<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JANUARY 23, 1999
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21379
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
(Exact name of registrants as specified in their charters)
DELAWARE 22-1833660
22-3349976
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Nos.)
800 COTTONTAIL LANE
FRANKLIN TOWNSHIP
SOMERSET, NEW JERSEY 08873
(Address of principal executive offices)
(732) 748-8900
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
----------------------------
CDI GROUP, INC.
---------------
INDEX
-----
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
------ ------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements ..................................................................3
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Operations (Unaudited) - For the Three
and Six Month Periods Ended January 23, 1999 and January 31, 1998................................3
Condensed Balance Sheets (Unaudited) - As of January 23, 1999 and
July 25, 1998....................................................................................4
Condensed Statements of Cash Flows (Unaudited) - For the Three
and Six Month Periods Ended January 23, 1999 and January 31, 1998................................5
Notes to Condensed Financial Statements of
Community Distributors, Inc. ....................................................................6
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
and Six Month Periods Ended January 23, 1999 and January 31, 1998 ...............................8
Condensed Consolidated Balance Sheets (Unaudited) - As of January 23, 1999
and July 25, 1998 ...............................................................................9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
and Six Month Periods Ended January 23, 1999 and January 31, 1998...............................10
Notes to Condensed Consolidated Financial Statements of
CDI Group, Inc. and Subsidiary .................................................................11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..............................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................21
PART II. OTHER INFORMATION
Item 4 Other Information ...............................................................................22
Item 5. Exhibits and Reports on Form 8-K ...............................................................22
SIGNATURES .....................................................................................23
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
January 23, January 31, January 23, January 31,
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 75,487 $ 74,463 $ 135,608 $ 129,185
Cost of sales 52,666 52,783 97,094 2,454
---------- ---------- ---------- ----------
Gross profit 22,821 21,680 38,514 36,731
Selling, general and administrative expenses 16,108 14,760 30,445 27,438
Administrative fees 62 63 125 126
Depreciation and amortization 1,327 1,258 2,978 2,725
Other income, net 78 147 579 252
---------- ---------- ---------- ----------
Operating income 5,402 5,746 5,545 6,694
Interest expense, net 1,988 2,241 3,928 2,959
---------- ---------- ---------- ----------
Income before income taxes 3,414 3,505 1,617 3,735
Provision for income taxes 1,844 1,687 873 2,036
---------- ---------- ---------- ----------
Net income $ 1,570 $ 1,818 $ 744 $ 1,699
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
As of As of
January 23, July 25,
1999 1998
-------------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ - $ 10,770
Accounts receivable 5,939 1,079
Inventory 39,073 29,246
Prepaid expenses and other current assets 917 1,013
-------------- --------------
TOTAL CURRENT ASSETS 45,929 42,108
Property and equipment, net 11,824 10,080
Deferred charges and other assets 5,767 6,290
Goodwill, net 30,645 31,603
-------------- --------------
TOTAL ASSETS $ 94,165 $ 90,081
-------------- --------------
-------------- --------------
LIABILITIES:
Revolver borrowings $ - $ -
Accounts payable 21,143 11,035
Accrued expenses and other current liabilities 7,273 8,237
Current portion of supplier advances 1,068 1,068
----- -----
TOTAL CURRENT LIABILITIES 29,484 20,340
Long-term debt 74,000 80,000
Supplier advances, net of current portion 1,146 629
Other long-term liabilities 4,297 3,498
-------------- --------------
TOTAL LIABILITIES $ 108,927 $ 104,467
-------------- --------------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings 2,780 3,156
Distribution in excess of capital (17,542) (17,542)
-------------- --------------
TOTAL STOCKHOLDER'S DEFICIT (14,762) (14,386)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 94,165 $ 90,081
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
January 23, January 31, January 23, January 31,
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,570 $ 1,818 $ 744 $ 1,699
Depreciation and amortization 1,327 1,258 2,978 2,725
Non-cash rent expense 121 102 249 221
LIFO provision 150 300 300 600
Gain on repurchase of Senior Notes - - (395) -
Changes in operating assets and liabilities (2,970) 2,553 (9,327) (2,170)
----------- ----------- ----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 198 6,031 (5,451) 3,075
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,639) (1,288) (3,005) (1,950)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,639) (1,288) (3,005) (1,950)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver borrowings 7,860 900 9,710 900
Repayments of revolver borrowings (9,710) (900) (9,710) (900)
Cash overdraft 4,411 - 4,411 -
Payments made on long-term debt - - - (29,269)
Proceeds from issuance of Senior Notes - - - 80,000
Repurchase of Senior Notes - - (5,605) -
Transaction fees paid - (548) - (3,634)
Dividend paid to parent (1,120) - (1,120) (45,000)
Additional capital received from parent - - - 242
----------- ----------- ----------- -----------
NET CASH FROM (USED IN) FINANCING ACTIVITIES 1,441 (548) (2,314) 2,339
Net increase (decrease) in cash and cash equivalents - 4,195 (10,770) 3,464
Cash and cash equivalents at beginning of period - 1,139 10,770 1,870
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 5,334 $ - $ 5,334
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying financial statements should be read in conjunction with
the audited financial statements of Community Distributors, Inc. (the
"Company"), and the notes thereto contained in the Company's annual report
on Form 10-K for its fiscal year ended July 25, 1998. The Company, a wholly
owned subsidiary of CDI Group, Inc. (the "Parent"), is engaged in the
operation of retail stores throughout New Jersey. These interim financial
statements are unaudited but, in the opinion of the Company, include all
adjustments, consisting only of normal recurring items, necessary to fairly
present the financial position and operating results for the interim
periods. Results for interim periods are not necessarily indicative of
results for the full year. The year end balance sheet data was derived from
audited financial statements but does not include all disclosures required
by generally accepted accounting principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of these
lawsuits should not have a material impact on the Company's results of
operations, financial position, and cash flows.
(4) DEBT OFFERING:
On October 16, 1997, the Company issued $80,000 of its 10 1/4% Senior Notes
Due 2004 ("Senior Notes") which are guaranteed by the Parent. The net
proceeds from the sale of the Senior Notes was approximately $76,000. The
Company used $29,000 of such net proceeds to refinance substantially all of
its then existing indebtedness and $45,000 of the net proceeds were used to
pay a dividend to the Parent, which then distributed a dividend in the same
amount to its stockholders. Under the relevant debt agreements, in the
event of a change in control, as defined, the Company is required to
repurchase all outstanding Senior Notes.
On October 16, 1997, The Company replaced its then existing credit facility
with a $20,000 five year revolving credit facility (the "Facility")
concurrent with the issuance of the Senior Notes. This Facility bears
interest at either the prime rate or the 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
Facility is a $5,000 letter of credit facility. Outstanding letters of
credit, guaranteeing certain contingent purchases which are not reflected
in the accompanying condensed financial statements, aggregated
approximately $1,527 and $1,666 at January 23, 1999 and July 25, 1998,
respectively. The Facility contains certain financial and operating
covenants, including a minimum fixed charge ratio. Additionally, the
Company cannot make any dividend or other distributions with respect to any
share of stock other than in certain limited circumstances.
6
<PAGE>
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
In October 1998, the Company obtained a waiver from the lender under the
Facility permitting the repurchase of an aggregate of $6,000 principal
amount of Senior Notes and the payment of a dividend to the Parent in the
amount of $1,120. On October 6, 1998, the Company repurchased an aggregate
of $5,000 principal amount of Senior Notes at a purchase price of $930 per
$1,000 principal amount of Senior Notes, plus accrued and unpaid interest.
On October 13, 1998, the Company repurchased an additional $1,000 principal
amount of Senior Notes at a purchase price of $925 per $1,000 principal
amount of Senior Notes, plus accrued and unpaid interest. As of January 23,
1999, $74,000 aggregate principal amount of Senior Notes remained
outstanding. On January 4, 1999, the Company paid a dividend to its Parent
in the amount of $1,120, which immediately thereafter paid a dividend in
the same amount to the common shareholders of the Parent as of the same
date.
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Company is pursuing collection of approximately $455 of
prescription receivables from managed health care plans and other
third-party payer plans ("Third Party Plans") that were purchased by The
Pharmacy Fund Receivables, Inc. Subsequent to the filing for bankruptcy,
the Company entered into a settlement agreement with The Pharmacy Fund
Receivables, Inc. and expects to collect the uncollected receivables. The
Company is unable to predict when such uncollected receivables may be
collected.
In addition to the Third Party Plan prescription receivables that were
purchased by The Pharmacy Fund Receivables, Inc., which the Company has yet
to collect, the Company is also pursuing $676 of post-petition prescription
receivables, of which $222 has been collected. Post-petition receivables
are those which arise because the Third Party Plans continued to make
payments to The Pharmacy Fund Receivables, Inc. for prescription
receivables generated subsequent to the September 9, 1998 bankruptcy
petition that were not purchased by The Pharmacy Fund Receivables, Inc.
Subsequent to the bankruptcy, the Company assumed the risk associated
with the collection of its Third Party Plan receivables.
(6) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories which are taken twice a year. The results of the last physical
inventory that was taken on January 23, 1999 did not have a material impact
on the results of operations.
7
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- --------------------------
January 23, January 31, January 23, January 31,
1999 1998 1999 1998
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 75,487 $ 74,463 $ 135,608 $ 129,185
Cost of sales 52,666 52,783 97,094 92,454
----------- ------------ ----------- ----------
Gross profit 22,821 21,680 38,514 36,731
Selling, general and administrative expenses 16,108 14,760 30,445 27,438
Administrative fees 62 63 125 126
Depreciation and amortization 1,327 1,258 2,978 2,725
Other income, net 78 147 579 252
----------- ------------ ----------- ----------
Operating income 5,402 5,746 5,545 6,694
Interest expense, net 2,427 2,766 4,806 4,007
----------- ------------ ----------- ----------
Income before income taxes 2,975 2,980 739 2,687
Provision for income taxes 1,690 1,503 566 1,669
----------- ------------ ----------- ----------
Net income $ 1,285 $ 1,477 $ 173 $ 1,018
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
As of As of
January 23, July 25,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ - $ 10,770
Accounts receivable 5,962 1,098
Inventory 39,073 29,246
Prepaid expenses and other current assets 917 1,582
----------- ------------
TOTAL CURRENT ASSETS 45,952 42,696
Property and equipment, net 11,824 10,080
Deferred charges and other assets 5,767 6,290
Goodwill, net 30,645 31,603
----------- ------------
TOTAL ASSETS $ 94,188 $ 90,669
----------- ------------
----------- ------------
LIABILITIES:
Revolver borrowings $ - $ -
Accounts payable 21,143 11,035
Accrued expenses and other current liabilities 6,966 8,237
Current portion of supplier advances 1,068 1,068
----------- ------------
TOTAL CURRENT LIABILITIES 29,177 20,340
Long-term debt 74,000 80,000
Subordinated debt 19,399 18,517
Supplier advances, net of current portion 1,146 629
Other long-term liabilities 2,348 2,118
----------- ------------
TOTAL LIABILITIES $ 126,070 $ 121,604
----------- ------------
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862 authorized,
issued and outstanding, redemption value $100 per share 786 786
Redeemable shares of Class A voting common stock, 57,963
shares issued and outstanding at net redemption
value at January 23, 1999 and July 25, 1998 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 196,632 issued and outstanding at
January 23, 1999 and July 25, 1998 - -
Class B non-voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
January 23, 1999 and July 25, 1998 - -
Additional paid-in capital - -
Retained earnings 1,443 2,390
Distribution in excess of capital (34,604) (34,604)
----------- ------------
TOTAL STOCKHOLDERS' DEFICIT (33,161) (32,214)
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 94,188 $ 90,669
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
January 23, January 31, January 23, January 31,
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,285 $ 1,477 $ 173 $ 1,018
Depreciation and amortization 1,327 1,258 2,978 2,725
Non-cash rent expense 121 102 249 221
Non-cash interest expense 439 527 878 1,055
LIFO provision 150 300 300 600
Changes in operating assets and liabilities (3,124) 2,367 (9,634) (2,639)
---------- ---------- ---------- ----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 198 6,031 (5,451) 2,980
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (1,639) (1,288) (3,005) (1,950)
---------- ---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES: (1,639) (1,288) (3,005) (1,950)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from revolver borrowings 7,860 900 9,710 900
Repayments of revolver borrowings (9,710) (900) (9,710) (900)
Cash overdraft 4,411 - 4,411 -
Payments made on long-term debt - - - (29,269)
Proceeds from issuance of Senior Notes - - - 80,000
Repurchase of Senior Notes - - (5,605) -
Transaction fees paid - (548) - (3,634)
Dividend paid (1,120) (1,120) (45,000)
Proceeds from exercise of common stock options - - - 242
Proceeds from loans to officers and directors - - - 182
---------- ---------- ---------- ----------
NET CASH FROM (USED IN) FINANCING ACTIVITIES 1,441 (548) (2,314) 2,434
Net increase (decrease) in cash and cash equivalents - 4,195 (10,770) 3,464
Cash and cash equivalents at beginning of period $ - 1,139 10,770 1,870
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 5,334 $ - $ 5,334
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
10
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of CDI
Group, Inc. and Subsidiary (the "Company"), and the notes thereto contained
in the Company's annual report on Form 10-K for its fiscal year ended July
25, 1998. The Company consists of an operating entity, Community
Distributors, Inc. (the "Subsidiary") which is engaged in the operation
of retail stores throughout New Jersey, and a holding company, CDI Group,
Inc. (the "Parent") which conducts no independent operations. These
interim consolidated financial statements are unaudited but, in the
opinion of the Company, include all adjustments, consisting only of normal
recurring items, necessary to fairly present the financial position and
operating results for the interim periods. Results for interim periods are
not necessarily indicative of results for the full year. The year end
balance sheet data was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles.
(2) ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) CONTINGENCIES:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of these
lawsuits should not have a material impact on the Company's consolidated
results of operations, financial position, and cash flows.
(4) DEBT OFFERING:
On October 16, 1997, the Subsidiary issued $80,000 of its 10 1/4% Senior
Notes Due 2004 ("Senior Notes") which are guaranteed by the Parent. The net
proceeds of the issuance of the Senior Notes was approximately $76,000. The
Subsidiary used $29,000 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 distributed a dividend in the
same amount to its stockholders. Under the relevant debt agreements, in the
event of a change in control, as defined, the Subsidiary is required to
repurchase all outstanding Senior Notes.
On October 16, 1997, the Subsidiary also replaced its then existing credit
facility with a $20,000 five year revolving credit facility (the
"Facility") concurrent with the issuance of the Senior Notes. This Facility
bears interest at either the prime rate or LIBOR plus 1.75% and is
collateralized by the Company's eligible accounts receivable and inventory
balances, as defined. Included in the Facility is a $5,000 letter of
credit facility. Outstanding letters of credit, guaranteeing certain
contingent purchases which are not reflected in the accompanying condensed
consolidated financial statements, aggregated approximately $1,527 and
$1,666 at January 23, 1999 and July 25, 1998, respectively. The Facility
contains certain financial and operating covenants, including a minimum
fixed charge ratio. Additionally, the Subsidiary cannot make any dividend
or other distributions with respect to any share of stock other than in
certain limited circumstances.
11
<PAGE>
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
In October 1998, the Parent obtained a waiver from the lender under the
Facility permitting the repurchase of an aggregate of $6,000 principal
amount of Senior Notes and the payment of a dividend to the shareholders of
the Parent in the amount of $1,120. On October 6, 1998, the Subsidiary
repurchased an aggregate of $5,000 principal amount of Senior Notes at a
purchase price of $930 per $1,000 principal amount of Senior Notes, plus
accrued and unpaid interest. On October 13, 1998, the Subsidiary
repurchased an additional $1,000 principal amount of Senior Notes at
a purchase price of $925 per $1,000 principal amount of Senior Notes,
plus accrued and unpaid interest. As of January 23, 1999, $74,000
aggregate principal amount of Senior Notes remained outstanding. On January
4, 1999, the Parent paid a dividend to its common shareholders in the
amount of $1,120.
In addition to the outstanding Senior Notes issued by the Subsidiary, the
Parent had outstanding long term debt, consisting of senior subordinated
notes due January 31, 2005, in the amount of $19,399 and $18,517 at January
23, 1999 and July 25, 1998, respectively, which includes accrued
interest.
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund, Inc. filed for bankruptcy under
Chapter 11 of the Federal bankruptcy code. In connection therewith, the
Subsidiary is pursuing collection of approximately $455 of prescription
receivables from managed health care plans and other third-party payer
plans ("Third Party Plans") that were purchased by The Pharmacy Fund
Receivables, Inc. Subsequent to the filing for bankruptcy, the Subsidiary
entered into a settlement agreement with The Pharmacy Fund Receivables,
Inc. and expects to collect the uncollected receivables. The Company is
unable to predict when such uncollected receivables may be collected.
In addition to the Third Party Plan prescription receivables that were
purchased by The Pharmacy Fund Receivables, Inc., which the Subsidiary has
yet to collect, the Subsidiary is also pursuing $676 of post-petition
prescription receivables, of which $222 has been collected. Post-petition
receivables are those which arise because the Third Party Plans continued
to make payments to The Pharmacy Fund Receivables, Inc. for prescription
receivables generated subsequent to the September 9, 1998 bankruptcy
petition that were not purchased by The Pharmacy Fund Receivables, Inc.
Subsequent to the bankruptcy, the Subsidiary assumed the risk
associated with the collection of its Third Party Plan receivables.
(6) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation
rates and inventory levels, and is adjusted for the results of physical
inventories which are taken twice a year. The results of the last physical
inventory that was taken on January 23, 1999 did not have a material impact
on the results of operations.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act 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 participants in managed health
care plans and other third-party payer plans ("Third Party Plans") as a
percentage of total pharmacy sales, and its impact on profitability; (ii) the
ability of Community Distributors, Inc. (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 Receivables,
Inc. and the Company's expectations regarding the recovery of funds owed to
it by such party; 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-looking statements represent the best
judgment of the Company and CDI Group, Inc. (the "Holding Company") as of the
date of this Quarterly Report on Form 10-Q, and the Company and the Holding
Company caution readers not to place undue reliance on such statements.
Actual performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to certain risks
and uncertainties, including, but not limited to, the risks and uncertainties
described or discussed in the section "Risk Factors" in the Prospectus dated
February 13, 1998 of the Company and of the Holding Company. These risks
include, among others, the following:
- Risks relating to the Company's substantial leverage and interest
expense obligations.
- Risks that the possible repeal of "Freedom of Choice" and "Any Willing
Provider" legislation in the State of New Jersey will hurt the
Company's competitive position vis-a-vis larger drug store chains.
- Risks that the Company's right to use the tradenames "Drug Fair" and
"Cost Cutters" may be challenged.
- Risks that adverse changes in economic, competitive and regulatory
conditions in northern and central New Jersey, or the country as a
whole, may negatively impact the Company's operating results.
- Risks that uncertainty in the Company's ability to renew leases for
its more profitable locations may negatively impact the Company's
operating results.
- Risks that increased participation by the Company's customers in Third
Party Plans will continue to erode the Company's margins on the sale
of pharmacy products.
- Risks of increased competition from mass merchandisers and chain
drugstores.
- Risks imposed by state and federal regulation of the sale of pharmacy
products and health care in general.
- Risks that the Company will be unable to find suitable locations for
expansion or that new store locations will not prove profitable within
a reasonable period of time.
GENERAL
The Company was founded in 1954 and until 1990 was managed primarily by
its founders. The Holding Company is the owner of all of the outstanding stock
of the Company. Since 1990, the Company has experienced significant growth led
by Frank Marfino, the Company's current Chief Executive Officer. The Company
currently operates a chain of 47 drug and general merchandise stores, with 30
drugstores operating under the "Drug Fair" name and 17 general merchandise
stores operating under the "Cost Cutters" name.
RESULTS OF OPERATIONS
Except where indicated below, the following discussion relates to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
13
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JANUARY 23, 1999 (THE "1999 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED JANUARY 31, 1998 (THE "1998 THREE-MONTH
PERIOD").
Net sales for the 1999 Three-month Period were $75.5 million as
compared to $74.5 million for the 1998 Three-month Period, an increase of
$1.0 million, or 1.3%. The results for the 1999 Three-month Period include
thirteen weeks while the results for the 1998 Three-month Period include
fourteen weeks. Net sales for the first thirteen weeks of the 1998
Three-month Period (the "Comparable 1998 Three-month Period") were $70.6
million as compared to net sales of $75.5 million for the 1999 Three-month
Period, an increase of $4.9 million, or 6.9%. This increase, which includes a
3.2% increase in same-store sales, was primarily due to (i) a 2.8% increase
in sales of non-pharmacy products from $54.7 million for the Comparable 1998
Three-month Period to $56.2 million for the 1999 Three-month Period, and (ii)
a 21.4% increase in pharmacy sales from $15.9 million for the Comparable 1998
Three-month Period to $19.3 million for the 1999 Three-month Period,
including a 30.1% increase in pharmacy sales to Third Party Plans from $11.7
million for the Comparable 1998 Three-month Period to $15.3 million for the
1999 Three-month Period. The Company attributes the increase in net sales of
non-pharmacy products to the opening of three new store locations in the
quarter preceding the 1999 Three-month Period and the acquisition of the
inventory and the customer list of an independent pharmacy during the 1999
Three-month Period as compared to the opening of two new store locations and
no acquisitions of customer lists during the Comparable 1998 Three-month
Period, as well as increased customer traffic in the Company's stores
associated with the increase in total pharmacy sales. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 473,000 for the 1999 Three-month Period as
compared to approximately 421,000 for the Comparable 1998 Three-month Period,
an increase of approximately 52,000, or 12.4%. The number of prescriptions
filled for Third Party Plan customers increased to approximately 378,000 for
the 1999 Three-month Period, as compared to 315,000 for the Comparable 1998
Three-month Period, an increase of 20.1%. Pharmacy sales to non-Third Party
Plan customers were $4.0 million in the 1999 Three-month Period as compared
to $4.2 million in the Comparable 1998 Three-month Period, a decrease of $0.2
million or 4.8%. This decrease occurred 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 from approximately 106,000 prescriptions filled in the Comparable
1998 Three-month Period to approximately 94,000 prescriptions filled in the
1999 Three-month Period. This decrease in volume was partially offset by
increased prices on pharmacy products.
Gross profit was $22.8 million for the 1999 Three-month Period, as
compared to $21.6 million for the 1998 Three-month Period, an increase of
$1.2 million, or 5.5%. Gross profit as a percentage of net sales was 30.2%
for the 1999 Three-month Period as compared to 29.0% for the 1998 Three-month
Period. This 1.2% increase in gross profit as a percentage of sales was due
primarily to an increase in the margin on non-pharmacy merchandise, which
offset the increase in pharmacy sales, which generate lower margins than
sales of non-pharmacy merchandise as a percentage of total sales in the 1999
Three-month Period as compared to the 1998 Three-month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $4.3 million for the 1999 Three-month Period as compared
to $3.5 million for the 1998 Three-month Period, an increase of $0.8 million,
or 22.9%, which was primarily the result of the increase in sales on a same
store basis combined with the maturing of new stores opened in the last three
fiscal years and improved purchase prices from the Company's primary
prescription drug wholesaler. Gross profit on sales to Third Party Plans was
$2.4 million for the 1999 Three-month Period as compared to $1.9 million for
the 1998 Three-month Period, an increase of $0.5 million, or 26.3%, which was
primarily the result of the increase in sales of prescriptions to Third Party
Plan customers as a percent of total sales of prescriptions. Gross profit on
sales of pharmacy products to non-Third Party Plan customers was $1.9 million
in the 1999 Three-month Period as compared to $1.6 million in the 1998
Three-month Period, an increase of $0.3 million, or 18.8%, primarily
resulting from improved purchase prices from the Company's primary wholesaler
and improved retail prices.
Although management expects that Third Party Plans sales as a
percentage of total sales will continue to increase, management believes that as
this rate of increase slows, margins will stabilize, resulting in pharmacy gross
profit growth that more closely approximates pharmacy sale growth rates.
Management believes that the rate of increase in Third Party Plan prescription
sales as a percentage of total pharmacy sales will slow because the current
growth rate, if continued, would reach the point at which almost all members of
the population who may be eligible
14
<PAGE>
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 $18.5 million for the 1999
Three-month Period, as compared to $18.0 million for the 1998 Three-month
Period, an increase of 2.8%. Gross profit as a percentage of non-pharmacy
sales was 32.9% for the 1999 Three-month Period as compared to 31.5% for the
1998 Three-month Period, an increase of 1.5%. Gross profit on non-pharmacy
sales increased primarily due to increased levels of sales and improved
pricing on higher margin seasonal merchandise during the 1999 Three-month
Period, 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 21.3% for the 1999 Three-month Period, as compared to 19.8% for the
1998 Three-month Period, an increase of 1.4%. 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, as well as higher
levels of selling, general and administrative expenses incurred at its three
new store openings during the quarter preceding the 1999 Three-month Period
as new stores typically incur higher levels of selling, general and
administrative expenses during the first three years after they are opened.
Net interest expense was $2.0 million in the 1999 Three-month Period
as compared to $2.2 million in the 1998 Three-month Period, a decrease of
$0.2 million resulting from the lower level of outstanding debt in connection
with the repurchase in October 1998 of $6.0 million aggregate principal
amount of the Company's 10 1/4% Senior Notes Due 2004 ("Senior Notes").
Non-cash interest expense on the Holding Company's outstanding subordinated
debt was $0.4 million for the 1999 Three-month Period as compared to $0.5
million for the 1998 Three-month Period, a decrease of $0.1 million,
resulting from the greater number of days in the 1998 Three-month Period due
to the additional week included in that Period.
Depreciation and amortization expense was $1.3 million in both the
1999 Three-month Period and 1998 Three-month Period. During the 1999
Three-month Period, depreciation expense increased by $0.1 million as a
result of three new stores opened in August and September 1998 while
amortization expense decreased by $0.1 million as a result of lower
amortization of beneficial leaseholds from the expiration of a store lease
and due to lower amortization of deferred financing costs related to the
lower amount of Senior Notes outstanding.
Provision for income taxes was $1.8 million for the 1999 Three-month
Period as compared to $1.7 million for the 1998 Three-month Period, an
increase of $0.1 million, or 5.9%, which was primarily the result of a higher
effective tax rate caused by a higher amount of non-deductible amortization
as a percentage of income before income taxes. Provision for income taxes for
the Holding Company was $1.7 million for the 1999 Three-month Period as
compared to $1.5 million for the 1998 Three-month Period, an increase of $0.2
million, or 13.3%, also resulting from the higher effective tax rate caused
by a higher amount of non-deductible amortization as a percentage of income
before income taxes.
Other income, net was $0.1 million for both the 1999 Three-month Period
and the 1998 Three-month Period as the Company consistently generated vending,
video game, and other miscellaneous income during both these periods.
Net income for the 1999 Three-month Period was $1.6 million as
compared to $1.8 million in the 1998 Three-month Period, a decrease of $0.2
million which is due to lower operating income and to increased levels of
interest, depreciation and amortization incurred. Net income for the Holding
Company for the 1999 Three-month Period was $1.3 million as compared to $1.5
in the 1998 Three-month Period, a
15
<PAGE>
decrease of $0.2 million, principally as a result of the factors described above
as well as the compounded interest incurred on the Holding Company's outstanding
subordinated debt.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 23, 1999 (THE "1999 SIX-MONTH
PERIOD") WITH THE SIX MONTHS ENDED JANUARY 31, 1998 (THE "1998 SIX-MONTH
PERIOD").
Net sales for the 1999 Six-month Period were $135.6 million as
compared to $129.2 million for the 1998 Six-month Period, an increase of $6.4
million, or 5.0%. The results for the 1999 Six-month Period include
twenty-six weeks while the results for the 1998 Six-month Period include
twenty-seven weeks. Net sales for the first thirteen weeks of the 1998 Six-month
Period (the "Comparable 1998 Six-month Period") were $125.3 million as
compared to net sales of $135.6 million for the 1999 Six-month Period, which
represented an increase of $10.3 million, or 8.2%. This increase, which
includes a 4.2% increase in same-store sales, was primarily due to (i) a 4.2%
increase in sales of non-pharmacy products from $95.0 million for the
Comparable 1998 Six-month Period to $99.0 million for the 1999 Six-month
Period, and (ii) a 20.8% increase in pharmacy sales from $30.3 million for
the Comparable 1998 Six-month Period to $36.6 million for the 1999 Six-month
Period, including a 29.3% increase in pharmacy sales to Third Party Plans
from $22.2 million for the Comparable 1998 Six-month Period to $28.7 million
for the 1999 Six-month Period. The Company attributes the increase in net
sales of non-pharmacy products to the opening of three new store locations in
the quarter preceding the 1999 Six-month Period and the acquisition of the
inventory and customer list of an independent pharmacy during the 1999
Six-month Period as compared to the opening of two new store locations and no
acquisitions of customer lists during the Comparable 1998 Six-month Period,
as well as increased customer traffic in the Company's stores associated with
the increase in total pharmacy sales. The number of prescriptions filled
(including prescriptions filled for Third Party Plans) was approximately
898,000 for the 1999 Six-month Period as compared to approximately 800,000
for the Comparable 1998 Six-month Period, an increase of approximately
98,000, or 12.2%. The number of prescriptions filled for Third Party Plan
customers increased to approximately 713,000 for the 1999 Six-month Period,
as compared to 593,000 for the Comparable 1998 Six-month Period, an increase
of 20.2%. Pharmacy sales to non-Third Party Plan customers were $7.9 million
in the 1999 Six-month Period as compared to $8.1 million in the Comparable
1998 Six-month Period, a decrease of $0.2 million, or 2.5%. This decrease
occurred primarily as the result of increased participation of the Company's
customers in Third Party Plans and a decrease in the volume of pharmacy
products sold to non-Third Party Plan customers from approximately 207,000
prescriptions filled in the Comparable 1998 Six-month Period to approximately
185,000 prescriptions filled in the 1999 Six-month Period, a decrease of
10.6%. This decrease in volume was partially offset by increased prices on
pharmacy products.
Gross profit was $38.5 million for the 1999 Six-month Period, as
compared to $36.7 million for the 1998 Six-month Period, an increase of 5.2%.
Gross profit as a percentage of net sales was 28.4% in each of the 1999
Six-month Period and the 1998 Six-month Period. Gross profit as a percentage
of sales remained constant as a result of the Company's ability to increase
the margin on non-pharmacy merchandise to mostly offset the fact that
pharmacy sales, which generate lower margins than sales of non-pharmacy
merchandise, represented a higher percentage of total sales in the 1999
Six-month Period as compared to the 1998 Six-month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $7.8 million for the 1999 Six-month Period as compared to
$6.5 million for the 1998 Six-month Period, an increase of $1.3 million, or
20.0%, which was primarily the result of the increase in sales on a same
store basis combined with the maturing of new stores opened in the Company's
last three fiscal years. Gross profit on sales to Third Party Plans was $4.6
million for the 1999 Six-month Period as compared to $3.6 million for the
1998 Six-month Period, an increase of 27.8%, which was primarily the result
of the increase in sales of prescriptions to Third Party Plan customers.
Gross profit on sales of pharmacy products to non-Third Party Plan customers
was $3.2 million in the 1999 Six-month Period as compared to $2.9 million in
the 1998 Six-month Period, an increase of 10.3%, primarily resulting from the
improved retail pricing to non-Third Party Plan customers which offset the
decrease in the volume of product sold to non-Third Party Plan customers.
Gross profit on non-pharmacy sales was $30.8 million for the 1999
Six-month Period, as compared to $30.1 million for the 1998 Six-month Period,
an increase of 2.3%. Gross profit as a percentage of non-pharmacy sales was
31.1% for the 1999 Six-month Period as compared to 30.8% for the 1998 Six-
16
<PAGE>
month Period, an increase of 0.3%. Gross profit on non-pharmacy sales increased
primarily due to increased levels of sales and improved pricing on higher margin
seasonal merchandise during the 1999 Six-month Period, offset by high levels of
sales in lower gross profit categories, including convenience foods.
Selling, general and administrative expense as a percentage of net
sales was 22.5% for the 1999 Six-month Period, as compared to 21.2% for the
1998 Six-month Period, an increase of 1.3%. 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, as well as higher levels of
selling, general and administrative expenses incurred at its three new store
opening during the quarter preceding the 1999 Six-month Period as new stores
typically incur higher levels of selling, general and administrative expenses
during the first three years after they are opened.
Net interest expense was $3.9 million in the 1999 Six-month Period
as compared to $3.0 million in the 1998 Six-month Period, an increase of $0.9
million, or 30.0%, resulting from the higher level of outstanding debt
incurred in connection with the issuance of the $80 million of the Company's
10 1/4% Senior Notes Due 2004 ("Senior Notes") in October 1997. Non-cash
interest expense on the Holding Company's outstanding subordinated debt was
$0.9 million for the 1999 Six-month Period as compared to $1.0 million for
the 1998 Six-month Period, a decrease of $0.1 million, or 10.0%, resulting
from the greater number of days in the 1998 Six-month Period due to the
additional week included in the 1998 Six-month Period.
Depreciation and amortization expense for the 1999 Six-month Period
was $3.0 million as compared to $2.7 million for the Comparable 1998
Six-month Period, an increase of 11.1%. The 1999 Six-month Period included a
one-time write off of $0.3 million of unamortized deferred financing costs
related to the repurchase of Senior Notes while the 1998 Six-month Period
included a one-time write off of unamortized deferred financing costs of $0.4
million related to the paydown of the Company's old credit facility in
connection with the issuance of the Senior Notes. Excluding the one-time
charges in both the 1999 and 1998 Six-month Periods, depreciation and
amortization expense for the 1999 Six-month Period was $2.7 million as
compared to $2.3 million for the 1998 Six-month Period, an increase of 17.4%,
which resulted from the higher level of amortization of deferred financing
costs incurred in connection with the issuance of the Senior Notes.
Other income, net was $0.6 million for the 1999 Six-month Period as
compared to $0.3 million for the 1998 Six-month Period, an increase of $0.3
million which is the result of the one time gain on the repurchase of the
aggregate $6.0 million of Senior Notes in October 1998.
Provision for income taxes was $0.9 million for the 1999 Six-month
Period as compared to $2.0 million for the 1998 Six-month Period, a decrease
of $1.1 million, or 55.0%, which was primarily the result of the lower income
before income taxes in the 1999 Six-month Period. Provision for income taxes
for the Holding Company was $0.6 million for the 1999 Six-month Period as
compared to $1.7 million for the 1998 Six-month Period, a decrease of $1.1
million, or 64.7%, also resulting from the lower income before income taxes
in the 1999 Six-month Period.
Net income for the 1999 Six-month Period was $0.7 million as
compared to net income of $1.7 million in the 1998 Six-month Period, a
decrease of $1.0 million which is due to lower operating income and to
increased levels of interest, depreciation and amortization incurred. Net
income for the Holding Company for the 1999 Six-month Period was $0.2 million
as compared to $1.0 in the 1998 Six-month Period, a decrease of $0.8 million,
principally as a result of the factors described above as well as the
compounded interest incurred on the Holding Company's outstanding
subordinated debt.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED JANUARY 23, 1999 WITH THE THREE MONTHS
ENDED JANUARY 31, 1998.
During the 1999 Three-month Period, cash provided by operations was
$0.2 million as compared to $6.0 million for the 1998 Three-month Period, a
decrease of $5.8 million. The decrease in cash provided by
17
<PAGE>
operations is the result of the higher level of investment in inventory
related to the significant increase in pharmacy sales and the Company's
efforts to improve the replenishment rate to its stores from the warehouse,
and the result of slower collection of Third Party Plan prescription
receivables due to the bankruptcy filing of The Pharmacy Fund Receivables,
Inc., with whom the Company had an arrangement to factor its Third Party Plan
prescription receivables. Cash used in investing activities was $1.6 million
during the 1999 Three-month Period as compared to $1.3 million during the
1998 Three-month Period, an increase of $0.3 million which was the result of
expenditures related to the three new store openings during the quarter
preceding the 1999 Three-month Period as compared to two new store openings
during the 1998 Three-month Period, as well as to increased expenditures on
technology and film processing equipment. Cash provided by financing
activities was $1.4 million during the 1999 Three-month Period as compared to
cash used in financing activities of $0.5 million during the 1998 Three-month
Period, an increase of $1.9 million. During the 1999 Three-month Period, the
cash provided by financing activities resulted from the net of the paydown of
all revolver borrowing, the cash overdraft, and the dividend paid to the
common shareholders of the Holding Company. The cash used during the 1998
Three-month Period consisted of $0.5 million related to transaction fees paid
in connection with the Company's issuance of $80 million aggregate principal
amount of its 10 1/4% Senior Notes in October 1997.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 23, 1999 WITH THE SIX MONTHS ENDED
JANUARY 31, 1998.
During the 1999 Six-month Period, cash used in operations was $5.5
million as compared to cash provided by operations of $3.1 million for the
1998 Six-month Period, a decrease of $8.6 million. The increase in cash used
in operations is the result of the higher level of investment in inventory
related to the significant increase in pharmacy sales and the Company's
efforts to improve the replenishment rate to its stores from the warehouse,
and the result of slower collection of Third Party Plan prescription
receivables due to the bankruptcy filing of The Pharmacy Fund Receivables,
Inc. with whom the Company had an arrangement to factor its Third Party Plan
prescription receivables. Cash used in investing activities was $3.0 million
during the 1999 Six-month Period as compared to $2.0 million during the 1998
Six-month Period, an increase of $1.0 million which was the result of the
three new store openings and the acquisition of the inventory and customer
list of an independent pharmacy during the 1999 Six-month Period as compared
to two new store openings during the 1998 Six-month Period. Cash used in
financing activities was $2.3 million during the 1999 Six-month Period as
compared to cash provided by financing activities of $2.3 million during the
1998 Six-month Period, a decrease of $4.6 million. During the 1998 Six-month
Period, the cash provided by financing activities resulted from the net
proceeds, after payment of the dividend to the common shareholders of the
Holding Company, of the issuance of the Senior Notes. The cash used during
the 1999 Six-month Period consisted of $5.6 million for the repurchase of
$6.0 million aggregate principal amount of Senior Notes, $1.1 million used
for the payment of dividend to the common shareholders of the Holding
Company, offset by $4.4 million of a cash overdraft.
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, to fund anticipated capital
expenditures and working capital requirements, and to comply with the terms
of its debt agreements during the remainder of its fiscal years ended July
31, 1999 and July 29, 2000. The Company's ability to make scheduled payments
of principal or interest on, or to refinance, its indebtedness will depend on
future operating performance and cash flow, which are subject to prevailing
economic conditions, prevailing interest rates and financial, competitive,
business and other factors beyond its control. The Company expects that
substantially all of its borrowings under its credit facility will bear
interest at floating rates, therefore, the Company's financial condition will
be affected by any changes in prevailing rates.
To date, the Company has repurchased an aggregate of $6.0 million of
its outstanding Senior Notes. The Company may in the future repurchase
additional Senior Notes if it is able to obtain appropriate waivers under the
Facility and such Senior Notes are available at a discount. Any such
repurchases could affect the Company's ability to cover its debt service
obligations and working capital requirements in the future.
18
<PAGE>
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 using the most recently available versions of these
packaged software solutions. During 1996, the Company decided to deploy the JDA
Software, Inc. Merchandise Management System ("MMS"), which it believes to be
Year 2000 compliant, based on representations from its licensor. The cost
incurred for the implementation of the MMS is estimated to be $2.0 million upon
completion. The software was implemented in October 1998, with $1.8 million of
the implementation cost being incurred through January 23, 1999, which was paid
for out of the Company's budgeted capital expenditures during fiscal years 1997
and 1998 and the first two fiscal quarters of 1999. The Company estimates that
an additional $0.2 million will be incurred in connection with additional
modification of the base MMS system to fit the operating needs of the Company.
The Company believes the deployment of the MMS resolves Year 2000 compliance
issues in the areas of purchasing, inventory management, cost management, retail
price management, sales audit, and accounts payable. The Company has evaluated
its other packaged software solution for the areas of payroll, human resources,
general ledger, budgeting, cost allocation, fixed assets, point-of-sale, and
pharmacy and has determined that the implementation of the next version of the
applicable packaged software solutions, which the Company estimates to be
implemented by June 1999, will enable the Company to be Year 2000 compliant in
these areas. Finally, the Company is in the process of evaluating the remaining
internally developed software applications for Year 2000 compliance and
estimates that the required modifications to those solutions will be completed
by July 1999. These internally developed software applications provide
functionality in the areas of inventory returns to vendors, advertising and
warehouse management. In addition to the JDA MMS implementation, the Company has
completed its Year 2000 related hardware upgrades for its corporate office and
for the pharmacy systems in eighteen of the Company's thirty-six stores that
have pharmacies. These upgrades cost approximately $0.1 million, which was paid
for out of the Company's fiscal 1999 capital expenditures budget.
The Company estimates that approximately $1.3 million of additional
costs will be incurred during the remaining six months of fiscal 1999 and first
five months of fiscal 2000 in order to achieve Year 2000 compliance for all of
its critical systems. The expenditures are estimated as follows: $0.2 million
for the remaining modification to the JDA MMS implementation, $0.2 million for
the upgrade to the most recent version of the Lawson Associates, Inc. financial
software solution, which includes general ledger, cost allocations, budgeting,
payroll, and human resources; $0.1 million for the cost to upgrade to the
current packaged software solution for store point-of-sale and pharmacy systems;
$0.2 million for modification of the existing internally developed warehouse
space management, receiving and distribution systems; $0.2 million for the
purchase of new point-of-sale and pharmacy system hardware upgrades at the
Company's stores and corporate office; $0.1 million for the purchase of store
radio frequency equipment which is used for the purpose of price auditing and
merchandise ordering; $0.2 million for the modification of the remaining
internally developed software solutions as well as for the purchase of
replacement personal computers at the Company's corporate office; and $0.1
million for consulting fees in connection with the Company's Year 2000
compliance program. In connection with the modification of the remaining
internally developed software solutions, the Company is developing formal
contingency plans to deal with any failures by its internal processing systems
or packaged software solutions which may not be Year 2000
19
<PAGE>
compliant. The Company does not anticipate having to defer any other information
technology projects in order to achieve timely resolution of the Year 2000
dating problem.
The Company relies upon various third parties for merchandise and
services. Interruption of supplier operations, due to their lack of Year 2000
compliance, could significantly affect the Company's operations, particularly if
the Company is unable to acquire merchandise for sale in its stores. The Company
is in the process of evaluating the status of its suppliers efforts toward
achieving Year 2000 compliance and, if necessary, to define appropriate
contingency plans. The Company expects to have the evaluation of its suppliers'
Year 2000 compliance completed by approximately June 1999 and the applicable
contingency plans in place by approximately October 1999. Various contingency
plans could include identification of alternate suppliers and accumulation of
inventory to assure merchandise is available for sale in its stores. The
evaluations of suppliers are a means to ensure the continued flow of merchandise
and services to the Company, but cannot eliminate the potential for disruption
due to lack of Year 2000 compliance by a third party supplier.
The Company's evaluation of Year 2000 compliance, both of its internal
systems and of its suppliers, is an ongoing process. Due to the uncertainty of
Year 2000 compliance by the Company's third party suppliers as noted above, the
Company is establishing applicable contingency plans, which it believes will
appropriately address Year 2000 compliance. However, no assurance can be given
that such contingency plans will address all potential Year 2000 compliance
failures.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Neither the Company nor the Holding Company engages in trading
market risk sensitive instruments or purchases hedging instruments or "other
than trading" instruments that are likely to expose the Company or the
Holding Company to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. Neither the Company nor the
Holding Company has purchased options or entered into swaps or forward or
futures contracts. The ability of the Company and the Holding Company (as
guarantor) to make periodic interest payments on the Senior Notes, at a fixed
rate of 10 1/4%, is not directly affected by fluctuations in the market. The
Company's primary market risk exposure is that of interest rate risk on
borrowings under the Facility, which are subject to interest rates based
either on the lender's prime rate or the London Interbank Offered Rate
("LIBOR"), and a change in the applicable interest rate would affect the rate
at which the Company could borrow funds.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. OTHER INFORMATION
None.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule of Community Distributors, Inc.
27.2 Financial Data Schedule of CDI Group, Inc.
(b) No Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended January 23, 1999.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
COMMUNITY DISTRIBUTORS, INC.
March 9, 1999 By: /S/ TODD H. PLUYMERS
-------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
March 9, 1999 By: /S/ TODD H. PLUYMERS
-------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
23
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK>0000774492
<NAME>COMMUNITY DISTRIBUTORS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
<PERIOD-START> OCT-25-1998 JUL-26-1998
<PERIOD-END> JAN-23-1999 JAN-23-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 5,939 5,939
<ALLOWANCES> 0 0
<INVENTORY> 39,073 39,073
<CURRENT-ASSETS> 45,929 45,929
<PP&E> 19,634 19,634
<DEPRECIATION> 7,810 7,810
<TOTAL-ASSETS> 94,165 94,165
<CURRENT-LIABILITIES> 29,484 29,484
<BONDS> 74,000 74,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (14,762) (14,762)
<TOTAL-LIABILITY-AND-EQUITY> 94,165 94,165
<SALES> 75,487 135,608
<TOTAL-REVENUES> 75,487 135,608
<CGS> 52,666 97,094
<TOTAL-COSTS> 16,108 30,445
<OTHER-EXPENSES> 1,389 3,103
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,988 3,928
<INCOME-PRETAX> 3,414 1,617
<INCOME-TAX> 1,844 873
<INCOME-CONTINUING> 1,570 744
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,570 744
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK>0000940727
<NAME>CDI GROUP
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
<PERIOD-START> OCT-25-1998 JUL-26-1998
<PERIOD-END> JAN-23-1999 JAN-23-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 5,962 5,962
<ALLOWANCES> 0 0
<INVENTORY> 39,073 39,073
<CURRENT-ASSETS> 45,952 45,952
<PP&E> 19,634 19,634
<DEPRECIATION> 7,810 7,810
<TOTAL-ASSETS> 94,188 94,188
<CURRENT-LIABILITIES> 29,177 19,177
<BONDS> 74,000 74,000
0 0
786 786
<COMMON> 0 0
<OTHER-SE> (33,161) (33,161)
<TOTAL-LIABILITY-AND-EQUITY> 94,188 94,188
<SALES> 75,487 135,608
<TOTAL-REVENUES> 75,487 135,608
<CGS> 52,666 97,094
<TOTAL-COSTS> 16,108 30,445
<OTHER-EXPENSES> 1,389 3,103
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,427 4,806
<INCOME-PRETAX> 2,975 739
<INCOME-TAX> 1,690 566
<INCOME-CONTINUING> 1,285 173
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,285 173
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
