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 29, 2000
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 08873-1227
(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 date.
Yes X No __
Number of shares of Common Stock, $.01 par value per share, of
Community Distributors, Inc. outstanding at March 14, 2000: 1,000 shares.
Number of shares of Class A Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at March 14, 2000: 254,595 shares.
Number of shares of Class B Non-Voting Common Stock, $.00001 par value
per share, of CDI Group, Inc. outstanding at March 14, 2000: 187,922 shares.
COMMUNITY DISTRIBUTORS, INC.
CDI GROUP, INC.
INDEX
ITEM PAGE
NUMBER NUMBER
------ ------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements............................................. 3
COMMUNTY DISTRIBUTORS, INC.
Condensed Statements of Operations (Unaudited) - For the Three
and Six Month Periods Ended January 29, 2000 and January 23, 1999......... 3
Condensed Balance Sheets (Unaudited) - As of January 29, 2000 and
January 23, 1999............................. ............................ 4
Condensed Statements of Cash Flows (Unaudited) - For the Three
and Six Month Periods Ended January 29, 2000 and January 23, 1999......... 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 29, 2000 and January 23, 1999.......... 8
Condensed Consolidated Balance Sheets (Unaudited) - As of January 29, 2000
and January 23, 1999....................................................... 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
and Six Month Periods Ended January 29, 2000 and January 23, 1999.......... 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................... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 22
Signatures................................................................... 23
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
January 29, January 23, January 29, January 23,
2000 1999 2000 1999
------------- ------------- ------------- --------------
Net sales $ 82,041 $ 75,487 $ 147,814 $ 135,608
Cost of sales 57,822 52,666 105,975 97,094
------------- ------------- ------------- --------------
Gross profit 24,219 22,821 41,839 38,514
Selling, general and administrative expenses 17,092 16,108 32,945 30,445
Administrative fees 62 62 125 125
Depreciation and amortization 1,531 1,327 2,981 2,978
Other income, net 118 78 206 579
------------- ------------- ------------- --------------
Operating income 5,652 5,402 5,994 5,545
Interest expense, net 2,026 1,988 4,068 3,928
------------- ------------- ------------- --------------
Income before income taxes 3,626 3,414 1,926 1,617
Provision for income taxes 2,609 1,844 1,384 873
------------- ------------- ------------- --------------
Net income $ 1,017 $ 1,570 $ 542 $ 744
============= ============= ============= ==============
See accompanying notes to condensed financial statements.
3
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
As of As of
January 29, July 31,
2000 1999
----------- -----------
ASSETS:
Cash and cash equivalents $ 384 $ 285
Accounts receivable 5,048 5,240
Inventory 36,861 35,787
Prepaid expenses and other current assets 958 1,013
----------- -----------
TOTAL CURRENT ASSETS 43,251 42,325
Property and equipment, net 13,174 12,861
Deferred charges and other assets 5,285 5,622
Goodwill, net 28,730 29,687
----------- -----------
TOTAL ASSETS $ 90,440 $ 90,495
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ 1,200
Accounts payable 14,300 14,357
Accrued expenses and other current liabilities 8,765 8,631
Current portion of supplier advances 1,029 653
----------- -----------
TOTAL CURRENT LIABILITIES 24,094 24,841
Long-term debt 74,000 74,000
Supplier advances, net of current portion 1,028 1,803
Other long-term liabilities 5,503 4,578
----------- -----------
TOTAL LIABILITIES $ 104,625 $ 105,222
----------- -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings 3,357 2,815
Distribution in excess of capital (17,542) (17,542)
----------- ----------
TOTAL STOCKHOLDER'S DEFICIT (14,185) (14,727)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 90,440 $ 90,495
=========== ===========
See accompanying notes to condensed financial statements.
4
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
January 29, January 23, January 29, January 23,
2000 1999 2000 1999
------------- ------------- ------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 1,017 $ 1,570 $ 542 $ 744
Depreciation and amortization 1,567 1,327 3,086 2,978
Non-cash rent expense 158 121 303 249
LIFO provision - 150 300 300
Gain on repurchase of Senior Notes - - - (395)
Changes in operating assets and liabilities 3,375 (2,970) (5,957) (9,327)
------------- ------------- ------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,117 198 (1,726) (5,451)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (983) (1,639) (1,900) (3,005)
------------- ------------- ------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (983) (1,639) (1,900) (3,005)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from revolver borrowings 9,200 7,860 29,500 9,710
Repayments of revolver borrowings (19,200) (9,710) (30,700) (9,710)
Cash overdraft 4,925 4,411 4,925 4,411
Repurchase of Senior Notes - - - (5,605)
Dividend paid to parent - (1,120) - (1,120)
------------- ------------- ------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITES (5,075) 1,441 3,725 (2,314)
Net increase (decrease) in cash and cash equivalents 59 - 99 (10,770)
Cash and cash equivalents at beginning of period 325 - 285 10,770
------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 384 $ - $ 384 $ -
============= ============= ============= ==============
See accompanying notes to condensed financial statements.
5
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 31, 1999. The Company, a wholly
owned subsidiary of CDI Group, Inc. (the "Parent"), is engaged in the
operation of retail stores selling pharmaceuticals and general merchandise
throughout New Jersey. These interim financial statements are unaudited
but, in the opinion of management, include all adjustments, consisting only
of normal recurring items, necessary to fairly present the financial
position and operating results and cash flows 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:
In October 1998, the Company repurchased an aggregate of $6,000 principal
amount of Senior Notes. On October 6, 1998, the Company repurchased an
aggregate of $5,000 principal amount of Senior Notes at a purchase price of
$930 per $1,000 principal amount of Senior Notes, plus accrued and unpaid
interest. On October 13, 1998, the Company repurchased an additional $1,000
principal amount of Senior Notes at a purchase price of $925 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. As of
January 29, 2000, $74,000 aggregate principal amount of Senior Notes
remained outstanding. Under the relevant Senior Note agreements, in the
event of a change in control, as defined, the Company may be required to
repurchase all outstanding Senior Notes.
The Company maintains a $20,000 five-year revolving credit facility (the
"Facility) with a bank. This Facility bears interest at either 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 financial statements,
aggregated approximately $2,943 and $2,016 at January 29, 2000 and July 31,
1999. The Facility contains certain financial and operating covenants, such
as a requirement that the Company maintains certain financial ratios and
satisfies 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. Additionally, the Company cannot make
any dividend or other distributions with respect to any share of stock
other than in certain limited circumstances.
6
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Company was pursuing collection of approximately $444 of
prescription receivables from managed health care plans and other
third-party payer plans ("Third Party Plans") that were purchased by PFR.
Subsequent to the filing for bankruptcy, the Company entered into a
settlement agreement with PFR and on December 3, 1999, collected $400 from
PFR in full settlement of the prescription receivables that were purchased
by PFR, with $44 of the uncollected amount being written-off in October
1999. 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 that are taken twice a year. The results of the last
physical inventory that was taken on January 29, 2000 did not have a
material impact on the results of operations, financial position and cash
flows.
7
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
January 29, January 23, January 29, January 23,
2000 1999 2000 1999
------------- ------------- ------------- --------------
Net sales $ 82,041 $ 75,487 $ 147,814 $ 135,608
Cost of sales 57,822 52,666 105,975 97,094
------------- ------------- ------------- --------------
Gross profit 24,219 22,821 41,839 38,514
Selling, general and administrative expenses 17,092 16,108 32,945 30,445
Administrative fees 62 62 125 125
Depreciation and amortization 1,531 1,327 2,981 2,978
Other income, net 118 78 206 579
------------- ------------- ------------- --------------
Operating income 5,652 5,402 5,994 5,545
Interest expense, net 2,510 2,427 5,035 4,806
------------- ------------- ------------- --------------
Income before income taxes 3,142 2,975 959 739
Provision for income taxes 2,439 1,690 1,045 566
------------- ------------- ------------- --------------
Net income $ 703 $ 1,285 $ (86) $ 173
============= ============= ============= ==============
See accompanying notes to condensed consolidated financial statements.
8
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
As of As of
January 29, July 31,
2000 1999
----------- -----------
ASSETS:
Cash and cash equivalents $ 384 $ 285
Accounts receivable 5,078 5,266
Inventory 36,861 35,787
Prepaid expenses and other current assets 958 1,013
----------- -----------
TOTAL CURRENT ASSETS 43,281 42,351
Property and equipment, net 13,174 12,861
Deferred charges and other assets 5,285 5,622
Goodwill, net 28,730 29,687
----------- -----------
TOTAL ASSETS $ 90,470 $ 90,521
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ 1,200
Accounts payable 14,300 14,357
Accrued expenses and other current liabilities 8,427 8,004
Current portion of supplier advances 1,029 653
----------- -----------
TOTAL CURRENT LIABILITIES 23,756 24,214
Long-term debt 74,000 74,000
Subordinated debt 21,339 20,369
Supplier advances, net of current portion 1,028 1,803
Other long-term liabilities 2,908 2,629
----------- -----------
TOTAL LIABILITIES $ 123,031 $ 123,015
----------- -----------
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 29, 2000 and July 31, 1999 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized 600,000 shares,
254,595 issued and outstanding at
January 29, 2000 and July 31, 1999 - -
Class B voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
January 29, 2000 and July 31, 1999 - -
Additional paid-in capital - -
Retained earnings 764 831
Distribution in excess of capital (34,604) (34,604)
----------- ----------
TOTAL STOCKHOLDERS' DEFICIT (33,840) (33,773)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 90,470 $ 90,521
=========== ===========
See accompanying notes to condensed consolidated financial statements.
9
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
January 29, January 23, January 29, January 23,
2000 1999 2000 1999
------------- ------------- ------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 703 $ 1,285 $ (86) $ 173
Depreciation and amortization 1,567 1,327 3,086 2,978
Non-cash rent expense 158 121 303 249
Non-cash interest expense 484 439 967 878
LIFO provision - 150 300 300
Gain on repurchase of Senior Notes - - - (395)
Changes in operating assets and liabilities 3,205 (3,124) (6,296) (9,634)
------------- ------------- ------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,117 198 (1,726) (5,451)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (983) (1,639) (1,900) (3,005)
------------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (983) (1,639) (1,900) (3,005)
CASH FLOWS USED IN FINANCING ACTIVITES:
Proceeds from revolver borrowings 9,200 7,860 29,500 9,710
Repayments of revolver borrowings (19,200) (9,710) (30,700) (9,710)
Cash overdraft 4,925 4,411 4,925 4,411
Repurchase of Senior Notes - - - (5,605)
Dividend paid - (1,120) - (1,120)
------------- ------------- ------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITES (5,075) 1,441 3,725 (2,314)
Net increase (decrease) in cash and cash equivalents 59 - 99 (10,770)
Cash and cash equivalents at beginning of period 325 - 285 10,770
------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 384 $ - $ 384 $ -
============= ============= ============= ==============
See accompanying notes to condensed consolidated financial statements.
10
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. (the "Parent") and Subsidiary (collectively referred to as the
"Company"), and the notes thereto contained in the Company's annual report
on Form 10-K for its fiscal year ended July 31, 1999. The accompanying
condensed consolidated financial statements include the accounts of the
Parent and its wholly-owned subsidiary, Community Distributors, Inc. (the
"Subsidiary"), which is engaged in the operation of retail stores selling
pharmaceuticals and general merchandise throughout New Jersey. The Parent
conducts no operations separate from the Subsidiary. 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, operating
results, and cash flows 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:
In October 1998, the Company repurchased an aggregate of $6,000 principal
amount of Senior Notes. On October 6, 1998, the Company repurchased an
aggregate of $5,000 principal amount of Senior Notes at a purchase price of
$930 per $1,000 principal amount of Senior Notes, plus accrued and unpaid
interest. On October 13, 1998, the Company repurchased an additional $1,000
principal amount of Senior Notes at a purchase price of $925 per $1,000
principal amount of Senior Notes, plus accrued and unpaid interest. As of
January 29, 2000, $74,000 aggregate principal amount of Senior Notes
remained outstanding. Under the relevant Senior Note agreements, in the
event of a change in control, as defined, the Company may be required to
repurchase all outstanding Senior Notes.
The Company maintains a $20,000 five-year revolving credit facility (the
"Facility) with a bank. This Facility bears interest at either 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 financial statements,
aggregated approximately $2,943 and $2,016 at January 29, 2000 and July 31,
1999. The Facility contains certain financial and operating covenants, such
as a requirement that the Company maintains certain financial ratios and
satisfies 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. Additionally, the Company cannot make
any dividend or other distributions with respect to any share of stock
other than in certain limited circumstances.
11
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
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 $21,339 and $20,369 at January
29, 2000 and July 31, 1999, respectively, which includes accrued interest.
(5) ACCOUNTS RECEIVABLE:
On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Subsidiary was pursuing collection of approximately $444 of
prescription receivables from managed health care plans and other
third-party payer plans ("Third Party Plans") that were purchased by PFR.
Subsequent to the filing for bankruptcy, the Company entered into a
settlement agreement with PFR and on December 3, 1999, collected $400 from
PFR in full settlement of the prescription receivables that were purchased
by PFR, with $44 of the uncollected amount being written-off in October
1999. 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 29, 2000 did not have a material impact
on the results of operations, financial position and cash flows.
12
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 the
Community Distributors, Inc. (the "Company") to meet its debt service
obligations and to fund anticipated capital expenditures and working capital
requirements in the future; and (iii) 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 of 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 "Certain Risks" in the Annual Report on Form 10-K for
its fiscal year ended July 31, 1999 for the Company and for the Holding Company.
RESULTS OF OPERATIONS
Except where indicated below, the following discussion relates to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 29, 2000 (THE "2000 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED JANUARY 23, 1999 (THE "1999 THREE-MONTH
PERIOD").
Net sales for the 2000 Three-Month Period were $82.0 million as
compared to $75.5 million for the 1999 Three-Month Period, an increase of $6.5
million, or 8.6%. This increase, which includes a 2.1% increase in same-store
sales, was primarily due to (i) a 4.1% increase in sales of non-pharmacy
products from $56.2 million for the 1999 Three-Month Period to $58.5 million for
the 2000 Three-Month Period, and (ii) a 21.8% increase in pharmacy sales from
$19.3 million for the 1999 Three-Month Period to $23.5 million for the 2000
Three-Month Period, including a 27.5% increase in pharmacy sales to Third Party
Plan customers from $15.3 million for the 1999 Three-Month Period to $19.5
million for the 2000 Three-Month Period. The Company attributes the increase in
net sales of non-pharmacy products to the opening of five new store locations
during the fiscal year ended July 31, 1999, to the opening of two new store
locations during the 2000 Three-Month Period, to the acquisition of the
inventories and the customer lists of two independent pharmacies during the
fiscal year ended July 31, 1999, and to the acquisition of the inventory and the
customer list of one independent pharmacy during the 2000 Three-Month Period, 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 522,000 for the 2000 Three-Month Period as compared to
approximately 473,000 for the 1999 Three-Month Period, an increase of
approximately 49,000, or 10.4%. The number of prescriptions filled for Third
Party Plan customers increased to approximately 434,000 for the 2000 Three-Month
Period, as compared to 378,000 for the 1999 Three-Month Period, an increase of
approximately 56,000, or 14.8%. Pharmacy sales to non-Third Party Plan customers
were $4.0 million in both the 1999 and 2000 Three-Month Periods, remaining
constant primarily as the result of increased 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
95,000 in the 1999 Three-Month Period to approximately 88,000 in the 2000
Three-Month Period.
Gross profit was $24.2 million for the 2000 Three-Month Period, as
compared to $22.8 million for the 1999 Three-Month Period, an increase of $1.4
million, or 6.1%. Gross profit as a percentage of net sales was 29.5% for the
2000 Three-Month Period as compared to 30.2% for the 1999 Three-Month Period.
This 0.7% decrease in gross profit as a percentage of sales was due to a greater
percentage of total sales being generated from pharmacy sales which generate
lower margins than sales of non-pharmacy merchandise and due to a lower gross
profit on pharmacy sales as
13
a percentage of pharmacy sales as a greater percentage of pharmacy sales were
generated from sales to Third Party Plan customers which generate lower margins
than pharmacy sales to non-Third Party Plan customers.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $4.6 million for the 2000 Three-Month Period as compared to
$4.3 million for the 1999 Three-Month Period, an increase of $0.3 million, or
7.0%, which was primarily the result of the increase in sales on a same store
basis, the maturing of new stores opened in the last three fiscal years,
improved purchase prices from the Company's primary prescription drug
wholesaler, and to the acquisition of the inventory and customer lists of five
independent pharmacies during the last three fiscal years. Gross profit on sales
to Third Party Plan customers was $3.0 million for the 2000 Three-Month Period
as compared to $2.4 million for the 1999 Three-Month Period, an increase of $0.6
million, or 25.0%, 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 $1.6 million in the 2000
Three-Month Period as compared to $1.9 million in the 1999 Three-Month Period, a
decrease of $0.3 million, or 15.8%, decreasing due to a lower prices on sales of
pharmacy products to non-Third Party Plan customers.
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 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 as a
percentage of sales, 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 $19.6 million for the 2000
Three-Month Period, as compared to $18.5 million for the 1999 Three-Month
Period, an increase of $1.1 million, or 5.9%. Gross profit as a percentage of
non-pharmacy sales was 33.5% for the 2000 Three-Month Period as compared to
32.9% for the 1999 Three-Month Period, an increase of 0.6%. Gross profit as a
percentage of non-pharmacy sales increased due to reduced markdowns on
non-pharmacy merchandise.
Selling, general and administrative expense as a percentage of net
sales was 20.7% for the 2000 Three-Month Period, as compared to 21.3% for the
1999 Three-Month Period, a decrease of 0.6%. This decrease in selling, general
and administrative expenses as a percentage of net sales is primarily due to
reduced costs of operating the Company's warehouse and to reduced levels of
expenses from stores opened during the fiscal year ended July 31, 1999 as stores
typically incur lower levels of expenses in each of the first three years of
operation.
Depreciation and amortization expense for the 2000 Three-Month Period
was $1.5 million as compared to $1.3 million for the 1999 Three-Month Period, an
increase of $0.2 million, or 15.4%, which resulted from the additional
amortization of the value of the customer lists of independent pharmacies which
were acquired during the fiscal year ended July 31, 1999 and the first six
months of the fiscal year ended July 29, 2000.
Other income, net was $0.1 million for the 2000 Three-Month Period and
for the 1999 Three-Month Period, remaining unchanged during the two periods.
The Company's net interest expense was $2.1 million in the 2000
Three-Month Period as compared to $2.0 million in the 1999 Three-Month Period,
an increase of $0.1 million resulting from the higher level of average
outstanding balances on the Company's revolving line of credit. Non-cash
interest expense on the Holding Company's outstanding subordinated debt was $0.4
million for both the 2000 Three-Month Period and 1999 Three-Month Period.
The Company's provision for income taxes was $2.6 million for the 2000
Three-Month Period as compared to $1.8 million for the 1999 Three-Month Period,
an increase of $0.8 million, or 44.4%, resulting from a higher income
14
before income taxes and higher effective tax rate in the 2000 Three-Month
Period. The Holding Company experienced a benefit from income taxes of $0.1
million in the 2000 Three-Month Period as compared to $0.2 million during the
1999 Three-Month Period, a decrease of $0.1 million. The Company's effective
tax rate is consistently higher than the statutory tax rates, and varies from
period to period, due to the relatively constant amortization of goodwill and
of beneficial leaseholds that are not deductible when calculating taxable
income, which varies from period to period.
The Company's net income for the 2000 Three-Month Period was $1.0
million as compared to $1.5 million in the 1999 Three-Month Period, a decrease
of $0.5 million, which is primarily due to increased operating income offset by
increased net interest expense and an increased provision for income taxes. The
Holding Company incurred a net loss of $0.3 million for the 2000 Three-Month
Period as compared to a net loss of $0.2 million during the 1999 Three-Month
Period, principally as a result of the interest incurred on the subordinated
debt.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 29, 2000 (THE "2000 SIX-MONTH
PERIOD") WITH THE SIX MONTHS ENDED JANUARY 23, 1999 (THE "1999 SIX-MONTH
PERIOD").
Net sales for the 2000 Six-Month Period were $147.8 million as compared
to $135.6 million for the 1999 Six-Month Period, an increase of $12.2 million,
or 9.0%. This increase, which includes a 2.9% increase in same-store sales, was
primarily due to (i) a 3.9% increase in sales of non-pharmacy products from
$99.0 million for the 1999 Six-Month Period to $102.9 million for the 2000
Six-Month Period, and (ii) a 22.7% increase in pharmacy sales from $36.6 million
for the 1999 Six-Month Period to $44.9 million for the 2000 Six-Month Period,
including a 29.3% increase in pharmacy sales to Third Party Plan customers from
$28.7 million for the 1999 Six-Month Period to $37.1 million for the 2000
Six-Month Period. The Company attributes the increase in net sales of
non-pharmacy products to the opening of five new store locations during the
fiscal year ended July 31, 1999, to the opening of two new store locations
during the 2000 Six-Month Period, to the acquisition of the inventories and the
customer lists of two independent pharmacies during the fiscal year ended July
31, 1999, and to the acquisition of the inventory and the customer list of one
independent pharmacy during the 2000 Six-Month Period, 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 991,000 for the 2000
Six-Month Period as compared to approximately 898,000 for the 1999 Six-Month
Period, an increase of approximately 93,000, or 10.4%. The number of
prescriptions filled for Third Party Plan customers increased to approximately
819,000 for the 2000 Six-Month Period, as compared to 713,000 for the 1999
Six-Month Period, an increase of approximately 106,000, or 14.9%. Pharmacy sales
to non-Third Party Plan customers were $7.8 million in the 2000 Six-Month Period
as compared to $7.9 million in the 1999 Six-Month Period, a decrease of $0.1
million, or 1.3%, resulting from increased 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
185,000 in the 1999 Six-Month Period to approximately 172,000 in the 2000
Six-Month Period.
Gross profit was $41.8 million for the 2000 Six-Month Period, as
compared to $38.5 million for the 1999 Six-Month Period, an increase of $3.3
million, or 8.6%. Gross profit as a percentage of net sales was 28.3% for the
2000 Six-Month Period as compared to 28.4% for the 1999 Six-Month Period. This
0.1% decrease in gross profit as a percentage of net sales is the result of an
increase in the gross profit on non-pharmacy sales as a percentage of the
Company's sales of non-pharmacy merchandise offset by a decrease in the gross
profit on pharmacy sales as a percentage of pharmacy sales and due to the fact
that pharmacy sales, which generate lower margins than sales of non-pharmacy
merchandise, represented a higher percentage of total sales in the 2000
Six-Month Period as compared to the 1999 Six-Month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $9.2 million for the 2000 Six-Month Period as compared to
$7.8 million for the 1999 Six-Month Period, an increase of $1.4 million, or
17.9%, which was primarily the result of the increase in sales on a same store
basis, the maturing of new stores opened in the last three fiscal years and to
the acquisition of the inventory and customer lists of five independent
pharmacies during the last three fiscal years. Gross profit on sales to Third
Party Plan customers was $6.2 million for the 2000 Six-Month Period as compared
to $4.6 million for the 1999 Six-Month Period, an increase of $1.6 million, or
34.8%, 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
$3.0 million in the 2000 Six-Month Period as compared to $3.2 million in the
1999 Six-Month Period, a decrease of $0.2 million, or 6.3%, decreasing due to
the decline in sales of pharmacy merchandise to non-Third Party Plan customers.
15
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 $32.6 million for the 2000
Six-Month Period, as compared to $30.7 million for the 1999 Six-Month Period, an
increase of $1.9 million, or 6.2%. Gross profit as a percentage of non-pharmacy
sales was 31.7% for the 2000 Six-Month Period as compared to 31.0% for the 1999
Six-Month Period, an increase of 0.7%. Gross profit as a percentage of
non-pharmacy sales increased due to reduced markdowns on non-pharmacy
merchandise.
Selling, general and administrative expense as a percentage of net
sales was 22.3% for the 2000 Six-Month Period, as compared to 22.4% for the 1999
Six-Month Period, a decrease of 0.1%. This decrease in selling, general and
administrative expenses as a percentage of net sales is primarily due to reduced
costs of operating the Company's warehouse and to reduced levels of expenses
from stores opened during the fiscal year ended July 31, 1999 as stores
typically incur lower levels of expenses in each of the first three years of
operation.
Depreciation and amortization expense for the 2000 Six-Month Period and
the 1999 Six-Month Period was $3.0 million, remaining unchanged due to an
increase in the amortization of acquired independent pharmacy customer lists and
to an increase in depreciation due to the increased amount of capital
expenditures during the fiscal year ended July 31, 1999 and during the 2000
Six-Month Period, offset by a reduction in the amount of amortization of
beneficial leaseholds.
Other income, net was $0.2 million for the 2000 Six-Month Period as
compared to $0.6 million for the 1999 Six-Month Period, a decrease of $0.4
million, resulting from the one-time gain of $0.4 million related to the
repurchase of aggregate $6.0 million of Senior Notes during the first quarter of
the 1999 fiscal year.
The Company's net interest expense was $5.0 million in the 2000
Six-Month Period as compared to $4.8 million in the 1999 Six-Month Period, an
increase of $0.2 million resulting from the higher level of average outstanding
balances on the Company's revolving line of credit. Non-cash interest expense on
the Holding Company's outstanding subordinated debt was $0.9 million for both
the 2000 Six-Month Period and 1999 Six-Month Period.
The Company's provision for income taxes was $1.3 million for the 2000
Six-Month Period as compared to $0.9 million for the 1999 Six-Month Period, an
increase of $0.4 million, or 44.4%, resulting from a higher income before income
taxes and higher effective tax rate in the 2000 Three-Month Period. The Holding
Company experienced a benefit from income taxes of $0.3 million in the 2000
Six-Month Period and in the 1999 Six-Month Period, 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 the relatively constant amortization of goodwill and of
beneficial leaseholds that are not deductible when calculating taxable income,
which varies from period to period.
The Company's net income for the 2000 Six-Month Period was $0.5 million
as compared to $0.7 million in the 1999 Six-Month Period, a decrease of $0.2
million, which is primarily due to increased operating income offset by
increased net interest expense and an increased provision for income taxes. The
Holding Company incurred a net loss of $0.6 million for the 2000 Six-Month
Period as compared to $0.5 million for the 1999 Six-Month Period, principally as
a result of the interest incurred on the subordinated debt.
16
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED JANUARY 29, 2000 (THE "2000 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED JANUARY 23, 1999 (THE "1999 THREE-MONTH
PERIOD").
During the 2000 Three-Month Period, cash from operations was $6.1
million as compared to $0.2 million for the 1999 Three-Month Period, an increase
in cash from operations of $5.9 million. The increased cash from operations is
primarily the result of a reduction in the Company's inventory during the 2000
Three-Month Period. Cash used in investing activities was $0.9 million during
the 2000 Three-Month Period as compared to $1.6 million during the 1999
Three-Month Period, a decrease of $0.7 million, which was the result of no store
openings during the 2000 Three-Month Period as compared to one store opening
during the 1999 Three-Month Period. Cash used in financing activities was $5.1
million during the 2000 Three-Month Period as compared to cash from financing
activities of $1.4 million during the 1999 Three-Month Period. Cash used in
financing activities during the 2000 Three-Month Period was from net revolver
repayments of $10.0 million offset by a cash overdraft of $4.9 million while the
cash from financing activities in the 1999 Three-Month Period was from net
revolver repayments of $1.9 million offset by a cash overdraft of $4.4 million.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 29, 2000 (THE "2000 SIX-MONTH
PERIOD") WITH THE SIX MONTHS ENDED JANUARY 23, 1999 (THE "1999 SIX-MONTH
PERIOD").
During the 2000 Six-Month Period, cash used in operations was $1.7
million as compared to $5.5 million for the 1999 Six-Month Period, a decreased
use of cash of $3.8 million. The decreased use of cash in operations is
primarily the result of a reduction of the Company's inventory during the 2000
Six-Month Period. Cash used in investing activities was $1.9 million during the
2000 Six-Month Period as compared to $3.0 million during the 1999 Six-Month
Period, a decrease of $1.1 million, which was the result of one less store
opening during the 2000 Six-Month Period as compared to during the 1999
Six-Month Period. Cash provided by financing activities was $3.7 million during
the 2000 Six-Month Period as compared to cash used in financing activities of
$2.3 million during the 1999 Six-Month Period. Cash provided by financing
activities during the 2000 Six-Month Period was from net revolver repayments of
$1.2 million offset by a cash overdraft of $4.9 million while the cash used in
the 1999 Six-Month Period for financing activities was a cash overdraft of $4.4
million offset by cash used to repurchase Senior Notes in the amount of $5.6
million and the payment of a dividend to the common shareholders of the Holding
Company in the amount of $1.1 million.
The Company believes that, based on anticipated levels of operations,
it will be able to meet its debt service obligations, including interest
payments on the Senior Notes when due, and to fund anticipated capital
expenditures and working capital requirements, and to comply with the terms of
its debt agreements during the remainder of its fiscal years ended July 29, 2000
and July 28, 2001. 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 $6.0 million of its outstanding
Senior Notes. The Company may in the future repurchase additional Senior Notes
if it is able to obtain appropriate waivers under the Facility and such Senior
Notes are available at a discount. Any such repurchases could affect the
Company's ability to cover its debt service obligations and working capital
requirements in the future.
YEAR 2000
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the 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
17
"Year 2000 Compliant." 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 acquired 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 were resolved by deploying
the most recently available versions of the packaged software solutions.
Beginning in 1996, the Company deployed the JDA Software, Inc.
Merchandise Management System ("MMS"), a packaged software solution that is 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 year
1997, 1998, and 1999. As a result of this implementation, 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, and did not experience any Year 2000 related
issues in these departments through March 14, 2000.
The Company completed the process of upgrading to the most recent
version of its packaged software solution in July 1999 for payroll, human
resources, general ledger, budgeting, and cost allocation application which are
used pursuant to a license from Lawson Associates, Inc. At completion of the
upgrade, the business systems used in these departments became Year 2000
Compliant. The cost for the upgrade to the new version of the Lawson Associates,
Inc. software package was $0.1 million, which was paid for out of the Company's
operating budget during fiscal 1999. The Company did not experience any Year
2000 related issues in these departments through March 14, 2000.
The Company manages its property, plant and equipment expenditures with
a packaged software solution provided by Para Research. The Company implemented
the most recent version of this application software, and based upon testing,
the Company did not experience any Year 2000 related issues in this area. No
additional cost was incurred related to the upgrade to the most recent version
of 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. All of the Company's pharmacies are operating with the Year 2000
Compliant version of a pharmacy operating system from Renlar, Inc. The cost
incurred to implement the most recent version of the Renlar, Inc. pharmacy
system in the pharmacies was $0.2 million, was primarily related to purchasing
new computer hardware to operate the Renlar, Inc. pharmacy software, and was
paid for out of the Company's capital expenditures budget. In regard to the cash
register related point-of-sale systems, the Company was required to upgrade the
computer hardware at a majority of the Company's store locations in order to
operate the Year 2000 Compliant point-of-sale software in the stores, at a total
cost of $0.2 million. Finally, no additional hardware purchases or modifications
were required related to ensuring Year 2000 Compliance for the Company's
in-store radio frequency applications. Through March 14, 2000, the Company did
not incur any Year 2000 related issues regarding any of its in-store
applications.
Finally, the Company evaluated the remaining internally developed
software applications for Year 2000 Compliance and completed the required
modifications to those solutions in December 1999. These internally developed
software applications provide functionality in the areas of inventory returns to
vendors and advertising. The cost of making the required modifications to these
programs was less than $0.1 million and was incurred as a normal cost of
operations. Through March 14, 2000, the Company did not incur any Year 2000
related issues regarding its internally developed software applications.
In addition, the Company continues to rely upon various third parties
for merchandise and services. Interruption of supplier operations, due to their
lack of Year 2000 Compliance could have significantly affected the Company's
operations, particularly if the Company was unable to acquire merchandise for
sale in its stores or was unable to obtain services needed to operate its
stores. The Company surveyed its third party suppliers of merchandise and
services and evaluated their efforts toward achieving Year 2000 Compliance and,
when necessary, defined appropriate contingency plans. These contingency plans
included identification of alternate third party suppliers and minimal
accumulations of inventory to assure merchandise was available for sale in its
stores. The cost to implement these contingency plans were minimal. Through
March 14, 2000, the Company has not experienced any disruptions
18
from its third party suppliers, but can give no assurances that failure of third
party suppliers to address Year 2000 Compliance will not have an adverse impact
on the Company's operations in the future.
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
ongoing Year 2000 Compliance by the Company's third party suppliers, which is
beyond the Company's control, the potential effect on financial results and the
condition of the Company cannot be measured.
OTHER MATTERS
On January 26, 2000, the Company cancelled its wholesale supply
agreement for pharmaceuticals with Neuman Distributors, Inc. ("Neuman") and is
in the process of negotiating a new wholesale supply agreement with various
other distributors. The potential effect on the financial results and on the
condition of the Company as a result of the cancellation of the wholesale supply
agreement with Neuman cannot be measured at this time. Also, the Company may be
negatively impacted by a higher cost of merchandise should it not be able to
finalize a new wholesale supply agreement or if the terms of a new wholesale
supply agreement are not equal to the terms of the cancelled Neuman wholesale
supply agreement.
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 required
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 is
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.
EMPLOYMENT REGULATION. The Company is subject to employment law
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.
19
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 Facility impose on the Company certain requirements and
restrictions, such as a requirement that the Company maintain certain financial
ratios and satisfy certain financial tests, limitation 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 industry in which the Company operates is 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 condition 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 limitation
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 officer 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 officer 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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Neither the Company nor the Holding Company engages in trading market
risk sensitive instruments or purchases hedging instruments or "other than
trading" instruments that are likely to expose the Company or the Holding
Company to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. Neither the Company nor the Holding
Company has purchased options or entered into swaps or forward or futures
contracts. The ability of the Company and the Holding Company (as guarantor) to
make periodic interest payments on the Senior Notes, at a fixed rate of 10 1/4%,
is not directly affected by fluctuations in the market. The Company's primary
market risk exposure is that of interest rate risk on borrowings under the
Facility, which are subject to interest rates based either on the lender's prime
rate or London Interbank Offered Rate ("LIBOR"), and a change in the applicable
interest rate would affect the rate at which the Company could borrow funds.
21
PART II - - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.*
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
Neither the Company nor the Holding Company filed any reports
on Form 8-K during the three-months ended January 29, 2000.
- -------------
* 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.
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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 14, 2000 By: /s/ Todd H. Pluymers
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Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
March 14, 2000 By: /s/ Todd H. Pluymers
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
23