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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 31, 1999
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
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COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
(Exact Names of Registrants as Specified in Their Charter)
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DELAWARE 22-1833660
(State or other jurisdiction of 22-3349976
incorporation or organization) (I.R.S. Employer Identification No.)
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800 COTTONTAIL LANE, FRANKLIN TOWNSHIP, SOMERSET, NEW JERSEY 08873-1227
(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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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH 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. Yes /X/ No / /
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 29, 1999 was 1,000, and
the number of shares of the Common Stock, par value $.00001 per share of CDI
Group, Inc., outstanding as of October 29, 1999 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........................................... 11
Item 4. Submission of Matters to a Vote of Securityholders.......... 11
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Historical Financial Data.......................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrants......... 57
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 62
Item 13. Certain Relationships and Related Transactions.............. 64
PART IV
Item 14. Exhibits and Financial Statement Schedules.................. 67
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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
these areas. 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 49
drug and general merchandise stores under two separate formats, Drug Fair and
Cost Cutters. Of the Company's 49 stores, 27 have been opened since 1989 and all
of the remaining 22 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," "fiscal 1999" and "fiscal
2000" refer to the fiscal years ended or ending July 31, 1994, July 28, 1996,
July 26, 1997, July 25, 1998, July 31, 1999 and July 29, 2000, 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 32 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 1999, the Company's pharmacies (including six at Cost
Cutters locations) filled over 1.8 million prescriptions, an average weekly
volume of approximately 1,000 scripts per pharmacy, and pharmacy sales increased
24.2% over fiscal 1998. Currently, approximately 81.0% 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 58.8% of Drug Fair revenues in fiscal 1999. 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, six locations have pharmacies, two within the store and four
as separate Drug Fair storefronts adjacent to the store. 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 categories:
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 categories and the approximate percentage of
revenues attributable to such categories are described below.
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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 1999:
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PERCENTAGE OF FISCAL 1999
SALES BY CATEGORY
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CATEGORY: DRUG FAIR COST CUTTERS
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Pharmacy.................................................. 41.2% 7.7%
Health and Beauty Care and OTC Pharmaceuticals............ 15.7 22.2
Other Merchandise......................................... 9.2 12.7
Housewares................................................ 7.5 15.9
Stationery and Greeting Cards............................. 6.9 12.4
Candy, Food and Beverage.................................. 9.2 11.2
Seasonal and Promotional.................................. 6.6 12.0
Cosmetics................................................. 3.7 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 the applicable fiscal year, the Company's stores
generated net sales of $237.8 million in fiscal 1998 (from 41 stores), and
$255.0 million in fiscal 1999 (from 42 stores), an increase of 7.2%. 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 32-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 margins from 29.2% in fiscal 1994 to 31.8% in fiscal 1999. 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 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 1999, the Company's pharmacies filled over 1.8 million
prescriptions, representing an average weekly volume of approximately 1,000
scripts per pharmacy, and pharmacy sales increased 24.2% over fiscal 1998.
Currently, approximately 81.0% of prescription volume results from sales to
Third-
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Party Plan participants. The Company offers discounts on prescriptions to senior
citizens, who accounted for approximately 10.0% of prescription sales volume in
fiscal 1999.
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 five 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 58.8% of Drug Fair revenues in fiscal
1999. 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 selection of general merchandise similar to 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 6.6% of Drug Fair's revenues in fiscal 1999. 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 selections 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 20 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
non-pharmacy merchandise mix similar to that of Drug Fair, with more than a 90%
overlap in general merchandise, at prices generally 10%-15% lower than at Drug
Fair. Currently, two Cost Cutters locations house their own pharmacies, and the
Company has added Drug Fair pharmacies adjacent to four 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 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, Target 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
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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,
two Cost Cutters locations house their own pharmacies and the Company has Drug
Fair pharmacies as separate storefronts adjacent to four 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, over-the-counter ("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 K-Mart 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 26 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. The Company estimates the average circular program costs $155,000 to
produce and distribute to approximately 800,000 recipients, although in some
cases the cost is partially offset by co-op advertising rebates received from
featured suppliers.
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 49
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
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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 ten 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 an agreement with Neuman Distributors, Inc. ("Neuman") to supply
pharmaceuticals, health and beauty care, home health care and related products.
The term of the Company's supply agreement with Neuman (the "Neuman Agreement")
expires in November 2001. Pursuant to the terms of the Neuman Agreement, the
Company purchases pharmacy and health and beauty care products at a specified
discount to Neuman's Costs. The Company believes that Neuman's Cost (as defined
in the Neuman Agreement) is higher than Neuman's actual cost for the
pharmaceutical products it supplies because it does not reflect all discounts
that may be available to Neuman from its suppliers. Cardinal Health, Inc.
("Cardinal") serves as a secondary supplier for products that are not routinely
carried by or are out of stock at Neuman, 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 Neuman and/or Cardinal were unable
to do so. 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 1999.
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 the
JDA Software, Inc. ("JDA") Merchandise Management System, the Company's E-3
warehouse replenishment system and Lawson Associates payroll and general ledger
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.
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
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 49 stores through a
point-of-sale network, utilizing IBM Chain Sales 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 warehouse and to provide management with detailed information on
individual store operations on a daily basis.
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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 warehouse. 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 because
substantially all 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
$2.2 million, which was paid for out of the Company's operating cash flows
during fiscal years 1997, 1998 and 1999. During fiscal 1999, additional
expenditures were made for the following: $0.1 million for the upgrade to the
most recent version of the Lawson financial systems, including general ledger,
cost allocations, budgeting, payroll and human resources; $0.3 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
$0.2 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 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
effects 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 operating inefficiencies and 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 five
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
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
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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 center are also registered with the Federal Drug
Enforcement Administration, although no pharmaceuticals are stored in the
distribution center. 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 is obligated to observe certain rules and
regulations, and a violation of these 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) potential or actual reactions to
drugs, (ii) therapeutic appropriateness, (iii) over utilization, or
underutilization, (iv) appropriate use of generic drugs, (v) therapeutic
duplication, (vi) drug-disease contraindications, (vii) drug-drug interactions,
(viii) incorrect drug dosage or duration of drug treatment, (ix) drug-allergy
interactions, and (x) 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
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
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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.
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.
8
<PAGE>
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 became 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 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 October 15, 1999, the Company had approximately 1,800 employees of
which approximately 42% were full-time and 58% 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.
9
<PAGE>
ITEM 2. PROPERTIES
The Company's stores by location, fiscal year opened, fiscal year
refurbished and size were as follows on October 29, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR SQUARE
LOCATION OPENED/REFURBISHED FOOTAGE
- -------- ------------------ --------
<S> <C> <C>
DRUG FAIR
South Plainfield............................................ 1959/1994 21,250
Manville.................................................... 1965/1991 20,000
Old Bridge.................................................. 1969/1992 16,527
Edison...................................................... 1970/1992 15,000
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
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
Belleville.................................................. 1999/-- 19,000
Clifton..................................................... 1999/-- 16,000
Wayne....................................................... 1999/-- 17,993
Sayreville.................................................. 1999/-- 17,500
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>
10
<PAGE>
All of 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 17 years remaining on lease terms. Six of these leases will
expire by the end of 2000, 20 leases will expire between 2001-2015 and 23 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 204,000 square feet of
warehouse and office space. The Company commenced occupation of the new facility
in September 1998, and has vacated 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 resulted in increased net annual facility
expenditures of approximately $450,000 during fiscal 1999. The Company believes
this new facility has improved and will continue to improve operating
efficiencies in several areas, particularly distribution and inventory control.
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.
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 twelve 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 due 2005 (the "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 Subordinated 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
11
<PAGE>
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 31, 1999, are derived from the audited financial
statements of the Company and the Predecessor Company. The financial statements
of the Predecessor Company for 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, fiscal 1998 and fiscal 1999 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 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 1997, fiscal 1998 and fiscal 1999
12
<PAGE>
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
------------- ---------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JAN. 29, 1995 JULY 30, 1995 JULY 28, 1996 JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $101,687 $96,171 $215,731 $231,033 $248,242 $275,270
Cost of sales................. 72,469 67,686 152,645 163,157 173,648 196,812
Gross profit.................. 29,218 28,485 63,086 67,876 74,594 78,458
Selling, general and
administrative expense...... 21,468 21,635 47,487 50,831 56,074 62,317
Other income, net............. 595 205 353 401 579 805
Administrative fees........... 0 125 250 250 250 250
Depreciation and
amortization(1)............. 884 1,980 4,341 4,399 5,386 5,910
-------- ------- -------- -------- -------- --------
Operating income.............. 7,461 4,950 11,361 12,797 13,463 10,786
Interest expense, net......... 0 2,284 3,998 3,018 6,748 8,033
-------- ------- -------- -------- -------- --------
Income before income taxes.... 7,461 2,666 7,363 9,779 6,715 2,753
Provision for income
taxes(2).................... 186 1,598 3,659 5,216 3,679 1,974
-------- ------- -------- -------- -------- --------
Net income.................... $ 7,275 $ 1,068 $ 3,704 $ 4,563 $ 3,036 $ 779
======== ======= ======== ======== ======== ========
Balance Sheet Data (End of
Period):
Working capital (unaudited)... $ 29,457 $10,645 $ 11,196 $ 9,875 $ 20,461 $ 17,484
Total assets.................. 53,176 86,079 84,931 81,256 91,282 90,495
Total debt.................... 0 45,000 39,360 29,467 80,418 74,311
Stockholder's equity
(deficit)................... 36,033 19,068 22,772 27,335 (14,386) (14,727)
Other Data (unaudited):
Ratio of earnings to fixed
charges(3).................. 8.1x 1.7x 2.1x 2.7x 1.3x 1.2x
Adjusted EBITDA(4)............ $ 9,682 $ 7,714 $ 16,913 $ 18,695 $ 18,566 $ 18,639
Gross margin.................. 28.7% 29.6% 29.2% 29.4% 30.1% 28.5%
Adjusted EBITDA margin(5)..... 9.5% 8.0% 7.8% 8.1% 7.5% 6.8%
Capital expenditures.......... $ 1,313 $ 1,070 $ 2,887 $ 1,287 $ 3,525 $ 5,435
Pharmacy sales growth......... 7.8% 10.1% 10.8% 16.3% 15.4% 24.2%
Pharmacy sales as a % of
total....................... 19.6 22.6 22.1 24.1 25.8% 28.9%
Third-Party Plan sales as a %
of pharmacy sales........... 47.2% 50.9% 61.5% 70.1% 74.8% 79.9%
Store data (unaudited):
Number of stores at end of
period:
Drug Fair................... 22 22 25 26 28 32
Cost Cutters................ 15 16 17 17 17 17
-------- ------- -------- -------- -------- --------
Total....................... 37 38 42 43 45 49
======== ======= ======== ======== ======== ========
Same-store sales growth
(unaudited)(6):
Drug Fair................... 4.0% 6.6% 3.5% 6.7% 6.9% 7.7%
Cost Cutters................ 4.0 4.3 0.9 2.7 3.9% 0.0%
-------- ------- -------- -------- -------- --------
Total....................... 4.0% 5.6% 2.4% 4.8% 5.5% 4.3%
======== ======= ======== ======== ======== ========
</TABLE>
- ------------------------
(1) Depreciation and amortization amounts for the periods set forth include
amortization of goodwill, beneficial leasehold intangibles, deferred
financing costs incurred and pharmacy customer lists.
(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 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
13
<PAGE>
subsequent period. If the Predecessor Company had been treated as a C
corporation for federal and state income tax purposes for the six month
period ended January 29, 1995, the Predecessor Company's provision for
income taxes for such period would have been approximately $3,000, and its
net income for such period would have been approximately $4,461.
(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 excluded in Adjusted EBITDA because they reflect non-cash
expense that do not directly impact the ability of the Company to service
its debt obligations. 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 THE COMPANY
----------- -----------------------------------------------------------------------------
SIX MONTHS
ENDED SIX MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
JAN. 29, ENDED ENDED ENDED ENDED ENDED
1995 JULY 30, 1995 JULY 28, 1996 JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income............. $7,275 $1,068 $ 3,704 $ 4,563 $ 3,037 $ 779
Provision for income
taxes................ 186 1,598 3,659 5,216 3,678 1,974
Interest expense,
net.................. 0 2,284 3,998 3,018 6,748 8,033
Depreciation and
amortization......... 884 1,980 4,341 4,399 5,386 5,910
Non-cash rent
expense.............. 0 217 552 413 523 585
Change in LIFO
reserve.............. 1,337 567 659 1,086 (806) 1,358
------ ------ ------- ------- ------- -------
Adjusted EBITDA........ $9,682 $7,714 $16,913 $18,695 $18,566 $18,639
====== ====== ======= ======= ======= =======
</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, 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 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.
14
<PAGE>
(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>
PREDECESSOR
COMPANY THE COMPANY
------------- -----------------------------------------------------------------------------
SIX SIX
MONTHS MONTHS TWELVE MONTHS ENDED
ENDED ENDED -------------------------------------------------------------
JAN. 29, 1995 JULY 30, 1995 JULY 28, 1996 JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Statement of Operations Data:
Net sales.................... $0 $96,171 $215,731 $231,033 $248,242 $275,270
Cost of sales................ 0 67,686 152,645 163,157 173,648 196,812
-- ------- -------- -------- -------- --------
Gross profit................. 0 28,485 63,086 67,876 74,594 78,458
Selling, general and
administrative expense..... 0 21,635 47,487 50,831 56,074 62,317
Other income, net............ 0 205 353 401 579 805
Administrative fees.......... 0 125 250 250 250 250
Depreciation and
Amortization............... 0 1,980 4,341 4,399 5,386 5,910
-- ------- -------- -------- -------- --------
Operating income............. 0 4,950 11,361 12,797 13,463 10,786
Interest expense, net........ 0 2,946 5,326 4,586 8,423 9,878
-- ------- -------- -------- -------- --------
Income before income taxes... 0 2,004 6,035 8,211 5,040 908
Provision for income taxes... 0 1,366 3,442 4,433 3,109 1,347
-- ------- -------- -------- -------- --------
Net Income (loss)............ $0 $ 638 $ 2,593 $ 3,778 $ 1,931 $ (439)
== ======= ======== ======== ======== ========
Balance Sheet Data (End of
Period)
Working capital
(unaudited)................ $0 $10,877 $ 11,656 $ 10,363 $ 22,356 $ 18,137
Total assets................. 0 86,105 84,950 81,332 90,669 90,521
Total debt................... 0 58,912 54,782 46,301 98,935 95,569
Stockholders' equity
(deficit).................. 0 5,388 7,077 10,855 (32,214) (33,773)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE
This Annual Report on Form 10-K may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, including,
but not limited to, (i) statements about possible changes in the rate of
increase of pharmacy sales to Third Party Plans as a percentage of total
pharmacy sales, and its impact on profitability; (ii) the ability of the Company
to meet its debt service obligations and to fund anticipated capital
expenditures and working capital requirements in the future; (iii) the amount
and sufficiency of the Company's planned expenditures to address the year 2000
dating problem; (iv) the impact on the Company of the bankruptcy of The Pharmacy
Fund, Inc.; and (v) certain other statements identified or qualified by words
such as "likely", "will", "suggests", "may", "would", "could", "should",
"expects", "anticipates", "estimates", "plans", "projects", "believes", or
similar expressions (and variants of such words or expressions). Investors are
cautioned that forward-looking statements are inherently uncertain. These
forward-
15
<PAGE>
looking statements represent the judgment of the Company and of the Holding
Company as of the date of this Annual Report on Form 10-K, and the Company and
the Holding Company caution readers not to place undue reliance on such
statements. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, but not limited to, the risks and
uncertainties described or discussed under the heading "Certain Risks" below.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1999 WITH FISCAL 1998
Net sales for fiscal 1999 were $275.3 million as compared to $248.2 million
for fiscal 1998, an increase of $27.1 million, or 10.9%. The results for fiscal
1999 include fifty-three weeks while the results for fiscal 1998 include
fifty-two weeks. Net sales for fiscal 1999 exclusive of the fifty-third week
("Comparable fiscal 1999") were $270.5 million as compared to $248.2 million for
fiscal 1998, an increase of $22.3 million, or 9.0%. This increase, which
includes a 4.3% increase in same store sales on a comparable fifty-two week
basis, was primarily due to (i) a 4.8% increase in sales of non-pharmacy
products from $184.1 million for fiscal 1998 to $193.0 million for Comparable
fiscal 1999, and (ii) a 21.7% increase in pharmacy sales from $64.1 million for
fiscal 1998 to $78.0 million for Comparable fiscal 1999, including a 28.2%
increase in pharmacy sales to Third-Party Plan customers from $48.6 million for
fiscal 1998 to $62.3 million for Comparable fiscal 1999. The Company attributes
the increase in net sales of non-pharmacy products to the opening of five new
store locations and the acquisition of the inventory and the customer lists of
two independent pharmacies during Comparable fiscal 1999 as compared to the
opening of two new store locations and the acquisition of the inventory and the
customer lists of two independent pharmacies during fiscal 1998, as well as to
increased customer traffic in the Company's stores associated with the increase
in total pharmacy sales. The number of prescriptions filled (including
prescriptions filled for Third-Party Plan customers) was approximately 1,843,000
for Comparable fiscal 1999 as compared to approximately 1,633,000 for fiscal
1998, an increase of approximately 210,000, or 12.9%. The number of
prescriptions filled for Third-Party Plan customers increased to approximately
1,482,000 for Comparable fiscal 1999, as compared to 1,240,000 for fiscal 1998,
an increase of approximately 242,000, or 19.5%. Pharmacy sales to
non-Third-Party Plan customers were $15.7 million for Comparable fiscal 1999 as
compared to $15.5 million for fiscal 1998, an increase of $0.2 million, or 1.3%.
This increase was the result of improved retail prices on pharmacy products,
offset by participation of the Company's customers in Third-Party Plans which
resulted in a decrease in the volume of pharmacy products sold to
non-Third-Party Plan customers from approximately 393,000 in fiscal 1998 to
approximately 361,000 in Comparable fiscal 1999.
Gross profit was $78.5 million for fiscal 1999, as compared to
$74.6 million for fiscal 1998, an increase of $3.9 million, or 5.2%. Gross
profit as a percentage of net sales was 28.5% for fiscal 1999 as compared to
30.1% for fiscal 1998. This 1.6% decrease in gross profit as a percentage of
sales was due primarily to (i) pharmacy sales, which generate lower margins than
sales of non-pharmacy merchandise, representing a higher percentage of total
sales in fiscal 1999 as compared to fiscal 1998, (ii) the incurrence of an
increase in LIFO reserve in fiscal 1999 of $1.4 million as compared to a
decrease in LIFO reserve in fiscal 1998 of $0.8 million, and (iii) a decline in
the margin on non-pharmacy merchandise due to greater competition in the
Company's market.
Gross profit on total pharmacy sales (including sales to Third-Party Plan
customers) was $16.6 million for fiscal 1999 as compared to $13.2 million for
fiscal 1998, an increase of $3.4 million, or 25.8%, which was primarily the
result of an increase in sales on a same store basis combined with the maturing
of new stores opened in the Company's last three fiscal years, the additional
week of sales in fiscal 1999 and improved purchase prices from the Company's
primary prescription drug wholesaler. Gross profit on sales to Third-Party Plan
customers was $10.7 million for fiscal 1999 as compared to $7.4 million for
fiscal 1998, an increase of $3.3 million, or 44.6%, which was primarily the
result of an increase in sales of prescriptions to Third-Party Plan customers as
a percentage of total sales of prescriptions. Gross profit on sales of pharmacy
products to non-Third-Party Plan customers was $5.9 million for fiscal 1999 as
compared to
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$5.8 million for fiscal 1998, an increase of $0.1 million, or 1.7%, increasing
slightly due to improved purchase prices from the Company's wholesaler and
improved retail prices.
Although management expects that sales to Third-Party Plan customers 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 that more closely approximates pharmacy sales
growth rates. Management believes that the rate of increase in sales to
Third-Party Plan customers as a percentage of total pharmacy sales will slow
because the current growth rate, if continued, would reach the point at which
almost all members of the population who may be eligible for enrollment in
Third-Party Plans will be so covered. However, management believes there will
always be some pharmacy customers who do not enroll in Third-Party Plans. The
Company is unable to estimate when this increase will slow, or stop, if at all.
Because of the lower margins on prescription sales to Third-Party Plan
participants, management believes that the increase in Third-Party Plan
prescription sales as a percentage of total pharmacy sales will negatively
impact profit margin, although this may be partly or wholly offset by the
increases in non-pharmacy sales that may result from increased floor traffic
associated with increased pharmacy sales. There can be no assurance, however,
that the increase in Third-Party Plan prescription sales as a percentage of
total prescription sales will continue, or that any resulting decrease in
overall margins will be offset.
Gross profit on non-pharmacy sales was $61.9 million for fiscal 1999 as
compared to $61.4 million for fiscal 1998, an increase of $0.5 million, or 0.8%.
Gross profit as a percentage of non-pharmacy sales was 31.6% for fiscal 1999 as
compared to 33.4% for fiscal 1998, a decrease of 1.8%. This 1.8% decrease in
gross profit as a percentage of sales is due primarily to the fact that the
Company incurred an increase in LIFO reserve in fiscal 1999 of $1.4 million as
compared to a decrease in LIFO reserve in fiscal 1998 of $0.8 million, and to a
decline in the margin on non-pharmacy merchandise due to greater competition in
the Company's market.
Selling, general and administrative expense as a percentage of net sales was
22.6% for fiscal 1999 and fiscal 1998. Excluding the one-time performance
related bonuses paid to the President and the Chief Financial Officer of the
Company in the amount of $1.4 million during fiscal 1998, and one-time
consulting engagement fees paid in the amount of $0.4 million during fiscal 1999
and in the amount of $0.2 million during fiscal 1998, selling, general and
administrative expense as a percentage of sales was 22.5% for fiscal 1999 as
compared to 22.0% for fiscal 1998, an increase of 0.5%. This increase in
selling, general and administrative expenses is primarily due to the higher
level of warehousing payroll incurred to consolidate the Company's warehouses
and corporate office into one larger facility, the higher cost of occupancy of
the one larger warehouse and corporate office facility, costs incurred to make
the Company's computer systems year 2000 compliant, as well as higher levels of
selling, general and administrative expenses incurred at the Company's five new
store openings during fiscal 1999 as new stores typically incur higher levels of
selling, general and administrative expenses during the first three years after
they are opened.
Depreciation and amortization expense for fiscal 1999 was $5.9 million as
compared to $5.4 million for fiscal 1998, an increase of $0.5 million, or 9.3%.
This increase resulted from the higher level of depreciation expense associated
with the increased number of stores.
Other income, net was $0.8 million for fiscal 1999 as compared to
$0.6 million for fiscal 1998, an increase of $0.2 million, which is the result
of the one-time gain on the repurchase of an aggregate of $6.0 million in
aggregate principal amount of Senior Notes in October 1998.
The Company's net interest expense was $8.0 million for fiscal 1999 as
compared to $6.7 million for fiscal 1998, an increase of $1.3 million, or 19.4%,
resulting from a higher total average long-term debt outstanding during fiscal
1999 as compared to fiscal 1998 and from higher average balances borrowed
against the Company's revolving line of credit. Non-cash interest expense on the
Holding Company's outstanding subordinated debt was $1.8 million during fiscal
1999 as compared to $1.7 million during fiscal 1998, an increase of
$0.1 million, resulting from the compounding of interest on the outstanding
subordinated debt.
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The Company's provision for income taxes was $2.0 million for fiscal 1999 as
compared to $3.7 million for fiscal 1998, a decrease of $1.7 million, or 45.9%,
which was primarily the result of the lower income before income taxes in fiscal
1999. The Holding Company experienced a benefit from income taxes of
$0.6 million in both fiscal 1999 and fiscal 1998 related to the interest expense
incurred on the outstanding subordinated debt. The Company's effective tax rate
is consistently higher than the statutory tax rates, and varies from period to
period, due to amortization of goodwill and of beneficial leaseholds which are
not deductible when calculating taxable income.
The Company's net income for fiscal 1999 was $0.8 million as compared to net
income of $3.0 million for fiscal 1998, a decrease of $2.2 million, which is
primarily due to lower operating income and to increased levels of interest,
depreciation and amortization incurred. The Holding Company incurred a net loss
of $0.4 million for fiscal 1999 as compared to net income of $1.9 million during
fiscal 1998, a decrease of $2.3 million, principally as a result of the factors
described above.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net sales for fiscal 1998 were $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 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 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.
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.
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
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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 the President and the
Chief Financial Officer of the Company 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 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.
The Company's provision for income taxes was $3.7 million for fiscal 1998 as
compared to $5.2 million for fiscal 1997, a decrease of $1.5 million, or 28.8%,
which was primarily the result of the lower income before income taxes in fiscal
1998. The Holding Company experienced a benefit from income taxes of
$0.6 million for fiscal 1998 as compared to $0.5 million for fiscal 1997, an
increased benefit of $0.1 million which was the result of lower interest expense
incurred on the outstanding subordinated debt. The Company's effective tax rate
is consistently higher than the statutory tax rates, and varies from period to
period, due to amortization of goodwill and of beneficial leaseholds which are
not deductible when calculating taxable income.
The Company's 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 factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
During fiscal 1999, cash used in operations was $3.2 million as compared to
cash provided by operations of $10.2 million during fiscal 1998, an increased
use of cash of $13.4 million. The increase in cash used in operations is the
result of lower net income, as well as the higher level of investment in
inventory related to the significant increase in pharmacy sales, the improvement
of the replenishment rate to the Company's stores from its warehouse, and for
the opening of five new stores, in addition to the slower collection of
Third-Party Plan prescription receivables due to the bankruptcy filing of The
Pharmacy Fund, Inc. with whom the Company had an arrangement to factor its
Third-Party Plan prescription receivables until September 9, 1998. Cash used in
investing activities was $5.4 million during fiscal 1999 as compared to
$3.5 million during fiscal 1998, an increased use of cash of $1.9 million, which
was the result
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of the opening of five new store locations during fiscal 1999 as compared to the
opening of two new store locations during fiscal 1998. Cash used in financing
activities was $1.8 million during fiscal 1999 as compared to cash provided by
financing activities of $2.2 million during fiscal 1998. During fiscal 1998, the
cash provided by financing activities resulted from the net proceeds, after
payment of a dividend of approximately $45.0 million to the common shareholders
of the Holding Company, of the issuance of the $80.0 million aggregate principal
amount of Senior Notes. The cash used in financing activities during fiscal 1999
consisted primarily of net revolver borrowings of $1.2 million and a cash
overdraft of $3.6 million offset by $5.6 million used for the repurchase of
$6.0 million aggregate principal amount of Senior Notes and $1.1 million used
for the payment of a dividend to the common shareholders of the Holding 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 fiscal 1998 as a result of the lower net income before taxes
which results from the higher level of interest expense of the Senior Notes, and
by a reduction of inventory at the Company's warehouse and in the stores. Cash
used in investing activities was $3.5 million during fiscal 1998 as compared to
$1.3 million during fiscal 1997, an increase of $2.2 million. This increase is
the result of the opening of two new stores, the purchase of certain assets of
two independent pharmacies, and to cost 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.
Historically, cash flows from operations, augmented when necessary by
borrowing 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 $17.5 million, $20.5 million, $9.9 million and
$11.2 million on July 31, 1999, July 25, 1998, July 26, 1997, and July 28, 1996,
respectively.
To date, the Company has repurchased $6.0 million of its outstanding Senior
Notes. The Company may in the future repurchase additional Senior Notes if it is
able to obtain appropriate waivers under its revolving credit facility and such
Senior Notes are available at a discount. Any such repurchases could affect the
Company's ability to cover its debt service obligations and working capital
requirements in the future.
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 16 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 four to six 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 49 stores, 27 have been opened since 1989 and all of the
remaining 22 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
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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 point of sale 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 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 204,000 square feet of
warehouse and office space. The Company occupied this new facility in
September 1998 and has vacated its prior corporate offices and two warehouse
facilities. The Company's monthly payment under the lease for the new facility
is approximately $67,000, and will result in increased net annual facility
expenditures of approximately $450,000.
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 2000
operating results. In addition, the Company incurred a short-term negative cash
flow due to the delay in collecting the Third-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, payable semi-annually, under the Senior
Notes will aggregate $7.6 million in fiscal 2000 and 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 and subject to the conditions of the Company's revolving credit
facility.
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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. $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), leaving $1.9 million of the proceeds available.
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 2000. The Company's ability to make
scheduled payments of principal or interest on, or to refinance, its
indebtedness will depend on future operating performance and cash flow, which
are subject to prevailing economic conditions, prevailing interest rates and
financial, competitive, business and other factors beyond its control. Although
the Company's cash flow and borrowings under 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 (as defined below), (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 Senior Notes. As of
July 31, 1999, the Company had outstanding borrowings under the credit facility
of $1.2 million. In addition, the Company believes that as of July 31, 1999, the
Company's borrowing base (as defined under the credit facility) was sufficient
to support borrowings of up to $20.0 million under such facility. The Company's
credit facility is being 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
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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 (or in the event Consolidated Net Income for such period is a
deficit then minus 100% of such deficit). Under the terms of the Company's
credit facility, the Company is prohibited from paying dividends to the Holding
Company in excess of (i) payments 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 Company's credit facility through October 16,
2002.
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 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.
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 31, 1999.
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. To the extent that a business system does not fail or make miscalculations
as a result of the Year 2000 date change, such a system is described as being
"Year 2000 Compliant." While the Company believes that it has been taking
adequate steps to make sure that its business systems are Year 2000 Compliant,
and does not believe that it will incur material cost to prepare for the Year
2000 date change, achieving complete Year 2000 Compliance is subject to various
risks and uncertainties, and there can be no assurance that the Year 2000 date
change will not lead to failures of such systems that may have a material
adverse effect on the Company's future results of operations and financial
condition. The Company has been aware of the possible impact of Year 2000 issues
on its operations for some time and has focused on making its business systems
Year 2000 Compliant since that time.
In anticipation of the Company's continued growth and need for additional
functionality, the Company has sought to acquire packaged software solutions as
compared to the internal development of software solutions. As a result, a
majority of the Company's Year 2000 Compliance issues have been resolved by
continuously deploying the most recently available versions of the packaged
software solutions.
Beginning in 1996, the Company decided to deploy the JDA Software, Inc.
Merchandise Management System ("MMS"), a packaged software solution, which it
believes, based on representations from its
23
<PAGE>
licensor and on certain limited testing performed by the Company, to be Year
2000 Compliant. The total implementation cost of the MMS was $2.2 million, and
was completed in July 1999. The $2.2 million incurred cost of the MMS has been
paid for out of the Company's capital expenditures budget during fiscal years
1997, 1998 and 1999. Management believes that at the completion of the MMS
implementation at the end of July 1999, the Company's business systems became
Year 2000 Compliant in the areas of purchasing, inventory management, cost
management, retail price management, warehouse management, sales audit, and
accounts payable.
The Company has completed the process of upgrading to the next version of
its packaged software solution for payroll, human resources, general ledger,
budgeting, and cost allocation applications which are used pursuant to a license
from Lawson Associates, Inc. At completion of the upgrade to the next version in
July 1999, the business systems used in these departments became Year 2000
Compliant. The cost for the implementation of the next version of such
applications was $0.1 million which was paid for out of the Company's operating
budget.
The Company manages its property, plant and equipment expenditures with a
packaged software solution provided by Para Research. The Company has already
implemented the most recent version of this application software, and based upon
testing, the Company expects these business systems to be Year 2000 Compliant.
No additional costs were incurred or are expected to be incurred in the future
related to this application.
Store systems include the pharmacy operating system, the point-of-sale
systems that run the cash register related point-of-sale applications, and
non-pharmacy radio frequency applications for store ordering and shelf price
auditing. The Company's pharmacy operating system is licensed from
Renlar, Inc., which has certified that its most recent version is Year 2000
Compliant. Of its 38 stores with pharmacies, all of the Company's stores are
operating with the Year 2000 Compliant version of the Renlar, Inc. system. The
cost incurred to implement the most recent version of the Renlar, Inc. pharmacy
system in the 38 pharmacies in which it has been installed was $0.2 million,
which was primarily related to purchasing new computer hardware to operate the
Renlar, Inc. pharmacy software, paid for out of the Company's capital
expenditures budget. Based upon ongoing testing and certifications from the
software licensors, management believes that the Company's software applications
with respect to cash register related point-of-sale systems are Year 2000
Compliant. However, the Company will be required to upgrade the computer
hardware at a majority of its store locations in order to operate the Year 2000
Compliant point-of-sale software in the stores. The Company estimates incurring
a cost of $0.2 million to upgrade this hardware and anticipates having the
upgraded hardware and Year 2000 Compliant software installed at all of the
Company's stores by the end of November 1999. In addition, the Company estimates
incurring a cost of $0.1 million to upgrade the software related to its
non-pharmacy radio frequency applications which will be incurred as a normal
operating cost. No additional hardware purchases or modifications are
anticipated to upgrade these radio frequency applications in order for them to
be Year 2000 Compliant.
Finally, the Company has two internally developed software applications for
which Year 2000 Compliance is at varying stages. First, the required
modifications to the Company's advertising software were completed in
July 1999, at a cost of $0.1 million, and provides the Company with Year 2000
Compliance for this software application. Second, the Company is currently in
the process of making the necessary modifications to its software application
for merchandise returns to vendors and expects to have it completed by
December 1999 at a cost of less than $0.1 million.
In summary, the Company estimates that a minimum of $0.4 million of future
costs will be required to be incurred to achieve Year 2000 Compliance,
including: $0.2 million for the hardware upgrades for its point-of-sale software
in the stores; $0.1 million to upgrade the software related to its non-pharmacy
radio frequency applications; and $0.1 million to make the necessary
modifications to the Company's internal software application for merchandise
returns to vendors. These costs will be incurred as part of the Company's
capital and operating expenditures budget and are expected to be completed as
previously discussed.
24
<PAGE>
In addition, the Company relies upon various third parties for merchandise
and services. Interruption of supplier operations, due to their lack of Year
2000 Compliance, could significantly affect the Company's operations,
particularly if the Company is unable to acquire merchandise for sale in its
stores or is unable to obtain services needed to operate its stores. The Company
has surveyed its third party suppliers of merchandise and services and is in the
process of evaluating their efforts toward achieving Year 2000 Compliance and,
if necessary, to define appropriate contingency plans. The Company expects to
have the evaluation of its third party suppliers' Year 2000 Compliance completed
by approximately October 1999 and certain contingency plans in place by
approximately November 1999. Various contingency plans could include
identification of alternate third party suppliers and accumulation of inventory
to ensure that merchandise is available for sale in its stores. The evaluations
of third party suppliers are a means to ensure the continued flow of merchandise
and services to the Company, but cannot eliminate the potential for disruption
due to lack of Year 2000 Compliance by a third party supplier.
The Company's evaluation of Year 2000 Compliance, both of its internal
systems and of its suppliers, is an ongoing process. Due to the uncertainty of
Year 2000 Compliance by the Company's third party suppliers as noted above, the
Company has established applicable contingency plans, which it believes will
appropriately address Year 2000 Compliance. However, no assurance can be given
that such contingency plans will address all potential Year 2000 Compliance
failures.
CERTAIN RISKS
The Company is subject to certain risks, including:
"FREEDOM OF CHOICE" AND "ANY WILLING PROVIDER" LEGISLATION. In July 1994,
New Jersey adopted "Freedom of Choice" legislation that requires Third-Party
Plans to allow their customers to purchase prescription drugs from the provider
of their choice as long as the provider meets uniformly established
requirements, and "Any Willing Provider" legislation that requires each
Third-Party Plan that has entered into an agreement with a prescription provider
to permit other prescription providers to enter into similar agreements. If this
legislation were repealed, larger national drugstore chains could enter into
exclusive contracts with Third-Party Plans, which could reduce the Company's
sales of prescriptions and potentially non-prescription items as well. In
addition, since none of the states surrounding New Jersey (other than Delaware)
has enacted similar legislation, the Company may be at a disadvantage if it
chooses to expand outside of New Jersey.
GOVERNMENT REGULATION AND REIMBURSEMENT PROGRAMS. The Company is subject to
numerous federal, state, and local licensing and registration regulations with
respect to, among other things, its pharmacy operations. Violations of any such
regulations could result in various penalties, including suspension or
revocation of the Company's licenses or registrations or monetary fines, which
could have a material adverse effect on the Company's financial condition and
results of operations.
Federal and New Jersey law requires the Company's pharmacists to offer free
counseling to customers about their medication. 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. New Jersey also regulates the dispensing of over-the-counter
controlled dangerous substances. These requirements could result in increased
costs to the Company.
MEDICAID AND MEDICARE. A portion of the Company's services are reimbursed by
government sponsored programs such as Medicaid and Medicare, with the remainder
being reimbursed by individual patients or Third-Party Plans. If the Company
were to fail to comply with reimbursement regulations, or if such reimbursement
programs were modified, the Company's business could be adversely affected. The
Company is also subject to laws prohibiting the submission of false or
fraudulent claims and certain financial relationships between health care
providers that are intended to induce the referral of patients, or the
recommendations of particular items or services. Violation of these laws could
result in loss of licensure, civil and criminal penalties, and exclusion from
federal health care programs.
25
<PAGE>
EMPLOYMENT REGULATION. The Company is subject to employment laws governing
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.
POTENTIAL GROWTH AND EXPANSION. The Company has grown in recent years by
opening new stores, remodeling and relocating existing stores and refining the
product mix in existing stores. The ability of the Company to continue to grow
in the future will depend on factors including existing and emerging
competition, the availability of working capital to support growth, the
Company's ability to manage costs and maintain margins in the face of pricing
pressures, and the ability to recruit and train additional qualified personnel.
New stores that the Company opens may not be profitable.
RESTRICTIONS ON THE COMPANY. Both the Indenture governing the Senior Notes
and the Company's revolving credit facility impose on the Company certain
requirements and restriction, such as a requirement that the Company maintain
certain financial ratios and satisfy certain financial tests, limitations on
capital expenditures, and restrictions on the ability of the Company to incur
debt, pay dividends, or take certain other corporate actions. These limitations
may restrict the Company's ability to pursue its business strategies.
COMPETITION. The industries in which the Company operates are highly
competitive.
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. A third party registered the service mark "Cost
Cutters," but does not currently operate in the Company's market areas. If such
third party commences operations in the Company's geographic market areas or
licenses the use of the name to a third party, the Company could be required to
stop using the name "Cost Cutters." In addition, any of the Company's other
trade names, service marks or trademarks could be challenged or invalidated in
the future.
ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION. 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.
LEASE RENEWALS ON THE COMPANY'S STORES. All of the Company's stores are
leased. Although the Company has historically been successful in renewing its
most important store leases when they have expired, there can be no assurance
that the Company will continue to be able to do so.
LEVERAGE. In connection with the Company's issuance of the Senior Notes,
the Company incurred a significant amount of indebtedness and, as a result, the
Company is highly leveraged. The Company is permitted to incur substantial
additional indebtedness in the future, subject to certain limitations contained
in the Indenture governing the Senior Notes.
CONTROLLING STOCKHOLDERS. The Holding Company owns all of the outstanding
capital stock of the Company. The existing stockholders of the Holding Company,
which include the Company's President and Chief Executive Officer, certain
entities affiliated with the other directors of the Company, and other officers
and employees of the Company, own all of the outstanding common stock of the
Holding Company. These stockholders have the power to appoint new management and
approve any action requiring the approval of the Company's stockholders,
including adopting amendments to the Company's charter and approving mergers or
sales of substantially all of the Company's assets.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends upon the
efforts, abilities and expertise of its executive officers and other key
employees, including its Chief Executive Officer and President. The loss of the
services of any key employees could have a material adverse effect on the
Company's financial condition and results of operations.
26
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Neither the Company nor the Holding Company engages in trading market risk
sensitive instruments or purchases hedging instruments or "other than trading"
instruments that are likely to expose the Company or the Holding Company to
market risk, whether interest rate, foreign currency exchange, commodity price
or equity price risk. Neither the Company nor the Holding Company has purchased
options or entered into swaps or forward or futures contracts. The ability of
the Company and the Holding Company (as guarantor) to make periodic interest
payments on the Senior Notes, at a fixed rate of 10 1/4%, is not directly
affected by fluctuations in the market. The Company's primary market risk
exposure is that of interest rate risk on borrowings under the Company's
revolving credit facility, which are subject to interest rates based either on
the lender's prime rate or London Interbank Offered Rate ("LIBOR"), and a change
in the applicable interest rate would affect the rate at which the Company could
borrow funds.
27
<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........................... 29
Balance sheets at July 25, 1998, and July 31, 1999.......... 30
Statements of income for the years ended July 26, 1997, July
25, 1998, and July 31, 1999............................... 31
Statements of cash flows for the years ended July 26, 1997,
July 25, 1998, and July 31, 1999.......................... 32
Statements of stockholder's deficit for the years ended July
26, 1997, July 25, 1998, and July 31, 1999................ 33
Notes to financial statements............................... 34
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Community Distributors, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income, cash flows and stockholder's deficit present fairly, in all material
respects, the financial position of Community Distributors, Inc. at July 31,
1999 and July 25, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended July 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
October 13, 1999
29
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT AT
JULY 25, 1998 JULY 31, 1999
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents................................. $ 10,770 $ 285
Accounts receivable....................................... 1,079 5,240
Inventories............................................... 29,246 35,787
Prepaid expenses and other current assets................. 1,013 1,013
-------- --------
Total current assets.................................. 42,108 42,325
-------- --------
Property and Equipment:
Leasehold improvements.................................... 6,177 7,943
Furniture, fixtures and equipment......................... 9,628 13,275
Automobiles and trucks.................................... 739 761
-------- --------
16,544 21,979
Less: Accumulated depreciation and amortization............. (6,464) (9,118)
-------- --------
Property and equipment, net................................. 10,080 12,861
-------- --------
Beneficial leaseholds, net.................................. 1,551 1,063
Other assets................................................ 567 920
Deferred financing costs, net............................... 3,426 2,659
Deferred tax assets......................................... 746 980
Goodwill, net............................................... 31,603 29,687
-------- --------
Total assets.......................................... $ 90,081 $ 90,495
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current Liabilities:
Revolver Borrowings....................................... $ -- $ 1,200
Accounts payable.......................................... 11,035 14,357
Accrued liabilities....................................... 6,120 5,796
Deferred tax liabilities.................................. 2,117 1,950
Current portion of supplier advances...................... 1,068 653
Income taxes payable...................................... -- 885
-------- --------
Total current liabilities............................. 20,340 24,841
Long-term debt.............................................. 80,000 74,000
Supplier advances, net of current portion................... 629 1,803
Other liabilities........................................... 2,118 2,629
Due to parent............................................... 1,380 1,949
-------- --------
Total liabilities..................................... 104,467 105,222
-------- --------
Commitments and contingencies
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. -- --
Retained earnings........................................... 3,156 2,815
Distribution in excess of capital........................... (17,542) (17,542)
-------- --------
Total stockholder's deficit........................... (14,386) (14,727)
-------- --------
Total liabilities and stockholder's deficit........... $ 90,081 $ 90,495
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 28, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales.................................... $231,033 $248,242 $275,270
Cost of sales................................ 163,157 173,648 196,812
-------- -------- --------
Gross profit............................... 67,876 74,594 78,458
Selling, general and administrative
expenses................................... 50,831 56,074 62,317
Administrative fees.......................... 250 250 250
Depreciation and amortization................ 4,399 5,386 5,910
Other income, net............................ 401 579 805
-------- -------- --------
Operating income........................... 12,797 13,463 10,786
Interest expense, net........................ 3,018 6,748 8,033
-------- -------- --------
Income before income taxes................. 9,779 6,715 2,753
Provision for income taxes................... 5,216 3,678 1,974
-------- -------- --------
Net income................................. $ 4,563 $ 3,037 $ 779
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 4,563 $ 3,037 $ 779
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 4,443 4,586 5,058
Amortization of deferred financing costs............ 108 800 767
Deferred rent liabilities........................... 414 523 585
LIFO provision...................................... 1,086 (806) 1,358
Gain on repurchase of senior notes.................. -- -- (395)
Gain on sale of property and equipment.............. 7 -- --
Changes in operating assets and liabilities:
Accounts receivable............................... 656 1,535 (4,161)
Inventories....................................... (3,123) 1,793 (7,899)
Prepaid expenses and other current assets......... (345) 72 --
Other assets...................................... (28) (476) (353)
Deferred tax assets............................... 392 (34) (234)
Due to parent..................................... 686 549 569
Deferred tax liabilities.......................... (1,355) 1,726 (167)
Accounts payable and accrued liabilities.......... 3,122 (1,228) (692)
Income taxes payable.............................. (1,108) (503) 885
Supplier advances................................. (52) (1,556) 759
Other liabilities................................. (48) 193 (74)
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 9,418 10,211 (3,215)
Cash flows used in investing activities:
Capital expenditures.................................. (1,287) (3,525) (5,438)
Proceeds from sale of fixed assets.................... 12 -- 3
------- -------- --------
Net cash used in investing activities............... (1,275) (3,525) (5,435)
Cash flows (used in) provided by financing activities:
Proceeds from issuance of Senior Notes................ -- 80,000 --
Distribution to parent................................ -- (45,000) (1,120)
Debt issuance costs paid.............................. -- (3,870) --
Proceeds from revolver borrowings..................... 7,550 900 41,960
Payments made on revolver borrowings.................. (7,550) (900) (40,760)
Repurchase of senior notes............................ -- -- (5,605)
Cash overdraft........................................ -- -- 3,690
Payments made on long-term debt....................... (9,896) (29,269) --
Capital received from parent.......................... -- 353 --
------- -------- --------
Net cash (used in) provided by financing
activities........................................ (9,896) 2,214 (1,835)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (1,753) 8,900 (10,485)
Cash and cash equivalents beginning of period........... 3,623 1,870 10,770
------- -------- --------
Cash and cash equivalents end of period................. $ 1,870 $ 10,770 $ 285
======= ======== ========
Supplemental disclosures of cash information:
Cash paid during the period:
Income taxes........................................ $ 6,606 $ 2,047 $ 815
======= ======== ========
Interest............................................ $ 3,160 $ 4,875 $ 8,198
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL
PAID-IN RETAINED IN EXCESS STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS OF CAPITAL EQUITY (DEFICIT)
------ -------- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
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) -- (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)
Net income............................... -- -- -- 779 -- 779
Distribution to parent................... -- -- -- (1,120) -- (1,120)
----- ---- -------- ------- -------- --------
Balance, July 31, 1999................... 1,000 $ -- $ -- $ 2,815 $(17,542) $(14,727)
===== ==== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<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". The Company manages
and operates as one business segment. The Company 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 maintains its accounts on a 52-53 week fiscal year ending with
the last Saturday in July. The years ended July 26, 1997 and July 25, 1998 each
contained 52 weeks, respectively. The year ended July 31, 1999 contained 53
weeks.
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 $1,577 and $2,935 higher than reported at July 25, 1998
and July 31, 1999, respectively. 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 $51 and $155 at July 25, 1998 and July 31, 1999, 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 26, 1997, July 25, 1998 and July 31, 1999 was
$1,952, $2,094 and $2,648, 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.
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
34
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
straight-line method. Accumulated amortization at July 25, 1998 and July 31,
1999 was $2,017 and $2,505, 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 25, 1998 and July 31, 1999 was $6,709 and
$8,625, 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 $1,697 and $2,456 of
advances received related to various inventory supply agreements at July 25,
1998 and July 31, 1999, 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 $14,174 of
additional purchases under the inventory supply agreements at July 31, 1999. 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 31, 1999. 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 31, 1999, as applicable to the specific inventory
supply agreements.
PREOPENING AND ADVERTISING COSTS
Costs associated with new stores prior to opening and advertising costs are
expensed as incurred. Advertising expense of $1,941, $1,703 and $2,662 for the
years ended July 26, 1997, July 25, 1998 and July 31, 1999, respectively is net
of co-op advertising rebates received from vendors in the amount of $3,523,
$4,430 and $4,303 for the years ended July 26, 1997, July 25, 1998 and July 31,
1999, respectively.
35
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTEREST EXPENSE (NET)
Interest expense for the fiscal years ended July 26, 1997, July 25, 1998 and
July 31, 1999 which has been recorded net of interest income was:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Interest expense............. $3,160 $7,007 $8,191
Interest income.............. (142) (259) (158)
------ ------ ------
Interest expense (net)....... $3,018 $6,748 $8,033
====== ====== ======
</TABLE>
INCOME TAXES
Deferred tax liabilities and assets are recorded 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.
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. The Company does not utilize derivative financial
instruments nor does it engage in hedging activities.
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").
36
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 25, 1998 and July 31, 1999.
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."
3. ACCOUNTS RECEIVABLE:
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 accelerated 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, and expects, collection of approximately $444 of Third
Party Plan prescription receivables that were purchased by The Pharmacy
Fund, Inc.
4. DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AT AT
JULY 25, 1998 JULY 31, 1999
------------- -------------
<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 $74,000
Less, current portion due within one year............ -- --
------- -------
Long-term portion.................................... $80,000 $74,000
======= =======
</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.
37
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. DEBT: (CONTINUED)
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 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 31, 1999, the Company incurred approximately $60 of commitment
fees and letter of credit fees under this facility.
On October 6, 1998, the Company repurchased $5,000 principal amount of
Senior Notes at a purchase price of $4,675, plus accrued and unpaid interest. On
October 13, 1998, the Company repurchased $1,000 principal amount of Senior
Notes at a purchase price of $930, plus accrued and unpaid interest. These
repurchases of Senior Notes resulted in a gain of $395 during the year ended
July 31, 1999.
5. 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 31, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JULY
- -----------
<S> <C>
2000........................................................ $ 10,518
2001........................................................ 9,914
2002........................................................ 9,595
2003........................................................ 9,346
2004........................................................ 9,229
Thereafter.................................................. 57,616
--------
$106,218
========
</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 year
ended July 26, 1997, July 25, 1998, and July 31, 1999, respectively, total rent
expense included:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Fixed minimum rent........... $8,261 $9,045 $10,181
Contingent rent.............. 180 219 250
------ ------ -------
Rent expense................. $8,441 $9,264 $10,431
====== ====== =======
</TABLE>
38
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. COMMITMENTS: (CONTINUED)
The Company recognizes rental expense from leases with scheduled rent
increases on the straight-line basis. During the years ended July 26, 1997,
July 25, 1998, July 31, 1999, the Company recognized rent expense in excess of
amounts paid of approximately $414, $523, and $585, respectively, which expense
is included in the amounts above.
LETTERS OF CREDIT
Outstanding letters of credit, guaranteeing certain contingent purchases
which are not reflected in the accompanying financial statements, aggregate
approximately $1,666 and $2,016 at July 25, 1998 and July 31, 1999.
6. INCOME TAXES:
The provision for income taxes for the years ended July 26, 1997, July 25,
1998 and July 31, 1999, respectively, consist of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current...................... $6,179 $1,987 $2,160
Deferred..................... (963) 1,691 (186)
------ ------ ------
$5,216 $3,678 $1,974
====== ====== ======
</TABLE>
The component of deferred taxes at July 25, 1998 and July 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
AT AT
JULY 25, JULY 31,
1998 1999
---------- ----------
<S> <C> <C>
Supplier advances, current........................... $ 329 $ 126
Inventory............................................ 194 235
Accruals and reserves................................ 624 687
Inventory (LIFO reserve)............................. (3,424) (3,251)
Depreciation......................................... 160 253
------- -------
Net deferred tax liability-current................... (2,117) (1,950)
------- -------
Accruals and reserves................................ 728 962
Supplier advances, non-current....................... 18 18
------- -------
Net deferred tax asset-long-term..................... $ 746 $ 980
======= =======
</TABLE>
39
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES: (CONTINUED)
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 ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Federal statutory tax rate... 34% 34% 34%
State and local income taxes,
net of federal tax
benefit.................... 8% 6% 11%
Goodwill amortization........ 9% 13% 30%
Other........................ 2% 2% (3)%
-- -- --
53% 55% 72%
== == ==
</TABLE>
7. RELATED PARTY TRANSACTIONS:
Included in the Company's statements of income for the years ended July 26,
1997, July 25, 1998 and July 31, 1999 are administrative fees of $250, for each
of the years, respectively. The Company has entered into administrative fee
agreements with certain shareholders of the Parent, 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.
8. 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.
9. 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 31, 1999.
10. 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.
On January 4, 1999 the Company paid a dividend to the Parent in the amount
of $1,120. The Parent then declared and paid a dividend of $1,120 to its
stockholders. The Company's dividend of $1,120 was funded from the Company's
operating cash flow.
40
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of independent accountants........................... 42
Consolidated balance sheets at July 25, 1998 and July 31,
1999...................................................... 43
Consolidated statements of income for the years ended July
26, 1997, July 25, 1998, and July 31, 1999................ 44
Consolidated statements of cash flows for the years ended
July 26, 1997, and July 25, 1998, and July 31, 1999....... 45
Consolidated statements of stockholders' deficit for the
years ended July 25, 1998 and July 31, 1999............... 46
Notes to consolidated financial statements.................. 47
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and 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' deficit present
fairly, in all material respects, the financial position of CDI Group, Inc. and
Subsidiary at July 31, 1999 and 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 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
October 13, 1999
42
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT AT
JULY 25, 1998 JULY 31, 1999
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents................................. $ 10,770 $ 285
Accounts receivable....................................... 1,098 5,266
Inventories............................................... 29,246 35,787
Prepaid expenses and other current assets................. 1,582 1,013
-------- --------
Total current assets.................................. 42,696 42,351
-------- --------
Property and Equipment:
Leasehold improvements.................................... 6,177 7,943
Furniture, fixtures and equipment......................... 9,628 13,275
Automobiles and trucks.................................... 739 761
-------- --------
16,544 21,979
Less: Accumulated depreciation and amortization............. (6,464) (9,118)
-------- --------
Property and equipment, net................................. 10,080 12,861
-------- --------
Beneficial leaseholds, net.................................. 1,551 1,063
Other assets................................................ 567 920
Deferred financing costs, net............................... 3,426 2,659
Deferred tax assets......................................... 746 980
Goodwill, net............................................... 31,603 29,687
-------- --------
Total assets.......................................... $ 90,669 $ 90,521
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current Liabilities:
Revolver Borrowings....................................... $ -- $ 1,200
Accounts payable.......................................... 11,035 14,357
Accrued liabilities....................................... 6,120 5,796
Deferred tax liabilities.................................. 2,117 1,950
Current portion of supplier advances...................... 1,068 653
Income taxes payable...................................... -- 258
-------- --------
Total current liabilities............................. 20,340 24,214
Long-term debt.............................................. 80,000 74,000
Subordinated debt........................................... 18,517 20,369
Supplier advances, net of current portion................... 629 1,803
Other liabilities........................................... 2,118 2,629
-------- --------
Total liabilities..................................... 121,604 123,015
-------- --------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value, 7,862
authorized, issued and outstanding at July 25, 1998, and
July 31, 1999 at net redemption value of $100 per share... 786 786
Redeemable share of Class A voting common stock, 57,963 and
57,963 shares issued and outstanding at July 25, 1998 and
July 31, 1999, respectively, at net redemption value...... 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 196,632 issued and outstanding at July 25,
1998 and July 31, 1999.................................... -- --
Class B non-voting common stock, $.00001 par value,
authorized 600,000 shares, 187,922 issued and outstanding
at July 25, 1998 and July 31, 1999........................ -- --
Additional paid-in capital.................................. -- --
Retained earnings........................................... 2,390 831
Distribution in excess of capital........................... (34,604) (34,604)
-------- --------
Total stockholders' deficit........................... (32,214) (33,773)
-------- --------
Total liabilities and stockholders' deficit........... $ 90,669 $ 90,521
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales.................................... $231,033 $248,242 $275,270
Cost of sales................................ 163,157 173,648 196,812
-------- -------- --------
Gross profit............................... 67,876 74,594 78,458
Selling, general and administrative
expenses................................... 50,831 56,074 62,317
Administrative fees.......................... 250 250 250
Depreciation and amortization................ 4,399 5,386 5,910
Other income, net............................ 401 579 805
-------- -------- --------
Operating income........................... 12,797 13,463 10,786
Interest expense, net........................ 4,586 8,423 9,878
-------- -------- --------
Income before income taxes................. 8,211 5,040 908
Provision for income taxes................... 4,433 3,109 1,347
-------- -------- --------
Net income (loss).......................... $ 3,778 $ 1,931 $ (439)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<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 YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)..................................... $ 3,778 $ 1,931 $ (439)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 4,443 4,586 5,058
Amortization of deferred financing costs............ 108 800 767
Deferred rent liabilities........................... 414 523 585
Non-cash interest expense........................... 1,585 1,683 1,845
LIFO provision...................................... 1,086 (806) 1,358
Gain on repurchase of Senior Notes.................. -- -- (395)
Gain on sale of property and equipment.............. 7 -- --
Changes in operating assets and liabilities
Accounts receivable............................... 645 1,546 (4,161)
Inventories....................................... (3,123) 1,793 (7,899)
Prepaid expenses and other current assets......... (391) (451) 569
Other assets...................................... (28) (476) (353)
Deferred tax assets............................... 392 (34) (234)
Deferred tax liabilities.......................... (1,355) 1,726 (167)
Accounts payable and accrued liabilities.......... 3,116 (1,233) (692)
Income taxes payable.............................. (1.159) -- 258
Supplier advances................................. (52) (1,556) 759
Other liabilities................................. (48) 194 (74)
------- -------- --------
Net cash provided by (used in) operating
activities.................................... 9,418 10,226 (3,215)
------- -------- --------
Cash flows used in investing activities:
Capital expenditures.................................. (1,287) (3,525) (5,438)
Proceeds from sale of fixed assets.................... 12 -- 3
------- -------- --------
Net cash used in investing activities........... (1,275) (3,525) (5,435)
------- -------- --------
Cash flows (used in) provided by financing activities:
Proceeds from issuance of senior notes................ -- 80,000 --
Distribution paid..................................... -- (45,000) (1,120)
Senior notes issuance fees paid....................... -- (3,870) --
Proceeds from repayment of loans to Directors and
officers............................................ 87 182 --
Proceeds from exercise of common stock options........ -- 243 --
Proceeds from revolver borrowings..................... 7,550 900 41,960
Payments made on revolver borrowings.................. (7,550) (900) (40,760)
Cash overdraft........................................ -- -- 3,690
Repurchase of Senior Notes............................ -- -- (5,605)
Payments made on long-term debt....................... (9,896) (29,269) --
Payments on subordinated debt......................... (87) (87) --
------- -------- --------
Net cash (used in) provided by financing activities..... (9,896) 2,199 (1,835)
------- -------- --------
Net increase (decrease) in cash and cash equivalents.... (1,753) 8,900 (10,485)
------- -------- --------
Cash and cash equivalents beginning of period........... 3,623 1,870 10,770
------- -------- --------
Cash and cash equivalents end of period................. $ 1,870 $ 10,770 $ 285
======= ======== ========
Supplemental disclosures of cash information:
Cash paid during the period:
Income taxes............................................ $ 6,605 $ 2,047 $ 815
======= ======== ========
Interest................................................ $ 3,160 $ 4,875 $ 8,198
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ ADDITIONAL DISTRIBUTION TOTAL
CLASS A CLASS B PAID-IN RETAINED IN EXCESS OF STOCKHOLDERS'
SHARES SHARES AMOUNT CAPITAL EARNINGS CAPITAL EQUITY (DEFICIT)
-------- -------- -------- ---------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 28, 1996.......... 196,632 187,922 $ -- $ 3,846 $ 3,231 $ -- $ 7,077
Net income...................... 3,778 3,778
------- ------- ---- ------- ------- -------- --------
Balance, July 26, 1997.......... 196,632 187,922 $ -- $ 3,846 $ 7,009 -- $ 10,855
Net loss for the three month
period ended October 25,
1997.......................... -- -- -- -- (459) -- (459)
Distribution paid............... (3,846) (6,550) (34,604) (45,000)
Net income for the period from
October 26, 1997 to July 25,
1998.......................... 2,390 2,390
------- ------- ---- ------- ------- -------- --------
Balance, July 25, 1998.......... 196,632 187,922 -- -- 2,390 (34,604) (32,214)
Net income (loss)............... -- -- -- -- (439) -- (439)
Distribution paid............... -- -- -- -- (1,120) -- (1,120)
------- ------- ---- ------- ------- -------- --------
Balance, July 31, 1999.......... 196,632 187,922 $ -- $ -- $ 831 $(34,604) $(33,773)
======= ======= ==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<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 (collectively referred to as
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 Company manages and operates as one business segment.
The accompanying consolidated financial statements include the accounts of
the Parent and its wholly-owned subsidiary, Community Distributors, Inc. (the
"Subsidiary"). 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. The fiscal years ended July 26, 1997, and July 25, 1998 each
contained 52 weeks, respectively. The year ended July 31, 1999 contained 53
weeks.
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 $1,577 and $2,953 higher than reported
at July 25, 1998 and July 31, 1999, respectively. 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 $51 and $155 at July 25, 1998 and July 31, 1999,
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 26, 1997, July 25, 1998, and July 31, 1999 was
$1,952, $2,094 and $2,648, 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
47
<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)
market rents on the acquisition date. Beneficial leaseholds are amortized over
the lease terms using the straight-line method. Accumulated amortization at
July 25, 1998 and July 31, 1999 was $2,017 and $2,505, 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 25, 1998 and July 31, 1999 was $6,709 and
$8,625, 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 $1,697 and
$2,456 of advances received related to various inventory supply agreements at
July 25, 1998 and July 31, 1999, respectively. Such amounts are being recorded
as a reduction of cost of sales as the Subsidiary's supply agreement obligations
are fulfilled, generally ranging from three to five years from the point that
the supplier advance is received. The Subsidiary'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 Subsidiary is currently committed to approximately $14,174 of
additional purchases under the inventory supply agreements at July 31, 1999. In
the event the Subsidiary 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 31, 1999. The amount presented as the current portion
of the supplier advances is estimated by the Subsidiary as the amount related to
the passage of time and the estimated inventory purchases to be made during the
twelve months following July 31, 1999, 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 $1,941, $1,703 and $2,662 for
the years ended July 26, 1997, July 25, 1998 and July 31, 1999, respectively is
net of co-op advertising rebates received from vendors in the amount of $3,523,
$4,430 and $4,303 for the years ended July 26, 1997, July 25, 1998 and July 31,
1999, respectively.
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)
INTEREST EXPENSE (NET)
Interest expense recorded for the fiscal years ended July 26, 1997,
July 25, 1998 and July 31, 1999, respectively, net of interest income was:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Interest expense....... $4,755 $8,692 $10,043
Interest income........ (169) (269) (165)
------ ------ -------
Interest expense
(net)................ $4,586 $8,423 $ 9,878
====== ====== =======
</TABLE>
INCOME TAXES
Deferred tax liabilities and assets are recorded 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 Subsidiary'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.
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. The Company does not utilize
derivative financial instruments nor does it engage in hedging activities.
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.
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)
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 25, 1998 and July 31, 1999.
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."
3. ACCOUNTS RECEIVABLES:
In November 1997, the Subsidiary entered into a Receivables Purchase
Agreement with The Pharmacy Fund, Inc. pursuant to which the Subsidiary has
agreed to factor all of its third party plan prescription receivables. Under the
terms of the aforementioned agreement, the Subsidiary accelerated 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 Subsidiary 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
Subsidiary is pursuing, and expects, collection of approximately $444 of
Third-Party Plan prescription receivables that were purchased by The Pharmacy
Fund, Inc.
50
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AT AT
JULY 25, 1998 JULY 31, 1999
------------- -------------
<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 $74,000
Senior subordinated notes and accrued interest-due January
31, 2005, principal plus interest at a rate of 10% per
annum, are payable upon maturity.......................... 18,517 20,369
------- -------
Total................................................. 98,517 94,369
------- -------
Less, current portion due within one year................. -- --
------- -------
Long-term portion........................................... $98,517 $94,369
======= =======
</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 senior notes and revolving credit facility.
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
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 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 Subsidiary'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 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
commitment. For the year ended July 31, 1999, the Subsidiary incurred
approximately $60 of commitment fees and letter of credit fees under this
facility.
On October 6, 1998, the Subsidiary repurchased $5,000 principal amount of
Senior Notes at a purchase price of $4,675, plus accrued and unpaid interest. On
October 13, 1998, the Subsidiary repurchased $1,000 principal amount of Senior
Notes at a purchase price of $930, plus accrued and unpaid interest. These
repurchases of Senior Notes resulted in a gain of $395 during the year ended
July 31, 1999.
51
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. 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 31, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING JULY
- -----------
<S> <C>
2000........................................................ $ 10,518
2001........................................................ 9,914
2002........................................................ 9,595
2003........................................................ 9,346
2004........................................................ 9,229
Thereafter.................................................. 57,616
--------
$106,218
========
</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 26, 1997, July 25, 1998, and July 31, 1999, respectively, total rent
expense included:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Fixed minimum rent........... $8,261 $9,045 $10,181
Contingent rent.............. 180 219 250
------ ------ -------
Rent expense................. $8,441 $9,264 $10,431
====== ====== =======
</TABLE>
The Company recognizes rental expense for leases with scheduled rent increases
on the straight-line basis. During the years ended July 26, 1997, July 25, 1998
and July 31, 1999, the Company recognized rent expense in excess of amounts paid
of $414, $523 and $585, respectively, which expense is included in the amounts
above.
LETTERS OF CREDIT
Outstanding letters of credit, guaranteeing certain contingent purchases
commitments, which are not reflected in the accompanying financial statements,
aggregate approximately $1,666 and $2,016 at July 25, 1998 and July 31, 1999.
52
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INCOME TAXES:
The provision for income taxes for the years ended July 26, 1997, July 23,
1998, and July 31, 1999, respectively, consist of the following:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Current...................... $5,396 $1,417 $1,533
Deferred..................... (963) 1,692 (186)
------ ------ ------
$4,433 $3,109 $1,347
====== ====== ======
</TABLE>
The components of deferred taxes at July 25, 1998 and July 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
AT AT
JULY 25, 1998 JULY 31, 1999
------------- -------------
<S> <C> <C>
Supplier advances, current........................... $ 329 $ 126
Inventory............................................ 194 235
Accruals and reserves................................ 624 687
Inventory (LIFO reserve)............................. (3,424) (3,251)
Depreciation......................................... 160 253
------- ------
Net deferred tax liability-current............. $(2,117) (1,950)
------- ------
Accruals and reserves................................ 728 962
Supplier advances, non-current....................... 18 18
------- ------
Net deferred tax asset-long-term............... $ 746 $ 980
======= ======
</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 26, JULY 25, JULY 31,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Federal statutory tax rate... 34% 34% 34%
State and local income taxes,
net of federal tax
benefit.................... 6% 6% 34%
Goodwill amortization........ 12% 20% 90%
Other........................ 2% 2% (10%)
--- --- ----
54% 62% 148%
=== === ====
</TABLE>
7. RELATED PARTY TRANSACTIONS:
Included in the Company's consolidated statements of income for the years
ended July 26, 1997, July 25, 1998, and July 31, 1999 are administrative fees of
$250, for each of the years, respectively. The Company has entered into
administrative fee agreements with certain shareholders of the Parent, 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.
53
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. 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 57,963 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.
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.
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 25, 1998 and July 31, 1999 of $87, has been reflected as a reduction of
the redemption value of the related redeemable Preferred and Common Stock.
9. 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
54
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCKHOLDERS' EQUITY: (CONTINUED)
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 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.
Except for the options granted to a senior executive described above,
options granted to date under the plan expire approximately ten years after the
date of grant, one-half of the options granted vest in equal amounts over five
years provided the grantee remains an employee of the Company and one-half of
the options granted vest in equal amounts over five years based on meeting
certain performance goals.
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.
55
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCKHOLDERS' EQUITY: (CONTINUED)
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
------------------ ----------------------- -----------------------
<S> <C> <C> <C>
Options outstanding at
beginning of period....... 67,079 67,079 38,924
Options granted............. -- 1,500 --
Options exercised........... -- 29,655 --
Options canceled............ -- -- (146)
Options outstanding at end
of period................. 67,079 38,924 38,778
Options available for grant
at end of period.......... 3,115 1,615 1,615
Options vested and
outstanding at end of
period.................... 30,989 12,001 19,702
</TABLE>
<TABLE>
<S> <C> <C> <C>
Option price per share for 37,424 shares at $10.00 1,500 shares at $31.00
outstanding options....... $ 10 37,278 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.
On January 4, 1999, the Subsidiary paid a dividend to the Parent in the
amount of $1,120. The Parent then declared and paid a dividend of $1,120 to its
stockholders. The dividend of $1,120 was funded from the Subsidiary's operating
cash flow.
10. 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.
11. 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 31, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
56
<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............................. 56 President, Chief Executive Officer and
Director of the Holding Company
Lynn L. Shallcross........................ 58 President--Cost Cutters Division of the
Company
Todd H. Pluymers.......................... 35 Chief Financial Officer of the Holding
Company and the Company
Barrie Levine............................. 54 Vice President--Pharmacy Operations of the
Company
William F. Gilligan....................... 57 Vice President--Distribution of the
Company
Michael P. Quinn.......................... 46 Vice President--Merchandising of the
Company
Kevin Marron.............................. 42 Director--MIS of the Company
Alan J. Kirschner......................... 45 Director--Loss Prevention of the Company
Mark H. DeBlois........................... 43 Director of the Holding Company and the
Company
Harvey P. Mallement....................... 59 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 35 years of
experience in Distribution-Warehouse Management.
57
<PAGE>
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 Distributors, 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. Quinn is a graduate of Manhattan College.
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. As
Director--Loss Prevention, Mr. Kirschner is also responsible for point-of-sale
and human resources for the Company. Prior to 1991, Mr. Kirschner held a similar
position with NBO Menswear and Rickel Home Centers, Inc. and has over twenty
years of experience in retail and loss prevention management. 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 $600 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.
58
<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 1997, fiscal 1998 and fiscal 1999 to
the Company's Chief Executive Officer and five other most highly-compensated
executive officers for fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL --------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION
- --------------------------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Frank Marfino....................................... 1997 $431,692 $ 228,680 $3,748(2)
President and Chief Executive Officer 1998 $460,384 $1,447,702 $3,534(2)
1999 $493,399 $ 256,230 $5,320(2)
Lynn L. Shallcross.................................. 1997 $167,135 $ 50,000 $2,586(3)
President--Cost Cutters Division 1998 $171,231 $ 50,000 $3,126(3)
1999 $181,923 $ 60,000 $3,232(3)
Todd H. Pluymers.................................... 1997 $133,606 $ 26,000 $ 741(4)
Chief Financial Officer 1998 $140,674 $ 227,500 $ 747(4)
1999 $150,761 $ 28,875 $ 797(4)
Barrie Levine....................................... 1997 $124,423 $ 12,200 $1,620(5)
Vice President--Pharmacy Operations 1998 $129,038 $ 22,500 $1,697(5)
1999 $136,538 $ 22,000 $2,278(5)
Michael Quinn....................................... 1997 -- -- --
Vice President--Merchandising 1998 $ 43,269 -- --
1999 $129,908 $ 7,500 $1,645(6)
William F. Gilligan................................. 1997 $107,231 $ 17,500 $1,738(7)
Vice President--Distribution 1998 $111,231 $ 20,520 $2,046(7)
1999 $118,192 $ 22,400 $2,111(7)
</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
1999 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, $1,275 and $1,325 for fiscal 1997, 1998 and 1999, respectively, as
well as the incremental cost of additional life insurance premiums in the
amounts of $2,448, $2,259 and $3,995 for fiscal 1997, 1998 and 1999,
respectively.
(3) Amounts include the values of the personal use of a company car equal to
$520, $520 and $540 for fiscal 1997, 1998 and 1999, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$2,066, $2,606 and $2,692 for fiscal 1997, 1998, and 1999, respectively.
(4) Amounts include the values of the personal use of a company car equal to
$520, $520 and $530 for fiscal 1997, 1998 and 1999, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$221, $227 and $267 for fiscal 1997, 1998, and 1999, respectively.
(5) Amounts include the values of the personal use of a company car equal to
$520, $520 and $530 for fiscal 1997, 1998 and 1999, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$1,100, $1,177 and $1,748 for fiscal 1997, 1998, and 1999, respectively.
59
<PAGE>
(6) Amount includes the value of the personal use of a company car equal to
$1,350, as well as the incremental cost of additional life insurance
premiums in the amount of $295.
(7) Amounts include the values of the personal use of a company car equal to
$520, $520 and $530 for fiscal 1997, 1998 and 1999, respectively, as well as
the incremental cost of additional life insurance premiums in the amounts of
$1,218, $1,526 and $1,581 for fiscal 1997, 1998, and 1999, respectively.
STOCK OPTIONS TABLE
The following table sets forth the number of options to purchase Common
Stock held by the Company's Chief Executive Officer and one other executive
officer as of the end of fiscal 1999. None of the Company's four other most
highly-compensated executive officers held any options to purchase Common Stock
as of the end of fiscal 1999, and there were no options to purchase Common Stock
granted during fiscal 1999.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR-END ($)
EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(1)
------------------------------ ----------------------------
<S> <C> <C>
Frank Marfino................................ 14,825/7,530 $0
Michael Quinn................................ 0/1,500 $0
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options is calculated by determining
the difference between the book value of the Common Stock underlying the
options at the end of fiscal 1999, which was negative, and the option
exercise price. The Common Stock was not publicly traded at the end of
fiscal 1999.
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 $176,000, $151,594, $135,000 and $117,000, 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
60
<PAGE>
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."
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 1999, 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 1999. 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
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. This loan was repaid in October 1998. See "Certain
Relationships and Related Transactions."
61
<PAGE>
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 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 31, 1999.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK PREFERRED STOCK
----------------------------- -----------------------------
AMOUNT OF NATURE AMOUNT OF NATURE
OF BENEFICIAL PERCENT OF OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(3) CLASS OWNERSHIP(3) CLASS
- ---------------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
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) 22.4% -- --
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
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
CLASS A COMMON STOCK PREFERRED STOCK
----------------------------- -----------------------------
AMOUNT OF NATURE AMOUNT OF NATURE
OF BENEFICIAL PERCENT OF OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(3) CLASS OWNERSHIP(3) CLASS
- ---------------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
European Development Capital.............. 14,064(6) 5.5% -- --
Corporation N.V.
co Harvest Partners, Inc.
767 Third Avenue
New York, NY 10017
Frank Marfino............................. 50,824(10) 18.9% 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 318,729(12) 83% 6,646 84.5%
Group (7 persons)
</TABLE>
- ------------------------
(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
63
<PAGE>
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 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 14,825 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 14,825 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."
64
<PAGE>
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 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
65
<PAGE>
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
</TABLE>
On January 4, 1999 the Company paid the Holding Company a dividend in the
amount of approximately $1.1 million, and the Holding Company paid a dividend of
approximately $1.1 million to its stockholders, which includes management,
certain employees of the Company, BancBoston and Harvest.
66
<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 certain other persons
(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 and
the Stockholders.*
10.7 Company Stock Purchase Warrant, dated as of January 30,
1995, issued by the Holding Company to Banque Paribas, 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).**
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.13 Letter Agreement, dated as of October 16, 1997, by and
between the Company and Frank Marfino regarding bonus
payment.*
10.14 Employment and Non-Competition Agreement, dated as of
January 30, 1995 by and between the Company and Todd H.
Pluymers.*+
10.15 Letter Agreement, dated as of October 16, 1997, by and
between the Company and Todd H. Pluymers regarding bonus
payment.*
10.16 Employment and Non-Competition Agreement, dated as of
January 30, 1995 by and between the Company and Lynn L.
Shallcross.*+
10.17 Employment and Non-Competition Agreement, dated as of
January 30, 1995 by and between the Company and William F.
Gilligan.*+
10.18 Employment and Non-Competition Agreement, dated as of
February 17, 1995 by and between the Company and Barrie
Levine.*+
10.19 Employment and Non-Competition Agreement, dated as of
March 16, 1998 by and between the Company and Michael
Quinn.+
10.20 Employment and Non-Competition Agreement, dated as of
January 30, 1995 by and between the Company and Frank
Marfino.*+
10.21 CDI Group, Inc. 1995 Stock Option Plan.+
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 CDI Group, Inc.
21.1 List of Subsidiaries of CDI Group, Inc.*
24.1 Power of Attorney (included in signature page to Form 10-K).
27.1 Financial Data Schedule of Community Distributors, Inc.
27.2 Financial Data Schedule of CDI Group, Inc.
99.1 Community Distributors, Inc. Summary of Valuation and
Qualifying Accounts.
99.2 CDI Group, Inc. Summary of Valuation and Qualifying
Accounts.
99.3 Reports of Independent Accountants on Financial Statement
Schedule.
</TABLE>
- ------------------------
* Incorporated by reference to the exhibits 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.
** Incorporated by reference to the same numbered exhibit to the Registrants'
Annual Report on Form 10-K, filed by the Registrants on October 23, 1998,
with respect to the Registrants' fiscal year ended July 25, 1998.
+ This item is a management contract or compensatory plan.
All schedules other than those set forth in Exhibits 27.1, 27.2, 99.1 and
99.2 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.
68
<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 29, 1999.
<TABLE>
<S> <C> <C>
COMMUNITY DISTRIBUTORS, INC.
By: /s/ FRANK MARFINO
-----------------------------------------
Frank Marfino,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ TODD H. PLUYMERS
-----------------------------------------
Todd H. Pluymers,
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL
AND ACCOUNTING OFFICER)
</TABLE>
<TABLE>
<S> <C> <C>
CDI GROUP, INC.
By: /s/ FRANK MARFINO
-----------------------------------------
Frank Marfino,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ TODD H. PLUYMERS
-----------------------------------------
Todd H. Pluymers,
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL
AND ACCOUNTING 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>
/s/ FRANK MARFINO President, Chief Executive October 29, 1999
------------------------------------------- Officer and Director of
Frank Marfino Community Distributors,
Inc. and CDI Group, Inc.
/s/ MARK H. DEBLOIS Director of Community October 29, 1999
------------------------------------------- Distributors, Inc. and CDI
Mark H. DeBlois Group, Inc.
/s/ HARVEY P. MALLEMENT Director of Community October 29, 1999
------------------------------------------- Distributors, Inc. and CDI
Harvey P. Mallement Group, Inc.
</TABLE>
<PAGE>
Exhibit 10.19
EMPLOYMENT AND NON-COMPETITION AGREEMENT
Michael Quinn
This EMPLOYMENT AND NON-COMPETITION AGREEMENT (this "AGREEMENT"), dated
as of March 16, 1998, is between Community Distributors, Inc., a Delaware
corporation (the "EMPLOYER"), and Michael Quinn (the "EMPLOYEE").
WHEREAS, the Employer wishes to employ the Employee as an executive
officer of the Employer, and the Employee wishes to work as an executive officer
of the Employer, on the terms set forth below.
NOW, THEREFORE, it is hereby agreed as follows:
Section 1. EMPLOYMENT. The Employer hereby employs the
Employee, and the Employee hereby accepts employment, upon the terms and subject
to the conditions hereinafter set forth.
Section 2. DUTIES. The Employee shall be employed as the Vice
President-Merchandising. In such capacity, the Employee shall have such
executive responsibilities and duties as are assigned by the Employer's Board of
Directors (the "BOARD") or the President of the Employer. The Employee agrees to
devote his full time and best efforts to the performance of his duties to the
Employer.
Section 3. TERM. The initial term of employment of the Employee
hereunder shall commence on the date hereof (the "COMMENCEMENT DATE") and shall
continue until the third anniversary of the Commencement Date (the "INITIAL
TERM"), unless earlier terminated pursuant to Section 6, and shall be renewed
automatically for additional one (1) year terms thereafter unless terminated by
either party by written notice to the other given at least ninety (90) days
prior to the expiration of the then current term.
Section 4. COMPENSATION AND BENEFITS. Until the termination of
the Employee's employment hereunder, in consideration for the services of the
Employee hereunder, the Employer shall compensate the Employee as follows:
(a) BASE SALARY. The Employer shall pay the Employee, in accordance
with the Employer's then current payroll practices, a base salary (the "BASE
SALARY"). The Base Salary will be paid at an annual rate of $125,000. Such Base
Salary may be increased from time to time at the sole discretion of the Board
and is in addition to the other benefits set forth herein.
<PAGE>
-2-
(b) VACATION. The Employee shall be entitled to three (3) weeks
vacation each calendar year. Any vacation shall be taken at the reasonable and
mutual convenience of the Employer and the Employee. Accrued vacation not taken
in any calendar year will not be carried forward or used in any subsequent
calendar year.
(c) INSURANCE; OTHER BENEFITS. Accident, disability, life and health
insurance for the Employee shall be provided by the Employer under group
accident, life and health insurance plans maintained by the Employer for its
full-time, salaried employees as such employment benefits may be modified from
time to time by the Board for all full-time, salaried employees. In addition,
the Employer shall either continue the Employee's current individual disability
insurance policy or arrange for coverage under an alternative disability
insurance policy which is no less favorable. The amount and extent of such
coverage shall be subject to the discretion of the Board; PROVIDED, THAT the
amount and extent of such coverage shall be no less favorable than such coverage
provided by the Employer to the Employee immediately prior to the date hereof.
Section 5. EXPENSES. The Employer shall reimburse the Employee for
all reasonable expenses of types authorized by the Employer and incurred by the
Employee in the performance of his duties hereunder. The Employee shall comply
with such budget limitations and approval and reporting requirements with
respect to expenses as the Employer may establish from time to time.
Section 6. TERMINATION. The Employee's employment hereunder
shall commence on the Commencement Date and continue until the expiration of
the Initial Term, and any extension of such term pursuant to Section 3,
except that the employment of the Employee hereunder shall earlier terminate:
(a) DEATH OR DISABILITY. Upon the death of the Employee during the
term of his employment hereunder or, at the option of the Employer, in the
event of the Employee's disability, upon thirty (30) days' written notice
from the Employer. The Employee shall be deemed disabled if an independent
medical doctor (selected by the Employer's health or disability insurer)
certifies that the Employee has for 180 days, consecutive or non-consecutive,
in any twelve (12) month period been disabled in a manner which seriously
interferes with his ability to perform his responsibilities under this
Agreement. Any refusal by the Employee to submit to a medical examination for
the purpose of certifying disability under this Section 6(a) shall be deemed
to constitute conclusive evidence of the Employee's disability.
(b) FOR CAUSE. For "Cause" immediately upon written notice by the
Employer to the Employee. For purposes of this Agreement, a termination shall be
for Cause if the Board shall determine that any one or more of the following has
occurred:
(i) the Employee shall have committed an act of fraud,
embezzlement, misappropriation or breach of fiduciary duty against the
Employer, including, but
<PAGE>
-3-
not limited to, the offer, payment, solicitation or acceptance of any
unlawful bribe or kickback with respect to the Employer's business; or
(ii) the Employee shall have been convicted by a court of competent
jurisdiction of, or pleaded guilty or nolo contendere to, any felony;
or
(iii) the Employee shall have committed a breach of any of the
covenants, terms and provisions of Sections 8 or 9 hereof; or
(iv) the Employee shall have breached any one or more of the
provisions of this Agreement (excluding Sections 8 and 9 hereof) or any
one or more of the provisions of the Stockholder Agreement dated as of
January 30, 1995 among CDI Group, Inc. and its stockholders, AND such
breach shall have continued for a period of ten (10) days after written
notice to the Employee specifying such breach in reasonable detail; or
(v) the Employee shall have refused, after explicit written notice,
to obey any lawful resolution of or direction by the Board which is
consistent with his duties hereunder.
(c) RESIGNATION OR TERMINATION WITHOUT CAUSE. Upon ninety (90) days'
written notice by the Employer to the Employee without Cause or by the Employee
to the Employer.
(d) RIGHTS AND REMEDIES ON TERMINATION.
(i) If the Employee's employment hereunder is terminated pursuant to
Section 6(a) or by the Employer pursuant to Section 6(c), then the Employee
(or his estate, as applicable) shall be entitled to receive payment, in
accordance with the Employer's then current payroll practices, of the
Employee's Base Salary in effect at the time of such termination for one year
following such termination; PROVIDED, HOWEVER, that in the case of a
termination by the Employer pursuant to Section 6(c), the Employee shall be
required to mitigate his damages by accepting other suitable employment
during such period and the Employer shall be entitled to reduce the amount
payable by the Employer under this Section 6(d)(i) by an amount equal to the
income received by the Employee pursuant to such new employment.
(ii) Except as otherwise set forth in this Section 6(d), the
Employee shall not be entitled to any severance or other compensation after
termination other than payment of any portion of his Base Salary through the
date of his termination and any expense reimbursements under Section 5 hereof
for expenses incurred in the performance of his duties prior to termination.
Section 7. INVENTIONS; ASSIGNMENT. All rights to discoveries,
inventions, improvements and innovations (including all data and records
pertaining thereto) related
<PAGE>
-4-
to the Employer's business, whether or not patentable, copyrightable,
registrable as a trademark, or reduced to writing, that the Employee may
discover, invent or originate during the term of his employment hereunder, and
for a period of twelve (12) months thereafter, either alone or with others and
whether or not during working hours or by the use of the facilities of the
Employer ("INVENTIONS"), shall be the exclusive property of the Employer. The
Employee shall promptly disclose all Inventions to the Employer, shall execute
at the request of the Employer any assignments or other documents the Employer
may deem necessary to protect or perfect its rights therein, and shall assist
the Employer, at the Employer's expense, in obtaining, defending and enforcing
the Employer's rights therein. The Employee hereby appoints the Employer as his
attorney-in-fact to execute on his behalf any assignments or other documents
deemed necessary by the Employer to protect or perfect its rights to any
Inventions.
Section 8. CONFIDENTIAL INFORMATION. The Employee recognizes and
acknowledges that certain assets of the Employer, including without limitation
information regarding customers, pricing policies, methods of operation,
proprietary computer programs, sales, products, profits, costs, markets, key
personnel, formulae, product applications, technical processes, and trade
secrets (hereinafter called "CONFIDENTIAL INFORMATION") are valuable, special,
and unique assets of the Employer and its affiliates. The Employee shall not,
during or after his term of employment, disclose any or any part of the
Confidential Information to any person, firm, corporation, association, or any
other entity for any reason or purpose whatsoever, directly or indirectly,
except as may be required pursuant to his employment hereunder; PROVIDED, that
Confidential Information shall in no event include (a) Confidential Information
which was generally available to the public at the time of disclosure by the
Employer or (b) Confidential Information which becomes publicly available other
than as a consequence of the breach by the Employee of his confidentiality
obligations hereunder. In the event of the termination of his employment,
whether voluntary or involuntary and whether by the Employer or the Employee,
the Employee shall deliver to the Employer all documents and data pertaining to
the Confidential Information and shall not take with him any documents or data
of any kind or any reproductions (in whole or in part) or extracts of any items
relating to the Confidential Information.
Section 9. NON-COMPETITION. During the term of the Employee's
employment hereunder and until one year after termination of the Employee's
employment hereunder, the Employee will not (a) anywhere within New Jersey, New
York or Pennsylvania or anywhere within 100 miles of any store operated by the
Employer at the time of the Employee's termination, engage, directly or
indirectly, alone or as a shareholder (other than as a holder of less than five
percent (5%) of the common stock of any publicly traded corporation), partner,
officer, director, employee or consultant of any other business organization
that is engaged or becomes engaged in a business involving or relating to the
operation of retail drug stores or in any other business activity that the
Employer is conducting at the time of the Employee's termination or has notified
the Employee that it proposes to conduct and for which the Employer has, prior
to the time of
<PAGE>
-5-
such termination, expended substantial resources (the "DESIGNATED INDUSTRY"),
(b) divert to any competitor of the Employer any customer of the Employer, or
(c) solicit or encourage any officer, key employee or consultant of the
Employer to leave its employ for alternative employment or hire or offer
employment to, any person to whom the Employer has offered employment. The
Employee will continue to be bound by the provisions of this Section 9 until
their expiration and shall not be entitled to any compensation from the
Employer with respect thereto except as provided in Section 6(d) hereof. If
at any time the provisions of this Section 9 shall be determined to be
invalid or unenforceable, by reason of being vague or unreasonable as to
area, duration or scope of activity, this Section 9 shall be considered
divisible and shall become and be immediately amended to only such area,
duration and scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter;
and the Employee agrees that this Section 9 as so amended shall be valid and
binding as though any invalid or unenforceable provision had not been
included herein.
Section 10. GENERAL.
(a) NOTICES. All notices and other communications hereunder shall be in
writing or by written telecommunication, and shall be deemed to have been duly
given if delivered personally or if mailed by certified mail, return receipt
requested, postage prepaid or sent by written telecommunication or telecopy, to
the relevant address set forth below, or to such other address as the recipient
of such notice or communication shall have specified to the other party hereto
in accordance with this Section 10(a):
If to the Employer, to:
Community Distributors, Inc.
251 Industrial Parkway
Somerville, New Jersey 08876
Attention: Mr. Frank Marfino, President
With a copy to:
Robert M. Wolf, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110-1726
If to the Employee, to:
Mr. Michael Quinn
c/o Community Distributors, Inc.
251 Industrial Parkway
Somerville, New Jersey 08876
<PAGE>
-6-
(b) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and
agrees that upon any breach by the Employee of his obligations under
Sections 7, 8 and 9 hereof, the Employer will have no adequate remedy at law,
and accordingly will be entitled to specific performance and other
appropriate injunctive and equitable relief.
(c) SEVERABILITY. If any provision of this Agreement is or becomes
invalid, illegal or unenforceable in any respect under any law, the validity,
legality and enforceability of the remaining provisions hereof shall not in any
way be affected or impaired.
(d) WAIVERS. No delay or omission by either party hereto in exercising
any right, power or privilege hereunder shall impair such right, power or
privilege, nor shall any single or partial exercise of any such right, power or
privilege preclude any further exercise thereof or the exercise of any other
right, power or privilege.
(e) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(f) ASSIGNS. This Agreement shall be binding upon and inure to the
benefit of the heirs and successors of each of the parties hereto, including any
entity which acquires substantially all of the assets or stock of the Employer.
(g) ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties, supersedes all prior agreements and understandings relating to
the subject matter hereof and shall not be amended except by a written
instrument hereafter signed by each of the parties hereto.
(h) GOVERNING LAW. This Agreement and the performance hereof shall be
construed and governed in accordance with the laws of the State of New Jersey.
<PAGE>
-7-
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have caused this Agreement to be duly executed as of the date and
year first above written.
COMMUNITY DISTRIBUTORS, INC.
By: /s/ Frank Marfino
---------------------------------
Title:Chief Executive Officer
/s/ Michael Quinn
---------------------------------
Michael Quinn
<PAGE>
Exhibit 10.21
CDI GROUP, INC.
1995 STOCK OPTION PLAN
1. PURPOSE
This Plan is intended to encourage ownership of Stock by employees and
consultants of the Company and its Affiliates and to provide additional
incentives for them to promote the success of the Company's business. The Plan
is intended to be an incentive stock option plan within the meaning of Section
422 of the Code but not all Options granted hereunder are required to be
Incentive Options.
2. DEFINITIONS
As used in this Plan the following terms shall have the following
meanings:
2.1. ACT means the Securities Act of 1933, as amended.
2.2. AFFILIATE means a parent or subsidiary corporation of the Company,
as defined in Sections 424(e) and (f), respectively, of the Code.
2.3. BOARD means the Company's Board of Directors.
2.4. CODE means the Internal Revenue Code of 1986, as amended from time
to time, or any statute successor thereto, and any regulations issued from time
to time thereunder.
2.5. COMMITTEE means a committee appointed by the Board, responsible
for the administration of the Plan, as provided in Section 5 of the Plan. No
member of the Committee shall be eligible to receive an Option under the Plan,
and no individual shall be eligible for membership on the Committee within one
year of having received an Option under the Plan. For any period during which no
such committee is in existence all authority and responsibility assigned the
Committee under the Plan shall be exercised, if at all, by the Board.
2.6. COMPANY means CDI Group, Inc., a corporation organized under the
laws of the State of Delaware.
2.7. EMPLOYMENT AGREEMENT means an agreement, if any, between the
Company, or any of its subsidiaries, and an Optionee, setting forth, INTER ALIA,
conditions and restrictions upon the transfer of shares of Stock.
2.8. FAIR MARKET VALUE means the value of a share of Stock on any date
as determined by the Committee.
2.9. GRANT DATE means the date as of which an Option is granted, as
determined under Section 7.
<PAGE>
-2-
2.10. INCENTIVE OPTION means an Option which by its terms is to be
treated as an "incentive stock option" within the meaning of Section 422 of the
Code.
2.11. NONSTATUTORY OPTION means any Option that is not an Incentive
Option.
2.12. OPTION means an option to purchase shares of Stock granted under
the Plan.
2.13. OPTION AGREEMENT means an agreement between the Company and an
Optionee, setting forth the terms and conditions of an Option.
2.14. OPTION PRICE means the price paid by an Optionee for a share of
Stock upon exercise of an Option.
2.15. OPTIONEE means a person eligible to receive an Option, as
provided in Section 6, to whom an Option shall have been granted under the Plan.
2.16. PLAN means this 1995 Stock Option Plan of the Company, as amended
from time to time.
2.17. STOCK means Class A Voting Common Stock, par value $.00001 per
share, of the Company.
2.18. STOCK RESTRICTION AGREEMENT means an agreement between the
Company and the Optionee in such form as the Committee may prescribe in
connection with the grant of any Option, setting forth certain restrictions upon
the transfer of shares of Stock.
2.19. TEN PERCENT OWNER means a person who owns, or is deemed within
the meaning of Section 422(b)(6) of the Code to own, stock possessing more than
10% of the total combined voting power of all classes of stock of the Company
(or any Affiliate). Whether a person is a Ten Percent Owner shall be determined
with respect to each Option based on the facts existing immediately prior to the
Grant Date of such Option.
3. TERM OF THE PLAN
Options may be granted hereunder at any time in the period commencing
on the adoption of the Plan by the Board and ending immediately prior to the
tenth anniversary of the earlier of the adoption of the Plan by the Board or
approval of the Plan by the Company's shareholders. Options granted prior to
shareholder approval of the Plan are hereby expressly conditioned upon such
approval, and shall be void AB INITIO in the event the shareholders of the
Company shall fail to approve the Plan within twelve (12) months of the Board's
approval of the Plan.
4. STOCK SUBJECT TO THE PLAN
At no time shall the number of shares of Stock then outstanding which
are attributable to the exercise of Options granted under the Plan, PLUS the
number of shares then issuable upon exercise of outstanding Options granted
under the Plan, exceed 65,882 shares, SUBJECT, HOWEVER, to the provisions of
Section 17 of the Plan. Shares to be issued upon the exercise of Options
<PAGE>
-3-
granted under the Plan may be either authorized but unissued shares or shares
held by the Company in its treasury. If any Option expires, terminates, or is
cancelled for any reason without having been exercised in full, the shares not
purchased thereunder shall again be available for Options thereafter to be
granted.
5. ADMINISTRATION
The Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall have complete authority, in its
discretion, to make or to select the manner of making the following
determinations with respect to each Option to be granted by the Company in
addition to any other determination allowed the Committee under the Plan: (a)
the employee or consultant to receive the Option; (b) whether the Option (if
granted to an employee) will be an Incentive Option or Nonstatutory Option; (c)
the time of granting the Option; (d) the number of shares subject to the Option;
(e) the Option Price; (f) the Option period; (g) the Option exercise date or
dates; and (h) the effect of termination of employment or other association with
the Company and its Affiliates on the subsequent exercisability of the Option.
In making such determinations, the Committee may take into account the nature of
the services rendered by the respective employees and consultants, their present
and potential contributions to the success of the Company and its subsidiaries,
and such other factors as the Committee in its discretion shall deem relevant.
Subject to the provisions of the Plan, the Committee shall also have complete
authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective Option Agreements (which need not be identical), and to make all
other determinations necessary or advisable for the administration of the Plan.
The Committee's determinations made in good faith on matters referred to in this
Plan shall be conclusive.
6. ELIGIBILITY: MAXIMUM GRANT PER INDIVIDUAL
An Option shall be granted only to an employee or consultant of one or
more of the Company or an Affiliate. A director of one or more of the Company or
any Affiliate who is not also an employee or consultant of one or more of the
Company or an Affiliate shall not be eligible to receive an Option. In no event
shall the number of shares with respect to which Options may be granted
hereunder to any one individual exceed 66 2/3% of the number of shares of Stock
subject to the Plan as set forth in Section 4, as the same may be adjusted from
time to time in accordance with Section 17.
7. TIME OF GRANTING OPTIONS
The granting of an Option shall take place at the time specified in the
Option Agreement. Only if expressly so provided in the Option Agreement shall
the Grant Date be the date on which an Option Agreement shall have been duly
executed and delivered by the Company and the Optionee.
<PAGE>
-4-
8. OPTION PRICE
The Option Price under each Incentive Option shall be not less than
100% of the Fair Market Value of Stock on the Grant Date, or not less than 110%
of the Fair Market Value of Stock on the Grant Date if the Optionee is a Ten
Percent Owner. The Option Price under each Nonstatutory Option shall not be so
limited solely by reason of this Section 8.
9. OPTION PERIOD
No Incentive Option may be exercised on or after the tenth anniversary
of the Grant Date, or on or after the fifth anniversary of the Grant Date, if
the Optionee is a Ten Percent Owner. The Option period under each Nonstatutory
Option shall not be so limited solely by reason of this Section 9. An Option may
be immediately exercisable or become exercisable in such installments,
cumulative or non-cumulative, as the Committee may determine. In the case of an
Option not otherwise immediately exercisable in full, the Committee may
accelerate the exercisability of such Option in whole or in part at any time,
provided the acceleration of the exercisability of any Incentive Option would
not cause the Option to fail to comply with the provisions of Section 422 of the
Code.
10. LIMIT ON INCENTIVE OPTION CHARACTERIZATION
An Incentive Option shall be considered to be an Incentive Option only
to the extent that the number of shares of Stock for which the Option first
becomes exercisable in a calendar year do not have an aggregate Fair Market
Value (as of the date of the grant of the Option) in excess of the "current
limit". The current limit for any Optionee for any calendar year shall be
$100,000 MINUS the aggregate Fair Market Value at the date of grant of the
number of shares of Stock available for purchase for the first time in the same
year under each other Incentive Option previously granted to the Optionee under
the Plan, and under each other incentive stock option previously granted to the
Optionee under any other incentive stock option plan of the Company and its
Affiliates, after December 31, 1986. Any shares of Stock which would cause the
foregoing limit to be violated shall be deemed to have been granted under a
separate Nonstatutory Option, otherwise identical in its terms to those of the
Incentive Option.
11. EXERCISE OF OPTION
An Option may be exercised by the Optionee giving written notice, in
the manner provided in Section 23, specifying the number of shares with respect
to which the Option is then being exercised. The notice shall be accompanied by
payment in the form of cash, or certified or bank check payable to the order of
the Company in an amount equal to the option price of the shares to be purchased
or, if the Committee had so authorized on the grant of any particular Option
hereunder (and subject to such conditions, if any, as the Committee may deem
necessary to avoid adverse accounting effects to the Company) by delivery of
that number of shares of Stock having a fair market value equal to the option
price of the shares to be purchased. Receipt by the Company of such notice and
payment shall constitute the exercise of the Option. Within 30 days thereafter
but subject to the remaining provisions of the Plan, the Company shall deliver
or cause to be delivered to the Optionee or his agent a certificate or
certificates for the number of shares
<PAGE>
-5-
then being purchased. Such shares shall be fully paid and nonassessable. Nothing
herein shall be construed to preclude the Company from participating in a
so-called "cashless exercise", provided the Optionee or other person exercising
the Option and each other party involved in any such exercise shall comply with
such procedures, and enter into such agreements, of indemnity or otherwise, as
the Company shall specify.
12. RESTRICTIONS ON ISSUE OF SHARES
12.1. VIOLATION OF LAW. Notwithstanding any other provision of the
Plan, if, at any time, in the reasonable opinion of the Company the issuance of
shares of Stock covered by the exercise of any Option may constitute a violation
of law, then the Company may delay such issuance and the delivery of a
certificate for such shares until (i) approval shall have been obtained from
such governmental agencies, other than the Securities and Exchange Commission,
as may be required under any applicable law, rule, or regulation; and (ii) in
the case where such issuance would constitute a violation of a law administered
by or a regulation of the Securities and Exchange Commission, one of the
following conditions shall have been satisfied:
(a) the shares with respect to which such Option has been
exercised are at the time of the issue of such shares effectively registered
under the Act; or
(b) the Company shall have received an opinion, in form and
substance satisfactory to the Company, from the Company's legal counsel to the
effect that the sale, transfer, assignment, pledge, encumbrance or other
disposition of such Shares or such beneficial interest, as the case may be, does
not require registration under the Act or any applicable state securities laws.
The Company shall make all reasonable efforts to bring about the occurrence of
said events.
12.2. EXECUTION OF STOCK RESTRICTION AGREEMENT; INTERPRETATION.
Whenever shares are to be issued pursuant to an Option, the Company shall be
under no obligation to issue such shares until such time, if ever, as the person
who exercises such Option, in whole or in part, shall have executed and
delivered to the Company the Stock Restriction Agreement specified by the
Committee in connection with the grant of such Option, if any. In the event of
any conflict between the provisions of this Plan and provisions of a Stock
Restriction Agreement or Employment Agreement, the provisions of the Stock
Restriction Agreement or Employment Agreement shall control, but insofar as
possible the provisions of the Plan and any such Agreement shall be construed so
as to give full force and effect to all such provisions.
12.3. PLACEMENT OF LEGENDS. Each certificate representing shares issued
upon the exercise of an Option will bear restrictive legends which may refer to
applicable restrictions under the Stock Restriction Agreement and Employment
Agreement, if any.
13. PURCHASE FOR INVESTMENT; SUBSEQUENT REGISTRATION
13.1. INVESTMENT REPRESENTATION. Unless the shares to be issued upon
exercise of an Option granted under the Plan have been effectively registered
under the Act, the Company shall
<PAGE>
-6-
be under no obligation to issue any shares covered by any Option unless the
person who exercises such Option, in whole or in part, shall give a written
representation to the Company which is satisfactory in form and substance to its
counsel and upon which the Company may reasonably rely, that he or she is
acquiring the shares issued pursuant to such exercise of the Option on his or
her own account for the purpose of investment and not with a view to, or for
sale in connection with, the distribution of any such shares.
13.2. REGISTRATION. If the Company shall deem it necessary or desirable
to register under the Act or other applicable statutes any shares with respect
to which an Option shall have been granted, or to qualify any such shares for
exemption from the Act or other applicable statutes, then the Company shall take
such action at its own expense. The Company may require from each Option holder,
or each holder of shares of Stock acquired pursuant to the Plan, such
information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Company and its officers and
directors from such holder against all losses, claims, damage and liabilities
arising from such use of the information so furnished and caused by any untrue
statement of any material fact therein or caused by the omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made. In addition, the Company may require of any such person that he or she
agree that, without the prior written consent of the Company or such managing
underwriter, he or she will not sell, make any short sale of, loan, grant any
option for the purchase of, pledge or otherwise encumber, or otherwise dispose
of, any shares of Stock during the 180 day period commencing on the effective
date of the registration statement relating to such underwritten public offering
of securities.
13.3. PLACEMENT OF LEGENDS; STOP ORDERS; ETC. Each share of Stock
issued pursuant to an Option granted under this Plan may bear a reference to the
investment representation made in accordance with Section 13.1 in addition to
any other applicable restriction under the Plan and the terms of the Option and
to the fact that no registration statement has been filed with the Securities
and Exchange Commission in respect to said Stock. All certificates for shares of
Stock or other securities delivered under the Plan shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of any stock exchange upon
which the Stock is then listed, and any applicable federal or state securities
law, and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
14. WITHHOLDING; NOTICE OF DISPOSITION OF STOCK
PRIOR TO EXPIRATION OF SPECIFIED HOLDING PERIOD
14.1. TAX WITHHOLDING. Whenever shares are to be issued in satisfaction
of an Option granted hereunder, the Company shall have the right to require the
Optionee to remit to the Company an amount sufficient to satisfy federal, state,
local or other withholding tax requirements if and to the extent required by law
(whether so required to secure for the Company an otherwise available tax
deduction or otherwise) prior to the delivery of any certificate or certificates
for such shares.
<PAGE>
-7-
14.2. NOTIFICATION OF DISPOSITION. Each person exercising any Incentive
Option granted under the Plan shall be deemed to have covenanted with the
Company to report to the Company any disposition of such shares prior to the
expiration of the holding periods specified by Section 422(a)(1) of the Code
and, if and to the extent that the realization of income in such a disposition
imposes upon the Company federal, state, local or other withholding tax
requirements, or any such withholding is required to secure for the Company an
otherwise available tax deduction, to remit to the Company an amount in cash
sufficient to satisfy those requirements.
15. TERMINATION OF ASSOCIATION WITH THE COMPANY
Unless the Committee shall provide otherwise in the grant of a
particular Option under the Plan, if the Optionee's employment or other
association with the Company is terminated, whether voluntarily or otherwise,
the Option shall immediately cease to be exercisable in any respect. Military or
sick leave shall not be deemed a termination of employment or other association,
PROVIDED that it does not exceed the longer of 90 days or the period during
which the absent Optionee's reemployment rights, if any, are guaranteed by
statute or by contract.
16. TRANSFERABILITY OF OPTIONS
Options shall not be transferable, other than by will or the laws of
descent and distribution, and may be exercised during the life of the Optionee
only by the Optionee.
17. ADJUSTMENTS FOR CORPORATE TRANSACTIONS
17.1. STOCK DIVIDEND, ETC. In the event of any stock dividend payable
in Stock or any split-up or contraction in the number of shares of Stock after
the date of the Option Agreement and prior to the exercise in full of the
Option, the number of shares subject to such Option Agreement and the price to
be paid for each share subject to the Option shall be proportionately adjusted.
17.2. STOCK RECLASSIFICATION. In the event of any reclassification or
change of outstanding shares of Stock, shares of stock or other securities
equivalent in kind and value to those shares an Optionee would have received if
he or she had held the full number of shares of Stock subject to the Option
immediately prior to such reclassification or change and had continued to hold
those shares (together with all other shares, stock and securities thereafter
issued in respect thereof) to the time of the exercise of the Option shall
thereupon be subject to the Option.
17.3. CONSOLIDATION OR MERGER. Subject to the remainder of this Section
17.3, in the event of any consolidation or merger of the Company with or into
another company or in case of any sale or conveyance to another company or
entity of the property of the Company as a whole or substantially as a whole,
shares of stock or other securities equivalent in kind and value to those shares
and other securities an Optionee would have received if he or she had held the
full number of shares of Stock remaining subject to the Option immediately prior
to such consolidation, merger, sale or conveyance and had continued to hold
those shares (together with all other shares, stock and securities thereafter
issued in respect thereof) to the time of the exercise of the Option shall
thereupon be subject to the Option. However, unless any Option Agreement shall
provide
<PAGE>
-8-
different or additional terms, in any such transaction the Committee, in its
discretion, may provide instead that any outstanding Option shall terminate, to
the extent not exercised by the Optionee prior to termination, either (a) at the
close of a period of not less than ten (10) days specified by the Committee and
commencing on the Committee's delivery of written notice to the Optionee of its
decision to terminate such Option without payment of consideration as provided
in the following clause or (b) as of the date of the transaction, in
consideration of the Company's payment to the Optionee of an amount of cash
equal to the difference between the aggregate Fair Market Value of the shares of
Stock for which the Option is then exercisable and the aggregate exercise price
for such shares under the Option.
17.4. DISSOLUTION OR LIQUIDATION. Upon dissolution or liquidation of
the Company, the Option shall terminate, but the Optionee (if at the time in the
employ of or otherwise associated with the Company or any of its Affiliates)
shall have the right, immediately prior to such dissolution or liquidation, to
exercise the Option to the extent exercisable on the date of such dissolution or
liquidation.
17.5. RELATED MATTERS. Any adjustment required by this Section 17 shall
be determined and made by the Committee. No fraction of a share shall be
purchasable or deliverable upon exercise, but in the event any adjustment
hereunder of the number of shares covered by the Option shall cause such number
to include a fraction of a share, such number of shares shall be adjusted to the
nearest smaller whole number of shares. In the event of changes in the
outstanding Stock by reason of any stock dividend, split-up, contraction,
reclassification, or change of outstanding shares of Stock of the nature
contemplated by this Section 17, the number of shares of Stock available for the
purposes of the Plan as stated in Section 4 shall be correspondingly adjusted.
18. RESERVATION OF STOCK
The Company shall at all times during the term of the Plan and any
outstanding Options granted hereunder reserve or otherwise keep available such
number of shares of Stock as will be sufficient to satisfy the requirements of
the Plan (if then in effect) and such Options and shall pay all fees and
expenses necessarily incurred by the Company in connection therewith.
19. LIMITATION OF RIGHTS IN STOCK;
NO SPECIAL EMPLOYMENT OR OTHER RIGHTS
The Optionee shall not be deemed for any purpose to be a stockholder of
the Company with respect to any of the shares of Stock covered by an Option,
except to the extent that the Option shall have been exercised with respect
thereto and, in addition, a certificate shall have been issued therefor and
delivered to the Optionee or his agent. Any Stock issued pursuant to the Option
shall be subject to all restrictions upon the transfer thereof which may be now
or hereafter imposed by the Certificate of Incorporation, the By-laws of the
Company, the Stock Restriction Agreement and the Employment Agreement. Nothing
contained in the Plan or in any Option shall confer upon any Optionee any right
with respect to the continuation of his or her employment or other association
with the Company (or any Affiliate), or interfere in any way with the right of
the Company (or any Affiliate), subject to the terms of any separate employment
or consulting
<PAGE>
-9-
agreement or provision of law or corporate articles or by-laws to the contrary,
at any time to terminate such employment or consulting agreement or to increase
or decrease the compensation of the Optionee from the rate in existence at the
time of the grant of an Option.
20. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the shareholders of the Company shall be construed as creating any
limitations on the power of the Board to adopt such other incentive arrangements
as it may deem desirable, including without limitation, the granting of stock
options other than under the Plan, and such arrangements may be either
applicable generally or only in specific cases.
21. TERMINATION AND AMENDMENT OF THE PLAN
The Board may at any time terminate the Plan or make such modifications
of the Plan as it shall deem advisable. No termination or amendment of the Plan
may, without the consent of the Optionee to whom any Option shall theretofore
have been granted, adversely affect the rights of such Optionee under such
Option.
22. NOTICES AND OTHER COMMUNICATIONS
Any notice, demand, request or other communication hereunder to any
party shall be deemed to be sufficient if contained in a written instrument
delivered in person or duly sent by first class registered, certified or
overnight mail, postage prepaid, or telecopied with a confirmation copy by
regular, certified or overnight mail, addressed or telecopied, as the case may
be, (i) if to the Optionee, at his or her residence address last filed with the
Company and (ii) if to the Company, at 251 Industrial Parkway, Somerville, New
Jersey 08876, Attention: President, Telecopier: (908) 722-8700, or to such other
address or telecopier number, as the case may be, as the addressee may have
designated by notice to the addressor. All such notices, requests, demands and
other communications shall be deemed to have been received: (i) in the case of
personal delivery, on the date of such delivery; (ii) in the case of mailing,
when received by the addressee; and (iii) in the case of facsimile transmission,
when confirmed by facsimile machine report.
23. GOVERNING LAW
The Plan and all Options and actions taken thereunder shall be
governed, interpreted and enforced in accordance with the laws of the State of
Delaware, without regard to the conflict of laws principles thereof.
*----------------*----------------*
The following does not form part of this Plan but is included solely for
informational purposes:
Date of Board Approval: January 30, 1995
<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
EARNINGS AVAILABLE FOR FIXED CHARGES JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
- ------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes...................................................... $ 9,779 $ 6,715 $ 2,753
ADD
Interest expense................................................................ 3,018 6,748 8,033
Interest component of rent expense.............................................. 2,811 3,057 3,477
--------- --------- ----------
Income as adjusted.............................................................. $ 15,608 $ 16,520 $ 14,263
--------- --------- ----------
--------- --------- ----------
Fixed charges
Interest expense................................................................ $ 3,018 $ 6,748 $ 8,033
Interest component of rent expense.............................................. 2,811 3,057 3,477
--------- --------- ----------
Total fixed charges............................................................. $ 5,829 $ 9,805 $ 11,510
--------- --------- ----------
--------- --------- ----------
Ratio of earnings to fixed charges.............................................. 2.68 1.68 1.24
</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>
<S> <C> <C> <C>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
EARNINGS AVAILABLE FOR FIXED CHARGES JULY 26, 1997 JULY 25, 1998 JULY 31, 1999
- ------------------------------------ ------------- ------------- -------------
Income before income taxes...................................................... $ 8,211 $ 5,040 $ 908
ADD
Interest expense................................................................ 4,586 8,423 9,878
Interest component of rent expense.............................................. 2,811 3,057 3,477
-------- --------- ---------
Income as adjusted.............................................................. $ 15,608 $ 16,520 $ 14,263
-------- --------- ---------
-------- --------- ---------
Fixed charges
Interest expense................................................................ $ 4,586 $ 8,423 $ 9,878
Interest component of rent expense.............................................. 2,811 3,057 3,477
-------- --------- ---------
Total fixed charges............................................................. $ 7,397 $ 11,480 $ 13,355
-------- --------- ---------
-------- --------- ---------
Ratio of earnings to fixed charges.............................................. 2.11 1.44 1.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000774492
<NAME> COMMUNITY DISTRIBUTORS, INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> JUL-26-1998
<PERIOD-END> JUL-31-1999
<CASH> 285
<SECURITIES> 0
<RECEIVABLES> 5,240
<ALLOWANCES> 0
<INVENTORY> 35,787
<CURRENT-ASSETS> 42,325
<PP&E> 21,979
<DEPRECIATION> 9,118
<TOTAL-ASSETS> 90,495
<CURRENT-LIABILITIES> 24,841
<BONDS> 74,000
0
0
<COMMON> 0
<OTHER-SE> (14,727)
<TOTAL-LIABILITY-AND-EQUITY> 90,495
<SALES> 275,270
<TOTAL-REVENUES> 275,270
<CGS> 196,812
<TOTAL-COSTS> 265,289
<OTHER-EXPENSES> 7,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,753
<INCOME-TAX> 1,974
<INCOME-CONTINUING> 779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 779
<EPS-BASIC> 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-31-1999
<PERIOD-START> JUL-26-1998
<PERIOD-END> JUL-31-1999
<CASH> 285
<SECURITIES> 0
<RECEIVABLES> 5,266
<ALLOWANCES> 0
<INVENTORY> 35,787
<CURRENT-ASSETS> 42,351
<PP&E> 21,979
<DEPRECIATION> 9,118
<TOTAL-ASSETS> 90,521
<CURRENT-LIABILITIES> 24,214
<BONDS> 94,369
1,279
0
<COMMON> 0
<OTHER-SE> (33,773)
<TOTAL-LIABILITY-AND-EQUITY> 90,521
<SALES> 275,270
<TOTAL-REVENUES> 275,270
<CGS> 196,812
<TOTAL-COSTS> 265,289
<OTHER-EXPENSES> 9,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 908
<INCOME-TAX> 1,347
<INCOME-CONTINUING> (439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (439)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
COMMUNITY DISTRIBUTORS, INC.
SUMMARY OF VALUATION AND QUALIFYING ACCOUNTS
(in dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INVENTORY BEGINNING END OF
RESERVES OF YEAR ADDITIONS REDUCTIONS YEAR
- ------------------------------------------------------------- --------- --------- ---------- ---------
Fiscal 1999.................................................. $ 50,882 $ 103,956 $ 0 $ 154,838
Fiscal 1998.................................................. $ 113,220 $ 0 $ (62,338) $ 50,882
Fiscal 1997.................................................. $ 108,779 $ 4,441 $ 0 $ 113,220
</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
CDI GROUP, INC.
SUMMARY OF VALUATION AND QUALIFYING ACCOUNTS
(in dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INVENTORY BEGINNING END OF
RESERVES OF YEAR ADDITIONS REDUCTIONS YEAR
- -------------------------------------------------------- --------- --------- ---------- -------
Fiscal 1999............................................. $ 50,882 $ 103,956 $ 0 $ 154,838
Fiscal 1998............................................. $ 113,220 $ 0 $ (62,338) $ 50,882
Fiscal 1997............................................. $ 108,779 $ 4,441 $ 0 $ 113,220
</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 99.3
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholder of
Community Distributors, Inc.:
Our audits of the financial statements referred to in our report dated
October 13, 1999 appearing in this Annual Report on Form 10-K of Community
Distributors, Inc. also included an audit of the financial statement schedule
included in this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
New York, New York
October 13, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
CDI Group, Inc. and Subsidiary:
Our audits of the consolidated financial statements referred to in our report
dated October 13, 1999 appearing in this Annual Report on Form 10-K of CDI
Group, Inc. and Subsidiary also included an audit of the financial statement
schedule included in this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
New York, New York
October 13, 1999
