary condition and in such condition as may be required by any insurance
underwriters or carriers maintaining coverage on the Premises. Sublessee
shall not use or permit the Premises to be used in any manner which would
impair the structural integrity, safety or strength of any buildings or
improvements on the Premises. Sublessee shall not conduct or operate its
business in any manner whatsoever which would violate any such conditions
nor conduct or operate its business so as to constitute a waste on the
Premises or a nuisance to or interference with the Premises.
(d) Sublessee shall not do or permit to be done any hazardous activities
and shall comply with all rules, orders, regulations and requirements of
industrial risk insurers or any other organization performing a similar
function. Sublessee shall in no event store or use explosives, toxic waste
or radioactive materials at the Premises. Sublessee, shall not dispose of
any solvents by pouring them on the ground or dispose of solvents (treated
or untreated) or other hazardous materials in violation of the rules or
regulations promulgated by any governmental agency or utility having
jurisdiction over the sewer system servicing the Premises.
(e) Sublessee shall pay, at least ten days before delinquency, all
taxes, assessments, license fees and other charges that are levied or
assessed against Sublessee's personal property installed or located in or on
the Premises and that become due during the term of this Sublease. On demand
by Sublessor, Sublessee shall furnish Sublessor with satisfactory evidence
of these payments.
(f) Sublessee shall keep the Premises free from any liens arising out of the
work performed, materials furnished or obligations incurred by or for the
benefit of Sublessee, including but not limited to its improvements on the
Premises. Notwithstanding the foregoing, should any such lien arise, Sublessee
shall file, within ten (10) days, an appropriate bond to remove such lien or
post other security acceptable to Sublessor.
7. Prime Lease.
(a) This Sublease is subject and subordinate to the Prime Lease. Sublessor
represents to Sublessee that the Prime Lease is in full force and effect and
that, to the best of its knowledge, no default exists on the part of any party
to the Prime Lease. Sublessor shall pay to Overlandlord all rent due under the
Prime Lease. Sublessee acknowledges that an expurgated copy of the Prime Lease
is attached as Exhibit D.
<PAGE>
Sublessee shall neither do nor permit anything to be done which could cause the
Prime Lease to be terminated or forfeited by reason of any right of termination
or forfeiture reserved or vested in the Overlandlord or which otherwise
constitutes a breach or default of the tenant's obligation under the Prime
Lease, and Sublessee shall indemnify, defend and hold harmless Sublessor, its
corporate affiliates and their officers, directors, shareholders, agents,
representatives, contractors and employees from and against all claims of any
kind whatsoever by reason of any breach or default on the part of Sublessee by
reason of which the Prime Lease may be terminated or forfeited or by virtue of
which Sublessor shall have any liability or obligation to Overlandlord or any
third party.
(b) The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Prime Lease, except for (1) those provisions of the Prime Lease which may be
inconsistent with this Sublease, in which case the terms and conditions of this
Sublease shall control, and (2) those provisions of the Prime Lease which are
excluded from the expurgated version provided to Sublessee. Therefore, for the
purpose of this Sublease, whenever in the Prime Lease the word Lessor is used,
it shall be deemed to mean Sublessor, and whenever in the Prime Lease the word
Lessee is used it shall be deemed to mean Sublessee. Notwithstanding the
foregoing, all rights of Overlandlord under the Prime Lease with regard to
access to the Premises or notice or consent with respect thereof shall remain
valid under this Sublease.
(c) Sublessee shall defend, indemnify and hold harmless Sublessor,
Overlandlord and their respective corporate affiliates, officers, directors,
shareholders, agents, representatives, contractors and employees from and
against all claims of any kind whatsoever arising out of or in connection with
Sublessee's failure to comply with or perform Sublessee's assumed obligations
pursuant to subsection 7(b).
8. Insurance and Indemnity.
(a) At it sole cost and expense, Sublessee shall at all times that this
Sublease is in effect carry and maintain the following insurance, with a
financially sound and reputable insurance carrier(s) acceptable to Sublessor,
and to Overlandlord if required under the Prime Lease, in the amounts specified
and in the form hereinafter provided for:
(i) Comprehensive general liability insurance insuring Sublessor and
Sublessee, and Overlandlord as required under the Prime Lease, with respect
to occurrences arising on or about the Premises, and covering personal
injury, death and property damage with a single combined limit of not less
than five million dollars ($5,000,000), against any and all liability of
Sublessee and its authorized representatives with respect to the Premises or
arising out of the maintenance, use or occupancy thereof, by Sublessee or
any of its employees, agents, guests or invitees or the performance or
non-performance by Sublessee of the terms and conditions of this Sublease;
and
(ii) All risk insurance including earthquake and flood coverage, with
vandalism and malicious mischief endorsement coverages, on all of
Sublessee's personal property and Improvements in, on or about the Premises
to the extent of at least 100% of their full replacement value. The proceeds
from any such policy shall be used by Sublessee for the replacement of
personal property and restoration of Sublessee's improvements; and
(iii) Sublessor, and Overlandlord as required under the Prime Lease,
shall be named as an additional insured in all such insurance policies and
coverages.
(b) Sublessee shall cause its insurer to waive all rights of recovery by way
of subrogation against Sublessor and Overlandlord in connection with any damages
covered by any such insurance policies and coverages as set forth in this
section. On or before the Sublease Commencement Date, Sublessee shall furnish to
Sublessor and Overlandlord and maintain continuously throughout the term of this
Sublease certificates of insurance as evidence of Sublessee's compliance with
its insurance obligations contained in this section.
(c) Each policy of insurance required to be provided by Sublessee under this
section and each certificate therefor shall (i) provide for at least thirty (30)
days' written notice to Sublessor and Overlandlord prior to cancellation,
expiration, reduction of coverage or other material modification; and
<PAGE>
(ii) provide that no act or omission of Sublessee shall result in forfeiture or
limit or otherwise affect the obligation of the insurance company to pay to or
on behalf of Sublessor the amount of any loss sustained. Sublessee shall not do
or permit to be done anything which shall invalidate any of the insurance
policies referred to in this Sublease. If Sublessee shall fail to procure and
maintain any insurance required to be maintained by it by virtue of any
provision of this section, Sublessor may, but shall not be required to, procure
and maintain such insurance at the expense of Sublessee, and the cost thereof
shall constitute Additional Rent.
(d) Neither Sublessor, any of its corporate affiliates, Overlandlord nor any
of their respective officers, directors, shareholders, agents, representatives,
contractors and employees shall be liable for any damage or liability of any
kind or for any injury to or death of any persons or damage to any property of
Sublessee or any other person during the term of this Sublease from any cause
whatsoever by reason of the use, occupancy and enjoyment of the Premises by
Sublessee or any person thereon or holding under Sublessee. Sublessee shall
indemnify, defend and hold harmless Sublessor, its corporate affiliates,
Overlandlord and their respective officers, directors, shareholders, agents,
representatives, employees and contractors from and against all liability
whatsoever on account of any asserted damage or injury and from all liens,
claims and demands arising out of any such use of this
Premises, any improvements, repairs or alterations which Sublessee may make
or cause to be made upon the Premises or the performance or non-performance by
Sublessee of any of the terms and conditions of this Sublease, except to the
extent determined to have been caused by Sublessor's negligence. This obligation
to indemnify shall include, without limitation, claims of Sublessee's employees
or agents that may be covered by Worker's Compensation Insurance and all costs,
and expenses, including, without limitation, attorneys' fees and costs, and all
other losses, costs, damages, expenses and liabilities that Sublessor may incur
in connection with any such damage, injury, claim or demand.
(e) Sublessee acknowledges that its business on the Premises will be
conducted for Sublessee's sole economical benefit. All risks of Sublessee's
operation at the Premises shall be borne exclusively by the Sublessee. Sublessee
hereby assumes and shall be liable for, and shall indemnify, defend and hold
harmless Sublessor, Sublessor's corporate affiliates, Overlandlord and their
respective officers, directors, shareholders, agents, representatives,
contractors and employees (the "Indemnitees") in connection with any and all
losses, costs, damages, expenses and liabilities, including attorneys' fees and
costs, liens, fines and penalties of any kind or nature, civil or criminal, and
special, indirect and consequential damages (collectively "Losses"), associated
with Sublessee's business operation at the Premises and any permits and licenses
which may be required therefor. Sublessee hereby releases the Indemnitees from
any and all Losses arising out of or associated with Sublessee's use of the
Premises and any permits and licenses which may be required therefor.
9. Environmental Obligations. Except with respect to and to the extent of any
environmental condition, obligation or liability existing at the Premises before
the earlier of the Sublease Commencement Date or the commencement of
construction of Sublessee's improvements, Sublessee hereby assumes any and all
environmental obligations and liabilities in connection with the Premises with
the understanding that such obligations and liabilities shall survive this
Sublease with respect to any negligent, wrongful or illegal act or omission of
Sublessee or violation of any condition of or agreement under this Sublease
binding on Sublessee. For purposes hereof, Sublessee's environmental obligations
and liabilities shall include, but not be limited to, all disposal storage,
recycling, transport and treatment of any hazardous substances, toxic
substances, wastes or regulated substances or material under any applicable
federal, state or local law or the reporting and disclosure requirements in
connection therewith. Sublessee shall indemnify, defend and hold harmless
Sublessor, Sublessor's corporate affiliates, Overlandlord and their respective
officers, directors, shareholders, agents, representatives, contractors and
employees from and against any and all losses, costs, damages and expenses
including attorneys' fees and costs arising from or in connection with or in any
manner related to such environmental obligations and liabilities.
10. Americans With Disabilities Act. Notwithstanding anything to the contrary
contained in this Sublease, Sublessee shall comply with any and all applicable
requirements of the Americans with Disabilities Act pertaining to the Premises
at Sublessee's sole cost and expense.
<PAGE>
11. Assignments and Subletting. Except as otherwise permitted below, Sublessee
shall not transfer, assign, sublet, hypothecate, sell, change ownership or
otherwise divest itself of any or all of its interest in and to the Premises or
this Sublease and shall not permit Sublessee's interest in this Sublease to be
vested in any third party by operation of law or otherwise. Notwithstanding the
foregoing, Sublessee may, subject to Overlandlord's approval as per the Prime
Lease, assign this sublease or sublet all or any portion thereof to a parent,
subsidiary or affiliated company of Sublessee, or to any resulting entity
following a merger or consolidation of Sublessee with another company. A
transfer, sale or hypothecation of Sublessee's stock shall not constitute an
assignment or sublease. In the event of any assignment or sublet, Sublessee
shall not be relieved of any liability under this sublease and all the
provisions of this sublease shall be binding upon the assignee or sub-sublessee.
12. Eminent Domain
(a) In the event that all or substantially all of the Premises are taken or
made unaccessible under the power of eminent domain, this Sublease shall
terminate as of the date possession is so taken. If more than twenty percent
(20%) of Premises are taken, Sublessee shall have the right to terminate this
Sublease. If this Sublease is terminated, all rents shall be paid up to the date
of possession of the Premises by public authority, and Sublessor shall make an
equitable refund of any rent paid by Sublessee in advance and not yet earned.
(b) In the event that any taking under the power of eminent domain does not
result in the termination of this Sublease a set forth above, this Sublease
shall remain in full force and effect, except that the rent shall be reduced in
the same proportion as the square footage of the Premises taken bears to the
square footage of the Premises immediately prior to such taking.
(c) All consideration or damages awarded for any taking under the power of
eminent domain and all consideration received by Sublessor pursuant to a
voluntary sale by Sublessor to any public or quasi-public body, agency or
person, corporate or otherwise, having the power of eminent domain, either under
threat or condemnation or while condemnation proceedings are pending, whether
for the whole or a part of the Premises, shall belong to and be the property of
Sublessor (or Overlandlord as determined under the Prime Lease) regardless of
how denominated. However, Sublessee shall be entitled to retain any compensation
for loss or damage to Sublessee's trade fixtures and removable property.
13. Default.
(a) Any of the following events shall constitute a default of this Sublease
by Sublessee:
(i) Failure of Sublessee to pay any rent or any other charge, or any
part thereof, required to be paid under this Sublease when due; or
(ii) Failure of Sublessee to observe or perform any other provision,
covenant, obligation or condition of this Sublease to be observed or
performed by Sublessee when such failure continues for ten (10) days after
notice thereof from Sublessor to Sublessee: or
(iii) Abandonment or vacation of the Premises by Sublessee; or
(iv) A general assignment by Sublessee for the benefit of creditors or
the filing by or against Sublessee of any proceeding under an insolvency or
bankruptcy law, unless, in the case of a proceeding filed against Sublessee,
such proceeding is dismissed within thirty (30) days, the appointment of a
trustee or receiver to take possession of all or substantially all of the
assets of Sublessee, unless possession is restored to Sublessee within
thirty (30) days, or any attachment, execution or other judicially
authorized seizure of all or substantially all of Sublessee's assets located
upon the Premises or of Sublessee's interest in this Sublease, unless such
seizure is discharged within thirty (30) days.
(b) In the event of any such default by Sublessee, in addition to any other
remedies available to Sublessor at law or in equity, Sublessor may treat the
occurrence of any one or more of said events as a breach of this Sublease. In
such event, in addition to any or all other rights or remedies Sublessor may
have under this Sublease and as provided by law, Sublessor shall have the right
to declare the term of this
<PAGE>
Sublease ended and to re-enter the Premises and take possession thereof and
remove all persons therefrom and Sublessee shall have no further claim thereon
or thereunder.
(c) Should Sublessor elect to terminate this Sublease under this section,
Sublessor may recover from Sublessee as damages:
(i) The worth at the time of award of any unpaid rent which had been
earned at the time of such termination, plus
(ii) The worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the time of award
exceeds the amount of such rental loss, if any, that Sublessee proves could
have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount
of such rental loss, if any, that Sublessee proves could be reasonably
avoided; plus
(iv) Any other amount necessary to compensate Sublessor for all the
detriment proximately caused by Sublessee's failure to perform its
obligations under this Sublease or which in the ordinary course of events
would be likely to result therefrom, including but not limited to any
attorneys' fees and costs incurred by Sublessor as a result of or in
connection with (1) such failure or with the enforcement of any term or
condition contained in this Sublease. (2) any cost and expenses incurred by
Sublessor in maintaining or preserving the Premises after such default or
preparing the Premises for reletting to a new tenant and (3) any repairs or
alterations to the Premises for such reletting, leasing commissions or any
other costs and expenses necessary or appropriate to relet the Premises;
plus
(v) At Sublessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
law.
As used in clauses (i) and (ii) above, the "worth at the time of award" is
computed by allowing interest at the maximum rate permissible. As used in clause
(iii) above, the "worth at the time of award" is computed by discounting such
amount at the discount rate of the Federal Reserve Bank at the time of award
plus 1%.
(d) Notwithstanding anything to the contrary contained in this Sublease, in
the event of default, Sublessor may, but shall not be obligated to, require that
all articles of personal property, other than inventory, and all business and
trade fixtures, machinery and equipment, furniture and movable partitions owned
by Sublessee or installed by Sublessee on the Premises remain on the Premises,
and, in that event and continuing during the length of such default. Sublessor
shall have the rights, subject to the rights of prior lienholders, to take
possession of and hold such property as security, to store such property at
Sublessee's expense and, upon giving thirty (30) days' notice to Sublessee, to
cause such property to be sold at private or public sale and apply the net
proceeds of sale, after all costs and expenses of getting the property ready for
sale and selling the property, including attorney's fees and costs, against
Sublessee's obligations to Sublessor; provided that Sublessor may, at its
option, require Sublessee to forthwith remove such property.
(e) The remedies given to Sublessor in this section are cumulative and shall
be in addition and supplemental to all other rights or remedies which Sublessor
may have under the laws then in force.
14. Notices. Whenever under the terms of or in connection with this Sublease
any notice, approval, advice, consent or demand is proper or required to be
given or served by either party, such notice, approval, advice, consent or
demand shall be in writing and shall be given or served by recognized overnight
courier service, with all charges prepaid, addressed as follows:
if to Sublessor:
Mitsubishi Electronics America, Inc.
5665 Plaza Drive
P.O. Box 6007
Cypress, CA 90630
Attn: Executive Vice President/Administration
<PAGE>
with a copy to:
Mitsubishi Electric America, Inc.
5665 Plaza Drive
P.O. Box 6007
Cypress, CA 90630
Attn: Executive Vice President and General Counsel
if to Sublessee:
Community Distributors, Inc.
800 Cottontail Lane
Somerset, NJ 08873
Attn: Chief Executive Officer
with a copy to:
Goldstein & Wallman
233 Broadway Suite 970
New York, NY 10279
Attn: Jack Goldstein
or to such other address for either party as may be supplied by notice given in
accordance herewith. Notice shall be deemed effective on the date of receipt or
the date on which delivery is refused.
15. Sublessor's Access to Premises.
(a) In addition to any right of access to the Premises held by Overlandlord
under the Prime Lease, Sublessor shall have the right to enter and inspect any
portion of the Premises to assure compliance by Sublessee with Sublessee's
obligations under this Sublease. Such inspections shall be made during normal
business hours and upon reasonable notice except in the event of an emergency.
(b) In addition to such right to periodic inspection, Sublessor shall have
the right to enter the Premises as often as Sublessor reasonably deems
necessary, during normal business hours and upon reasonable notice, except in
the event of an emergency:
(i) to show the Premises to prospective subtenants;
(ii) to post notices of nonresponsibility;
(iii) in case of an emergency; and
(iv) to otherwise enforce Sublessor's rights under this Sublease.
(c) Sublessor's rights of entry pursuant to this section may be exercised
without Sublessor being deemed guilty of an eviction of Sublessee and without
abatement of rent. Sublessor shall not unreasonably interfere with the business
of Sublessee when exercising the right of entry under this Sublease and shall be
responsible only for damage caused by any unreasonable entry or negligent
conduct during the entry. Except as otherwise provided in this sublease,
Sublessee hereby waives any claim for damages for any injury or inconvenience to
or interference with Sublessee's business, any loss or occupancy or quiet
enjoyment of the Premises and any other loss occasioned thereby. Any entry to
the Premises by Sublessor pursuant to this section, shall not under any
circumstances be construed or deemed to be forcible or unlawful entry into or a
detainer of the Premises or an eviction of Sublessee from the Premises or any
portion thereof. No provision of the Sublease shall be construed as obligating
Sublessor to perform any repairs, maintenance or alterations to the Premises
unless they are necessitated by the acts of Sublessor.
16. Waiver. The waiver by Sublessor or Sublessee of any breach of any term,
covenant or condition contained in this Sublease shall not be deemed a waiver of
any subsequent breach of the same or any other term, covenant or condition
contained in this Sublease. Sublessor's consent to or approval of any of
Sublessee's conduct shall not be deemed to relieve Sublessee from obtaining
Sublessor's waiver, consent or approval of any similar act or subsequent breach
by Sublessee. Sublessor's acceptance of rent shall not be
<PAGE>
deemed to be a waiver of any prior breach by Sublessee of any term, covenant or
condition, except as to payment of the rent so accepted by Sublessor, regardless
of Sublessor's knowledge of such preceding breach at the time of acceptance of
such rent.
17. Broker. Sublessee and Sublessor each represent and warrant to the other
that neither has had any dealings with any person, firm, broker or finder in
connection with this Sublease, other than the Seeley Company and CB commercial,
and each party agrees to indemnify, defend and hold harmless the other party
from and against any and all liability, costs, expenses, including reasonable
attorneys' fees and costs, for compensation, commission or charges which may be
claimed by the indemnifying party's own broker identified herein or by any such
unnamed broker, finder or other similar party by reason of any dealings or
actions of the indemnifying party. Sublessor shall be responsible to pay for the
commission to the two above named brokers on a fifty/fifty basis in accordance
with the commission agreement between Sublessor and Seeley Company.
18. Quiet Enjoyment. Subject to Sublessee's compliance with the covenants
and agreements, terms, provisions and conditions of this Sublease, Sublessor
covenants that Sublessee shall quietly enjoy the Premises without interruption
by Sublessor.
19. Miscellaneous Provisions.
(a) All payment and indemnification obligations of Sublessee, shall survive
the expiration or termination of this Sublease. If Sublease fails to pay
Sublessor any amount payable under this Sublease when due, such amount shall
bear interest at the rate of one and one-half percent (1.5%) per month or the
highest rate permitted by law, whichever is less, from its due date until paid.
Sublessee shall pay Sublessor for all costs of collection, including attorneys'
fees and costs.
(b) Upon the expiration of earlier termination of this Sublease, Sublessee
shall quit or surrender the Premises to Sublessor "broom-clean" and in good
order, condition and repair, except for ordinary wear and tear and casualty
damage not caused by Sublessee, or any of its employees, invitees, guests,
agents or contractors.
(c) If Sublessee remains in possession of the Premises after the expiration
or earlier termination of this Sublease, Sublessee shall be deemed to be
occupying the Premises as a Sublessee from month to month at the sufferance of
Sublessor at 150% of the rental rate in effect at the time of such expiration or
termination, subject to all of the terms and conditions of this Sublease. The
foregoing is in addition to and does not affect Sublessor's right to entry or
any other rights of Sublessor under this Sublease.
(d) The language in all parts of this Sublease shall in all cases be
construed simply according to its fair meaning and not strictly for or against
either Sublessor or Sublessee.
(e) Captions and headings are for convenience only and shall not be used in
interpreting the terms and provisions of this Sublease.
(f) This Sublease contains all of the agreements of the parties with respect
to the subject matter of this Sublease, and no prior arrangement or
understanding pertaining to any such matter shall be effective for any purpose.
(g) This Sublease cannot be changed orally, but only in a writing duly
executed by the parties.
(h) The enforceability, interpretation and all other aspects of this
Sublease shall be governed by and construed according to the laws of the State
of New Jersey.
(i) Each party represents that it has full power and authority to enter into
and perform this Sublease and that the individual executing this Sublease on its
behalf has been duly authorized and empowered to enter into this Sublease on its
behalf.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of the date
specified on the first page hereof.
<TABLE>
<S> <C>
MITSUBISHI ELECTRONICS AMERICA, INC. COMMUNITY DISTRIBUTORS, INC.
By: BRUCE R. BRENIZER By: FRANK MARFINO
- -------------------------------------------- --------------------------------------------
Name: BRUCE R. BRENIZER Name: FRANK MARFINO
- -------------------------------------------- --------------------------------------------
Title: VP: HR. ADMIN. Title: PRES & CEO
- -------------------------------------------- --------------------------------------------
Date: 5-21-98 Date: 5-21-98
- -------------------------------------------- --------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 12.1
COMMUNITY DISTRIBUTORS, INC.
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JULY 28, JULY 26, JULY 25,
EARNINGS AVAILABLE FOR FIXED CHARGES 1996 1997 1998
- ----------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Income before income taxes................................................... $ 7,363 $ 9,779 $ 6,715
ADD
Interest expense............................................................. 3,998 3,018 6,848
Interest component of rent expense........................................... 2,624 2,811 3,057
----------- ----------- -----------
Income as adjusted........................................................... $ 13,985 $ 15,608 $ 16,620
----------- ----------- -----------
----------- ----------- -----------
Fixed Charges
Interest expense............................................................. $ 3,998 $ 3,018 $ 6,848
Interest component of rent expense........................................... 2,624 2,811 3,057
----------- ----------- -----------
Total Fixed Charges.......................................................... $ 6,622 $ 5,829 $ 9,905
----------- ----------- -----------
----------- ----------- -----------
Ratio of earnings to fixed charges........................................... 2.11 2.68 1.68
</TABLE>
<PAGE>
EXHIBIT 12.2
CDI GROUP, INC. & SUBSIDIARY
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
ENDED ENDED ENDED
JULY 28, JULY 26, JULY 25,
EARNINGS AVAILABLE FOR FIXED CHARGES 1996 1997 1998
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Income before income taxes....................................................... $ 6,035 $ 8,211 $ 5,040
ADD
Interest expense................................................................. 5,326 4,586 8,423
Interest component of rent expense............................................... 2,624 2,811 3,057
--------- --------- ---------
Income as adjusted............................................................... $ 13,985 $ 15,608 $ 16,520
--------- --------- ---------
Fixed Charges
Interest expense................................................................. $ 5,326 $ 4,586 $ 8,423
Interest component of rent expense............................................... 2,624 2,811 3,057
--------- --------- ---------
Total Fixed Charges.............................................................. $ 7,950 $ 7,397 $ 11,480
--------- --------- ---------
Ratio of earnings to fixed charges............................................... 1.76 2.11 1.44
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Community Distributors, Inc.:
We consent to incorporation by reference in the Registration Statement
Number 333-41281 on Form S-4 of Community Distributors, Inc. of our report dated
September 28, 1998, relating to the balance sheets of Community Distributors,
Inc. at July 26, 1997 and July 25, 1998, and the related statements of income,
cash flows, and stockholder's equity (deficit) for each of the years in the
three-year period ended July 25, 1998, which report appears in the July 25, 1998
annual report on Form 10-K of Community Distributors, Inc. and to our report
dated September 28, 1998 on the related financial statement schedule, which
report appears in the July 25, 1998 annual report on Form 10-K of Community
Distributors, Inc.
[LOGO]
PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 22, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the financial statements of Community Distributors, Inc. is
included on page 28 on this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 27 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
[LOGO]
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
CDI Group, Inc. and Subsidiary:
We consent to incorporation by reference in the Registration Statement
Number 333-41281 on Form S-4 of CDI Group, Inc. and Subsidiary of our report
dated September 28, 1998, relating to the consolidated balance sheets of CDI
Group, Inc. and Subsidiary at July 26, 1997 and July 25, 1998, and the related
statements of income, cash flows, and stockholders' equity (deficit) for each of
the years in the three-year period ended July 25, 1998, which report appears in
the July 25, 1998 annual report on Form 10-K of CDI Group, Inc. and Subsidiary,
and to our report dated September 28, 1998 on the related financial statement
schedule, which report appears in the July 25, 1998 annual report on Form 10-K
of CDI Group, Inc. and Subsidiary.
[LOGO]
PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 22, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of CDI Group, Inc. and
Subsidiary is included on page 43 on this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 42 of this form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
[LOGO]
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 28, 1998
<PAGE>
EXHIBIT 99.1
SCHEDULE II.1
COMMUNITY DISTRIBUTORS, INC.
SUMMARY OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
INVENTORY BEGINNING END
RESERVES OF YEAR ADDITIONS REDUCTIONS OF YEAR
- ------------------------------------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Fiscal 1998....................................................... $ 113,220 $ 0 $ (62,338) $ 50,882
Fiscal 1997....................................................... $ 108,779 $ 4,441 $ 0 $ 113,220
Fiscal 1996....................................................... $ 61,233 $ 47,546 $ 0 $ 108,779
</TABLE>
Note The Company has the demonstrated ability, based upon its contractual and
other relationships with its vendors, to recover virtually all of the
costs of excess, obsolete and damaged inventory upon return of such
inventory to its vendors.
<PAGE>
EXHIBIT 99.2
SCHEDULE II.2
CDI GROUP, INC.
SUMMARY OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
INVENTORY BEGINNING END
RESERVES OF YEAR ADDITIONS REDUCTIONS OF YEAR
- ------------------------------------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Fiscal 1998....................................................... $ 113,220 $ 0 $ (62,338) $ 50,882
Fiscal 1997....................................................... $ 108,779 $ 4,441 $ 0 $ 113,220
Fiscal 1996....................................................... $ 61,233 $ 47,546 $ 0 $ 108,779
</TABLE>
Note The Company has the demonstrated ability, based upon its contractual and
other relationships with its vendors, to recover virtually all of the
costs of excess, obsolete and damaged inventory upon return of such
inventory to its vendors.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK>0000774492
<NAME>COMMUNITY DISTRIBUTORS INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-27-1997
<PERIOD-END> JUL-25-1998
<CASH> 10,770
<SECURITIES> 0
<RECEIVABLES> 1,079
<ALLOWANCES> 0
<INVENTORY> 29,246
<CURRENT-ASSETS> 42,108
<PP&E> 16,544
<DEPRECIATION> 6,464
<TOTAL-ASSETS> 90,081
<CURRENT-LIABILITIES> 20,340
<BONDS> 80,000
0
0
<COMMON> 0
<OTHER-SE> (14,386)
<TOTAL-LIABILITY-AND-EQUITY> 90,081
<SALES> 248,242
<TOTAL-REVENUES> 248,242
<CGS> 173,648
<TOTAL-COSTS> 235,358
<OTHER-EXPENSES> 6,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,715
<INCOME-TAX> 3,678
<INCOME-CONTINUING> 3,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,067
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK>0000940727
<NAME>CDI GROUP, INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-27-1997
<PERIOD-END> JUL-25-1998
<CASH> 10,770
<SECURITIES> 0
<RECEIVABLES> 1,098
<ALLOWANCES> 0
<INVENTORY> 29,246
<CURRENT-ASSETS> 42,696
<PP&E> 16,544
<DEPRECIATION> 6,464
<TOTAL-ASSETS> 90,669
<CURRENT-LIABILITIES> 20,340
<BONDS> 98,517
1,279
0
<COMMON> 0
<OTHER-SE> (32,214)
<TOTAL-LIABILITY-AND-EQUITY> 90,669
<SALES> 248,242
<TOTAL-REVENUES> 248,242
<CGS> 173,648
<TOTAL-COSTS> 235,358
<OTHER-EXPENSES> 7,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,040
<INCOME-TAX> 3,109
<INCOME-CONTINUING> 1,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,931
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
