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 APRIL 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 June 9, 2000: 1,000 shares.
Number of shares of Class A Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at June 9, 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 June 9, 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
COMMUNITY DISTRIBUTORS, INC.
Condensed Statements of Operations (Unaudited) - For the Three
and Nine Month Periods Ended April 29, 2000 and April 24, 1999.......................... 3
Condensed Balance Sheets (Unaudited) - As of April 29, 2000 and
April 24, 1999............................. ............................................ 4
Condensed Statements of Cash Flows (Unaudited) - For the Three
and Nine Month Periods Ended April 29, 2000 and April 24, 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 Nine Month Periods Ended April 29, 2000 and April 24, 1999.......................... 8
Condensed Consolidated Balance Sheets (Unaudited) - As of April 29, 2000
and April 24, 1999...................................................................... 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
and Nine Month Periods Ended April 29, 2000 and April 24, 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 NINE MONTHS ENDED
------------------ -----------------
April 29, April 24, April 29, April 24,
2000 1999 2000 1999
------------- ------------- ------------- --------------
Net sales $ 68,678 $ 64,650 $ 216,492 $ 200,258
Cost of sales 50,960 47,042 156,935 144,136
------------- ------------- ------------- --------------
Gross profit 17,718 17,608 59,557 56,122
Selling, general and administrative expenses 16,051 15,553 48,996 45,998
Administrative fees 63 63 188 188
Depreciation and amortization 1,447 1,393 4,428 4,373
Other income, net 105 124 311 704
------------- ------------- ------------- --------------
Operating income 262 723 6,256 6,267
Interest expense, net 2,059 2,046 6,127 5,974
------------- ------------- ------------- --------------
Income (loss) before income taxes (1,797) (1,323) 129 293
Provision (benefit) for income taxes (1,291) (714) 93 158
------------- ------------- ------------- --------------
Net income (loss) $ (506) $ (609) $ 36 $ 135
============= ============= ============= ==============
See accompanying notes to condensed financial statements.
3
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
As of As of
April 29, July 31,
2000 1999
----------- -----------
ASSETS:
Cash and cash equivalents $ 440 $ 285
Accounts receivable 5,835 5,240
Inventory 43,733 35,787
Prepaid expenses and other current assets 2,308 1,013
----------- -----------
TOTAL CURRENT ASSETS 52,316 42,325
Property and equipment, net 13,364 12,861
Deferred charges and other assets 5,148 5,622
Goodwill, net 28,251 29,687
----------- -----------
TOTAL ASSETS $ 99,079 $ 90,495
=========== ===========
LIABILITIES:
Revolver borrowings $ 10,400 $ 1,200
Accounts payable 14,076 14,357
Accrued expenses and other current liabilities 5,771 8,631
Current portion of supplier advances 1,029 653
----------- -----------
TOTAL CURRENT LIABILITIES 31,276 24,841
Long-term debt 74,000 74,000
Supplier advances, net of current portion 2,857 1,803
Other long-term liabilities 5,637 4,578
----------- -----------
TOTAL LIABILITIES $ 113,770 $ 105,222
----------- -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings 2,851 2,815
Distribution in excess of capital (17,542) (17,542)
----------- ----------
TOTAL STOCKHOLDER'S DEFICIT (14,691) (14,727)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 99,079 $ 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 NINE MONTHS ENDED
April 29, April 24, April 29, April 24,
2000 1999 2000 1999
------------- ------------- ------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ (506) $ (609) $ 36 $ 135
Depreciation and amortization 1,461 1,393 4,467 4,373
Non-cash rent expense 157 172 460 421
LIFO provision 300 150 600 450
Gain on repurchase of Senior Notes - - - (395)
Changes in operating assets and liabilities (14,122) (13,335) (15,074) (18,168)
------------- ------------- ------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (12,710) (12,229) (9,511) (13,184)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (984) (395) (2,884) (3,485)
------------- ------------- ------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (984) (395) (2,884) (3,485)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from revolver borrowings 24,600 24,250 54,100 33,960
Repayments of revolver borrowings (14,200) (13,150) (44,900) (22,860)
Cash overdraft 3,350 1,524 3,350 1,524
Repurchase of Senior Notes - - - (5,605)
Dividend paid to parent - - - (1,120)
------------- ------------- ------------- --------------
NET CASH FROM FINANCING ACTIVITES 13,750 12,624 12,550 5,899
Net increase (decrease) in cash and cash equivalents 56 - 155 (10,770)
Cash and cash equivalents at beginning of period 384 - 285 10,770
------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 440 $ - $ 440 $ -
============= ============= ============= ==============
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 10 1/4% Senior Notes due 2004 (the "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 April 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 $395 and $2,016 at April 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 NINE MONTHS ENDED
------------------ -----------------
April 29, April 24, April 29, April 24,
2000 1999 2000 1999
------------- ------------- ------------- --------------
Net sales $ 68,678 $ 64,650 $ 216,492 $ 200,258
Cost of sales 50,960 47,042 156,935 144,136
------------- ------------- ------------- --------------
Gross profit 17,718 17,608 59,557 56,122
Selling, general and administrative expenses 16,051 15,553 48,996 45,998
Administrative fees 63 63 188 188
Depreciation and amortization 1,447 1,393 4,428 4,373
Other income, net 105 124 311 704
------------- ------------- ------------- --------------
Operating income 262 723 6,256 6,267
Interest expense, net 2,590 2,529 7,625 7,336
------------- ------------- ------------- --------------
Income (loss) before income taxes (2,328) (1,806) (1,369) (1,069)
Provision (benefit) for income taxes (1,476) (883) (431) (319)
------------- ------------- ------------- --------------
Net income (loss) $ (852) $ (923) $ (938) $ (750)
============= ============= ============= ==============
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
April 29, July 31,
2000 1999
----------- -----------
ASSETS:
Cash and cash equivalents $ 440 $ 285
Accounts receivable 5,866 5,266
Inventory 43,733 35,787
Prepaid expenses and other current assets 2,308 1,013
----------- -----------
TOTAL CURRENT ASSETS 52,347 42,351
Property and equipment, net 13,364 12,861
Deferred charges and other assets 5,148 5,622
Goodwill, net 28,251 29,687
----------- -----------
TOTAL ASSETS $ 99,110 $ 90,521
=========== ===========
LIABILITIES:
Revolver borrowings $ 10,400 $ 1,200
Accounts payable 14,076 14,357
Accrued expenses and other current liabilities 5,247 8,004
Current portion of supplier advances 1,029 653
----------- -----------
TOTAL CURRENT LIABILITIES 30,752 24,214
Long-term debt 74,000 74,000
Subordinated debt 21,873 20,369
Supplier advances, net of current portion 2,857 1,803
Other long-term liabilities 3,060 2,629
----------- -----------
TOTAL LIABILITIES $ 132,542 $ 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 April 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
April 29, 2000 and July 31, 1999 - -
Class B voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
April 29, 2000 and July 31, 1999 - -
Additional paid-in capital - -
Retained earnings (deficit) (107) 831
Distribution in excess of capital (34,604) (34,604)
----------- ----------
TOTAL STOCKHOLDERS' DEFICIT (34,711) (33,773)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 99,110 $ 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 NINE MONTHS ENDED
------------------ -----------------
April 29, April 24, April 29, April 24,
2000 1999 2000 1999
------------- ------------- ------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ (852) $ (923) $ (938) $ (750)
Depreciation and amortization 1,461 1,393 4,467 4,373
Non-cash rent expense 157 172 460 421
Non-cash interest expense 531 483 1,498 1,362
LIFO provision 300 150 600 450
Gain on repurchase of Senior Notes - - - (395)
Changes in operating assets and liabilities (14,307) (13,504) (15,598) (18,645)
NET CASH USED IN OPERATING
------------- ------------- ------------- --------------
ACTIVITIES (12,710) (12,229) (9,511) (13,184)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (984) (395) (2,884) (3,485)
------------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (984) (395) (2,884) (3,485)
CASH FLOWS USED IN FINANCING ACTIVITES:
Proceeds from revolver borrowings 24,600 24,250 54,100 33,960
Repayments of revolver borrowings (14,200) (13,150) (44,900) (22,860)
Cash overdraft 3,350 1,524 3,350 1,524
Repurchase of Senior Notes - - - (5,605)
Dividend paid - - - (1,120)
------------- ------------- ------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITES 13,750 12,624 12,550 (5,899)
Net increase (decrease) in cash and cash equivalents 56 - 155 (10,770)
Cash and cash equivalents at beginning of period 384 - 285 10,770
------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 440 $ - $ 440 $ -
============= ============= ============= ==============
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 10 1/4% Senior Notes due 2004 (the "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 April 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 $395 and $2,016 at April 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 $21,873 and $20,369 at April
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.
13
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 APRIL 29, 2000 (THE "2000 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED APRIL 24, 1999 (THE "1999 THREE-MONTH
PERIOD").
Net sales for the 2000 Three-Month Period were $68.7 million as
compared to $64.7 million for the 1999 Three-Month Period, an increase of $4.0
million, or 6.2%. This increase, which includes a 1.2% increase in same-store
sales, was primarily due to (i) a 1.4% increase in sales of non-pharmacy
products from $44.1 million for the 1999 Three-Month Period to $44.7 million for
the 2000 Three-Month Period, and (ii) a 16.5% increase in pharmacy sales from
$20.6 million for the 1999 Three-Month Period to $24.0 million for the 2000
Three-Month Period, including a 23.5% increase in pharmacy sales to Third Party
Plan customers from $16.6 million for the 1999 Three-Month Period to $20.5
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, which included the effects of the
acquisition of the inventories and the customer lists of two independent
pharmacies, and to the opening of three new store locations during the
nine-months ended April 29, 2000, which included the effects of the acquisition
of the inventories and the customer lists of two independent pharmacies, as well
as to increased customer traffic in the Company's stores associated with the
increase in total pharmacy sales. The increase in pharmacy sales is a function
of the number of prescriptions filled as well as a rise in the cost of pharmacy
product to the Company, which is then passed on to the customer. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 515,000 for the 2000 Three-Month Period as compared
to approximately 486,000 for the 1999 Three-Month Period, an increase of
approximately 29,000, or 6.0%. The number of prescriptions filled for Third
Party Plan customers increased to approximately 437,000 for the 2000 Three-Month
Period, as compared to 394,000 for the 1999 Three-Month Period, an increase of
approximately 43,000, or 10.9%. Pharmacy sales to non-Third Party Plan customers
were $3.5 million in the 2000 Three-Month Periods as compared to $4.0 million in
the 1999 Three-Month Period, a decrease of $0.5 million, 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 92,000 in the 1999 Three-Month
Period to approximately 78,000 in the 2000 Three-Month Period.
Gross profit was $17.7 million for the 2000 Three-Month Period, as
compared to $17.6 million for the 1999 Three-Month Period, an increase of $0.1
million, or 0.6%. Gross profit as a percentage of net sales was 25.8% for the
14
2000 Three-Month Period as compared to 27.2% for the 1999 Three-Month Period.
This 1.4% 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, due to a lower gross
profit on pharmacy sales as a percentage of pharmacy sales because 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, and due to a lower volume of Lawn & Garden and Spring & Summer
seasonal merchandise resulting from cooler and wetter weather during the 2000
Three-Month Period as compared to the 1999 Three-Month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $5.1 million for the 2000 Three-Month Period as compared to
$4.3 million for the 1999 Three-Month Period, an increase of $0.8 million, or
18.6%, 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 six independent
pharmacies during the last three fiscal years. Gross profit on sales to Third
Party Plan customers was $3.8 million for the 2000 Three-Month Period as
compared to $2.9 million for the 1999 Three-Month Period, an increase of $0.9
million, or 31.0%, 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 $1.3 million in the 2000
Three-Month Period as compared to $1.4 million in the 1999 Three-Month Period, a
decrease of $0.1 million, or 7.1%. This decrease was due to a lower volume of
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 $12.6 million for the 2000
Three-Month Period, as compared to $13.3 million for the 1999 Three-Month
Period, a decrease of $0.7 million, or 5.3%. Gross profit as a percentage of
non-pharmacy sales was 28.2% for the 2000 Three-Month Period as compared to
30.2% for the 1999 Three-Month Period, a decrease of 2.0%. Gross profit as a
percentage of non-pharmacy sales decreased due to a lower volume of Lawn &
Garden and Spring & Summer seasonal merchandise resulting from cooler and wetter
weather during the 2000 Three-Month Period as compared to the 1999 Three-Month
Period.
Selling, general and administrative expense as a percentage of net
sales was 23.4% for the 2000 Three-Month Period, as compared to 24.1% for the
1999 Three-Month Period, a decrease of 0.7%. 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 was $1.4 million for the 2000
Three-Month Period and 1999 Three-Month Period, remaining unchanged during the
two periods.
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
15
outstanding subordinated debt was $0.5 million for both the 2000 Three-Month
Period and 1999 Three-Month Period.
The Company's benefit from income taxes was $1.3 million for the 2000
Three-Month Period as compared to $0.7 million for the 1999 Three-Month Period,
a decrease of $0.6 million, resulting from a greater loss before income taxes
offset by a higher effective tax rate in the 2000 Three-Month Period. The
Holding Company experienced a benefit from income taxes of $0.2 million in the
2000 Three-Month Period and 1999 Three-Month Period. 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 loss for the 2000 Three-Month Period was $0.5 million
as compared to $0.6 million in the 1999 Three-Month Period, a decrease of $0.1
million, which is primarily due to a decreased operating income offset by an
increased benefit from income taxes. The Holding Company incurred a net loss of
$0.4 million for the 2000 Three-Month Period as compared to a net loss of $0.3
million during the 1999 Three-Month Period, an increased loss of $0.1 million,
principally as a result of the interest incurred on the subordinated debt.
COMPARISON OF THE NINE MONTHS ENDED APRIL 29, 2000 (THE "2000 NINE-MONTH
PERIOD") WITH THE NINE MONTHS ENDED APRIL 24, 1999 (THE "1999 NINE-MONTH
PERIOD").
Net sales for the 2000 Nine-Month Period were $216.5 million as
compared to $200.3 million for the 1999 Nine-Month Period, an increase of $16.2
million, or 8.1%. This increase, which includes a 2.4% increase in same-store
sales, was primarily due to (i) a 3.1% increase in sales of non-pharmacy
products from $143.1 million for the 1999 Nine-Month Period to $147.5 million
for the 2000 Nine-Month Period, and (ii) a 20.6% increase in pharmacy sales from
$57.2 million for the 1999 Nine-Month Period to $69.0 million for the 2000
Nine-Month Period, including a 27.3% increase in pharmacy sales to Third Party
Plan customers from $45.4 million for the 1999 Nine-Month Period to $57.8
million for the 2000 Nine-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, which included the effects of the
acquisition of the inventories and the customer lists of two independent
pharmacies, to the opening of three new store locations during the 2000
Nine-Month Period, which included the effects of the acquisition of the
inventories and the customer lists of two independent pharmacies, as well as to
increased customer traffic in the Company's stores associated with the increase
in total pharmacy sales. The increase in pharmacy sales is a function of the
number of prescriptions filled as well as a rise in the cost of pharmacy product
to the Company, which is then passed on to the customer. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 1,506,000 for the 2000 Nine-Month Period as
compared to approximately 1,383,000 for the 1999 Nine-Month Period, an increase
of approximately 123,000, or 8.9%. The number of prescriptions filled for Third
Party Plan customers increased to approximately 1,256,000 for the 2000
Nine-Month Period, as compared to 1,107,000 for the 1999 Nine-Month Period, an
increase of approximately 149,000, or 13.5%. Pharmacy sales to non-Third Party
Plan customers were $11.2 million in the 2000 Nine-Month Period as compared to
$11.8 million in the 1999 Nine-Month Period, a decrease of $0.6 million, or
5.1%, 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 276,000 in the 1999
Nine-Month Period to approximately 250,000 in the 2000 Nine-Month Period.
Gross profit was $59.6 million for the 2000 Nine-Month Period, as
compared to $56.1 million for the 1999 Nine-Month Period, an increase of $3.5
million, or 6.2%. Gross profit as a percentage of net sales was 27.5% for the
2000 Nine-Month Period as compared to 28.0% for the 1999 Nine-Month Period. This
0.5% decrease in gross profit as a percentage of net sales is the result of a
decrease in the gross profit on non-pharmacy sales as a percentage of the
Company's sales of non-pharmacy merchandise in addition to 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 Nine-Month Period as compared to the 1999 Nine-Month Period.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $14.3 million for the 2000 Nine-Month Period as compared to
$12.1 million for the 1999 Nine-Month Period, an increase of $2.2 million, or
18.2%, 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 six independent
pharmacies
16
during the last three fiscal years. Gross profit on sales to Third Party Plan
customers was $10.7 million for the 2000 Nine-Month Period as compared to $7.5
million for the 1999 Nine-Month Period, an increase of $3.2 million, or 42.7%,
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 $3.6
million in the 2000 Nine-Month Period as compared to $4.6 million in the 1999
Nine-Month Period, a decrease of $1.0 million, or 21.7%. This decrease was due
to the decline in sales of pharmacy merchandise 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 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 $45.3 million for the 2000
Nine-Month Period, as compared to $44.0 million for the 1999 Nine-Month Period,
an increase of $1.3 million, or 3.0%. Gross profit as a percentage of
non-pharmacy sales was 30.7% for both the 2000 Nine-Month Period and 1999
Nine-Month Period.
Selling, general and administrative expense as a percentage of net
sales was 22.6% for the 2000 Nine-Month Period, as compared to 23.0% for the
1999 Nine-Month Period, a decrease of 0.4%. 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 Nine-Month Period
and the 1999 Nine-Month Period was $4.4 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
Nine-Month Period, offset by a reduction in the amount of amortization of
beneficial leaseholds.
Other income, net was $0.3 million for the 2000 Nine-Month Period as
compared to $0.7 million for the 1999 Nine-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 $6.1 million in the 2000
Nine-Month Period as compared to $6.0 million in the 1999 Nine-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 $1.5 million for the
2000 Nine-Month Period as compared to $1.3 million for the 1999 Nine-Month
Period, an increase of $0.2 million.
The Company's provision for income taxes was $0.1 million for the 2000
Nine-Month Period as compared to $0.2 million for the 1999 Nine-Month Period, an
increase of $0.1 million, or 50.0%, resulting from a lower income before income
taxes offset by a higher effective tax rate in the 2000 Three-Month Period. The
Holding Company experienced a benefit from income taxes of $0.5 million in the
2000 Nine-Month Period and in the 1999 Nine-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
17
varies from period to period.
The Company's net income for the 2000 Nine-Month Period was $0.0
million as compared to $0.1 million in the 1999 Nine-Month Period, a decrease of
$0.1 million, which is primarily due to decreased operating income offset by
increased net interest expense. The Holding Company incurred a net loss of $0.9
million for the 2000 Nine-Month Period and for the 1999 Nine-Month Period,
principally as a result of the interest incurred on the subordinated debt.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED APRIL 29, 2000 (THE "2000 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED APRIL 24, 1999 (THE "1999 THREE-MONTH
PERIOD").
During the 2000 Three-Month Period, cash used in operations was $12.7
million as compared to cash used in operations of $12.2 million for the 1999
Three-Month Period, an increase in cash used in operations of $0.5 million. The
increased cash used in operations is primarily the result of an increase in the
Company's inventory and accounts receivable during the 2000 Three-Month Period
that was primarily the result of the opening of three new stores and the
acquisition of the inventory and customer lists of two independent pharmacies
during the nine-months ended April 29, 2000. Cash used in investing activities
was $1.0 million during the 2000 Three-Month Period as compared to $0.4 million
during the 1999 Three-Month Period, an increased use of cash of $0.6 million,
which was the result of a higher level of capital expenditures during the 2000
Three-Month Period. Cash from financing activities was $13.8 million during the
2000 Three-Month Period as compared to cash from financing activities of $12.6
million during the 1999 Three-Month Period, an increase in cash from financing
activities of $1.2. Cash from financing activities during the 2000 Three-Month
Period was from net revolver borrowings of $10.4 million in addition to a cash
overdraft of $3.4 million while the cash from financing activities in the 1999
Three-Month Period was from net revolver borrowings of $11.1 million in addition
to a cash overdraft of $1.5 million.
COMPARISON OF THE NINE MONTHS ENDED APRIL 29, 2000 (THE "2000 NINE-MONTH
PERIOD") WITH THE NINE MONTHS ENDED APRIL 24, 1999 (THE "1999 NINE-MONTH
PERIOD").
During the 2000 Nine-Month Period, cash used in operations was $9.5
million as compared to $13.2 million for the 1999 Nine-Month Period, an
increased use of cash of $3.7 million. The increased use of cash in operations
is primarily the result of an increase in the Company's inventory and accounts
receivable during the 2000 Nine-Month Period that was primarily the result of
the opening of three new stores and the acquisition of the inventory and
customer lists of two independent pharmacies during the 2000 Nine-Month Period.
Cash used in investing activities was $2.9 million during the 2000 Nine-Month
Period as compared to $3.5 million during the 1999 Nine-Month Period, a decrease
of $0.6 million, which was the result of lower capital expenditures during the
2000 Nine-Month Period as compared to during the 1999 Nine-Month Period. Cash
provided by financing activities was $12.6 million during the 2000 Nine-Month
Period as compared to cash provided by financing activities of $5.9 million
during the 1999 Nine-Month Period, an increase of $6.7 million. Cash provided by
financing activities during the 2000 Nine-Month Period was from net revolver
borrowings of $9.2 million in addition to a cash overdraft of $3.4 million while
the cash provided by the 1999 Nine-Month Period for financing activities was
from net revolver borrowings of $11.1 million in addition to a cash overdraft of
$1.5 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.
18
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
The Company has not incurred any significant costs in excess of those
previously disclosed in conjunction with its Year 2000 Compliance efforts. 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"). On
April 24, 2000, the Company signed a wholesale supply agreement with Cardinal
Health, Inc. ("Cardinal"). The wholesale supply agreement with Cardinal was
effective in connection with the cancellation of the wholesale supply agreement
with Neuman and provided relatively equivalent terms to the wholesale supply
agreement with Neuman. The Company believes that it did not incur a negative
impact on its financial results and condition or cash flows as a result of the
cancellation of the wholesale supply agreement with Neuman and the
implementation of a wholesale supply agreement with Cardinal.
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. Government-sponsored programs, such as Medicaid
and Medicare, reimburse a portion of the Company's services 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
19
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.
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
1.1 Certificate of Incorporation, as amended, of CDI
Group, Inc. (the "Holding Company").*
1.2 By-Laws of the Holding Company.*
1.3 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 April 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.
22
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.
June 9, 2000 By: /S/ TODD H. PLUYMERS
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
June 9, 2000 By: /S/ TODD H. PLUYMERS
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
23