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 QUARTERLY PERIOD ENDED JANUARY 26, 2002
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 days.
Yes X No
--- ---
Number of shares of Common Stock, $.01 par value per share, of Community
Distributors, Inc. outstanding at March 12, 2002: 1,000 shares.
Number of shares of Class A Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at March 12, 2002: 196,632 shares.
Number of shares of Class B Non-Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding at March 12, 2002: 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
Six Month Periods Ended January 26, 2002 and January 27, 2001............................... 3
Condensed Balance Sheets (Unaudited) - As of January 26, 2002 and
July 28, 2001............................................................................... 4
Condensed Statements of Cash Flows (Unaudited) - For the Three and
Six Month Periods Ended January 26, 2002 and January 27, 2001............................... 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 and
Six Month Periods Ended January 26, 2002 and January 27, 2001............................... 8
Condensed Consolidated Balance Sheets (Unaudited) - As of January 26, 2002
and July 28, 2001........................................................................... 9
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
and Six Month Periods Ended January 26, 2002 and January 27, 2001........................... 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....................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 21
SIGNATURES.................................................................................... 22
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three Months Ended Six Months Ended
------------------------- ------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
---------- ----------- ----------- -----------
Net sales $ 87,677 $ 85,400 $ 160,343 $ 156,189
Cost of sales 63,061 62,577 116,740 116,427
--------- --------- ---------- ----------
Gross profit 24,616 22,823 43,603 39,762
Selling, general and administrative expenses 18,537 19,095 35,095 35,835
Administrative fees 62 62 125 125
Depreciation and amortization 1,085 1,539 2,166 3,048
Other income, net 66 51 212 511
--------- --------- ---------- ----------
Operating income 4,998 2,178 6,429 1,265
Interest expense, net 1,989 2,195 3,979 4,331
--------- --------- ---------- ----------
Income/(loss) before income taxes 3,009 (17) 2,450 (3,066)
Provision (benefit) for income taxes 1,216 358 1,004 (804)
Income/(loss) before cumulative
--------- --------- ---------- ----------
effect of accounting change 1,793 (375) 1,446 (2,262)
Cumulative effect of change in accounting
for goodwill - - 7,236 -
--------- --------- ---------- ----------
Net income/(loss) $ 1,793 $ (375) $ (5,790) $ (2,262)
========= ========= ========== ==========
See accompanying notes to condensed financial statements.
3
COMMUNITY DISTRIBUTORS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
As of As of
January 26, July 28,
2002 2001
----------- -----------
ASSETS:
Cash and cash equivalents $ 1,521 $ 2,215
Accounts receivable 8,123 7,547
Inventory 36,239 33,949
Prepaid expenses and other current assets 1,633 1,341
----------- -----------
TOTAL CURRENT ASSETS 47,516 45,052
Property and equipment, net 11,423 12,298
Deferred charges and other assets 5,911 6,397
Goodwill, net 18,620 25,856
----------- -----------
TOTAL ASSETS $ 83,470 $ 89,603
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ -
Accounts payable 13,294 14,101
Accrued expenses and other current liabilities 8,410 8,470
Current portion of supplier advances 650 650
----------- -----------
TOTAL CURRENT LIABILITIES 22,354 23,221
Long-term debt 74,000 74,000
Supplier advances, net of current portion 2,005 2,359
Other long-term liabilities 7,969 7,091
----------- -----------
TOTAL LIABILITIES $ 106,328 $ 106,671
----------- -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital - -
Retained earnings (deficit) (5,316) 474
Distribution in excess of capital (17,542) (17,542)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (22,858) (17,068)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 83,470 $ 89,603
=========== ===========
See accompanying notes to condensed financial statements.
4
COMMUNITY DISTRIBUTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended Six Months Ended
-------------------------- -------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ------------ ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ 1,793 $ (375) $ (5,790) $ (2,262)
Depreciation and amortization 1,158 1,600 2,304 3,152
Non-cash rent expense 108 185 236 384
LIFO provision 113 100 225 400
Cumulative effect of change in accounting
for goodwill - - 7,236 -
Changes in operating assets and liabilities 2,850 5,177 (5,849) (8,318)
----------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,022 6,687 (1,638) (6,644)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (445) (1,151) (943) (1,603)
Acquisitions of pharmacy customer lists - - - (398)
----------- ---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (445) (1,151) (943) (2,001)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from revolver borrowings 11,220 21,425 37,995 53,725
Repayments of revolver borrowings (18,770) (28,650) (37,995) (46,700)
Cash overdraft 1,887 1,713 1,887 1,713
----------- ---------- ----------- ----------
NET CASH FROM (USED IN) FINANCING ACTIVITES (5,663) (5,512) 1,887 8,738
Net increase (decrease) in cash and cash equivalents (86) 24 (694) 93
Cash and cash equivalents at beginning of period 1,607 533 2,215 464
----------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,521 $ 557 $ 1,521 $ 557
=========== ========== =========== ==========
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 28, 2001. 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 the 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. See
Note 8.
The Company maintains a $20,000 revolving credit facility (the "Facility")
with a bank expiring in October 2002. The 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,
totaled approximately $2,183 and $937 at January 26, 2002 and July 28,
2001, respectively. At January 26, 2002, $17,817 of the Facility was
available to the Company. 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. See Note 8.
(5) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
that is determined based on current estimates of gross profit rate,
inflation rates and inventory levels, and is adjusted for the results of
physical inventories. The results of the last physical inventory that was
taken on January 26, 2002 did not have a material impact on the results of
operations, financial position and cash flows.
6
COMMUNITY DISTRIBUTORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(6) GOODWILL:
Effective July 29, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
("SFAS 142"), which requires that goodwill not be amortized but instead be
tested at least annually for impairment by reporting unit and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. In accordance with SFAS 142,
the Company has six months from the initial date of adoption to complete
its impairment testing. Adoption of SFAS 142 has resulted in the
elimination of goodwill amortization expense of $479 and $958 during the
three and six month periods ended January 26, 2002.
The Company has completed its assessment of goodwill during its second
quarter, which resulted in goodwill impairment of $7,236 that has been
recorded as a cumulative effect of accounting change as of the beginning of
the current fiscal year. In accordance with SFAS 142, the Company has
restated its first quarter results to give effect to this accounting
change. The Company's restated first quarter results for such cumulative
effect of accounting change results in a net loss of $7,583 as compared to
the previously reported net loss of $347 for the quarter ended October 27,
2001. The $7,236 cumulative effect of change in accounting has no tax
effect, as the Company's goodwill is nondeductible for tax reporting
purposes.
The Company has performed its assessment of goodwill and other intangible
assets by comparing the fair value of the Company, which has been
determined to be the reporting unit for such measurement purposes, to its
net book value in accordance with the provisions of SFAS 142. The Company
has estimated its fair value based upon a combination of historical and
projected results giving appropriate weighting to such data in arriving at
an estimate of fair value. The Company's equity is not subject to
quotations.
(7) ACCOUNTING POLICIES:
Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets", was
issued in August 2001. SFAS 144 establishes accounting and reporting
standards for impairment of long-lived assets to be disposed of. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The
Company is evaluating the impact, if any, of adopting SFAS 144 but does not
believe the effect of adoption will be material.
(8) SUBSEQUENT EVENTS:
On February 11, 2002, the Company amended the terms of its Facility. Under
this amendment, the Facility limit was increased to $30,000 with a sublimit
for the repurchase of Senior Notes in the amount of $15,000, although the
Company is currently limited to utilizing only $25,000 of the Facility
under terms of the Senior Notes. In addition, the Company extended the term
of the facility to April 2004, incurred a commitment fee of $250, is
subject to certain prepayment fees and gives the Company the ability to
reduce the commitment upon request.
Subsequent to the end of the second quarter, the Company has repurchased
$17,025 aggregate principal amount of its outstanding Senior Notes at a
discount, resulting in a significant gain that will be reflected as an
extraordinary item in the Company's financial statements for the third
quarter ended April 27, 2002.
On February 24, 2002, the Company suffered the total loss of one of its
Cost Cutters stores due to a fire. During the fiscal year ended July 28,
2001, this store contributed $0.3 million of the total Company's income
before income taxes. The Company maintains insurance to recover its loss of
inventory, property and equipment and lost profits from this store
location. The Company does not expect to be able to reopen this store until
the second half of the fiscal year ending July 26, 2003.
7
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three Months Ended Six Months Ended
------------------------- ------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
--------- --------- ---------- ----------
Net sales $ 87,677 $ 85,400 $ 160,343 $ 156,189
Cost of sales 63,061 62,577 116,740 116,427
--------- --------- ---------- ----------
Gross profit 24,616 22,823 43,603 39,762
Selling, general and administrative expenses 18,537 19,095 35,095 35,835
Administrative fees 62 62 125 125
Depreciation and amortization 1,085 1,539 2,166 3,048
Other income, net 66 51 212 511
--------- --------- ---------- ----------
Operating income 4,998 2,178 6,429 1,265
Interest expense, net 2,574 2,726 5,150 5,394
--------- ---------- ---------- ----------
Income/(loss) before income taxes 2,424 (548) 1,279 (4,129)
Provision (benefit) for income taxes 1,018 172 594 (1,176)
Income/(loss) before cumulative effect
--------- ---------- ---------- ----------
of accounting change 1,406 (720) 685 (2,953)
Cumulative effect of change in accounting
for goodwill - - (7,236) -
--------- ---------- ----------- ----------
Net income/(loss) $ 1,406 $ (720) $ (6,551) $ (2,953)
========= ========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
8
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
As of As of
January 26, July 28,
2002 2001
----------- -----------
ASSETS:
Cash and cash equivalents $ 1,521 $ 2,215
Accounts receivable 8,166 7,587
Inventory 36,239 33,949
Prepaid expenses and other current assets 1,633 1,341
----------- -----------
TOTAL CURRENT ASSETS 47,559 45,092
Property and equipment, net 11,423 12,298
Deferred charges and other assets 5,911 6,397
Goodwill, net 18,620 25,856
----------- -----------
TOTAL ASSETS $ 83,513 $ 89,643
=========== ===========
LIABILITIES:
Revolver borrowings $ - $ -
Accounts payable 13,294 14,101
Accrued expenses and other current liabilities 8,000 7,710
Current portion of supplier advances 650 650
----------- -----------
TOTAL CURRENT LIABILITIES 21,944 22,461
Long-term debt 74,000 74,000
Subordinated debt 25,840 24,665
Supplier advances, net of current portion 2,005 2,359
Other long-term liabilities 3,938 3,821
----------- -----------
TOTAL LIABILITIES $ 127,727 $ 127,306
----------- -----------
COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value, 7,862
authorized, issued and outstanding, redemption
value $100 per share 786 786
Redeemable shares of Class A voting common stock, 57,963
shares issued and outstanding at net redemption
value at January 26, 2002 and July 28, 2001 493 493
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value,
authorized 600,000 shares, 196,632 issued and
outstanding at January 26, 2002 and July 28, 2001 - -
Class B non-voting common stock, $.00001 par value,
authorized 600,000 shares, 187,922 issued and
outstanding at January 26, 2002 and July 28, 2001 - -
Additional paid-in capital - -
Retained deficit (10,889) (4,338)
Distribution in excess of capital (34,604) (34,604)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (45,493) (38,942)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 83,513 $ 89,643
=========== ===========
See accompanying notes to condensed consolidated financial statements.
9
CDI GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended Six Months Ended
-------------------------- -------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ------------ ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ 1,406 $ (720) $ (6,551) $ (2,953)
Depreciation and amortization 1,158 1,600 2,304 3,152
Non-cash rent expense 108 185 236 384
Non-cash interest expense 585 531 1,171 1,063
LIFO provision 113 100 225 400
Cumulative effect of change in accounting
for goodwill - - 7,236 -
Changes in operating assets and liabilities 2,652 4,991 (6,259) (8,690)
-------- --------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 6,022 6,687 (1,638) (6,644)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (445) (1,151) (943) (1,603)
Acquisition of pharmacy customer lists - - - (398)
-------- --------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (445) (1,151) (943) (2,001)
CASH FLOWS USED IN FINANCING ACTIVITES:
Proceeds from revolver borrowings 11,220 21,425 37,995 53,725
Repayments of revolver borrowings (18,770) (28,650) (37,995) (46,700)
Cash overdraft 1,887 1,713 1,887 1,713
-------- -------- -------- --------
NET CASH FROM (USED IN) FINANCING ACTIVITES (5,663) (5,512) 1,887 8,738
Net increase (decrease) in cash and cash equivalents (86) 24 (694) 93
Cash and cash equivalents at beginning of period 1,607 533 2,215 464
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,521 $ 557 $ 1,521 $ 557
======== ======== ======== ========
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 (defined below and collectively
referred to with the parent as the "Company"), and the notes thereto
contained in the Company's annual report on Form 10-K for its fiscal year
ended July 28, 2001. 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 the 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. See Note
8.
The Company maintains a $20,000 revolving credit facility (the "Facility")
with a bank expiring in October 2002. The 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,
totaled approximately $2,183 and $937 at January 26, 2002 and July 28,
2001, respectively. At January 26, 2002, $17,817 of the Facility was
available to the Company. 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. See Note 8.
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 $25,840 and $24,665 at January
26, 2002 and July 28, 2001, respectively, which includes accrued interest.
11
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
(5) INVENTORY COSTING METHOD:
Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
that is determined based on current estimates of gross profit rate,
inflation rates and inventory levels, and is adjusted for the results of
physical inventories. The results of the last physical inventory that was
taken on January 26, 2002 did not have a material impact on the results of
operations, financial position and cash flows.
(6) GOODWILL:
Effective July 29, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
("SFAS 142"), which requires that goodwill not be amortized but instead be
tested at least annually for impairment by reporting unit and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. In accordance with SFAS 142,
the Company has six months from the initial date of adoption to complete
its impairment testing. Adoption of SFAS 142 has resulted in the
elimination of goodwill amortization expense of $479 and $958 during the
three and six month periods ended January 26, 2002.
The Company has completed its assessment of goodwill during its second
quarter, which resulted in goodwill impairment of $7,236 which has been
recorded as a cumulative effect of accounting change as of the beginning of
the current fiscal year. In accordance with SFAS 142, the Company has
restated its first quarter results to give effect to this accounting
change. The Company's restated first quarter results for such cumulative
effect of accounting change results in a net loss of $7,583 as compared to
the previously reported net loss of $347 for the quarter ended October 27,
2001. The $7,236 cumulative effect of change in accounting has no tax
effect as the Company's goodwill is nondeductible for tax reporting
purposes.
The Company has performed its assessment of goodwill and other intangible
assets by comparing the fair value of the Company, which has been
determined to be the reporting unit for such measurement purposes, to its
net book value in accordance with the provisions of SFAS 142. The Company
has estimated its fair value based upon a combination of historical and
projected results giving appropriate weighting to such data in arriving at
an estimate of fair value. The Company's equity is not subject to
quotations.
(7) ACCOUNTING POLICIES:
Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets", was
issued in August 2001. SFAS 144 establishes accounting and reporting
standards for impairment of long-lived assets to be disposed of. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The
Company is evaluating the impact, if any, of adopting SFAS 144 but does not
believe the effect of adoption will be material.
(8) SUBSEQUENT EVENTS:
On February 11, 2002, the Company amended the terms of its Facility. Under
this amendment, the Facility limit was increased to $30,000 with a sublimit
for the repurchase of Senior Notes in the amount of $15,000, although the
Company is currently limited to utilizing only $25,000 of the Facility
under terms of the Senior Notes. In addition, the Company extended the term
of the facility to April 2004, incurred a commitment fee of $250, is
subject to certain prepayment fees and gives the Company the ability to
reduce the commitment upon request.
Subsequent to the end of the second quarter, the Company has repurchased
$17,025 aggregate principal amount of its outstanding Senior Notes at a
discount, resulting in a significant gain that will be reflected as an
extraordinary item in the Company's financial statements for the third
quarter ended April 27, 2002.
12
CDI GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
On February 24, 2002, the Company suffered the total loss of one of its
Cost Cutters stores due to a fire. During the fiscal year ended July 28,
2001, this store contributed $0.3 million of the total Company's income
before income taxes. The Company maintains insurance to recover its loss of
inventory, property and equipment and lost profits from this store
location. The Company does not expect to be able to reopen this store until
the second half of the fiscal year ending July 26, 2003.
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; (iii) statements regarding present and future
repurchases by the Company of some of its Senior Notes; (iv) statements
regarding the effect of the fire in one of the Cost Cutters stores; and (v)
certain other statements identified or qualified by words such as "likely",
"will", "suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. These forward-looking
statements represent the best judgment of the Company and 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 28, 2001
for the Company and for the Holding Company.
RESULTS OF OPERATIONS
Except where indicated below, the following discussion relates to the
operations of the Company only. The Holding Company conducts no operations
separate from the Company.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 26, 2002 (THE "2002 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED JANUARY 27, 2001 (THE "2001 THREE-MONTH
PERIOD").
Net sales for the 2002 Three-Month Period were $87.7 million as compared to
$85.4 million for the 2001 Three-Month Period, an increase of $2.3 million, or
2.7%. This increase, which includes a 2.5% increase in same-store sales, was
primarily due to (i) a 12.4% increase in pharmacy sales from $29.0 million for
the 2001 Three-Month Period to $32.6 million for the 2002 Three-Month Period,
including a 15.4% increase in pharmacy sales to Third Party Plan customers from
$25.3 million for the 2001 Three-Month Period to $29.2 million for the 2002
Three-Month Period and (ii) a 2.3% decrease in sales of non-pharmacy products
from $56.4 million for the 2001 Three-Month Period to $55.1 million for the 2002
Three-Month Period. The Company attributes the decrease in net sales of
non-pharmacy products to the continuing levels of increased competition in the
Company's markets, a decline in personal consumer spending during the 2002
Three-Month Period and to reductions in inventory levels that resulted in fewer
markdown sales. The number of prescriptions filled (including prescriptions
filled for Third Party Plan customers) was approximately 617,000 for the 2002
Three-Month Period as compared to approximately 574,000 for the 2001 Three-Month
Period, an increase of approximately 43,000, or 7.5%. The number of
prescriptions filled for Third Party Plan customers increased to approximately
545,000 for the 2002 Three-Month Period, as compared to 495,000 for the 2001
Three-Month Period, an increase of approximately 50,000, or 10.1%. Pharmacy
sales to non-Third Party Plan customers were $3.4 million in the 2002
Three-Month Period as compared to $3.7 million in the 2001 Three-Month Period, a
decrease of $0.3 million, or 8.1%, due to the increased participation of the
Company's customers in Third Party Plans and a decrease in the number of
prescriptions filled for non-Third Party Plan customers from approximately
79,000 in the 2001 Three-Month Period to approximately 72,000 in the 2002
Three-Month Period.
Gross profit was $24.6 million for the 2002 Three-Month Period, as compared
to $22.8 million for the 2001 Three-Month Period, an increase of $1.8 million,
or 7.9%. Gross profit as a percentage of net sales was 28.1% for the 2002
Three-Month Period as compared to 26.7% for the 2001 Three-Month Period. This
1.4% increase in gross profit as a percentage of net sales was due primarily to
an improved retail pricing strategy on non-pharmacy sales and to fewer clearance
markdowns on seasonal merchandise sales.
14
Gross profit on total pharmacy sales (including sales to Third Party Plan
customers) was $5.9 million for the 2002 Three-Month Period as compared to $5.6
million for the 2001 Three-Month Period, an increase of $0.3 million, or 5.4%,
which was primarily 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 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 $4.5 million for the 2002 Three-Month
Period as compared to $4.2 million for the 2001 Three-Month Period, an increase
of $0.3 million, or 7.1%, which was primarily the result of the increase in the
number of prescriptions sold to Third Party Plan customers. Gross profit on
sales of pharmacy products to non-Third Party Plan customers was $1.4 million in
the 2002 Three-Month Period and 2001 Three-Month Period.
Gross profit on non-pharmacy sales was $18.7 million for the 2002
Three-Month Period, as compared to $17.2 million for the 2001 Three-Month
Period, an increase of $1.5 million, or 8.7%. Gross profit as a percentage of
non-pharmacy sales was 33.9% for the 2002 Three-Month Period as compared to
30.5% for the 2001 Three-Month Period, an increase of 3.4%. Gross profit as a
percentage of non-pharmacy sales increased primarily due to an improved retail
pricing strategy and to fewer clearance markdowns on seasonal merchandise sales.
Selling, general and administrative expense as a percentage of net sales
was 21.1% for the 2002 Three-Month Period, as compared to 22.4% for the 2001
Three-Month Period, a decrease of 1.3%. This decrease in selling, general and
administrative expenses as a percentage of net sales is primarily due to
initiatives to reduce operating expenses that were partially offset by increases
in the cost of compensation for pharmacists and employee benefits.
Depreciation and amortization expense was $1.0 million for the 2002
Three-Month Period as compared to $1.5 million for the 2001 Three-Month Period,
a decrease of $0.5 million, or 33.3%. This decrease is primarily the result of
the elimination of the amortization of goodwill in connection with the
implementation of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
Other income, net was $0.1 million for the 2002 Three-Month Period and 2001
Three-Month Period.
The Company's net interest expense was $2.0 million in the 2002 Three-Month
Period as compared to $2.2 million in the 2001 Three-Month Period, a decrease of
$0.2 million resulting from the lower level of outstanding balances and lower
interest rates charged 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 2002 Three-Month Period and was $0.5 million in the 2001 Three-Month
Period, an increase of $0.1 million resulting from the compounding of interest
on the subordinated debt.
The Company's provision for income taxes was $1.2 million for the 2002
Three-Month Period as compared to $0.4 million for the 2001 Three-Month Period,
an increase of $0.8 million. The Holding Company experienced a benefit from
income taxes of $0.2 million in the 2002 Three-Month Period and 2001 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 amortization
of goodwill and of beneficial leaseholds, both of which are not deductible when
calculating taxable income.
The Company's net income for the 2002 Three-Month Period was $1.8 million
as compared to a net loss of $0.4 million in the 2001 Three-Month Period, an
increase of $2.2 million, which is primarily due to the factors previously
discussed. The Holding Company incurred a net loss of $0.4 million for the 2002
Three-Month Period as compared to $0.3 million for the 2001 Three-Month Period,
an increase of $0.1 million.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 26, 2002 (THE "2002 SIX-MONTH
PERIOD") WITH THE SIX MONTHS ENDED JANUARY 27, 2001 (THE "2001 SIX-MONTH
PERIOD").
Net sales for the 2002 Six-Month Period were $160.3 million as compared to
$156.2 million for the 2001 Six-Month Period, an increase of $4.1 million, or
2.6%. This increase, which includes a 1.8% increase in same-store sales, was
primarily due to (i) a 13.3% increase in pharmacy sales from $55.7 million for
the 2001 Six-Month Period to $63.1 million for the 2002 Six-Month Period,
including an 16.6% increase in pharmacy sales to Third Party Plan customers from
$48.3 million for the 2001 Six-Month Period to $56.3 million for the 2002
Six-Month Period and (ii) a 3.3% decrease in sales of non-pharmacy products from
$100.5 million for the 2001 Six-Month Period to $97.2 million for the 2002
Six-Month Period. The Company attributes the decrease in net sales of
non-pharmacy products to the continuing
15
levels of increased competition in the Company's markets, a decline in personal
consumer spending during the 2002 Six-Month Period and to reductions in
inventory levels that resulted in fewer markdown sales. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 1,190,000 for the 2002 Six-Month Period as compared
to approximately 1,108,000 for the 2001 Six-Month Period, an increase of
approximately 82,000, or 7.4%. The number of prescriptions filled for Third
Party Plan customers increased to approximately 1,048,000 for the 2002 Six-Month
Period, as compared to 950,000 for the 2001 Six-Month Period, an increase of
approximately 98,000, or 10.3%. Pharmacy sales to non-Third Party Plan customers
were $6.8 million in the 2002 Six-Month Period as compared to $7.4 million in
the 2001 Six-Month Period, a decrease of $0.6 million, or 8.1%, due to the
increased participation of the Company's customers in Third Party Plans and a
decrease in the number of prescriptions filled for non-Third Party Plan
customers from approximately 158,000 in the 2001 Six-Month Period to
approximately 142,000 in the 2002 Six-Month Period.
Gross profit was $43.6 million for the 2002 Six-Month Period, as compared
to $39.8 million for the 2001 Six-Month Period, an increase of $3.8 million, or
9.5%. Gross profit as a percentage of net sales was 27.2% for the 2002 Six-Month
Period as compared to 25.5% for the 2001 Six-Month Period. This 1.7% increase in
gross profit as a percentage of net sales was due primarily to an improved
retail pricing strategy on non-pharmacy sales and to fewer clearance markdowns
on seasonal merchandise sales.
Gross profit on total pharmacy sales (including sales to Third Party Plan
customers) was $11.6 million for the 2002 Six-Month Period as compared to $10.7
million for the 2001 Six-Month Period, an increase of $0.9 million, or 8.4%,
which was primarily 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 due 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 $8.8 million for the 2002 Six-Month
Period as compared to $8.1 million for the 2001 Six-Month Period, an increase of
$0.7 million, or 8.6%, which was primarily the result of the increase in the
number of prescriptions sold to Third Party Plan customers. Gross profit on
sales of pharmacy products to non-Third Party Plan customers was $2.8 million in
the 2002 Six-Month Period as compared to $2.6 million for the 2001 Six-Month
Period, an increase of $0.2 million, or 7.7%, that was primarily the result of
improved price management on sales of pharmacy products to non-Third Party Plan
customers.
Gross profit on non-pharmacy sales was $32.0 million for the 2002 Six-Month
Period, as compared to $29.1 million for the 2001 Six-Month Period, an increase
of $2.9 million, or 10.0%. Gross profit as a percentage of non-pharmacy sales
was 32.9% for the 2002 Six-Month Period as compared to 29.0% for the 2001
Six-Month Period, an increase of 4.0%. Gross profit as a percentage of
non-pharmacy sales increased primarily due to an improved retail pricing
strategy and to fewer clearance markdowns on seasonal merchandise sales.
Selling, general and administrative expense as a percentage of net sales
was 21.9% for the 2002 Six-Month Period, as compared to 22.9% for the 2001
Six-Month Period, a decrease of 1.0%. This decrease in selling, general and
administrative expenses as a percentage of net sales is primarily due to
initiatives to reduce operating expenses that were partially offset by increases
in the cost of compensation for pharmacists and employee benefits.
Depreciation and amortization expense was $2.2 million for the 2002
Six-Month Period as compared to $3.0 million for the 2001 Six-Month Period, a
decrease of $0.8 million, or 26.7%. This decrease is primarily the result of the
elimination of the amortization of goodwill in connection with the
implementation of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
Other income, net was $0.2 million for the 2002 Six-Month Period as
compared to $0.5 million for the 2001 Six-Month Period, a decrease of $0.3
million, resulting from the one-time receipt of $0.4 million during the 2001
Six-Month Period as a member of the class in the Brand Name Drug class action
litigation.
The Company's net interest expense was $4.0 million in the 2002 Six-Month
Period as compared to $4.3 million in the 2001 Six-Month Period, a decrease of
$0.3 million resulting from the lower level of outstanding balances and lower
interest rates charged on the Company's revolving line of credit. Non-cash
interest expense on the Holding Company's outstanding subordinated debt was $1.2
million in the 2002 Six-Month Period and was $1.1 million in the 2001 Six-Month
Period, an increase of $0.1 million resulting from the compounding of interest
on the subordinated debt.
16
The Company's provision for income taxes was $1.0 million for the 2002
Six-Month Period as compared to a benefit for income taxes of $0.8 million for
the 2001 Six-Month Period, an increase of $1.8 million. The Holding Company
experienced a benefit from income taxes of $0.4 million in the 2002 Six-Month
Period and 2001 Six-Month Period related to the interest expense incurred on the
outstanding subordinated debt. The Company's effective tax rate is consistently
higher than the statutory tax rates, and varies from period to period, due to
the amortization of goodwill and of beneficial leaseholds, both of which are not
deductible when calculating taxable income.
Effective July 29, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", ("SFAS
142"), which requires that goodwill not be amortized but instead be tested at
least annually for impairment by reporting unit and expensed against earnings
when the implied fair value of a reporting unit, including goodwill, is less
than its carrying amount. In accordance with SFAS 142, the Company has six
months from the initial date of adoption to complete its impairment testing. The
Company has completed its assessment of goodwill during its second quarter,
which resulted in goodwill impairment of $7,236 which has been recorded as a
cumulative effect of accounting change as of the beginning of the current fiscal
year. In accordance with SFAS 142, the Company has restated it s first quarter
results to give effect to this accounting change. The Company has performed its
assessment of goodwill and other intangible assets by comparing the fair value
of the Company, which has been determined to be the reporting unit for such
measurement purposes, to its net book value in accordance with the provisions of
SFAS 142. The Company has estimated its fair value based upon a combination of
historical and projected results giving appropriate weighting to such data in
arriving at an estimate of fair value.
The Company's net loss for the 2002 Six-Month Period was $5.8 million as
compared to $2.3 million in the 2001 Six-Month Period, an increase in the net
loss of $3.5 million, which is primarily due to the impairment of goodwill in
connection with adoption of FAS 142 offset by improved operating income during
the 2002 Six-Month Period as compared to the 2001 Six-Month Period. Excluding
the impairment of goodwill, the Company's net income was $1.4 million for the
2002 Six-Month Period as compared to a net loss of $2.3 million for the 2001
Six-Month Period, an increase in net income of $3.7 million. The Holding Company
incurred a net loss of $0.8 million for the 2002 Six-Month Period as compared to
$0.7 million for the 2001 Six-Month Period, an increase of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF THE THREE MONTHS ENDED JANUARY 26, 2002 (THE "2002 THREE-MONTH
PERIOD") WITH THE THREE MONTHS ENDED JANUARY 27, 2001 (THE "2001 THREE-MONTH
PERIOD").
During the 2002 Three-Month Period, cash provided by operations was $6.0
million as compared to $6.7 million for the 2001 Three-Month Period, a decrease
of $0.7 million. This decrease in cash used in operations is primarily the
result of a smaller change in inventory during the 2002 Three-Month Period as
compared to the 2001 Three-Month Period. Cash used in investing activities was
$0.4 million during the 2002 Three-Month Period as compared to $1.2 million
during the 2001 Three-Month Period, a decrease of $0.8 million, which was
primarily the result of no store openings during the 2002 Three-Month Period as
compared to one store opening during the 2001 Three-Month Period. Cash used in
financing activities was $5.7 million during the 2002 Three-Month Period as
compared to $5.5 million during the 2001 Three-Month Period. Cash used in
financing activities during the 2002 Three-Month Period was for net repayments
of borrowings under the Facility of $7.6 million offset by a cash overdraft of
$1.9 million while the cash used in financing activities during the 2001
Three-Month Period was for net repayments of borrowings under the Facility of
$7.2 million offset by a cash overdraft of $1.7 million.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 26, 2002 (THE "2002 SIX-MONTH
PERIOD") WITH THE SIX MONTHS ENDED JANUARY 27, 2001 (THE "2001 SIX-MONTH
PERIOD").
During the 2002 Six-Month Period, cash used in operations was $1.6
million as compared to $6.6 million for the 2001 Six-Month Period, a decrease
of $5.0 million. This decrease in cash used in operations is primarily the
result of a larger reduction of inventory and smaller reduction in accounts
payable during the 2002 Six-Month Period as compared to the 2001 Six-Month
Period. Cash used in investing activities was $0.9 million during the 2002
Six-Month Period as compared to $2.0 million during the 2001 Six-Month
Period, a decrease of $1.1 million, which was primarily the result of no
store openings during the 2002 Six-Month Period as compared to two store
17
openings during the 2001 Six-Month Period. Cash provided by financing
activities was $1.9 million during the 2002 Six-Month Period as compared to
$8.7 million during the 2001 Six-Month Period. Cash provided by financing
activities during the 2002 Six-Month Period was from a cash overdraft of
$1.9 million while the cash provided by financing activities during the 2001
Six-Month Period was for net borrowings under the Facility of $7.0 million and a
cash overdraft of $1.7 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
27, 2002 and July 26, 2003. 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. Subsequent to the
end of the second quarter, the Company has repurchased $17.0 million aggregate
principal amount of its outstanding Senior Notes at a discount, resulting in
a significant gain that will be reflected as an extraordinary item in the
Company's financial statements for the third quarter ended April 27, 2002.
The Company is considering from time to time additional repurchases of its
Senior Notes. Any repurchases of Senior Notes may be made on the open market
or in privately negotiated transactions. The Company plans to fund such
purchases from its working capital or seek additional financing if needed.
The Company expects that substantially all of its borrowings under the
Facility will bear interest at floating rates; therefore, the Company's
financial condition will be affected by any changes in prevailing rates.
CERTAIN RISKS
The Company is subject to certain risks, including:
"FREEDOM OF CHOICE" AND "ANY WILLING PROVIDER" LEGISLATION. In July 1994,
New Jersey adopted "Freedom of Choice" legislation that requires Third-Party
Plans to allow their customers to purchase prescription drugs from the provider
of their choice as long as the provider meets uniformly established
requirements, and "Any Willing Provider" legislation that requires each
Third-Party Plan that has entered into an agreement with a prescription provider
to permit other prescription providers to enter into agreements under the same
terms and conditions. If this legislation were repealed, larger national
drugstore chains could enter into exclusive contracts with Third-Party Plans,
which could reduce the Company's sales of prescriptions and potentially
non-prescription items as well. In addition, since none of the states
surrounding New Jersey (other than Delaware) has enacted similar legislation,
the Company may be at a disadvantage if it chooses to expand outside of New
Jersey.
GOVERNMENT REGULATION AND REIMBURSEMENT PROGRAMS. The Company is subject to
numerous federal, state, and local licensing and registration regulations with
respect to, among other things, its pharmacy operations. Violations of any such
regulations could result in various penalties, including suspension or
revocation of the Company's licenses or registrations or monetary fines, which
could have a material adverse effect on the Company's financial condition and
results of operations.
Federal and New Jersey law requires the Company's pharmacists to offer free
counseling to customers about their medication. In addition, the Company's
pharmacists are required to conduct a prospective drug review before any new
prescriptions are dispensed, and may conduct a similar review prior to refilling
any prescriptions. New Jersey also regulates the dispensing of over-the-counter
controlled dangerous substances. These requirements could result in increased
costs to the Company.
MEDICAID AND MEDICARE. A portion of the Company's services are reimbursed
by government sponsored programs such as Medicaid and Medicare, with the
remainder being reimbursed by individual patients or Third-Party Plans. If the
Company were to fail to comply with reimbursement regulations, or if such
reimbursement programs were modified, the Company's business could be adversely
affected. The Company is also subject to laws prohibiting the submission of
false or fraudulent claims and certain financial relationships between health
care providers that are intended to induce the referral of patients, or the
recommendations of particular items or services. Violation of these laws could
result in loss of licensure, civil and criminal penalties, and exclusion from
federal health care programs.
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
18
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.
LIQUIDITY. There can be no assurance that the Company will generate
sufficient cash flow to pay interest and principal on its Senior Notes due
2004, of which $57.0 million aggregate principal amount was outstanding at
March 12, 2002. There can be no assurance that the Company will have
sufficient cash available or will be able to raise sufficient cash to pay the
principal of the Senior Notes in 2004 or the principal and accrued interest
of the subordinated debt of the Parent.
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 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 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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
20
PART II - - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Neither the Company nor the Holding Company filed any reports on Form
8-K during the three months ended January 26, 2002.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
COMMUNITY DISTRIBUTORS, INC.
March 12, 2002 By: /S/ TODD H. PLUYMERS
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
CDI GROUP, INC.
March 12, 2002 By: /S/ TODD H. PLUYMERS
---------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
22