- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
OCTOBER 30, 1999

/ / 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)

22-1833660
DELAWARE 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 14, 1999: 1,000 shares.

Number of shares of Class A Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding as of December 14, 1999: 254,595 shares.

Number of shares of Class B Non-Voting Common Stock, $.00001 par value per
share, of CDI Group, Inc. outstanding as of December 14, 1999: 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 30, 1999 and October 24,
1998...................................................... 3

Condensed Balance Sheets (Unaudited)--As of October 30, 1999
and July 31, 1999......................................... 4

Condensed Statements of Cash Flows (Unaudited)--For the
Three Months Ended October 30, 1999 and October 24,
1998...................................................... 5

Notes to Condensed Financial Statements of Community
Distributors, Inc......................................... 6

CDI GROUP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations
(Unaudited)--For the Three Months Ended October 30, 1999
and October 24, 1998...................................... 8

Condensed Consolidated Balance Sheets (Unaudited)--As of
October 30, 1999 and July 31, 1999........................ 9

Condensed Consolidated Statements of Cash Flows
(Unaudited)--For the Three Months Ended October 30, 1999
and October 24, 1998...................................... 10

Notes to Condensed Consolidated Financial Statements of CDI
Group, Inc. and Subsidiary................................ 11

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13

Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 19

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K............................ 20

Signatures.................................................. 21

PART I--FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

COMMUNITY DISTRIBUTORS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

THREE MONTHS ENDED
-------------------------
OCTOBER 30, OCTOBER 24,
1999 1998
----------- -----------

Net sales................................................... $65,773 $60,121
Cost of sales............................................... 48,153 44,428
------- -------
Gross profit.............................................. 17,620 15,693
Selling, general and administrative expenses................ 15,853 14,338
Administrative fees......................................... 63 63
Depreciation and amortization............................... 1,450 1,650
Other income, net........................................... 88 501
------- -------
Operating income.......................................... 342 143
Interest expense, net....................................... 2,042 1,941
------- -------
Loss before income taxes.................................. (1,700) (1,798)
Benefit for income taxes.................................... (1,225) (971)
------- -------
Net loss.................................................. $ (475) $ (827)
======= =======

See accompanying notes to condensed financial statements.

COMMUNITY DISTRIBUTORS, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

AS OF AS OF
OCTOBER 30, JULY 31,
1999 1999
----------- --------

ASSETS:
Cash and cash equivalents................................. $ 325 $ 285
Accounts receivable....................................... 5,844 5,240
Inventory................................................. 47,692 35,787
Prepaid expenses and other current assets................. 1,836 1,013
-------- --------
TOTAL CURRENT ASSETS.................................... 55,697 42,325
Property and equipment, net............................... 12,982 12,861
Deferred charges and other assets......................... 5,493 5,622
Goodwill, net............................................. 29,208 29,687
-------- --------
TOTAL ASSETS................................................ $103,380 $ 90,495
======== ========
LIABILITIES:
Revolver borrowings....................................... $ 10,000 $ 1,200
Accounts payable.......................................... 21,241 14,357
Accrued expenses and other current liabilities............ 5,785 8,631
Current portion of supplier advances...................... 653 653
-------- --------
TOTAL CURRENT LIABILITIES............................... 37,679 24,841
Long-term debt............................................ 74,000 74,000
Supplier advances, net of current portion................. 1,533 1,803
Other long-term liabilities............................... 5,370 4,578
-------- --------
TOTAL LIABILITIES........................................... $118,582 $105,222
-------- --------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding.................................. -- --
Additional paid-in capital................................ -- --
Retained earnings......................................... 2,340 2,815
Distribution in excess of capital......................... (17,542) (17,542)
-------- --------
TOTAL STOCKHOLDER'S DEFICIT............................. (15,202) (14,727)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................. $103,380 $ 90,495
======== ========

See accompanying notes to condensed financial statements.

COMMUNITY DISTRIBUTORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

THREE MONTHS ENDED
-------------------------
OCTOBER 30, OCTOBER 24,
1999 1998
----------- -----------

CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.................................................. $ (475) $ (827)
Depreciation and amortization............................. 1,519 1,650
Non-cash rent expense..................................... 142 129
LIFO provision............................................ 300 150
Gain on repurchase of Senior Notes........................ -- (395)
Changes in operating assets and liabilities............... (11,663) (7,789)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES....................... (10,177) (7,082)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures...................................... (917) (1,365)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (917) (1,365)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from revolver borrowings......................... 20,300 2,850
Repayments of revolver borrowings......................... (11,500) (1,000)
Cash overdraft............................................ 2,334 1,432
Repurchase of Senior Notes................................ -- (5,605)
-------- --------
NET CASH FROM (USED IN) FINANCING ACTIVITES................. 11,134 (2,323)

Net increase (decrease) in cash and cash equivalents........ 40 (10,770)
Cash and cash equivalents at beginning of period............ 285 10,770
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 325 $ --
======== ========

See accompanying notes to condensed financial statements.

COMMUNITY DISTRIBUTORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

(UNAUDITED)

(1) BASIS OF PRESENTATION:

The accompanying financial statements should be read in conjunction with the
audited financial statements of Community Distributors, Inc. (the "Company"),
and the notes thereto contained in the Company's annual report on Form 10-K for
its fiscal year ended July 31, 1999. The Company, a wholly owned subsidiary of
CDI Group, Inc. (the "Parent"), is engaged in the operation of retail stores
selling pharmaceuticals and general merchandise throughout New Jersey. These
interim financial statements are unaudited but, in the opinion of management,
include all adjustments, consisting only of normal recurring items, necessary to
fairly present the financial position and operating results and cash flows for
the interim periods. Results for interim periods are not necessarily indicative
of results for the full year. The year-end balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.

(2) ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(3) CONTINGENCIES:

The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the disposition of these
lawsuits should not have a material impact on the Company's results of
operations, financial position, and cash flows.

(4) DEBT:

In October 1998, the Company repurchased an aggregate of $6,000 principal
amount of Senior Notes. On October 6, 1998, the Company repurchased an aggregate
of $5,000 principal amount of Senior Notes at a purchase price of $930 per
$1,000 principal amount of Senior Notes, plus accrued and unpaid interest. On
October 13, 1998, the Company repurchased an additional $1,000 principal amount
of Senior Notes at a purchase price of $925 per $1,000 principal amount of
Senior Notes, plus accrued and unpaid interest. As of October 30, 1999, $74,000
aggregate principal amount of Senior Notes remained outstanding. Under the
relevant Senior Note agreements, in the event of a change in control, as
defined, the Company may be required to repurchase all outstanding Senior Notes.

The Company maintains a $20,000 five year revolving credit facility (the
"Facility) with a bank. This Facility bears interest at either prime rate or the
London Interbank Offered Rate ("LIBOR") plus 1.75% and is collateralized by the
Company's eligible accounts receivable and inventory balances, as defined.
Included in the Facility is a $5,000 letter of credit facility. Outstanding
letters of credit, guaranteeing certain contingent purchases which are not
reflected in the accompanying financial statements, aggregated approximately $34
and $2,016 at October 30, 1999 and July 31, 1999. The Facility contains certain
financial

COMMUNITY DISTRIBUTORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

(4) DEBT: (CONTINUED)

and operating covenants, such as a requirement that the Company maintain certain
financial ratios and satisfy certain financial tests, limitations on capital
expenditures, and restrictions on the ability of the Company to incur debt, pay
dividends, or take certain other corporate actions. Additionally, the Company
cannot make any dividend or other distributions with respect to any share of
stock other than in certain limited circumstances.

(5) ACCOUNTS RECEIVABLE:

On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Company was pursuing collection of approximately $444 of
prescription receivables from managed health care plans and other third-party
payer plans ("Third Party Plans") that were purchased by PFR. Subsequent to the
filing for bankruptcy, the Company entered into a settlement agreement with PFR
and on December 3, 1999, collected $400 from PFR in full settlement of the
prescription receivables that were purchased by PFR, with $44 of the uncollected
amount being written-off in October 1999. Subsequent to the bankruptcy, the
Company assumed the risk associated with the collection of its Third Party Plan
receivables.

(6) INVENTORY COSTING METHOD:

Inventory at interim periods is valued on a last-in, first-out (LIFO) basis
which is determined based on estimates of gross profit rate, inflation rates and
inventory levels, and is adjusted for the results of physical inventories which
are taken twice a year. The results of the last physical inventory that was
taken on July 31, 1999 did not have a material impact on the results of
operations, financial position and cash flows.

CDI GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

THREE MONTHS ENDED
-------------------------
OCTOBER 30, OCTOBER 24,
1999 1998
----------- -----------

Net sales................................................... $65,773 $60,121
Cost of sales............................................... 48,153 44,428
------- -------
Gross profit............................................ 17,620 15,693
Selling, general and administrative expenses................ 15,853 14,338
Administrative fees......................................... 63 63
Depreciation and amortization............................... 1,450 1,650
Other income, net........................................... 88 501
------- -------
Operating income........................................ 342 143
Interest expense, net....................................... 2,525 2,380
------- -------
Loss before income taxes................................ (2,183) (2,237)
Benefit for income taxes.................................... (1,394) (1,125)
------- -------
Net loss................................................ $ (789) $(1,112)
======= =======

See accompanying notes to condensed consolidated financial statements.

CDI GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

AS OF AS OF
OCTOBER 30, JULY 31,
1999 1999
----------- --------

ASSETS:
Cash and cash equivalents................................. $ 325 $ 285
Accounts receivable....................................... 5,872 5,266
Inventory................................................. 47,692 35,787
Prepaid expenses and other current assets................. 1,836 1,013
-------- --------
TOTAL CURRENT ASSETS.................................. 55,725 42,351

Property and equipment, net............................... 12,982 12,861
Deferred charges and other assets......................... 5,493 5,622
Goodwill, net............................................. 29,208 29,687
-------- --------
TOTAL ASSETS................................................ $103,408 $ 90,521
======== ========

LIABILITIES:
Revolver borrowings....................................... $ 10,000 $ 1,200
Accounts payable.......................................... 21,241 14,357
Accrued expenses and other current liabilities............ 5,616 8,004
Current portion of supplier advances...................... 653 653
-------- --------
TOTAL CURRENT LIABILITIES............................. 37,510 24,214

Long-term debt............................................ 74,000 74,000
Subordinated debt......................................... 20,854 20,369
Supplier advances, net of current portion................. 1,533 1,803
Other long-term liabilities............................... 2,794 2,629
-------- --------
TOTAL LIABILITIES........................................... $136,691 $123,015
-------- --------

COMMITMENTS AND CONTINGENCIES:
Redeemable preferred stock, $1.00 par value,
7,862 authorized, issued and outstanding, redemption
value $100 per share.................................... 786 786
Redeemable shares of Class A voting common stock, 57,963
shares issued and outstanding at net redemption value at
October 30, 1999 and July 31, 1999...................... 493 493

STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.00001 par value, authorized
600,000 shares, 254,595 issued and outstanding at
October 30, 1999 and July 31, 1999 -- --
Class B voting common stock, $.00001 par value, authorized
600,000 shares, 187,922 issued and outstanding at
October 30, 1999 and July 31, 1999 -- --
Additional paid-in capital................................ -- --
Retained earnings......................................... 42 831
Distribution in excess of capital......................... (34,604) (34,604)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT........................... (34,562) (33,773)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $103,408 $ 90,521
======== ========

See accompanying notes to condensed consolidated financial statements.

CDI GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(AMOUNTS IN THOUSANDS)

THREE MONTHS ENDED
-------------------------
OCTOBER 30, OCTOBER 24,
1999 1998
----------- -----------

CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.................................................. $ (789) $(1,112)
Depreciation and amortization............................. 1,519 1,650
Non-cash rent expense..................................... 142 129
Non-cash interest expense................................. 483 441
LIFO provision............................................ 300 150
Gain on repurchase of Senior Notes........................ -- (395)
Changes in operating assets and liabilities............... (11,832) (7,945)
------- -------
NET CASH USED IN OPERATING ACTIVITIES....................... (10,177) (7,082)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures...................................... (917) (1,365)
------- -------
NET CASH USED IN INVESTING ACTIVITIES....................... (917) (1,365)
CASH FLOWS USED IN FINANCING ACTIVITES:
Proceeds from revolver borrowings......................... 20,300 2,850
Repayments of revolver borrowings......................... (11,500) (1,000)
Cash overdraft............................................ 2,334 1,432
Repurchase of Senior Notes................................ -- (5,605)
------- -------
NET CASH FROM (USED IN) FINANCING ACTIVITES................. 11,134 (2,323)
Net increase (decrease) in cash and cash equivalents........ 40 (10,770)
Cash and cash equivalents at beginning of period............ 285 10,770
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 325 $ --
======= =======

See accompanying notes to condensed consolidated financial statements.

CDI GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

(UNAUDITED)

(1) BASIS OF PRESENTATION:

The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of CDI Group,
Inc. (the "Parent") and Subsidiary (collectively referred to as the "Company"),
and the notes thereto contained in the Company's annual report on Form 10-K for
its fiscal year ended July 31, 1999. The accompanying condensed consolidated
financial statements include the accounts of the Parent and its wholly-owned
subsidiary, Community Distributors, Inc. (the "Subsidiary"), which is engaged in
the operation of retail stores selling pharmaceuticals and general merchandise
throughout New Jersey. The Parent conducts no operations separate from the
Subsidiary. These interim consolidated financial statements are unaudited but,
in the opinion of the Company, include all adjustments, consisting only of
normal recurring items, necessary to fairly present the financial position,
operating results, and cash flows for the interim periods. Results for interim
periods are not necessarily indicative of results for the full year. The
year-end balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.

(2) ESTIMATES:

(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:

CDI GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

(4) DEBT: (CONTINUED)

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 $20,854 and $20,369 at October 30, 1999
and July 31, 1999, respectively, which includes accrued interest.

(5) ACCOUNTS RECEIVABLE:

On September 9, 1998, The Pharmacy Fund Receivables, Inc. ("PFR") filed for
bankruptcy under Chapter 11 of the Federal bankruptcy code. In connection
therewith, the Subsidiary was pursuing collection of approximately $444 of
prescription receivables from managed health care plans and other third-party
payer plans ("Third Party Plans") that were purchased by PFR. Subsequent to the
filing for bankruptcy, the Company entered into a settlement agreement with PFR
and on December 3, 1999, collected $400 from PFR in full settlement of the
prescription receivables that were purchased by PFR, with $44 of the uncollected
amount being written-off in October 1999. Subsequent to the bankruptcy, the
Company assumed the risk associated with the collection of its Third Party Plan
receivables.

(6) INVENTORY COSTING METHOD:

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY NOTE

This Quarterly Report on Form 10-Q may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, including,
but not limited to, (i) statements about possible changes in the rate of
increase of pharmacy sales to participants in managed health care plans and
other third-party payer plans ("Third Party Plans") as a percentage of total
pharmacy sales, and its impact on profitability; (ii) the ability of Community
Distributors, Inc. (the "Company") to meet its debt service obligations and to
fund anticipated capital expenditures and working capital requirements in the
future; (iii) the amount and sufficiency of the Company's planned expenditures
to address the year 2000 dating problem; and (iv) certain other statements
identified or qualified by words such as "likely", "will", "suggests", "may",
"would", "could", "should", "expects", "anticipates", "estimates", "plans",
"projects", "believes", or similar expressions (and variants of such words or
expressions). Investors are cautioned that forward-looking statements are
inherently uncertain. These forward-looking statements represent the best
judgment of the Company and of CDI Group, Inc. (the "Holding Company") as of the
date of this Quarterly Report on Form 10-Q, and the Company and the Holding
Company caution readers not to place undue reliance on such statements. Actual
performance and results of operations may differ materially from those projected
or suggested in the forward-looking statements due to certain risks and
uncertainties, including, but not limited to, the risks and uncertainties
described or discussed in the section "Certain Risks" in the Annual Report on
Form 10-K for its fiscal year ended July 31, 1999 for the Company and for the
Holding Company.

RESULTS OF OPERATIONS

Except where indicated below, the following discussion 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 30, 1999 (THE "2000 PERIOD") WITH
THE THREE MONTHS ENDED OCTOBER 24, 1998 (THE "1999 PERIOD").

Net sales for the 2000 Period were $65.8 million as compared to $60.1
million for the 1999 Period, an increase of $5.7 million, or 9.5%. This
increase, which includes a 3.9% increase in same-store sales, was primarily due
to (i) a 3.5% increase in sales of non-pharmacy products from $42.8 million for
the 1999 Period to $44.4 million for the 2000 Period, and (ii) a 23.7% increase
in pharmacy sales from $17.3 million for the 1999 Period to $21.4 million for
the 2000 Period, including a 30.4% increase in pharmacy sales to Third Party
Plan customers from $13.5 million for the 1999 Period to $17.6 million for the
2000 Period. The Company attributes the increase in net sales of non-pharmacy
products to the opening of five new store locations during the fiscal year ended
July 31, 1999, to the opening of two new store locations during the 2000 Period,
to the acquisition of the inventories and the customer lists of two independent
pharmacies during the fiscal year ended July 31, 1999, and to the acquisition of
the inventory and the customer list of an independent pharmacy during the 2000
Period, as well as to increased customer traffic in the Company's stores
associated with the increase in total pharmacy sales. The number of
prescriptions filled (including prescriptions filled for Third Party Plan
customers) was approximately 469,000 for the 2000 Period as compared to
approximately 425,000 for the 1999 Period, an increase of approximately 44,000,
or 10.4%. The number of prescriptions filled for Third Party Plan customers
increased to approximately 385,000 for the 2000 Period, as compared to 335,000
for the 1999 Period, an increase of approximately 50,000, or 14.9%. Pharmacy
sales to non-Third Party Plan customers were $3.8 million in both the 1999 and
2000 Periods, remaining constant primarily as the result of increased
participation of the Company's customers in Third Party Plans, which resulted in
a decrease in the volume of pharmacy products sold to

non-Third Party Plan customers from approximately 90,000 in the 1999 Period to
approximately 84,000 in the 2000 Period.

Gross profit was $17.6 million for the 2000 Period, as compared to $15.7
million for the 1999 Period, an increase of $1.9 million, or 12.1%. Gross profit
as a percentage of net sales was 26.7% for the 2000 Period as compared to 26.1%
for the 1999 Period. This 0.6% increase in gross profit as a percentage of sales
was due to an increase in the margin on pharmacy merchandise due to improved
cost of pharmacy merchandise under the new purchasing agreement with Neuman
Distributors, Inc., and to an increase in the margin on non-pharmacy
merchandise, offset by the fact that pharmacy sales, which generate lower
margins than sales of non-pharmacy merchandise, represented a higher percentage
of total sales in the 2000 Period as compared to the 1999 Period.

Gross profit on total pharmacy sales (including sales to Third Party Plan
customers) was $4.6 million for the 2000 Period as compared to $3.5 million for
the 1999 Period, an increase of $1.1 million, or 31.4%, which was primarily the
result of the increase in sales on a same store basis, the maturing of new
stores opened in the last three fiscal years, improved purchase prices from the
Company's primary prescription drug wholesaler, and to the acquisition of the
inventory and customer lists of five independent pharmacies during the last
three fiscal years. Gross profit on sales to Third Party Plan customers was $3.2
million for the 2000 Period as compared to $2.2 million for the 1999 Period, an
increase of $1.0 million, or 45.5%, 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 $1.4 million in the 2000 Period as compared
to $1.3 million in the 1999 Period, an increase of $0.1 million, or 7.7%,
increasing slightly due to improved purchase prices from the Company's
wholesaler and improved retail prices.

Although management expects that sales to Third Party Plan customers as a
percentage of total pharmacy sales will continue to increase, management
believes that as this rate of increase slows, margins will stabilize, resulting
in pharmacy gross profit growth that more closely approximates pharmacy sales
growth rates. Management believes that the rate of increase in sales to Third
Party Plan customers as a percentage of total pharmacy sales will slow because
the current growth rate, if continued, would reach the point at which almost all
members of the population who may be eligible for enrollment in Third Party
Plans will be so covered. However, management believes there will always be some
pharmacy customers who do not enroll in Third Party Plans. The Company is unable
to estimate when this increase will slow, or stop, if at all. Because of the
lower margins on prescription sales to Third Party Plan participants, management
believes that the increase in Third Party Plan prescription sales as a
percentage of total pharmacy sales will negatively impact profit margin,
although this may be partly or wholly offset by the increases in non-pharmacy
sales that may result from increased floor traffic associated with increased
pharmacy sales. There can be no assurance, however, that the increase in Third
Party Plan prescription sales as a percentage of total prescription sales will
continue, or that any resulting decrease in overall margins will be offset.

Gross profit on non-pharmacy sales was $13.0 million for the 2000 Period, as
compared to $12.2 million for the 2000 Period, an increase of $0.8 million, or
6.6%. Gross profit as a percentage of non-pharmacy sales was 29.3% for the 2000
Period as compared to 28.5% for the 1999 Period, an increase of 0.8%. Gross
profit as a percentage of non-pharmacy sales increased due to improved retail
prices on the Company's sales of seasonal merchandise, and reduced markdowns on
non-pharmacy merchandise.

Selling, general and administrative expense as a percentage of net sales was
24.2% for the 2000 Period, as compared to 23.8% for the 1999 Period, an increase
of 0.4%. This increase in selling, general and administrative expenses as a
percentage of net sales is primarily due to the higher cost of occupancy of the
one larger warehouse and corporate office facility beginning in September 1998
as well as higher levels of selling, general and administrative expenses
incurred at the Company's five new stores opened during the fiscal year ended
July 31, 1999 and two new stores opened during the 2000 Period as new stores

typically incur higher levels of selling, general and administrative expenses
during the first three years after they are opened.

Depreciation and amortization expense for the 2000 Period was $1.5 million
as compared to $1.7 million for the 1999 Period, a decrease of $0.2 million, or
11.8%, which resulted from the one-time amortization of deferred financing costs
incurred in connection with the repurchase of $6.0 million in aggregate
principal amount of Senior Notes during the 1999 Period.

Other income, net was $0.1 million for the 2000 Period as compared to $0.5
million for the 1999 Period, a decrease of $0.4 million, resulting from the
one-time gain of $0.4 million related to the repurchase of $6.0 million in
aggregate principal amount of Senior Notes during the 1999 Period.

The Company's net interest expense was $2.0 million in the 2000 Period as
compared to $1.9 million in the 1999 Period, an increase of $0.1 million
resulting from the higher level of average outstanding balances on the Company's
revolving line of credit. Non-cash interest expense on the Holding Company's
outstanding subordinated debt was $0.5 million for both the 2000 Period and 1999
Period.

The Company's benefit for income taxes was $1.2 million for the 2000 Period
as compared to $1.0 million for the 1999 Period, an increase of $0.2 million, or
20.0%, which was primarily the result of a higher effective tax rate during the
2000 Period. The Holding Company experienced a benefit from income taxes of $0.2
million in the 2000 Period as compared to $0.1 million during the 1999 Period,
an increase of $0.1 million 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 2000 Period was $0.5 million as compared to
$0.8 million in the 1999 Period, a decrease of $0.3 million, which is primarily
due to higher operating income. The Holding Company, exclusive of the Company's
net loss, incurred a net loss of $0.3 million for both the 2000 Period and 1999
Period, principally as a result of the interest incurred on the subordinated
debt.

LIQUIDITY AND CAPITAL RESOURCES

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 30, 1999 (THE "2000 PERIOD") WITH
THE THREE MONTHS ENDED OCTOBER 24, 1998 (THE "1999 PERIOD").

During the 2000 Period, cash used in operations was $10.2 million as
compared to $7.1 million for the 1999 Period, an increased use of cash of $3.1
million. The increased use of cash in operations is primarily the result of the
higher level of investment in inventory related to the significant increase in
pharmacy sales, the improvement of the replenishment rate to the Company's
stores from its warehouse, and the offset by one less store opening during the
2000 Period as compared to the 1999 Period. Cash used in investing activities
was $0.9 million during the 2000 Period as compared to $1.4 million during the
1999 Period, a decrease of $0.5 million, which was the result of one less store
opening during the 2000 Period as compared to during the 1999 Period. Cash
provided by financing activities was $11.1 million during the 2000 Period as
compared to cash used in financing activities of $2.3 million during the 1999
Period. Cash provided by financing activities during the 2000 Period was from
net revolver borrowings of $8.8 million and by a cash overdraft of $2.3 million,
while the cash used in the 1999 Period for financing activities was from net
revolver borrowings of $1.8 million and by a cash overdraft of $1.4 million
offset by cash used to repurchase Senior Notes in the amount of $5.6 million.

The Company believes that, based on anticipated levels of operations, it
will be able to meet its debt service obligations, including interest payments
on the Senior Notes when due, and to fund anticipated capital expenditures and
working capital requirements, and to comply with the terms of its debt
agreements during the remainder of its fiscal years ended July 29, 2000 and
July 28, 2001. The Company's ability

to make scheduled payments of principal or interest on, or to refinance its
indebtedness will depend on future operating performance and cash flow, which
are subject to prevailing economic conditions, prevailing interest rates and
financial, competitive, business and other factors beyond its control. The
Company expects that substantially all of its borrowings under its credit
facility will bear interest at floating rates; therefore, the Company's
financial condition will be affected by any changes in prevailing rates.

To date, the Company has repurchased $6.0 million of its outstanding Senior
Notes. The Company may in the future repurchase additional Senior Notes if it is
able to obtain appropriate waivers under the Facility and such Senior Notes are
available at a discount. Any such repurchases could affect the Company's ability
to cover its debt service obligations and working capital requirements in the
future.

YEAR 2000

The information provided below constitutes "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act and is
subject to the terms thereof. The following description of the Company's
remediation process is meant for information purposes and not as a form of
covenant, warranty, representation or guarantee of any kind. In addition, many
of the Company's year 2000-related efforts are dependent upon third parties that
are effectively beyond the Company's control.

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. To the extent that a business system does not fail or make miscalculations
as a result of the Year 2000 date change, such a system is described as being
"Year 2000 Compliant." While the Company believes that it has been taking
adequate steps to make sure that its business systems are Year 2000 Compliant,
and does not believe that it will incur material costs to prepare for the Year
2000 date change, achieving complete Year 2000 Compliance is subject to various
risks and uncertainties, and there can be no assurance that the Year 2000 date
change will not lead to failures of such systems that may have a material
adverse effect on the Company's future results of operations and financial
condition. The Company has been aware of the possible impact of Year 2000 issues
on its operations for some time and has focused on making its business systems
Year 2000 Compliant since that time.

In anticipation of the Company's continued growth and need for additional
functionality, the Company has sought to acquire packaged software solutions as
compared to the internal development of software solutions. As a result, a
majority of the Company's Year 2000 Compliance issues have been resolved by
continuously deploying the most recently available versions of the packaged
software solutions.

Beginning in 1996, the Company decided to deploy the JDA Software, Inc.
Merchandise Management System ("MMS"), a packaged software solution, which it
believes, based on representations from its licensor and on certain limited
testing performed by the Company, to be Year 2000 Compliant. The total
implementation cost of the MMS was $2.2 million, and was completed in
July 1999. The $2.2 million incurred cost of the MMS has been paid for out of
the Company's capital expenditures budget during fiscal year 1997, 1998, and
1999. Management believes that at the completion of the MMS implementation at
the end of July 1999, the Company's business systems became Year 2000 Compliant
in the areas of purchasing, inventory management, cost management, retail price
management, warehouse management, sales audit, and accounts payable.

The Company has completed the process of upgrading to the next version of
its packaged software solution for payroll, human resources, general ledger,
budgeting, and cost allocation applications which are used pursuant to a license
from Lawson Associates, Inc. At completion of the upgrade to the next version in
July 1999, the business systems used in these departments became Year 2000
Compliant. The cost for the implementation of the next version of such
applications was $0.1 million, which was paid for out of the Company's operating
budget.

The Company manages its property, plant and equipment expenditures with a
packaged software solution provided by Para Research. The Company has already
implemented the most recent version of this application software, and based upon
testing, the Company expects these business systems to be Year 2000 Compliant.
No additional costs were incurred or are expected to be incurred in the future
related to this application.

Store systems include the pharmacy operating system, the point-of-sale
systems that run the cash register related point-of-sale applications, and
non-pharmacy radio frequency applications for store ordering and shelf price
auditing. The Company's pharmacy operating system is licensed from Renlar, Inc.,
which has certified that its most recent version is Year 2000 Compliant. Of its
40 stores with pharmacies, all of the Company's stores are operating with the
Year 2000 Compliant version of the Renlar, Inc. system. The cost incurred to
implement the most recent version of the Renlar, Inc. pharmacy system in the
pharmacies in which it has been installed was $0.2 million, which was primarily
related to purchasing new computer hardware to operate the Renlar, Inc. pharmacy
software, and was paid for out of the Company's capital expenditures budget.
Based upon ongoing testing and certifications from the software licensors,
management believes that the Company's software applications with respect to
cash register related point-of-sale systems are Year 2000 Compliant. However,
the Company was required to upgrade the computer hardware at a majority of the
Company's store locations in order to operate the Year 2000 Compliant
point-of-sale software in the stores. The Company incurred a cost of $0.2
million to upgrade this hardware. In addition, the Company estimates incurring a
cost of $0.1 million to upgrade the software related to its non-pharmacy radio
frequency applications which will be incurred as a normal operating cost. No
additional hardware purchases or modifications are anticipated to upgrade to
these radio frequency applications in order for them to be Year 2000 Compliant.

Finally, the Company has two internally developed software applications for
which Year 2000 Compliance is at varying stages. First, the required
modifications to the Company's advertising software were completed in
July 1999, at a cost of $0.1 million, and provides the Company with Year 2000
Compliance for this software application. Second, the Company is currently in
the process of making the necessary modifications to its software application
for merchandise returns to vendors and expects to have it completed during
December 1999 at a cost of less than $0.1 million.

In summary, the Company estimates that a minimum of $0.2 million of future
costs will be required to be incurred to achieve Year 2000 Compliance,
including: $0.1 million to upgrade the software related to its non-pharmacy
radio frequency applications; and $0.1 million to make the necessary
modifications to the Company's internal software application for merchandise
returns to vendors. These costs will be incurred as part of the Company's
capital and operating expenditures budget and are expected to be completed as
previously discussed.

In addition, the Company relies upon various third parties for merchandise
and services. Interruption of supplier operations, due to their lack of Year
2000 Compliance could significantly affect the Company's operations,
particularly if the Company is unable to acquire merchandise for sale in its
stores or is unable to obtain services needed to operate its stores. The Company
has surveyed its third party suppliers of merchandise and services and is in the
process of evaluating their efforts toward achieving Year 2000 Compliance and,
if necessary, to define appropriate contingency plans. The Company has completed
the evaluation of its third party suppliers' Year 2000 Compliance and has put
the applicable contingency plans in place. These contingency plans include,
among others, identification of alternate third party suppliers and accumulation
of inventory to ensure that merchandise is available for sale in its stores. The
evaluations of third party suppliers are a means to ensure the continued flow of
merchandise and services to the Company, but cannot eliminate the potential for
disruption due to lack of Year 2000 Compliance by a third party supplier.

The Company's evaluation of Year 2000 Compliance, both of its internal
systems and of its suppliers, is an ongoing process. Due to the uncertainty of
Year 2000 Compliance by the Company's third party

suppliers as noted above, the Company has established applicable contingency
plans, which it believes will appropriately address Year 2000 Compliance.
However, no assurance can be given that such contingency plans will address all
potential Year 2000 Compliance failures.

CERTAIN RISKS

The Company is subject to certain risks, including:

"FREEDOM OF CHOICE" AND "ANY WILLING PROVIDER" LEGISLATION. In July 1994,
New Jersey adopted "Freedom of Choice, legislation that required Third-Party
Plans to allow their customers to purchase prescription drugs from the provider
of their choice as long as the provider meets uniformly established
requirements, and "Any Willing Provider" legislation that requires each
Third-Party Plan that has entered into an agreement with a prescription provider
to permit other prescription providers to enter into similar agreements. If this
legislation were repealed, larger national drugstore chains could enter into
exclusive contracts with Third-Party Plans, which could reduce the Company's
sales of prescriptions and potentially non-prescription items as well. In
addition, since none of the states surrounding New Jersey (other than Delaware)
has enacted similar legislation, the Company may be at a disadvantage if it
chooses to expand outside of New Jersey.

GOVERNMENT REGULATION AND REIMBURSEMENT PROGRAMS. The Company is subject to
numerous federal, state, and local licensing and registration regulations with
respect to, among other things, its pharmacy operations. Violations of any such
regulations could result in various penalties, including suspension or
revocation of the Company's licenses or registrations or monetary fines, which
could have a material adverse effect on the Company's financial condition and
results of operations.

Federal and New Jersey law requires the Company's pharmacists to offer free
counseling to customers about their medication. In addition, the Company's
pharmacists are required to conduct a prospective drug review before any new
prescriptions are dispensed, and may conduct a similar review prior to refilling
any prescriptions. New Jersey also regulates the dispensing of over-the-counter
controlled dangerous substances. These requirements could result in increased
costs to the Company.

MEDICAID AND MEDICARE. A portion of the Company's services is reimbursed by
government-sponsored programs such as Medicaid and Medicare, with the remainder
being reimbursed by individual patients or Third-Party Plans. If the Company
were to fail to comply with reimbursement regulations, or if such reimbursement
programs were modified, the Company's business could be adversely affected. The
Company is also subject to laws prohibiting the submission of false or
fraudulent claims and certain financial relationships between health care
providers that are intended to induce the referral of patients, or the
recommendations of particular items or services. Violation of these laws could
result in loss of licensure, civil and criminal penalties, and exclusion from
federal health care programs.

EMPLOYMENT REGULATION. The Company is subject to employment law governing
minimum wage requirements, overtime and working conditions. An increase in the
minimum wage rate, employee benefit costs, or other costs associated with
employees could adversely affect the Company.

POTENTIAL GROWTH AND EXPANSION. The Company has grown in recent years by
opening new stores, remodeling and relocating existing stores and refining the
product mix in existing stores. The ability of the Company to continue to grow
in the future will depend on factors including existing and emerging
competition, the availability of working capital to support growth, the
Company's ability to manage costs and maintain margins in the face of pricing
pressures, and the ability to recruit and train additional qualified personnel.
New stores that the Company opens may not be profitable.

RESTRICTIONS ON THE COMPANY. Both the Indenture governing the Senior Notes
and the Facility impose on the Company certain requirements and restrictions,
such as a requirement that the Company maintain certain financial ratios and
satisfy certain financial tests, limitation on capital expenditures, and
restrictions

on the ability of the Company to incur debt, pay dividends, or take certain
other corporate actions. These limitations may restrict the Company's ability to
pursue its business strategies.

COMPETITION. The 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 limitation contained
in the Indenture governing the Senior Notes.

CONTROLLING STOCKHOLDERS. The Holding Company owns all of the outstanding
capital stock of the Company. The existing stockholders of the Holding Company,
which include the Company's President and Chief Executive Officer, certain
entities affiliated with the other directors of the Company, and other 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 executive officers and other key
employees, including its Chief Executive Officer and President. The loss of the
services of any key employees could have a material adverse effect on the
Company's financial condition and results of operations.

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 Company's
revolving credit 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.

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Certificate of Incorporation, as amended, of CDI Group, Inc.
(the "Holding Company").*
3.2 By-laws of the Holding Company.*
3.3 Certificate of Incorporation, as amended, of Community
Distributors, Inc. (the "Company").*
3.4 Amended and Restated By-laws of the Company.*
27.1 Financial Data Schedule of Community Distributors, Inc.
27.2 Financial Data Schedule of CDI Group, Inc.

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the three months ended
October 30, 1999.

- ------------------------

* Incorporated by reference to the exhibits to the Registrants' Registration
Statement No. 333-41281, on Form S-4, filed by the Registrants with respect
to $80,000,000 aggregate principal amount of the Company's 10 1/4% Senior
Notes due 2004, Series B.

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 14, 1999 By: /s/ TODD H. PLUYMERS
-----------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL FINANCE
AND ACCOUNTING OFFICER)

CDI GROUP, INC.

December 14, 1999 By: /s/ TODD H. PLUYMERS
-----------------------------------------
Todd H. Pluymers,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL FINANCE
AND ACCOUNTING OFFICER)