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 OCTOBER 28, 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 December 12, 2000: 1,000 shares.
Number of shares of Class A Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at December 12, 2000: 196,632 shares.
Number of shares of Class B Non-Voting Common Stock, $.00001 par value
per share, of CDI Group, Inc. outstanding at December 12, 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
Months Ended October 28, 2000 and October 30, 1999............................... 3
Condensed Balance Sheets (Unaudited) - As of October 28, 2000 and
July 29, 2000.................................................................... 4
Condensed Statements of Cash Flows (Unaudited) - For the Three
Months Ended October 28, 2000 and October 30, 1999............................... 5
Notes to Condensed Financial Statements of
Community Distributors, Inc (Unaudited).......................................... 6
CDI GROUP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
Months Ended October 28, 2000 and October 30, 1999............................... 8
Condensed Consolidated Balance Sheets (Unaudited) - As of October 28, 2000
and July 29, 2000................................................................ 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
Months Ended October 28, 2000 and October 30, 1999............................... 10
Notes to Condensed Consolidated Financial Statements of
CDI Group, Inc. and Subsidiary (Unaudited)....................................... 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......................... 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURES......................................................................... 20
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED
-----------------------------
October 28, October 30,
2000 1999
------------- --------------
Net sales $ 70,789 $ 65,773
Cost of sales 53,850 48,153
------------- --------------
Gross profit 16,939 17,620
Selling, general and administrative expenses 16,739 15,853
Administrative fees 63 63
Depreciation and amortization 1,508 1,450
Other income, net 460 88
------------- --------------
Operating income (911) 342
Interest expense, net 2,136 2,042
------------- --------------
Loss before income taxes (3,047) (1,700)
Benefit for income taxes (1,162) (1,225)
------------- --------------
Net loss $ (1,885) $ (475)
============= ==============
See accompanying notes to condensed financial statements.
3
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
As of As of
October 28, July 29,
2000 2000
----------- -----------
ASSETS:
Cash and cash equivalents $ 533 $ 464
Accounts receivable 7,617 7,356
Inventory 47,528 37,076
Prepaid expenses and other current assets 2,795 1,625
----------- -----------
TOTAL CURRENT ASSETS 58,262 46,521
Property and equipment, net 13,476 13,838
Deferred charges and other assets 6,867 6,728
Goodwill, net 27,293 27,772
----------- -----------
TOTAL ASSETS $ 106,109 $ 94,859
=========== ===========
LIABILITIES:
Revolver borrowings $ 15,500 $ 1,250
Accounts payable 16,903 17,220
Accrued expenses and other current liabilities 6,654 8,124
Current portion of supplier advances 994 993
----------- -----------
TOTAL CURRENT LIABILITIES 40,051 27,587
Long-term debt 74,000 74,000
Supplier advances, net of current portion 2,588 2,762
Other long-term liabilities 6,634 5,789
----------- -----------
TOTAL LIABILITIES $ 123,273 $ 110,138
----------- -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings 378 2,263
Distribution in excess of capital (17,542) (17,542)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (17,164) (15,279)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 106,109 $ 94,859
=========== ===========
See accompanying notes to condensed financial statements.
4
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED
-----------------------------
October 28, October 30,
2000 1999
------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (1,885) $ (475)
Depreciation and amortization 1,554 1,519
Non-cash rent expense 198 142
LIFO provision 300 300
Changes in operating assets and liabilities (15,268) (11,509)
------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (15,101) (10,023)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (452) (917)
Acquisitions of pharmacy customer lists (397) (154)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (849) (1,071)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from revolver borrowings 32,300 20,300
Repayments of revolver borrowings (18,050) (11,500)
Cash overdraft 1,769 2,334
------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITES 16,019 11,134
Net increase (decrease) in cash and cash equivalents 69 40
Cash and cash equivalents at beginning of period 464 285
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 533 $ 325
============= ==============
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, as amended, for its fiscal year ended July 29, 2000. The
Company, a wholly owned subsidiary of CDI Group, Inc. (the "Parent"), is
engaged in the operation of retail stores throughout New Jersey. These
interim financial statements are unaudited but, in the opinion of
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:
Long-term debt includes $74,000 of 10 1/4% senior notes due in 2004 (the
"Senior Notes") which are guaranteed by the Parent. The terms of the
Senior Notes include certain restrictive covenants regarding the payment
of dividends, the incurrence of debt, the use of proceeds resulting from
disposition of assets and certain other defined activities. Under the
relevant debt agreements, in the event of a change in control, as
defined, the Company is required to repurchase all such outstanding
notes.
The Company maintains a $20,000 revolving credit facility (the "Facility")
with a bank expiring in October 2002. 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 $3,144 at July 29, 2000.
The Company did not have any outstanding letter of credit commitments as
of October 28, 2000. The Facility contains certain financial and
operating covenants, including a minimum fixed charge ratio. Additionally,
the Company cannot make any dividend or other distributions with respect
to any share of stock other than in certain limited circumstances.
6
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(5) 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.
7
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED
-----------------------------
October 28, October 30,
2000 1999
------------- --------------
Net sales $ 70,789 $ 65,773
Cost of sales 53,850 48,153
------------- --------------
Gross profit 16,939 17,620
Selling, general and administrative expenses 16,739 15,853
Administrative fees 63 63
Depreciation and amortization 1,508 1,450
Other income, net 460 88
------------- --------------
Operating income (911) 342
Interest expense, net 2,668 2,525
------------- --------------
Loss before income taxes (3,579) (2,183)
Benefit for income taxes (1,348) (1,394)
------------- --------------
Net loss $ (2,231) $ (789)
============= ==============
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
October 28, July 29,
2000 2000
----------- -----------
ASSETS:
Cash and cash equivalents $ 533 $ 464
Accounts receivable 7,652 7,389
Inventory 47,528 37,076
Prepaid expenses and other current assets 2,981 2,080
----------- -----------
TOTAL CURRENT ASSETS 58,694 47,009
Property and equipment, net 13,476 13,838
Deferred charges and other assets 6,867 5,977
Goodwill, net 27,293 27,772
----------- -----------
TOTAL ASSETS $ 106,330 $ 95,347
=========== ===========
LIABILITIES:
Revolver borrowings $ 15,500 $ 1,250
Accounts payable 16,903 17,220
Accrued expenses and other current liabilities 6,654 7,902
Current portion of supplier advances 994 993
----------- -----------
TOTAL CURRENT LIABILITIES 40,051 27,365
Long-term debt 74,000 74,000
Subordinated debt 22,957 22,424
Supplier advances, net of current portion 2,588 2,762
Other long-term liabilities 3,364 3,195
----------- -----------
TOTAL LIABILITIES $ 142,960 $ 129,746
----------- -----------
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 October 28, 2000 and July 29, 2000 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 196,632 issued and outstanding at
October 28, 2000 and July 29, 2000 - -
Class B voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
October 28, 2000 and July 29, 2000 - -
Additional paid-in capital - -
Retained earnings (3,305) (1,074)
Distribution in excess of capital (34,604) (34,604)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (37,909) (35,678)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 106,330 $ 95,347
=========== ===========
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
-----------------------------
October 28, October 30,
2000 1999
------------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (2,231) $ (789)
Depreciation and amortization 1,554 1,519
Non-cash rent expense 198 142
Non-cash interest expense 532 483
LIFO provision 300 300
Changes in operating assets and liabilities (15,454) (11,832)
------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (15,101) (10,177)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (452) (917)
Acquisition of pharmacy customer lists (397) (154)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (849) (1,071)
CASH FLOWS USED IN FINANCING ACTIVITES:
Proceeds from revolver borrowings 32,300 20,300
Repayments of revolver borrowings (18,050) (11,500)
Cash overdraft 1,769 2,334
------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITES 16,019 11,134
Net increase (decrease) in cash and cash equivalents 69 40
Cash and cash equivalents at beginning of period 464 285
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 533 $ 325
============= ==============
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, as amended, for its fiscal year ended July 29, 2000. 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 throughout New Jersey. 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:
Long-term debt includes $74,000 of 10 1/4% senior notes due in 2004 (the
"Senior Notes") which are guaranteed by the Parent. The terms of the
senior notes include certain restrictive covenants regarding the payment
of dividends, the incurrence of debt, the use of proceeds resulting from
disposition of assets and certain other defined activities. Under the
relevant debt agreements, in the event of a change in control, as defined,
the Company is required to repurchase all such outstanding notes.
The Company maintains a $20,000 revolving credit facility (the "Facility")
with a bank expiring in October 2002. 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 $3,144 at July 29, 2000.
The Company did not have any outstanding letter of credit commitments as
of October 28, 2000. The Facility contains certain financial and operating
covenants, including a minimum fixed charge ratio. Additionally, the
Company cannot make any dividend or other distributions with respect to
any share of stock other than in certain limited circumstances.
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 $22,957 and $22,424 at October
28, 2000 and July 29, 2000, respectively, which includes accrued interest.
(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.
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,
as amended, for its fiscal year ended July 29, 2000 for the Company and for
the Holding Company.
RESULTS OF OPERATIONS
Except where indicated below, the following discussion related to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 28, 2000 (THE "2001 PERIOD") WITH
THE THREE MONTHS ENDED OCTOBER 30, 1999 (THE "2000 PERIOD").
Net sales for the 2001 Period were $70.8 million as compared to
$65.8 million for the 2000 Period, an increase of $5.0 million, or 7.6%. This
increase, which includes a 7.6% increase in same-store sales, was primarily
due to (i) a 0.5% decrease in sales of non-pharmacy products from $44.4
million for the 2000 Period to $44.2 million for the 2001 Period, and (ii) a
24.3% increase in pharmacy sales from $21.4 million for the 2000 Period to
$26.6 million for the 2001 Period, including a 30.5% increase in pharmacy
sales to Third Party Plan customers from $17.6 million for the 2000 Period to
$23.0 million for the 2001 Period. The Company attributes the decrease in net
sales of non-pharmacy products to the increased competition in the Company's
markets, to an increased level of sales at lower prices due to increased
markdowns offset by new stores opened during the 2001 Period. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 534,000 for the 2001 Period as compared to
approximately 469,000 for the 2000 Period, an increase of approximately
65,000, or 13.9%. The number of prescriptions filled for Third Party Plan
customers increased to approximately 455,000 for the 2001 Period, as compared
to 385,000 for the 2000 Period, an increase of approximately 70,000, or
18.2%. Pharmacy sales to non-Third Party Plan customers were $3.6 million in
the 2001 Period as compared to $3.8 million in the 2000 Period, a decrease of
$0.2 million, or 5.3%, primarily as the result of increased participation of
the Company's customers in Third Party Plans and by a decrease in the volume
of pharmacy products sold to non-Third Party Plan customers from
approximately 84,000 in the 2000 Period to approximately 79,000 in the 2001
Period.
Gross profit was $16.9 million for the 2001 Period, as compared to
$17.6 million for the 2000 Period, a decrease of $0.7 million, or 4.0%. Gross
profit as a percentage of net sales was 23.9% for the 2001 Period as compared to
26.7% for the 2000 Period. This 2.9% decrease in gross profit as a percentage of
sales was due primarily to (i) pharmacy sales, which generate lower margins than
sales of non-pharmacy merchandise, representing a higher percentage of total
sales in the 2001 Period as compared to the 2000 Period, (ii) a decrease in the
margin on pharmacy merchandise due to the new purchasing agreement with Cardinal
Health, Inc., and (iii) a decline in the margin on non-pharmacy merchandise due
to greater competition in the Company's market and increased markdowns on
seasonal merchandise.
Gross profit on total pharmacy sales (including sales to Third Party
Plan customers) was $5.0 million for the 2001 Period as compared to $4.6 million
for the 2000 Period, an increase of $0.4 million, or 8.7%, which was primarily
13
the result of the increase in sales and prescriptions filled 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 seven independent
pharmacies during the last three fiscal years. Gross profit on sales to Third
Party Plan customers was $3.7 million for the 2001 Period as compared to $3.2
million for the 2000 Period, an increase of $0.5 million, or 15.6%, which was
primarily the result of the increase in sales of prescriptions to Third Party
Plan customers as a percent of total sales of prescriptions. Gross profit on
sales of pharmacy products to non-Third Party Plan customers was $1.3 million in
the 2001 Period as compared to $1.4 million in the 2000 Period, a decrease of
$0.1 million, or 7.1%, which was primarily the result of a decrease in sales of
prescriptions to non-Third Party Plan customers as a percentage of total sales
of prescriptions.
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 may further 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 by
higher margins on non-pharmacy merchandise.
Gross profit on non-pharmacy sales was $11.9 million for the 2001
Period, as compared to $13.0 million for the 2000 Period, a decrease of $1.1
million, or 8.5%. Gross profit as a percentage of non-pharmacy sales was 26.9%
for the 2001 Period as compared to 29.3% for the 2000 Period, a decrease of
2.4%. Gross profit as a percentage of non-pharmacy sales decreased due to
greater competition in the Company's market and to an increase in the amount of
markdowns taken on seasonal merchandise.
Selling, general and administrative expense as a percentage of net
sales was 23.6% for the 2001 Period, as compared to 24.2% for the 2000 Period, a
decrease of 0.6%. This decrease in selling, general and administrative expenses
as a percentage of net sales is primarily due to a greater growth of total net
sales from the 2000 Period to the 2001 Period as compared to the increase in
total selling, general and administrative expense from the 2000 Period to the
2001 Period.
Depreciation and amortization expense was $1.5 million for the 2001
and 2000 Periods.
Other income, net was $0.5 million for the 2001 Period as compared
to $0.1 million for the 2000 Period, an increase of $0.4 million, resulting
from the Company's receipt of $0.4 million as a member of the class in the
Brand Name Drug class action litigation.
The Company's net interest expense was $2.1 million in the 2001 Period
as compared to $2.0 million in the 2000 Period, an increase of $0.1 million
resulting from the higher level of outstanding balances on the Company's
revolving line of credit. Non-cash interest expense on the Holding Company's
outstanding subordinated debt was $0.6 in the 2001 Period as compared to $0.5
million for 2000 Period, an increase of $0.1 million resulting from the
compounding of interest on the subordinated debt.
The Company's benefit for income taxes was $1.2 million for the 2001
and 2000 Periods, which was primarily the result of a lower effective tax rate
during the 2001 Period due to a larger loss before income taxes resulting
primarily from the decline in gross profit. The Holding Company experienced a
benefit from income taxes of $0.2 million in the 2001 and 2000 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 amortization of goodwill and
of beneficial leaseholds that are not deductible when calculating taxable
income.
The Company's net loss for the 2001 Period was $1.9 million as
compared to $0.5 million in the 2000 Period, an increase in the net loss of
$1.4 million, which is primarily due to lower gross profit during the 2001
Period as
14
previously discussed. The Holding Company incurred a net loss of $0.3 for both
the 2001 Period and 2000 Period, principally as a result of the accrued interest
on the subordinated debt.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 28, 2000 (THE "2001 PERIOD") WITH
THE THREE MONTHS ENDED OCTOBER 30, 1999 (THE "2000 PERIOD").
During the 2001 Period, cash used in operations was $15.1 million as
compared to $10.0 million for the 2000 Period, an increased use of cash of
$5.1 million. The increased use of cash in operations is the result of the
higher level of investment in pharmacy inventory related to the significant
increase in pharmacy sales and as the result of an increase in non-pharmacy
seasonal inventory, offset by one less store opened during the 2001 Period as
compared to the 2000 Period. Cash used in investing activities was $0.8
million during the 2001 Period as compared to $1.1 million during the 2000
Period, a decrease of $0.3 million, which was the result of one less store
opened during the 2001 Period as compared to during the 2000 Period offset by
an increased level of expenditures to purchase the customer lists of
independent pharmacies. Cash provided by financing activities was $16.0
million during the 2001 Period as compared to $11.1 million during the 2000
Period. Cash provided by financing activities during the 2001 Period was from
net borrowings on the Company's credit facility of $14.2 million and by a
cash overdraft of $1.8 million while the cash provided by financing
activities in the 2000 Period was from net borrowings on the Company's credit
facility of $8.8 million and by a cash overdraft of $2.3 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 28, 2001 and July 27, 2002. The Company's ability to make scheduled
payments of principal or interest thereon, 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.
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
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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.
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 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 industries in which the Company operates are highly
competitive.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS. The Company uses various
trade names, service marks and trademarks including "Drug Fair" and "Cost
Cutters" in the conduct of its business. A third party registered the service
mark "Cost Cutters", but does not currently operate in the Company's market
areas. If such third party commences operations in the Company's geographic
market areas or licenses the use of the name to a third party, the Company could
be required to stop using the name "Cost Cutters". In addition, any of the
Company's other trade names, service marks or trademarks could be challenged or
invalidated in the future.
ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION. All of the Company's
stores are located in Northern and central New Jersey. As a result, the Company
is sensitive to economic, competitive, and regulatory 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
limitations contained in the Indenture governing the Senior Notes.
CONTROLLING STOCKHOLDERS. The Holding Company owns all of the
outstanding capital stock of the Company. The existing stockholders of the
Holding Company, which include the Company's President and Chief Executive
Officer, certain entities affiliated with the other directors of the Company,
and other officers and employees of the Company, own all of the outstanding
common stock of the Holding Company. These stockholders have the power to
appoint new management and approve any action requiring the approval of the
Company's stockholders, including
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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 Chief Executive Officer and
President and other key employees. 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.
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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.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule of Community Distributors,
Inc.
27.2 Financial Data Schedule of CDI Group, Inc.
(b) No Reports on Form 8-K
Neither the Company nor the Holding Company filed any reports
on Form 8-K during the three months ended October 28, 2000.
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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.
December 12, 2000 By: /s/ TODD H. PLUYMERS
-------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
December 12, 2000 By: /s/ TODD H. PLUYMERS
-------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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